UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 6-K/A
(Amendment No. 1)
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
Date: April 29, 2020
UBS Group AG
Commission File Number: 1-36764
UBS AG
Commission File Number: 1-15060
(Registrants'
Names)
Bahnhofstrasse 45, Zurich, Switzerland
Aeschenvorstadt 1, Basel, Switzerland
(Address of principal executive offices)
Indicate by check mark whether the registrant files or
will file annual reports under cover of Form 20‑F or Form 40-F.
Form 20-F x Form
40-F o
This Amendment No. 1 to our Form 6K, originally filed with the
Securities and Exchange Commission on April 28, 2020, which consisted of the
presentation materials related to the First Quarter 2020 Results of UBS Group
AG and UBS AG and the transcript of the management call with investors and
analysts, is, hereby, amended to correct a portion of the Q&A session.
First quarter
2020 results
28
April 2020
Speeches by Sergio P. Ermotti, Group Chief Executive Officer, and Kirt Gardner, Group Chief Financial Officer
Including analyst Q&A session
Transcript.
Numbers for slides refer to the first quarter 2020 results presentation. Materials and
a webcast replay are available at www.ubs.com/investors
Sergio P.
Ermotti
Good
morning, and thank you all for joining us today. I hope you and your families
are safe and healthy. Our thoughts are with all the people affected by the
virus, as well as those fighting its spread at the frontline day-in, day-out.
All of us at UBS are humbled and inspired by their example.
I
would also like to take a moment to commemorate Marcel Ospel, our former
Chairman, and Juerg Zeltner, former member of the Group Executive Board, who
both passed away recently. Marcel laid the foundations of our firm as we know
it today. And Juerg helped building our unique wealth management franchise.
Slide
2 – 1Q20 highlights
Our
key messages for today are summarized on this slide. This quarter, I can
comfortably say that you saw UBS as its best in all dimensions.
Slide
3 – COVID-19 – Supporting our stakeholders
Starting
with our support to overcome the shocks on the economy and society we are
currently experiencing.
A
huge collective effort is needed. Unlike the financial crisis, banks can be a
part of the solution this time around, by supporting clients, as well as
working in partnership with policy makers and regulators to provide an
effective transmission mechanism for government support.
UBS
is and wants to be part of the solution. Social responsibility was already a
key part of UBS’s agenda, so supporting our employees, clients and communities
is a natural extension of what we are already doing.
Our first
priority from the very beginning has been the safety and wellbeing of our
employees. We introduced enhanced procedures to safeguard those whose presence
in our facilities is critical, and almost everyone in the firm now has the
ability to work from home.
We
know the current situation is challenging for many of our staff, so we are
providing extra support and help to balance work and extended family-care
needs.
Across
the organization, from our technology and operations teams right through to our
client-facing staff, our employees made sure that we continue to deliver for
our clients.
We
provide them with advice when they need it the most, and more. Thanks to
disciplined risk management and resource allocation going into the crisis, we
have the capacity to lend and provide liquidity to our clients, big and small.
With a 15 billion increase in loans in the quarter, we went well beyond
participation in the government relief programs.
From
the very beginning we supported and played an active role in shaping the Swiss
SME lending program, which I will cover in a minute. We have also been active
in the US, where we have nearly a third of our staff. There, we expect to make
up to 2 billion available for loans to small businesses under the federal plan.
To
help those who are fighting against the virus at the frontlines and for people
in need, UBS is contributing 30 million for global aid and local projects in
our communities. This amount was funded out of the variable compensation pool.
The
Group Executive Board and our employees around the world are donating their
time and money to coronavirus-related efforts in their communities, something
we actively support in many ways.
Crises
like this one show the true character of people and organizations. And I have
to say, our employees’ response across the entire firm has been remarkable, so
I’d like to thank all of my colleagues for their efforts.
Slide
4 – Strength and resilience
Our
operational resilience, strong financial position and successful business model
have been and continue to be a great asset, particularly in this environment.
They are the result of investments and disciplined execution of our strategy
over the years.
We
have been consistently investing over 10% of our revenues in technology for
years, building a rock-solid infrastructure and client-centric digital
capabilities. And today, those investments are really paying off.
Our
business continuity plans proved effective as we adapted and responded to the
current situation, showing a higher degree of digital agility at scale. It was
a remarkable feat. While managing the business efficiently and effectively, we
leveraged our investments and early Asia experiences helped us to rapidly scale
up flexible working capabilities globally.
Today,
90,000 people can connect from home on UBS's systems. They are able to do that
at any point in time and with access to core capabilities they need. This
includes our employees and external staff, all part of the UBS ecosystem.
We
successfully managed March’s high volumes and activity across our trading and
client platforms, including peaks of three times the normal levels, which
enabled us to gain market share and share of wallet with our clients.
We
believe many of the operational changes will be permanent, so learning from
today will make us even better tomorrow.
This
challenging environment has also brought us even closer together. Every day I
see examples of even better collaboration being driven by a sense of urgency to
help each other and to do the best for clients. Many of us at UBS are finding
that being apart can actually bring us closer together.
This
operational resilience and strong culture is complemented by our strong
financial position and clear strategic direction.
Over
the last decade we significantly reduced our risk profile, putting financial
strength, asset-gathering businesses and our universal bank at the heart of our
strategy. This, complemented by our focused investment bank.
We
have been hard at work developing our unique and complementary business
portfolio and geographic footprint, leveraging our integrated bank approach.
Our
capacity to generate capital, diversified earnings streams and attractive
business mix mean we are well equipped to handle adverse conditions.
This
makes us attractive for depositors and bondholders seeking stability. We are
very mindful of our responsibilities for those on both sides of our balance
sheet.
Slide
5 – Supporting the Swiss economy
As
a Swiss-based Group and the number one bank in Switzerland, we feel a special
responsibility to support our home market in weathering the effects of the
crisis.
We
made sure clients who use UBS for their day-to-day financial needs had
uninterrupted access to their funds, as well as our transaction capabilities
and advice. Their mobile and online activity increased significantly, with
mobile logins up nearly 40% and online onboarding nearly doubling in the
quarter. We also kept half of our branches open, maintaining ease of access
for our clients, while ensuring the highest health and safety standards.
Our
commitment to lending and providing resources went well beyond the government-backed
program. We issued one billion in new mortgages to individual clients and
provided 2 billion in net new loans to Swiss corporates. These numbers are on
top of the more than 2.5 billion we provided to over 21,000 Swiss SMEs under
the government-backed program which we swiftly implemented by mobilizing
significant resources.
I
want to be very clear on two points here. First, UBS will not make any profits
from the government-backed loans. If there are any, we will donate them
directly to relief efforts. Second, we are not pushing out risks to
taxpayers. Around two thirds of the SMEs who applied for loans under the
program did not have a credit line with UBS before. And for the remaining
third who did, the vast majority are healthy and should have no issue repaying
debt.
A good
indicator of the strength of our SME clients is that as of last Friday, they
had drawn only about a third of the credit lines we provided under the program.
Slide
6 – Helping our clients to navigate challenging markets
As
I mentioned, our employees’ professionalism and expertise in looking after our
clients’ needs, offering advice and solutions, made a big difference this
quarter. By smartly adapting to conditions and new ways of working, we were
able to deepen our relationship with many of our clients.
Our
CIO and research teams have played a critical role in delivering timely advice
to corporate, institutional and wealth clients. They have issued high-quality,
differentiating content at lightning speed across a wide range of digital
channels. For example, in March alone, our research teams published over
13,000 reports and organized over 1,500 conference calls, livestreams, webinars
and podcasts, and even held a virtual art gallery viewing.
These
efforts were highly appreciated by clients and we saw significant increases in
their engagement levels. The number of CIO interactions more than doubled in
the quarter.
Slide
7 – Drop in short-term optimism but investors remain positive long-term
Let
me give you a quick flavor for our most recent investor survey, which will be
published tomorrow.
Investors
remain optimistic over the long term, even if short-term sentiment turned more
negative, as you can see here. This is especially clear in the US, where the
impact of the crisis on the job market has been most pronounced so far.
We
are not seeing signs of investors panicking however, with only 16% of them
planning to reduce their investments. More than a third are considering
increasing their exposure over the next six months, showing there is great
potential for us to advise and interact with clients.
Slide
8 – 1Q20 net profit USD 1.6bn, +40%; 17.7% RoCET1
Now
moving on to financial results. As I said, this quarter you saw UBS at its
best, including our financial performance, and confirming our ability to
deliver in a variety of conditions.
Our
net profit increased 40% to 1.6 billion and return on CET1 reached 17.7%.
The
results were driven by strong performances across our all businesses. And very
importantly, these were achieved without the help of special items in revenues,
costs or tax. Credit losses and mark-to-market losses are part of banking and
we see them as an integral part of our results. In the current environment, the
risk of incurring operational and trading losses is high, but our credit losses
were limited, reflecting the quality of our lending book, effective hedging and
our disciplined risk-return approach over the last decade.
We
delivered attractive risk-adjusted returns in January, February, and during the
very challenging March.
Client
engagement, market conditions and our operational resilience led to high
business volumes and a 10% improvement in operating income despite increased
credit loss expenses.
Also,
we showed effective resource management across the organization.
We
remained disciplined on efficiency and effectiveness with costs consistent with
our plans leading to a 6% positive operating leverage. The cost/income ratio
stood at 72%.
We
maintained high capital ratios in line with our guidance, again without
factoring any benefits from temporary regulatory reliefs.
It
goes without saying that temporary regulatory relief measures are welcome to
help banks to facilitate credit to the economy.
Many
of the rules implemented after the financial crisis are good and we supported
them. Others proved to be less effective or counter-productive, which has
become clearer over the last couple of months. What our industry needs right
now is fixing those issues, not just through temporary relief but by permanent
changes that will allow for more planning certainty. We will continue to make
constructive suggestions to shape a stronger system.
During
Q1, our CET1 capital increased by 1.1 billion, after prudently accruing for a
2020 dividend and repurchasing 350 million worth of shares in the first half of
the quarter.
Our
strong capital, funding and liquidity position enable us to support our clients
and the economy while paying dividends. Of course we are mindful that capital
returns are an important part of our equity story. But I'm sure you all
understand it is too early to talk about what these may be for this year.
Slide
9 – Executing our 2020-2022 priorities
We
are executing on the strategic priorities we presented in January as we manage
through the crisis.
We
are making good progress on our initiatives across the firm to build a more
integrated bank, and to deliver the very best of UBS to clients. Let me pick
up on Global Wealth Management as an example.
In
January, Iqbal and Tom outlined steps to unlock the franchise’s full potential
and these are being delivered at significant speed.
We
have already completed a number of initiatives, such as aligning the Ultra High
Net Worth segment with the regions and flattening the organizational structure.
The
more integrated and client-oriented setup, faster decision-making, empowerment
and reduced complexity are making a difference already.
We
are also active in our more long-term collaboration plans. For example, we
made good progress on the build-out of our Global Family Office capabilities
and onboarding of new clients.
Also,
the partnership between Global Wealth Management and Asset Management for our
US wealth management clients investing in separately managed accounts led to 9
billion of inflows for Asset Management in the quarter. This has been a
resounding success that by far exceeded our plans.
So
summing up, I am proud of how well we delivered this quarter, not only for our
clients but also for our shareholders.
I
will now hand over to Kirt, before some final remarks.
Kirt
Gardner
Slide
9 – Executing our 2020-2022 priorities
Thank
you, Sergio. Good morning everyone.
My
remarks will focus on divisional performance as you’ve already heard the Group
highlights, and I'll also take you through some points on our credit exposure
and capital position.
Slide
10 – Global Wealth Management
Starting
with Global Wealth Management, performance was consistently excellent
throughout the quarter, with operating income at around 1.5 billion in each
month leading to the best result since the financial crisis. But it was a tale
of two halves in terms of the dynamics driving the business.
January
and February were more risk-on, partly due to a strong start to the year on
more positive client sentiment, combined with our own initiatives and client
engagement, as well as the usual seasonality. March, on the other hand,
brought a sharp switch to risk-off and a sudden need to reposition portfolios.
Coming
into the quarter, we planned to significantly increase our client
interactions. Consistent with this strategy, we’ve been extremely proactive in
engaging with clients throughout the quarter, with more than double the number
of client interactions with our CIO compared with 1Q19, as we shared tailored
content and insights and completed tens of thousands of proactive client
portfolio reviews during the quarter, with engagement further intensifying
after the crisis took hold in March.
PBT
was up 41% year-on-year, with around 400 million of pre-tax profit each month,
demonstrating the strength of the business whether in a constructive market
environment or a highly turbulent one.
Operating
income increased 14% to a new high since the financial crisis, partly
reflecting our progress on strategic growth levers throughout the quarter.
Costs increased a more modest 6%, or 4% excluding restructuring.
We
had net new money inflows of 12 billion despite 16 billion of outflows from our
deposit program, which will be P&L accretive. Net new loans were strong at
4 billion, reaching nearly 9 billion by mid-March before COVID-19-related
de-leveraging actions were taken by clients.
As
market volatility increased and asset prices dropped in March, we naturally
managed a significant increase in margin calls, although only for around 3% of
clients with a Lombard loan at the peak. We experienced a small number of
impairments and credit loss expenses were 53 million in the quarter or only 3
basis points of GWM's loan book. Our credit book went through a severe real
life stress test this quarter. Not only did we pass, but we did so while
continuing to support our clients and winning new business. All of this
highlights the high quality of our Lombard portfolio and our risk management
framework. Margin calls have returned to a more normal level in April, and our
loan-to-value remained at 50% for the overall Lombard book.
In the
midst of the turmoil, we came together as one firm. For example, the GWM/IB
collaborative efforts are now in full swing, enhancing our product shelf across
structured products and lending. We are also progressing the growth of our GFO
segment, where we saw extremely strong performance, with income up 32% across
the IB and GWM.
Slide
11 – Global Wealth Management
Recurring
fees were up 10% year-on-year and 3% sequentially. As a reminder, we bill in
arrears based on quarter-end balances in the Americas and month-end balances
everywhere else. As such, revenues did not fully reflect the 11% fall in
invested assets that we saw in Q1.
The
lower invested asset base will be a headwind in the second quarter this year.
We would expect recurring fee income to be down between 200 and 300 million
sequentially in the second quarter before management actions.
Net
interest income was up 2%, mainly driven by growth in loan revenues. This was
partly offset by lower deposit revenues on higher volumes. Looking ahead, we’d
expect further deposit margin compression from US dollar rate cuts to at least
partly offset any benefits from loan growth and effective deposit management.
Transaction-based
income was up 46% on outstanding client engagement. Increased client activity
was powered by higher advisor productivity, as well as timely thought
leadership and solutions, supported by CIO insights and organized events.
Transaction-based revenues were fairly consistent across the three months,
demonstrating the strength of our client engagement model in all types of
market environments.
And
during March, when we transitioned to working from home and interacted with our
clients remotely, we actually saw an increased level of client interactions.
We had record contact rates in Switzerland, as we offered new ways of
interacting with clients via webinars, conference calls, and virtual round
tables with CIO analysts. Outside the Americas, there were 30% more inbound
calls compared with 4Q19, 60% more in APAC and we had very positive client
feedback that our advisors were reachable at all times during the crisis. And
in the Americas, we had over a 30% year-on-year increase in calls within our
Wealth Advice Center.
Many
of our clients actively managed their investments on our advice to navigate the
current market uncertainty. That said, as we go through this crisis, we don't
necessarily expect to see a repeat of these activity levels. As trading volumes
normalize, we'd expect 2Q20 transaction-based income to decrease sequentially.
It’s
also times like these that underscore the value of our long-term approach to
managing wealth: what we do is a long way from just investing assets. We sit
together with our clients – in person or virtually – and work through three
aspects: Liquidity, Longevity, and Legacy. That covers short-term cashflow,
sustainable wealth creation and income generation, and thinking about the
future, which can be generational wealth transfer, philanthropy or impact
investing. This framework leads to deeper client conversations and it helps
maintain a long-term, goal-oriented focus, while navigating the current
market. Our clients need and value advice, and never more so than in uncertain
times like these. In fact, our investor survey suggests that 81% of investors
with an advisor are looking for more guidance, and of those who don’t have an
advisor, 34% are more open to working with one now.
Slide
12 – Global Wealth Management
All
regions had double-digit PBT and advisor productivity growth, and positive net
new money.
In the
Americas, PBT was a record, driven by improved recurring fees on all-time high
invested asset levels at year-end and excellent transaction-based income. Our
cost/income ratio also hit an all-time low.
Asia
had its best quarter on record. Here we saw profits double, with outstanding
transaction revenues supported by very high demand for structured products.
Cost discipline also helped expenses come down slightly despite the revenue
performance, driving our cost/income ratio down to its lowest level ever.
Higher
transaction revenues and advisor productivity also drove profit growth in EMEA
and Switzerland. We furthermore saw a year-on-year increase in net mandate
sales in Switzerland.
Slide
13 – Personal & Corporate Banking (CHF)
Moving
to P&C. PBT was down 16%, as credit loss expenses of 74 million francs,
primarily on corporate loans, offset solid operating performance.
Notwithstanding
the higher CLE this quarter, P&C still delivered returns above 15%,
demonstrating the ability of this business to return well above its cost of
capital even when recording higher than usual credit losses.
Income
before credit provisions was down slightly on lower transaction-based revenues,
mainly reflecting lower fees from corporate clients, and partly due to lower
credit card-related income, where transaction volumes were down 18% in March as
a result of social distancing. For 2Q, we expect continued pressure on credit card-related
income due to reduced usage, but we’re not anticipating noteworthy losses in
this business.
NII
was stable. Recurring net fee income was the highest on record and benefitted
from the shift in business volume from GWM in 4Q19.
P&C’s
cost/income ratio improved to 58% on lower costs.
We
continue to support our individual and corporate clients with solutions and
funding, and this goes beyond the government-sponsored Swiss SME lending
program. Outside of this program, we had around 2 billion francs of net new
loans to support our corporate clients in the first quarter.
Slide
14 – Asset Management
Asset
Management had another very strong quarter with PBT up over 50% to 157 million
dollars and 11% positive operating leverage.
Operating
income was up 15%, primarily driven by net management fees, which increased by
14% on higher average invested assets, along with the continued positive
momentum of net new run rate fees since the second half of 2019. Performance
fees were up 9 million.
Net
new money was very strong at 33 billion, or 23 billion excluding money markets,
with positive contributions across all channels and very strong inflows into
traditional asset classes. And on the GWM/AM initiative on separately managed
accounts in the Americas, we had 9 billion net new money during the first
quarter and 17 billion to-date, well ahead of our plans.
“Virtual”
engagement with clients has been strong. For example, we’ve published around a
hundred strategy updates and white papers since the beginning of March to
support clients through current market conditions, and hosted more than 50
digital events.
Slide
15 – Investment Bank
The
IB had an exceptional quarter, with its best PBT since 2015.
Our
IB's capital-light business model, which is focused on advice and execution by
leveraging digital capabilities, has proven to be robust during this time of
extreme volatility and market disruption. There was a significant return of
volumes and volatility, and we were well placed to support our clients with advice
and reliable, uninterrupted access to the markets and funding, helping them
navigate extreme volatility. We’ve seen little to no disruptions in our
service to our clients and have successfully managed very high volumes across
our businesses, particularly in our trading operations, where our systems were
resilient and remained available globally.
PBT
rose significantly from a weak 1Q19 to 709 million, on 39% operating income
growth – including the CLE booked – and 12% higher costs.
Global
Markets revenues increased by 44%, mainly driven by FX, Rates and Cash
Equities, as they benefitted from increased client activity on elevated
volatility. We believe we gained market share in electronic trading in FX and
Equities, reflecting the continued investments in our platforms. Our unified
Global Markets model, with integrated Equities and FRC, allowed us to manage
risk more holistically across all asset classes. The combined set-up resulted
in faster decision making, and helped us react more nimbly to market moves.
Global
Banking revenues were up 44% as well, outperforming fee pools globally. This
was mainly due to a number of large transactions in Advisory and a strong
performance in ECM Cash. Markdowns on loans in LCM, corporate lending and real
estate finance portfolios were more than offset by gains on related hedges.
Credit
loss expenses were 122 million, mostly on energy exposures and securities
financing transactions related to mortgage REITs.
Our
cost/income ratio improved to 68%.
Slide
16 – Group Functions
Group
Functions loss before tax was 410 million.
In
Group Treasury, we saw negative 131 million, including losses from accounting
asymmetries partly offset by gains from hedge accounting ineffectiveness. The
former included negative income on own credit valuations that are largely
attributable to funding spread widening on derivatives in the Investment Bank
and Non-core and Legacy Portfolio. These asset-side funding valuation
adjustment losses are booked through P&L, but there are also liability-side
own credit-related valuation gains after tax of 934 million that are recorded
through OCI in equity.
We also
booked valuation losses of 143 million in NCL on our remaining exposure to
auction rate securities. Total auction rate securities assets were 1.4
billion, all of which are double-A-rated.
Slide
17 – IFRS 9 credit loss expense and allowances
At
the Group level, we booked credit losses of 268 million in the quarter, of
which 89 related to stage 1 and 2 and 179 related to stage 3. Now let me take
you through the moving parts.
First
of all, we updated the macroeconomic assumptions in our baseline scenario and
weightings applied to other scenarios, which drove 26 million; this within
stage 1 and 2 positions.
Other
stage 1 and 2 positions added another 63 million, most of which was related to
oil and gas and securities financing exposures in the IB.
The
stage 1 and 2 CLE did not impact our CET1 capital, as they were offset against
our existing Basel III expected loss.
Stage
3 CLE of 179 million mainly related to various impairments in the IB, GWM, and
P&C. One-third was in P&C and these predominantly stem from a
deterioration in the recoveries expected from loans to corporate clients that
were already credit-impaired at year-end 2019. IB oil and gas exposures and
securities financing together added another 60 million. Lombard loans and
securities-backed lending were the primary drivers of 41 million in GWM , with
just four cases of losses above 1 million.
At
the end of the quarter, our total allowances on balance sheet were 1.3 billion.
Slide
18 – Comparing credit loss expense and allowances under IFRS and US GAAP
When
comparing credit loss expenses across banks, naturally the most important
consideration is the nature of the credit books, but accounting differences are
relevant as well. UBS reports under IFRS and has therefore been subject to
IFRS 9 since January 2018, like most non-US banks. US GAAP has a broadly
equivalent concept called Current Expected Credit Loss, or CECL, which was introduced
for the first time this quarter. Under CECL, a financial institution
recognizes each asset's lifetime expected credit loss upfront, requiring
forecasting and modelling.
Unlike
CECL, IFRS 9 bifurcates expected credit losses prior to being credit-impaired
into two stages. Stage 1 applies to all loans originated or purchased, and
reflects possible default events within the next 12 months. Stage 2 behaves
similarly to the initial stage of CECL, by capturing loans that have
experienced a significant increase in credit risk since initial recognition and
subjecting them to a lifetime expected loss allowance. In the first quarter,
in addition to our review of the quality of the credit portfolio, we updated
our scenarios to consider the deterioration of the environment in our
forecasting assumptions, while also following the guidance issued by regulators
and standard-setters.
As
an approximation to CECL, under an “all Stage 2” approach, we would have
reported around 80 million of additional credit loss expense in the quarter for
a total CLE of around 350 million, and our total allowance balance would be
around 450 million higher at the end of the quarter, or around 1.7 billion.
There
are of course other differences between US GAAP and IFRS. Overall, we do not
believe that there is a net benefit or disadvantage to reporting under the one
or the other when we compare both accounting standards.
Expected
credit loss estimates are highly sensitive to economic forecasts. Considering
the recent developments, we are therefore likely to continue to see elevated
credit loss expenses over the next quarter.
Slide
19 – Loans and advances to customers
I
want to spend a couple minutes providing an update on our lending book. We
have 338 billion of loans on our balance sheet and another 90 billion
off-balance sheet. Our total allowance balance against these instruments is 26
basis points, and only 2.8 billion, or 65 basis points, are credit-impaired.
Of
the 338 billion of loans, the vast majority is secured by real estate or
securities. Our mortgage exposure is predominantly in Switzerland and mostly
owner-occupied residential mortgages, where we have no signs of stress so far.
Our exposure to commercial real estate is limited. Affordability criteria are
very strict and LTVs are generally low. Credit loss expenses of 8 million in
Q1 were 4 basis points of our mortgage book.
A
third of our on balance sheet exposure is Lombard and securities-based lending,
mostly in GWM. These are fully collateralized loans that can be cancelled
immediately if collateral quality deteriorates or margin calls are not met.
Our losses were limited at 3 basis points.
Of
the 27 billion corporate loans, nearly half is with Swiss small and
medium-sized enterprises, with the rest split between large corporates in
Switzerland and our IB’s global lending portfolio.
Two-thirds
of our off-balance sheet exposure is credit lines and loan commitments. Most
of the rest is guarantees, where historical losses have been small. These
exposures are mostly in P&C.
Slide
20 – Oil and gas exposures
Our
oil and gas net lending exposure is 1.5 billion, down significantly in the last
four years, when we made a strategic decision to reduce our financial exposure
and footprint in this sector, related to both risk and sustainability
considerations.
More
than half of our exposure is with investment grade-rated counterparties. And
about half of our total exposure is to the integrated and midstream segments,
which we would consider to be less susceptible to prolonged periods of low oil
prices. Under a scenario where WTI oil prices are 10 dollars, we would expect
around 250 million of losses over the next two years.
Slide
21 – Investment Bank loan underwriting commitments
We
had 11 billion of loan underwriting commitments in our IB. As of the end of
last week, we have syndicated 3.5 billion, of which 3 billion sub-investment
grade, reducing our outstanding loan underwriting commitments to 7.3 billion.
Of this amount, 2.9 [edit: 2.8] billion is investment-grade. The
remaining 4.5 billion includes a few large transactions with good credit
fundamentals and an overall diverse set of exposures.
Slide
22 – Corporate lending and credit line utilization
As
Sergio has already said, we have been and will continue to support our clients
with credit and liquidity. During the quarter, we extended 5 billion of loans
and credit lines across P&C and the IB. Through April 22nd, we saw an
incremental 1 billion in draw-downs.
In an
unlikely scenario where our clients draw down 100% of their facilities, we
would see a 9 billion rise in RWA, or a manageable 40 basis point decrease in
our CET1 ratio.
Slide
23 – Risk-weighted assets
Risk-weighted
assets rose by 10% or 27 billion during the quarter, with increases from both
credit and market risk, the majority of which related to supporting our clients
as they confronted the implications of COVID-19, along with the impact of
extreme market volatility.
During
the quarter, we had an increase of 1.8 billion from the full implementation of
SA-CCR.
More
than half of the 18 billion higher credit risk RWA was driven by new business
and draws on existing credit facilities. We also saw a rise in derivative
exposures as a result of higher market volatility and client activity, as well
as more securities financing transactions.
Higher
average regulatory and stressed VaR from unprecedented and sharp market moves
across asset classes drove 10 billion higher market risk RWA from extremely low
levels exiting 4Q19. Given that higher market volatility is likely to persist
in 2Q, and considering the 3-month window for regulatory VaR, we expect market
risk RWA to rise further in the second quarter. Importantly, this does not
imply any actual increase in our market risk, but rather is driven by the
technical nature of regulatory and stressed VaR.
Our
RWA did not benefit from any regulatory-granted exemptions or relief during the
quarter.
While
there is some potential to hedge our regulatory and stressed VaR, we always
assess the cost of hedging against our cost of capital, along with any risk
management considerations in determining appropriate hedging actions.
Slide
24 – Capital and leverage ratios
Our
capital position remains strong, with capital ratios consistent with our
guidance and comfortably above regulatory requirements. Again, that's without
taking into account any of FINMA's relief measures.
Our
CET1 capital ratio was 12.8%. With higher expected market risk RWA that I just
referenced and the deployment of further balance sheet to support our clients,
our CET1 ratio could be slightly below the lower end of our guidance in the
second quarter.
Excluding
the temporary COVID-19 related FINMA exemption for sight deposits at central
banks, our CET1 leverage ratio was 3.8%.
Early
in the quarter, we effectively managed our liquidity, allowing us to weather
the most challenging periods of stress. In particular, we were able to avoid
any term issuance until the markets returned to more attractive pricing
levels. Our liquidity and overall financial position continue to be very
strong.
Now back
to Sergio for closing remarks.
Sergio P.
Ermotti
Slide
25 – Deploying our strengths
Thank
you Kirt. Let me sum up here before moving to questions.
The
very strong quarter is the result of years of disciplined strategy execution,
responsible risk management and sustained investments.
As
we look ahead, of course nobody is under the illusion that things are going to
be easy.
The
range of potential outcomes of this crisis remains very wide. We entered these
turbulent times in a position of strength. UBS's financial position is strong
and our business model is fundamentally resilient, built around our integrated
business model in which each business has a vital role for the success of the
others.
Our
diversification and risk profile is different from that of many other banks and
I am convinced that we are well-equipped, probably better than most, to deal
with adverse scenarios. We will continue to execute on our strategic
priorities, serving clients and – last but not least – delivering for our
shareholders.
With
that, let's open up for questions.
Analyst
Q&A (CEO and CFO)
Kian
Abouhoussein, JP Morgan
Yes,
thank you for taking my question. The first question is related to – first of
all, thank you very much for the guidance on recurring fees in the wealth
management business – can you also comment on the NII: How you see the NII
developing considering the lower rates? That’s the first question. And the
second question is: On your macro-assumptions for IFRS 9, what have you
assumed? And in that context, if I look at your report, the larger report, you
talk about the ECL and the fact that you are covering at a lower level than
100%, and you have discussed that a level of 100% of coverage would be more
like 600 million USD impact, rather than more like the 400 that you have taken
– so can you just discuss how we square the macro assumption as well as your
ECL allowances, so we can get a better picture around provisioning outlook?
Kirt
Gardner
Kian,
thank you, thank you for both your questions. In terms of net interest income,
what I highlighted is that we do expect to see the impact of the rate cuts from
the US show up in the second quarter – that would represent headwinds overall
to net interest income in our wealth management business, and also we do see
continued further headwinds in terms of where rates are currently for Swiss
francs as well as euros for our P&C business. You know, having said that we
haven’t currently provided specific guidance on what we expect the
quarter-on-quarter impact to be.
Just
on your question about IFRS 9, as we indicated in our report of course, we went
through an exercise to update our scenarios – and we did a couple of things,
firstly, our base line scenario as you would expect now reflects a higher
unemployment and overall GDP contraction. In addition to that, we felt that our
severely adverse, or more adverse, scenario was appropriate for the first
quarter, although we currently are going through a revision of that scenario as
we enter the second quarter. The other thing that we did is, we eliminated the upside
scenario and we also eliminated the mild depression scenario – so we ended up
with a 70%-30% mix between base line and also our adverse scenario. And that
resulted in the stage 1 and stage 2 that you saw that we booked for the
quarter.
Now
in terms of your question around ECL, I think what we highlighted is, just
given the fact that our Basel III expected loss is higher than our current
total balance for ECL from stage 1 and 2, we don’t see any impact in our CET1
capital from the P&L that we booked for our credit loss expense. I think
that’s probably what you were reading through in terms of the reference, and
the impact of what we booked versus our capital overall.
Sergio
Ermotti
Maybe
just to add, on NII I would just probably want to add that in addition to what
Kirt said based on the headwinds, partially we will mitigate those headwinds
because of the credit we deploy out – are also creating some counter-effects,
and which, as I said, will out-mitigate or manage that situation. So that’s
probably…
Kian
Abouhoussein, JP Morgan
If
I can just add one follow up on the economic scenario base line and more the
severe and mild downside, can you just quantify them? Because I don’t find
anywhere input data in terms of real GDP assumptions or unemployment – if you
could just give us that for this year, next year.
Kirt
Gardner
Yes,
Kian, we didn’t provide any specific details on the assumptions for those
scenarios – I guess I would only comment in terms of the base line as I
mentioned, it was a deterioration from our assumptions at the end of the fourth
quarter, as you would expect, and in terms of our severe global crisis
scenario, I would only mention that if you look at those factors, they tend to
be more adverse than what you see in the severely adverse CCAR scenario, what
you see in the ECB ICAP scenario and so on – it does encompass a very
significant narrative around global downturn. And I think, as with all our
peers we’re going to continue to update our scenarios as we see the overall
crisis evolve.
Kian
Abouhoussein, JP Morgan
Okay,
thank you.
Anke
Reingen, RBC
Yes,
thank you very much. I had two questions. The first is on capital. You
indicated that the capital ratio might fall in the second quarter below your
target range – but I just wonder if you were to apply the temporary leave in
the capital, would that potentially be an offset and an indication about the
dividend accrual for financial year 2020? And then just a follow up question on
the cost of risk: You’ve been quite cautious in your comments. Is it fair to
assume that Q2 could be higher than the P&L charge in Q1? But could you be
more specific in how much buffer you have in terms of the hit against capital?
Thank you very much.
Kirt
Gardner
Yes,
Anke, thank you for your questions. In terms of capital, just to be clear, what
I indicated, as I said, that we could fall slightly below our guidance range –
in the lower end of our guidance range on CET1 capital, is 12.7%. Now
importantly, if you look at the removal of the counter-cyclical buffer, which
was granted by FINMA as well as other regulators, that puts our total
requirement at 9.7%. So that still leaves us with a very, very significant
buffer to our actual requirement. Now also importantly, while we have a removal
of the buffer for our requirement, it doesn’t help the ratio at all. So there’s
nothing right now in terms of relief that’s been made available that we’ve
availed ourselves of, that has made any impact on our current CET1 capital
ratio that we reported at 12.8%.
Sergio
Ermotti
In
respect of dividend, Anke, I don’t think I have much more to say. I think at
this stage we can only tell you that I believe it’s both prudent not to talk
about it, but it’s also prudent to take in consideration that, as I mentioned
before, capital returns is part of our equity story – so we are accruing for a
dividend in 2020, but it’s very premature to talk about levels, and any other
topic around this, other than saying that we are well aware that there are, we
have to balance capital solidity and the ability to respond to the crisis but
also to continue to have an attractive capital return story.
Kirt
Gardner
And
maybe Anke, just to add to Sergio’s comments that in terms of our 2020
dividend, for the half that has been postponed, we continue to maintain a special
reserve for the payment of that second half, that has not yet been accreted
back to our capital, and that’s just as consistent with our current expectation
that we will pay that. Now on your question on the risk side…
Sergio
Ermotti
On
the risk side, I think that the question is on the comments we made on risk is
that you know, the elevated levels are elevated in terms of our own historical
standards, and you know, I consider the first quarter, although it’s a strong
performance in relative terms to peers, an elevated level. So it’s difficult to
do, you know, a forecast right now on how much they will be. We have been
trying to show scenarios, and of course we need to adapt any major negative
developments in the macro-economic assumptions. As Kirt pointed out, you know,
very coherent with the way we manage risk and risk reward, you can assume that
our existing underlying macro-assumptions are quite severe. And but now, we
don’t know exactly what the next round of economist outlook is going to be. We
take external views. It is not only our UBS internal macro-economic view that
we take in consideration, so but you know, even if we stress our portfolio,
it’s very difficult to see any meaningful result out of this crisis.
Anke
Reingen, RBC
Thank
you very much.
Jeremy
Sigee, Exane BNP Paribas
Morning,
thank you. Just a couple of clarifications please. First one is on the CET1 and
other related discussion that we’ve already been having. You mentioned that you
expect further expansion in market risk RWAs from the sort of averaging effect
of that. Just wondered if you could put some scale around that. Are we talking
about a similar expansion to what we saw in Q1 or something less than that? And
linked to that, are there any other movements that you kind of expect already
in RWAs, either from technical calibration effects or from rule changes or
anything. Is there any moving parts that you could explain to us?
And
then my second question is really just a clarification: You said that you’re
prudently accruing a dividend for 2020. Is that dividend in line with your
existing policy of small year-on-year increases in the dividend?
Sergio
Ermotti
As
I said, it’s premature. I understand, Jeremy, the need of clarity, but you know
there is not a lot of things I can say around the dividend. You can only assume
that we are accruing a dividend which is aligned with the current market
conditions and the need I mentioned before. So hopefully we will be able to
give more guidance and clarity on dividends, I suppose after the summer. I
think before then, I don’t think it’s appropriate and it’s not in the interest
of anybody to talk too much about this topic. So we keep our focus on execution
and delivering capital and generation, and then the issue will be resolved. It
will resolve itself.
Kirt
Gardner
Yes,
Jeremy, in terms of your question on RWA, you know first just to highlight of
course, we were coming off of extremely low market risk RWA as of the end of
the fourth quarter – you see that, just 7 billion, and so therefore when you
look at the increase, I think it’s a bit amplified because of the low base. But
nevertheless, also as I highlighted, we just look at the technical nature of
how reg Var and stress Var impacts our market risk RWA, and knowing the
volatility, remains at higher levels. And you think about the three-month reg
Var window that we’re certainly in, and continues to extend as we see higher
levels of volatility. All of that suggests that we’re going to see a further
increase in the second quarter. I would only say as well, we would expect, and
we’re making of course capacity available to continue to support our clients,
and that is both through some level of potential drawdowns for existing
facilities, but also we’re still open for new business and we see very, very
attractive opportunities to continue to deploy capital on given the fact that
we still have attractive buffers, we’re going to do so and we’re going to
support our clients and our shareholders, as we go through the second quarter.
Now
overall, when I look at both sides of that equation, what I mentioned is that
we would expect to be right now possibly slightly below our 12.7%, that is the
range that we’ve guided on. Away from that, there’s no additional regulatory or
other related increases – what we mentioned as well is during the quarter, we
fully implemented SA-CCR, so we no longer have any phase ins for SA-CCR, and
over the past couple of years we’ve been diligently implementing basically what
has been the overall progress towards Basel III, and there’s no further such increases
that we anticipate for this year.
Jeremy
Sigee, Exane BNP Paribas
And
just as you think about, as you say, you’ve got very strong buffers above your
regulatory minimums, and there are opportunities to deploy balance sheet –
what’s your sort of levels of comfort? You know, you could easily go down to
say, 12%, and we would still look at that and say that’s still a pretty decent
ratio – what’s your tolerance for lower ratios in this environment?
Sergio
Ermotti
Yeah
well, Jeremy, I think that we are mindful that the buffers are there to be
used, but also as I mentioned before, it’s very important that those buffers
are used also with a time frame in mind. So it would not be really wise to go
out and use the buffer immediately. We don’t know how the crisis will play out.
We need to be careful in managing any dimension. You know, we believe that we
have enough capital generation and ability to serve clients and support the
economy, without going deep into using the buffers, so I don’t think that I
want to speculate about what is the level that we will be down. But of course,
everything which has a 12 in front I believe is both in absolute and relative
terms, very important – because I think that we can comfortably say that, if
you look at our CET1 ratio right now, which is absence of any kind of
concessions, on a relative basis, is extremely strong. And of course, capital
strength, as the largest wealth manager in the world, is an absolute must. And
we also have a duty, as I mentioned before, to protect our clients, being the
ones who have on-balance sheet assets with us, but also the ones who have
liabilities with us. So we are always very mindful to make sure that the full
picture of how we look at our stakeholders and clients, bond holders, is fully
reflected in the way we manage risk and capital.
Jeremy
Sigee, Exane BNP Paribas
Very
good. Thank you.
Jon
Peace, Credit Suisse
Morning,
my first question is, you’ve talked about some of the revenue headwinds going
into the second quarter. But would you say in this environment that activity is
still elevated across the bank, maybe particularly in the investment bank,
compared with a normal April?
And my
second question is on the French tax appeal verdict: I think we’d originally
been hoping for an update on that, perhaps around September-October. Do you
think in this current environment that’s likely to be delayed? Do you have any
visibility there? Thank you.
Sergio
Ermotti
So
I think it’s very difficult to talk about the environment – but you know, as
Kirt mentioned in his remarks, we all know that the first quarter was very
active with two different kind of connotations: the first half and the second
half. In the second half, we were very profitable, also including loan loss
provisions and marks down. But of course with a different nature of
profitability and levels. I would say that the environment we see so far is
similar to the March environment than it is to January and February. But it is
way too early to call for any trends, you know, I am referring to the IB
environment. Of course, Kirt already extensively spoke about wealth management
and what it means. So of course we need to understand that there is also some
kind of seasonality coming into the second quarter – although nowadays, I would
say the last 12 months or 20 or so, talking about seasonality is a little bit
difficult but of course we have some seasonality factors, so it’s premature,
but I would say that so far, you know, we are not seeing a dramatic change of
the environment compared to the way March went.
On
the French tax, we were, you know, other than more updates, we were expecting
any outcome probably by September, which we all know now that we’ll find out on
June 2 when the trial was supposed to start on June 2. Now what we know is that
on June 2 we will find out the new date of the trial. So till June 2 we have no
update and then based on that you can assume that still we believe that from
the day of the beginning of the trial, you have to put few months, three months
maybe, I don’t know, two, three, four months, time frame between the end of the
trial and the verdict of the second round – so more information, you know, will
come out during June, I’m sure you’re going to see publicly, and we will be
able, if anything, to make comments for Q2 results.
Jon
Peace, Credit Suisse
Great,
thank you.
Stefan
Stalmann, Autonomous Research
Good
morning, gentlemen, I have two questions please. The first one, on your
sensitivity of net interest income to rising interest rates – which you
helpfully disclose every quarter. That has actually doubled, compared to
year-end to the upside, but has not changed to the downside of falling rates.
Could you maybe talk a little bit about what has triggered this much higher
upside sensitivity? Is it positioning? Or is it just a different way of
estimating the impact of a given move.
And
the second question goes back to IFRS 9 and expected losses – I think the
disclosure is very helpful about what the provisioning impact is, by moving to
a severe worst scenario. But I’m just surprised how small that difference
actually is. It turns out you only need a 170 million extra provisions to move
to an adverse scenario – which according to your annual report is something
like 6-9% GDP contraction. I find that quite counter-intuitive. Maybe you could
talk a little bit about how the additional provisions and that kind of move
would be so low in stage 2.
And
maybe, in that context, could you maybe roughly guide what you would expect to
see in stage 3 assets, in stage 3 provisions, if you move into your severe
downside scenario under IFRS 9. Thank you.
Kirt
Gardner
Yes,
Stefan, in terms of your first question, if you look at what’s taken place with
interest rates now that the US rates have cut down close to zero, what you see
now when we model the upside, particularly since a lot of our assets are very
short term, is it the pickup on the upside now that we’ve had such compression
just tends to be much more favourable, particularly given some of the model
data assumptions overall on both the deposit side as well as what we would
expect in terms of the asset-pricing side, and all of that together contributes
to a more significant overall pickup with the 100 basis point move. Now on the
downside, the reason why that’s far less than the upside, is again because of
the compression – and when you start to model into negative rates and you
assume floors particularly on your asset margins, your asset margins actually
tend to stay fairly firm if you see any further downturn in rates. And we’ve
seen that very much in terms of how our NII has behaved in Switzerland with the
negative rates.
Now
overall, in IFRS 9, the reason when we model the assumption of what happens if
we move from 70/30 to say a 100% with our severe scenario, we model that on the
interesting mix between stage 1 and stage 2. And so because you still see a
very high percentage of our loans overall that remain in stage 1, but we don’t
include any significant increase in credit risk, then the impact overall is the
one that we’ve indicated, which is somewhat over a 100 million, but it’s not
that severe overall beyond that, just as I said because at the same time we
don’t include any modelling of further migration from stage 1 to stage 2. Now
regarding your question on modelling the impact on impairments, I mean that’s
not something that currently we’ve disclosed, as you would expect. We
continuously run our stress models, and we look at the full impact of our
credit exposure as we think about the adequacy of our capital buffers and how
we manage them.
Stefan
Stalmann, Autonomous Research
Thank
you very much.
Andrew
Coombs, Citi
Good
morning, thank you for your comments and I’ll commend you as well on your
commitments to support the COVID relief projects. If I could just follow up
with a couple of more on the reserve build in interaction with capital: The
first question, we’re typically looking at the disclosure you provided on page
77 of the report, where you say that if you did apply life-time of expected
credit losses on all stage 1 and 2 exposures, ECL would have climbed from 429
to 900 – just trying to square the circle with how that compares to the 18
million incremental you guided to on slide 18, if you were to adopt CECL.
Because the incremental numbers in the report seem somewhat higher.
So
perhaps you could just clarify there. And then the second question would just
be on the remarks about the capital expected loss under the IRRB model less the
existing provision – if I look at that, it did decline slightly from 495 to
429, but it declined by less than the loss you actually booked through the P&L.
So trying to understand what some moving parts there and does this mean you can
take up to another 430 million provisions without it essentially impacting your
capital position? Thank you.
Kirt
Gardner
Yes,
Andrew, so maybe it would be helpful if you go to slide 18 of the presentation
– and what we do there is that we model what our provision in our allowance
balance would have been under CECL. And importantly, what you see is the
starting point is coming into the quarter – we would have already had a total
allowance balance of 1.4 billion, which already would have been 372 million
higher than our balance would have been under IFRS 9, or was actually under
IFRS 9. So there we would have already in the process of adopting CECL, we
would have already booked the 372 million increase directly to equity, similar
to when we adopted IFRS 9, and similar to what you saw with the US banks, and
also the Swiss bank that report on the US GAAP. So then, the impact during the
quarter was an incremental 80 million in stage 2 on top of what we would have
booked under IFRS 9. And so that then takes the total increase, you see, our
increase goes up to 429 and then we would have seen the 80 million on top of
the 372 to get to 450 million under CECL. So that results in the total of 890
million in allowance balances of the end of the quarter. I hope that’s clear.
Andrew
Coombs, Citi
That
is clear. Sorry, I missed the step-up at the end 2019 there. I guess just to
round out this whole debate, if we’re trying to essentially kitchen sink, I’m
not sure, it’s clearly not the right thing to do, but if we were just to look
at kitchen sinking sensitivity. You talk about ECL allowance to move to, two
parts to your equation. One is if you were essentially expecting to do the
life-time credit losses in all stage 1 and 2, which goes from 429 to 900, so
470 incremental, and on top of that you talk about if it were to move to a
severe downside scenario, it would be an incremental 170. If you were to move
to a 100% severe scenario and move to a life-time of expected credit losses, so
not the best case if you were to apply that sensitivity, you would be looking
at the 470 plus the 170 plus an incremental number, because you would be taking
on the life-time expected credit losses under a whole severe 100% scenario.
Does that make sense?
Kirt
Gardner
Yes,
Andrew. We run those models, and you’re right, our total allowance balance
would have further increased if we would apply a 100% of the severe scenario
plus the full CECL impact. And you can assume that we would have been nicely
above a billion. And we just run those scenarios so we understand the
sensitivity in the reporting, what would happen and what if – but of course
it’s not relevant because we’ll report under IFRS 9 going forward. (Sergio
Ermotti: And it goes against equity). And well, at that point the question is
how much of that would have gone against equity, which kinds of gets into your
second question. And you can’t exactly look at dollar for dollar in terms of
what we booked, because the structure of our Basel III expected loss sits in
capital, that balance has an assumption across different parts of the portfolio
– so depending on what you booked for stage 1 or stage 2, it would determine on
whether a portion of that goes to equity or a portion does not, is offset. So
it’s a little bit more complicated and nuanced in terms of the actual impact.
We can get back to you and just reconcile what took place during the first
quarter.
Andrew
Coombs, Citi
No,
I appreciate that, we’re all having to adapt to the complexity of IFRS 9. But
thank you, that was very helpful.
Benjamin
Goy, Deutsche Bank
Yes,
hi, good morning, two questions please. First, on your client survey, sounds
relatively constructive – do you think you can keep your fee margin more stable
this time unlike in previous crises? And then secondly, on the 183 million of
write-downs, that were fully offset by hedges – I’m just wondering is that your
general hedging policy or could you act swiftly as the pandemic unfolded? Thank
you.
Sergio
Ermotti
So,
I mean, first of all I think that if you look from an historical standpoint of
view, when you look at margin perfection, I don’t know if you refer back to the
financial crisis, where we had more of an idiosyncratic situation, of course
you know, protecting margin there was a function of outflows – but in general I
can say that in an environment like this one, we can price-advise, we can get
margins up on transaction business. So I don’t think that there is an issue of
margins as you can see it is all about client activity levels and the way we
engage with them, if anything in many cases, we are able to, you know, price
our services while staying competitive in a way that is recognised by the
client as being added value.
In
respect of our hedging strategy, it is very much what I said. It is not that we
were particularly quick in reacting to the pandemic – it’s part of the way we
manage risk across the cycle. So I remember that means that maybe there are
quarters in the past in which we could have seen a little bit of a better
momentum in NII and any other dimension of the business, but we always say that
what matters for us is risk-adjusted returns. And return on deployed capital.
And looking at also our cost base versus the return on risk-weighted assets.
And in this quarter, you saw this being fully deployed. So no, we were not
quicker or smarter during the crisis. We were coherent over the cycle, entering
into the crisis with the same discipline we had over the last decade.
Benjamin
Goy, Deutsche Bank
Very
clear, thank you.
Adam
Terelak, Mediobanca
Yeah,
good morning, I wanted to dig back into GWM and NII – I know your hesitant to
give any formal guidance, but I wanted to understand whether we can still think
about the 60 million of the cuts that we had last year, as a potential
headwind, and then how we’re thinking about loan growth on the other side?
Clearly you are sticking to your 13% mid-term guidance on CET1. But there are
lingering COVID19 RWA coming through. Does that mean that your loan growth
aspirations for GWM have been downgraded, or is there any impact shall we say,
given that there is some balance sheet that has to be set aside for COVID
crisis?
And
finally, could you give us a bit of colour on the deposit outflows you saw
clearly in the repricing there, and whether you could quantify the benefits for
the quarter and what that could be for the coming quarters as well? Thank you.
Kirt
Gardner
Yes,
thank you Adam, just in terms of our capital deployment – and I already
highlighted when I addressed how we saw our RWA progress as we go through
Quarter 2, and I think importantly, what I indicated is, we do expect, and
there is a portion of capital that we expect to deploy for lending purposes.
And that cuts across any potential drawdowns along with any additional business
that we would do within our P&C business as well as our IB and GWM. Very
importantly, we’ll continue to prioritise our allocation of RWA for further GWM
loan growth. And what you saw on the first quarter, is actually, our loan
growth was trending very, very positively as we got through the first half of
the quarter – we reached almost 9 billion. But then we did see some
deleveraging from COVID. We ended up with about short of 4 billion in net new
loans. We continue to have a good pipeline of opportunity with GWM and we would
expect to continue to see lending growth as we make our way through second
quarter. That in turn will help us set part of the net interest income
headwinds that we see from the rate cuts that were referred to, they were very
clearly, if you model it through, there is going to be a step down,
particularly in deposit margin, as you go through the quarter, and we’ll do
everything we can on the deposit management side along with loan growth, to
offset that as much as possible.
In
terms of the deposit outflows, what I referenced is that we saw 16 billion
outflows from the programs that we announced that we would implement at the end
of the 4th quarter, coming into the 1st quarter, I did
say that that was accretive overall for NII – that also, will have a positive
impact to partially offset some of the headwinds that we’re seeing. We didn’t
indicate how accretive, but it does have an important impact overall on net
interest income.
And
then, more than offsetting that actually what you saw also during the quarter
is we did have very strong deposit inflows, particularly in the US – and I
think that just references, first of all, UBS is viewed as being a safe haven
and a secure place to put your cash, along with move the clients made, where
they did go out of investments into cash – so they are holding more cash now,
including with us.
Adam
Terelak, Mediobanca
Great,
thank you.
Magdalena
Stoklosa, Morgan Stanley
Thank
you very much, really two quick questions. One on costs, and another one on
medium-term targets. So on costs, of course we’ve discussed some caution on
revenue trajectory from here, but how do you see your cost flex as a potential
for the offset of the revenue challenges? And particularly, in 2020. And my
second question really, how do you see the medium-term targets now kind of
post-2020 as kind of numbers that you would like to deliver or aspire to,
beyond this year. Thank you.
Sergio
Ermotti
Thank
you, Magdalena. So I mean, first of all, in terms of the mid-terms target, the
aspiration remains the same mid-terms – of course we are not really moving away
and we need to have more visibility on how the environment develops – to talk
about 2020 is very dependent on that. Medium to long term, I am totally
convinced that particularly in 2021, we will see a more normalised environment,
and therefore there is no reason for us to put in doubt our medium to long-term
targets range. Short term, you know, I am glad that we have a strong start of
the year, we do our best to get at the target but it’s very premature to talk
about that. But I remain totally convinced, and the first quarter gives me even
higher confidence that while it’s not really appropriate to talk about targets
in this environment, one cannot stop to think about how to manage the crisis
and how to manage the near terms and the medium terms stories. So overall, on
cost flex, you know, first of all I have to say that we are still working on taking
down a billion of costs for this year – a chunk of it will be fully annualised
into our numbers. But we are also of the view and if anything, this quarter was
a vindication of our story that the issue is that if you don’t continue to
invest in your capabilities, you are not able to have infrastructure that
allows you to serve clients, to be effective and efficient, and to capture
opportunities. So the flexibility we have, we have some natural edges on our
cost side as a function of our revenues works in the compensation for example.
We can delay or spread over time some of those investments that we want to do.
Therefore, we gain further flexibility. But I don’t see us having a necessity
to take Draconian actions on cost – because as you can see, the issue is all
relative about how the revenues environment performs and therefore we need to
stay focussed on creating value long term and not take actions that are not
constructive for the future.
But
we have some degree of flexibility across natural edges and delays on how we
implement.
Magdalena
Stoklosa, Morgan Stanley
Thank
you very much, very clear.
Jernej
Omahen, Goldman Sachs
Good
morning from my side as well. I have three questions. Sergio, in your opening
remarks you made reference to selected regulatory changes that were implemented
but have been implemented so far on a temporary basis and that you were hopeful
that some of them could become permanent, or should become permanent. Can I
just ask you, if you are willing to be more concrete as to exactly what
measures you had in mind?
The
second question is on again, Sergio, in your opening remarks you were talking
about government plans in which UBS is playing an active role – you commented
that UBS will not make any profit out of these programs and whatever profit is
made, will be donated. I was just wondering: so as a starting point, what are
the asset prices for these loans? Because I am assuming the starting position
is we are solving this for break even, so that you would get asset prices which
are asset rates rather which are very, very attractive from a borrower’s
perspective.
And
then my third and final question is just, obviously all the focus is on credit
losses, and the credit quality outlook, and I’d like you maybe to comment in a
different manner – Sergio, obviously, you were in European banking at the time
of the global financial crisis, and the European sovereign crisis, and I was
just wondering, you mentioned a very still, still a very wide range of possible
outcomes for this current crisis we are going through. In your mind, how likely
is it that the credit loss experience in this crisis – the credit loss, I’m not
talking about mark to market and those things – that the credit loss experience
in this crisis is less severe than what we’ve seen in 08-09 and 11-12. Thank
you very much.
Sergio
Ermotti
So
thank you, well, I mean, I don’t want to go through our very comprehensive view
of detailed regulatory issues but I would say that, you know, from my
standpoint of view, as I mentioned, there are great merits, of you know, of the
regulatory framework and regulation that responded to the 2008 financial
crisis, as I mentioned, I believe that the vast majority is absolutely, was
necessary, is necessary. But inevitably when you make so many changes, we have
a situation in which you create intended or unintended consequences that then
prove to be contra-productive over the years. And I believe that recognising
also that this crisis not like the financial crisis, on which the entire
regulatory regimes were de-facto built – we need to respond and adapt now to
the crisis and fixing those issues.
In
my point of view, I mean, I can tell you two examples where I believe there is
a need of rebalancing: for example, the temporary relief on LRD calculations for
cash deposited at central banks is being taken out of the LRD calculation. It’s
something that I think is a structural issue that should have never been there.
It’s not very coherent with the way risk weightings are assessed on some of the
sovereigns. Therefore I could have said that this should be a permanent use. In
our example, we are right now more risk-weighted assets constrained so we don't
have an LRD need, but also having an LRD concession that adds two months, or
three months of time horizon, is useless. Because you can’t do the deploy of 6
billion of LRD with a danger of those LRD being pulled back in three-month
time.
The
pro-cyclicality of some of the provisions, although, again we are very
comfortable with our provisioning, as I mentioned before and Kirt really
explained this matter comprehensively – the truth of the matter is that the
outcome of our CLE is a reflection of our credit risk. And therefore, but I do
see that some of the IRFS and the accounting standards are putting too much. pro-cyclicality
I would expect maybe two times to be able to build up more reserves and having
less volatility around this issue. Particularly in the first phase of the
situation. So this is something that is a minor effect. They are not
necessarily comments that are reflecting UBS, by the way.
Government
plans – I mean there are, if you look at the Swiss program, there are two
aspects – one is for the very small SMEs where the government is guaranteeing
100%, and there is no interest rate, so we make no profit out of the credit, we
have potentially a funding, we have a funding advantage, because we can
refinance those loans at the central bank – so if you take out our cost,
potentially of serving the clients and so on, potentially we will be left with
some margin out of the funding, between 0 that we apply to the clients and the
refunding at the Swiss National Bank – that’s where we think, you know, we will
not book those profits, we will, eventually if there are any profits, going to
put them into our a relief fund.
For the
second trench, we take 15% of the risk – of the risk-weighted assets – and we
are still able to refund it at central bank, but there we take risk, other than
the cost of serving. We’re going to also there try to really manage the line.
So the spirit of helping now is not to make money out of this program. The
spirit is to become the transmission mechanism for governments and central
banks to help the economy, and it is not for banks to make any profit out of
it. And that’s the reason why we take that stance.
On
credit losses, what happened, that is very difficult to answer that question –
I think that’s of course one of the scenarios, we are looking for example – is
what happened to our credit risk provisions during the financial crisis in the
Swiss business, right? If I take, as a reference point, that one. Over 2008, 09
and 10, we took in aggregate 250 million of losses. Now each crisis is
different. And you know, as you do with stress models, you go across the board,
you look at different situations, and we believe that we can see that financial
crisis as being one of the outcome, but even, if it’s more, or less, it doesn’t
really meaningfully change our view that you know we are able to absorb a
higher degree of stress and credit without compromising the soundness of our
capital and our profitability also, importantly.
Because
if I really run through the Swiss business – also through a severe stress –
they’re going to come out with being able to pay their cost of capital, most
likely. So that’s really the kind of stress we look at when we do scenario
analysis, and of course you know, it’s very complex, as you know, and you know,
we try to keep it as simply as possible in the external communication. But the
most important issue for me is that there is a high degree of prudence and
while looking always for risk reward, because we are – as an organisation, what
I always like to say is that we are not risk-averse, we are risk-aware – and it
means that we are pricing risk appropriately and also taking in consideration
worst-case scenarios.
Jernej
Omahen, Goldman Sachs
Thank
you very much.
Amit
Goel, Barclays
Hi,
thank you. So just a follow up, just on the CET1 capital. Just wanted to check
in terms of creating migration impact – what are you seeing or thinking for
that in Q2. So I think a number of banks have kinda called that out as a
potential impact. I saw obviously on the undrawn commitment on slide 22, I
think there you’re referring to stable risk-weights on drawn exposures, but I
think that’s maybe a slightly different thing. So just wanted to get your
thoughts. Because just trying to understand really where CET1 capital may drop
in Q2. Thank you.
Kirt
Gardner
Also
a little bit difficult to answer the question, because it depends on what you
assume for your rating migration. But obviously, weighing downgrades certainly
will have an impact and will increase our RWA, and we include that in our
modelling – we look at that in our stress scenarios and we add that to
consideration in terms of how we could deploy capital along with what our
buffer retention should be. But it’s not a straightforward question to answer,
unless we talk about multiple different scenarios and what kinds of downgrades.
Sergio
Ermotti
Well,
but I guess at the end of the day we have given you the guidance on what we
expect our CET1 ratio to be in Q2. Kirt clearly said that it may be slightly
below our range guidance. So you have to assume that our scenario coming into
second quarter is embedding the recent developments and our other dimensional
on capital generation. But you know, who knows what happens in a few weeks’
time. At this point in time, we are comfortable with that statement.
Kirt
Gardner
Maybe
just to kinda further make the point, I think if you look at our slide 19, you
see that rating migration really is impactful to our corporate loan portfolio,
which is pretty confined at 27 billion – so perhaps unlike others, we don’t
have a large portion of our portfolio where rating migration could have a
substantial impact in RWA spikes.
Amit
Goel, Barclays
Thank
you.
Piers
Brown, HSBC
Yeah,
good morning, quite a few of my questions have already been addressed. So I’ve
just got a couple of small follow ups. Just firstly, coming back to the
question of the CET1 temporary exemptions – where you’ve talked about not
having availed of some of them. I think we’ve, I mean we’ve had a couple of
them already outlined in terms of, I think, on the slide you talked about the
Var backtesting exception and how that didn’t really help your market risk
number. You also talked to Sa-CCR you fully implemented that rather than
phasing. Is it fundamentally the case that you chose not to avail of other
exemptions, regulatory exemptions? Or is it just that any other items outside
of those two that you’ve highlighted weren’t material for you this quarter?
That’s the first question.
And
then the second question, just coming back to some of the mark to market Losses
that youj’ve highlighted on the auction rate positions and the 183 million on
the LCM and the other items in the investment bank. I wonder if you could just
talk to how those positions might have behaved so far in the second quarter.
Obviously, we’ve had a pretty big recovery in credit whether some of those
positions may have reverted back to closely to where they were in terms of
close to valuation pre–marks. Thank you.
Kirt
Gardner
Pierce,
on the RWA question, I think personally – we actually didn’t need to be able to
avail ourselves of any of the opportunities, let’s call them, that were on
offer – nor were there others that were offered to us that might have been
helpful. So in terms of backtesting exceptions, it just wasn’t something that
we required because we actually didn’t hit a threshold that would have then
triggered a multiplier.
On the
mark to market losses, first of all if you look at the ARS positions, I think
as you know what happened in the market during the first quarter, of course
with this significant dry-up of liquidity particularly in the tax-free market
just along with the drop in interest rates – on the liquidity side, we have
seen liquidity come back a little bit, and we would assume that that’s going to
be helpful to those positions. Obviously, on the interest rate side they remain
low – but I would just re-highlight the fact that the notional underpinning the
143 that we referenced on the page, is double-“A”. And so we have full
confidence that we’ll recover 100% of that notional and there’s no concern at
all that we have round that, over quality. And we also expect that we’re
currently already earning very good net interest income, so the margin on those
positions are actually also quite attractive to us – so as long as they’re on
the books, we’re earning quite well from them. Now in terms of the LCM
positions, it’s a little bit harder to talk as markets remain quite volatile
and you also have different impacts that are idiosyncratic across sectors. So
if you look at oil and gas, if you look at how different sectors are continuing
to respond to the crisis, it’s going to have a flow-through impact, and a
second-order impact on how any, either LCM, or corporate lending, or real
estate portfolios, which are the three portfolios we referenced – where we
incurred a 183 million of mark to market losses. With also the point that we
highlighted that we did offset those losses fully with gains on hedges.
Piers
Brown, HSBC
Could
I just briefly follow up on, you gave a number for the ARS book I think it's
1.4 billion. Are you able to just give some indication in terms of sizing the
LCM books, how big are they, or are you able to give any information in terms
of the size of those portfolios?
Kirt
Gardner
You
can’t really correspond specifically the LCM with those losses, because as I
mentioned, they cut across other portfolios, including our commercial real
estate portfolios. But what we did do is, we outlined on slide 21, we just gave
you an overall profile of our LCM exposure. And we were at 10.8 as of the end
of the quarter, and I think importantly, what we saw even in these challenging
markets, we were able to de-risk between the end of the quarter and the end of
last week, 3.5 billion – so our current exposure there is 7.3 billion, of which
about 40% is investment grade. And actually a larger portion of what we de-risk
was in sub-investment versus investment grade. And also, what we highlight here
is, in the sub-investment grade it all is with business that are core clients
of ours where we have a great confidence in the credit fundamentals, and also
on the strategic merit of the business that we’re doing with them.
Piers
Brown
Okay,
that’s great, thank you very much.
Patrick
Lee, Santander
Good
morning, everyone. Thanks for picking my questions. I just have two quick
follow-up questions on the wealth management revenue. Firstly, on the recurring
fee headwinds that you mentioned – the 200-300 million – I just wanted to check
with you, how much of this is purely the mechanical effect of the US quarterly
billing, or how much of this is purely the subjective view from your side in
terms of where asset prices would be by the end of June, if hypothetically the
market goes back to 2019 levels. Would that make a big change to that
assumption or to that guidance?
Secondly,
relating to transaction revenues, which has a very, very strong quarter – on
slide 12 you gave a bit more colour in terms of that, evolution by geography,
for example APAC doubling, is I guess kind of expected. But I was surprise that
Swiss actually saw such a big jump in transaction revenues. And I know you
mentioned that they are more interactions and all that, but is there anything
special in that that we should be aware in terms of the transfer of business –
or is that just the new normal in that particular geography? Thanks.
Kirt
Gardner
Yes,
Patrick, in terms of your first question, any time we provide any kind of
guidance, it’s modelling off of asset rates, interest rates, forward, anything
that we can reference from a market perspective – we generally do not overlay
any kind of management actions, or any assumptions we might make otherwise. So
therefore, when you look at the 200-300 million, mechanically if you look at
our overall invested assets, which you see quite clearly on slide 11 – so there
was an 11% drop, we were at 2.3 billion – roughly half of that is US, and
that’s a billing base for the US business throughout the quarter. The other
half is international, we bill on a monthly basis.
And so of
course, if the impact, the market performance we already saw in the month of
April, assuming that holds through the end of April, will have a positive
impact on our international business. And then it really depends on the
international side, what happens over the next couple of months.
In
terms of your transaction revenues, one of the things I mentioned that I think
did have a really important impact on the overall level of transaction revenue
we saw from clients was the increased engagement level, and Tom and Iqbal were
very focused on purposely increasing substantially the level of client
interaction we had across all our regions – and we highlighted in fact in
Switzerland there was a 30% increase in client interaction levels.
That,
combined with just this extreme volatility that we had in the quarter, that
actually made available structured product and other repositioning
opportunities, where our CIO was very focused on pushing out solutions,
resulted in the very good transaction revenue formats that we had in the
quarter – and it certainly included in Switzerland, so it extended across all
regions.
Patrick
Lee, Santander
Great,
thanks.
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UBS Group AG
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By: _/s/ Ella Campi_____________ ____
Name: Ella Campi
Title: Executive Director
UBS AG
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Name: David Kelly
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