trivago Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 16 speakers on the call.

Operator

Ladies and gentlemen, good morning. Welcome to the First Quarter 2023 Results Presentation. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Sarah Mackie, UBS Investor Relations. Please go ahead, madam.

Speaker 1

Good morning, and welcome, everyone. Before we start, I would like to draw your attention to our cautionary statement slide at the back of today's results presentation. Please also refer to the risk factors in our 2022 annual report together with additional disclosures in our SEC filings. On Slide 2, you can see our agenda for today. It's now my pleasure to hand over to Sergio Amotti, Group CEO.

Speaker 2

Thank you, Sarah. Good morning, everyone. I'm happy to be back here with all of you, And it's an honor and privilege to lead UBS once again, especially at such pivotal time for our organization and for all our stakeholders. First of all, I'd like to thank Ralphs, the management team and all of our employees for their dedication over the last two and a half years. During this time, UBS delivered Record results and continue to build trust and confidence with our clients and our stakeholders.

Speaker 2

Our performance this quarter demonstrates that we continue to be a source of stability for our clients during periods of significant uncertainty. Our strong flows across Global Wealth Management Asset Management reflect our clients' continued confidence and trust in us. The results include an increase in litigation provisions relating to U. S. Residential mortgage backed securities.

Speaker 2

We are in advanced discussions with the U. S. Department of Justice, and I'm pleased that we are making progress towards resolving this legacy matter that dates back 15 years. On an underlying basis, which also excludes litigation. Our results were solid with a return on CET1 capital of 16.5% and a cost to income ratio of 72.8%.

Speaker 2

When I left UBS in 2020, our strength and stability put us in a position to consider all options for our future, including transformative acquisitions. Today, UBS is stronger than ever. We diversified revenue streams, continued capital and liquidity strength, disciplined risk management and a balance sheet for all seasons. As a result, we are well prepared to be part of the solution to rescue Credit Suisse and contribute to financial stability in Switzerland and globally. Despite its complexity, I'm convinced that this transaction will also provide value for the clients and employees of the combined organization.

Speaker 2

The acquisitions enable us to benefit from the significant value franchise value and in many cases complementary businesses within Credit Suisse. For our clients, the Q1 was largely continuation of the teams from 2022. Clients continue to be concerned about the impact of debt inflation and central bank policies We'll have on economic growth, especially in the U. S. While our wealth management clients remain on the sidelines, Our advisors help them identify opportunities to manage their liquidity and diversify risks.

Speaker 2

As a result, we benefited from $20,000,000,000 in net new fee generating assets globally An annualized growth rate of 6%. Net new money in GWM was 28,000,000,000 Importantly, dollars 7,000,000,000 of this came in the 10 business days after the acquisition announcement. This is a further testament to how clients turn to us as they search for stability. During the Q1, we helped our clients diversify cash holdings as they shifted deposits into money market funds and T Bills. In Asset Management, we saw another $18,000,000,000 in We saw further deleveraging, particularly in the Americas, but also in APAC and EMEA.

Speaker 2

This was offset by loan growth in Switzerland, resulting in stable loan balances quarter on quarter, excluding FX. Compared to last year's very strong Q1, institutional clients were less active, particularly in equity derivatives and cash as they lacked conviction in an uncertain market. However, we did have strong performances in prime brokerage and electronic effects. Clients continue to turn to us for advice in managing their assets, including their liquidity. What is important is deposit shifts into money market and T Bills remained with UBS, and we also saw 9,000,000,000 in new deposits into our platform.

Speaker 2

This has supported positive net new money across all of our regions in the Q1. Let me go through each of the regions in more detail. In the Americas, Our separately managed account initiative with asset management further supported net new fee generating assets. And during the period of significant disruption in March, we saw positive inflows from our clients. As a result, we had solid menu money for the quarter.

Speaker 2

Our advisor recruiting momentum Also continued and should support flows in future periods, aligned with our continued growth ambitions in the U. S. The strength of our business in Switzerland resulted in another quarter of inflows into mandates and other investment products. In EMEA, clients continue to be cautious overall, but Net new money was positive and net interest income rose by nearly 60% as we started to benefit from higher euro rates. Lastly, While our clients in Asia Pacific continue to take a wait and see approach in terms of transactions, we saw broad based flows into Net new fee generating assets.

Speaker 2

We have now seen 17% net new fee generating asset growth in APAC over the last 12 months. When I first became UBS' Group CEO in 2011, we positioned our asset gathering and the Swiss businesses at the heart of our strategy. We successfully restructured our investment bank by reducing non core market activities and assets with discipline. We solidified our capital position and we took decisive actions to strengthen our culture. As a result of our efforts, we restore trust with all our stakeholders, As we now embark on another transformational step in UBS' journey, Our principle will remain the same.

Speaker 2

We will be laser focused on delivering the best possible outcome for our unrivaled client franchises, our employees, our shareholders and for all of Switzerland. We will do this by maintaining our strong culture and focus on prudent risk management. The combination of UBS and Credit Suisse will result in around $5,000,000,000,000 of invested assets, which is the equivalent for us of 7 to 10 years of net new money. It will make us the 2nd largest wealth manager in the world. Importantly, it will reinforce our position as the only truly global player among the leading wealth managers with strategic scale and complementary capabilities in the most attractive growth markets.

Speaker 2

We will reinforce our leading position in APAC, Switzerland and EMEA and will significantly enhance our position in Latin America. In Asset Management, the combination will improve our positioning globally and in Europe. But more importantly, we will bring together 2 highly complementary businesses to increase our scale and accelerate our strategic growth plans. With the combination, Our clients will benefit from an enhanced offering in alternatives, credit and thematics with additional scale for our index platform. We are already the leading bank in Switzerland.

Speaker 2

This is not a result of our size or market share, but our expert capabilities and the global reach we provide our clients. The combination with Credit Suisse will reinforce these strengths. There is Strong competition in the Swiss market. For example, the combined market share of UBS and Credit Suisse in mortgages and in loans to corporate and public institution is lower than that of the Cantonal Banks. Raiffeisen has twice as many branches as UBS and Credit Suisse combined.

Speaker 2

So customers have plenty of options, and we will have to work hard to earn and retain their relationships. As we think about the future of this business, my commitment is that we will look at the best option to create most value for both franchises in the interest of our clients, employees, shareholders and society at large. This assessment will be based on facts, not emotions. Globally, we will stay true to our capital light client focused Investment Bank model, which we will leverage across the organization while benefiting from the diversification and complementary capabilities. As a result, the Investment Bank will account for around 25% of group risk weighted assets on day 1 and beyond.

Speaker 2

Activities outside our strategic focus and risk appetite will be run down in the best interest of our shareholders, while minimizing the risk of potential losses to the Swiss taxpayers. We are excited about the opportunity to deliver the combined strengths of both firms to an expanded client base. And initial conversation with our clients suggest they agree and recognize the value of the combined organization. There is much to do and there will be Difficult decisions to be made over the coming months. Transformations don't happen in a straight line.

Speaker 2

We know that from our own experience. That we are confident in our ability to deliver on the end state as well as our existing growth ambition in the U. S. And APAC to create long term value for all our stakeholders. Before I hand over to Sarah, I'd like to provide a brief update on the status of the acquisition.

Speaker 2

We have received the required approvals from the Swiss authorities, including FEMA, as well as the UK's PRA and the U. S. Federal Reserve. Additional required approvals are being expedite, and we continue to expect The transaction to close in the Q2. Since the deal is pending, we are limited in what we can communicate at this time, but we remain committed to providing as much transparency as possible once information becomes available.

Speaker 2

Sarah will take you through our high level plan to provide you with more information on the transaction. One of my immediate priorities is our people across both organizations. We look forward to welcoming our new colleagues at UBS. Until closing, we are restricted in the extent we can engage and we are doing as much as we can given these restrictions. We have a lot of work ahead of to bring our firms together and this transaction will present interesting and challenging opportunities to our current and future employees.

Speaker 2

We will be one team upon closing of the transaction and we want the best people to take UBS forward. I'm also focused on establishing our target operating model and organizational structure. It is clear that while we manage this integration, we need a model that will allow us to stay close to clients and deliver on our ambitions and financial targets while also minimizing distractions. Over the coming weeks, I will provide you with more information on this. In summary, Our strategy, capital strengths, risk management and culture are what have put us in a position today to deliver solid underlying results against a challenging market backdrop.

Speaker 2

All of these factors will also play an important role as we deliver on our integration plans. While the task ahead of us is challenging and urgent, We believe that the acquisition of Credit Suisse presents a unique opportunity to generate significant long term value to all of our stakeholders. In particular, I'm convinced that this transaction will help to reinforce The leading position of the Swiss Financial Center and will be of benefit to the entire economy. As we start writing our next chapter, I'm looking forward to working with my executive team and my colleagues across UBS and Credit Suisse to build an organization that our clients, employees, shareholders and Switzerland can be proud of. With that, I hand over to Sarah.

Speaker 3

Thank you, Sergio. Good morning, everyone. Starting on Slide 8. Our first quarter reported net profit of $1,000,000,000 Included a $665,000,000 provision related to the advanced discussions with the DOJ regarding our legacy RMBS litigation matter. On an underlying basis, we delivered solid results While maintaining a balance sheet for all seasons and against an uncertain market backdrop, Underlying profit before tax was $2,400,000,000 with a return on CET1 of 16.5% and a costincome ratio of 72.8 percent, in line with our group targets.

Speaker 3

You will find the delta between reported and underlying performance in the appendix. Underlying revenue was down 8% and expense was down 2%. FX impacted revenues and expense for a positive net impact of $13,000,000 The net credit loss Expense was $38,000,000 compared with $18,000,000 last year, all low levels, Reflecting the high quality of our loan book, with 90% 94% collateralization, Our portfolio remains very resilient in the current environment. Let's start with revenue on Slide 9. Our underlying revenue ex FX was down 8% with an increase from NII in GWM and P and C, more than offset by lower asset base and transaction fees as well as lower IB revenue.

Speaker 3

What is driving this picture It's a macroeconomic environment characterized by a decrease in equity markets as well as lower levels of client M and A and Capital Market activity versus last year. However, we continue to see the benefits of higher rates and solid activity in fixed income. Moving to NII on Page 10. In the Q1, NII of $2,200,000,000 was up $520,000,000 or 31% year on year. Quarter on quarter, NII was up 3%, in line with overall guidance.

Speaker 3

This reflects The benefit of our global diversification has increases in Swiss franc and euro more than offset reductions in U. S. Dollar NII. Moving to the chart in the second column. The increase was driven by the benefit of rates.

Speaker 3

This was largely offset by changes in deposit mix. Our experience this quarter is in line with the trends we have seen over the last year. Our clients have continued to shift some of their balances from suites Into higher yielding products, we will come back to money market funds and treasury bonds, but within deposits, clients have moved into our attractive saving accounts and CDs. Moving to deposit volumes. Total deposits decreased 3% sequentially.

Speaker 3

However, it is important to note that these funds have not left our platform. At the start of the year, often based on our investment advice, we have seen clients repositioning from deposits into money market funds and treasuries within our platform. In fact, we retained those balances. And on top of that, in JWM, we had $9,000,000,000 of net new deposits into UBS, mostly driven by the U. S.

Speaker 3

After March 10. Looking ahead, Based on the current forwards, for 2Q 'twenty three, we anticipate a mid single digit decrease versus 1Q 'twenty three A slight increases in P and C are expected to be offset by reductions in GWM. We also expect the full year to be broadly in line with 4Q annualized. Now turning to costs on Page 11. We had reported operating expense of EUR 7,200,000,000.

Speaker 3

This included the litigation provision mentioned earlier and EUR 70,000,000 acquisition costs. Excluding these and FX, this quarter's operating expense was down 1% as reductions in variable comp more than offset inflationary pressures on salaries, investments in technology, T and E and redundancy costs. On redundancy costs, we saw $68,000,000 of expense related to initiatives across GWM, I'll be in the end this quarter. We expect the benefit of these actions to materialize in the following quarters. For 2023, on a stand alone basis, we still expect costs ex litigation and FX to increase by net 2% to 3% year on year, and we are on track to deliver on our gross cost saving program of EUR 1,100,000,000.

Speaker 3

Let's move to our businesses, starting with GWM on Page 12. GWM profit before tax in the quarter was $1,200,000,000 Revenue was 2% lower than last year with asset base and transaction revenue down in all regions, partially offset by net interest income. We continue to actively manage deposits sequentially. Operating expense ex litigation and FX was flat year on year. We delivered net new money of $28,000,000,000 with net inflows in all regions.

Speaker 3

Net new fee generating assets were $20,000,000,000 in the quarter and annualized growth rate of 6%, mostly into advisory mandates and SMAs. Moving to Asset Management on Page 13 with a profit before tax of $94,000,000 Total revenue decreased 13% With lower net management fees driven by market headwinds, asset mix and FX as well as lower performance fees net of the pass through referred to on this page. The costincome ratio was 81%, With lower revenue and operating expense up 1%, the team has taken action to address this negative operating leverage, the benefits of which you will see in the coming quarters. Net new money in the quarter was $14,000,000 delivering a strong net new money annualized growth rate of over 5%. This includes $18,000,000,000 into money markets as we successfully captured client demand for cash lag solutions.

Speaker 3

Now on to DIB on Slide 14. DIB delivered $477,000,000 in profit before tax and a 15% return on attributed equity. Revenue in Global Markets of $2,000,000,000 was down 15% ex FX against a record Q1 last year. In Equities, Activity level decreased in all regions, particularly in equity derivatives and cash equities. Despite this, We delivered the best quarter on record in our prime brokerage and a very strong performance in eFX.

Speaker 3

With very different market conditions versus the beginning of last year, we were up 1% in FRC with Credit more than offsetting FX and rates. Global Banking revenue was down 30% As the positive momentum at the start of the year was interrupted by the sudden uptick in uncertainty in financials in March affecting client sentiment. Against this backdrop, we outperformed the global C4 with particular strength in APAC and EMEA. Within M and A, we saw market outperformance across all regions. Operating expense was down 5% ex litigation and FX, primarily driven by lower variable compensation and with cost savings initiatives largely offsetting inflationary pressures on salaries.

Speaker 3

Wrapping up on the businesses with the excellent performance in P and C on Page 15. Profit before tax in the Q1 was CHF553 1,000,000, the best quarter in almost 15 years when excluding one off gains. This result was largely driven by 32% higher NII. Overall, total revenue rose 18% year on year, including record transaction based income and stable recurring fees. We consistently engaged with our clients, and we're able to deliver €860,000,000 of net new investment products, an annualized growth rate of 16%.

Speaker 3

We also saw EUR 1,700,000,000 of net new loans, while net new deposits were negative EUR 1,800,000,000 Our positive flows in Personal Banking were more than offset by outflows in corporate and institutional clients, mainly driven by investment activities. We delivered a costincome ratio of 52%, a 7 percentage point improvement year over year. This reflects 5% higher costs, largely reflecting technology investments. This consistent focus on our digital transformation continues to pay off. We saw an 11 percentage which benefits our clients and creates operational efficiencies.

Speaker 3

Now moving to Slide 16. At times of uncertainty, our clients continue to turn to UBS as a safe harbor. We have a strong capital and liquidity position, risk management and a balance sheet for all seasons. As we continue to prudently manage our resources, we maintained healthy liquidity buffers With an LCR of 162 percent and an NSFR of 118%, broadly stable Q on Q. We maintained EUR 144,000,000,000 cash balances, which is 29% of deposits and more than half of our HQLA.

Speaker 3

In total, 90% of our HQLA qualifies as level 1, which is the highest quality of liquid assets. In line with our liquidity management principles, we continue to target a diversified funding mix across regions and products, including deposit types. UBS has not tapped into any of the SMB facilities, and we expect to continue not to do so. Moving to capital on Page 17. At 13.9%, we continue to have a strong capital position, comfortably above our 13% guidance and 10.4% regulatory requirement.

Speaker 3

Underwork, starting at 14.2% at the end of last quarter. Net profit contributed 30 basis points, offset by capital returns to our shareholders at around 50 basis points. The net currency effect was close to nil quarter on quarter as the FX impact on CET1 and RWA offset each other. In the Q1, we have repurchased $1,300,000,000 of shares. While we remain committed to our capital return policy, and we intend to resume them as soon as possible.

Speaker 3

On Slide 18, As you heard from Sergio, we are committed to providing as much transparency as possible as information becomes available. On this slide, we summarize the sequence of disclosures. Let me highlight a few items. The first column refers to the registration statement with the SEC, which is a requirement for the close. It will include pro form a financials as of December 31, 2022.

Speaker 3

Assuming we close as expected in the 2nd quarter, 2Q earnings will include consolidated financial statements for the combined group under IFRS and in U. S. Dollars. And in order for us to have time to prepare that information, our earnings date is likely to change. After that, we plan to update you regularly.

Speaker 3

Wrapping up. In 1Q 'twenty three, We delivered a solid set of underlying results with strong flows as clients continue to turn to us for advice and stability in uncertain times. Looking ahead, the acquisition of Credit Suisse is a great opportunity to accelerate our strategic plans. We will execute the work that needs to be done with discipline while remaining focused on delivering for our clients, shareholders and all other stakeholders. With that, let's open up for questions.

Operator

We will now begin the question and answer session for analysts and investors. The first question is from Chris Hallum from Goldman Sachs. Please go

Speaker 4

ahead. Yes. Good morning, everybody. Firstly, on the future capital requirements, at the time of the announcement, Finna said that a larger bank would require higher capital buffers. Have you had any further clarity on the size of that increasing capital requirement?

Speaker 4

And particularly, To what extent those high capital requirements may be influenced by the ultimate perimeter of the group? And I suppose any thoughts you have around how those decisions Will ultimately feed into the timing of future capital return decisions. That's the first question. And then secondly, In the report this morning, you've outlined that the emergency ordinance provides for the loss sharing agreement with the Swiss Confederation, but that the emergency ordinance will expire within 6 months of its issuance date, after which time those measures would need to be codified into law by the Swiss Parliament. Does that mean that the loss sharing guarantees Still are effectively subject to parliamentary approval in 6 months' time.

Speaker 4

And if so, what are your confidence levels in getting those approvals?

Speaker 2

Okay. Thank you. On capital requirements, the situation will be clearer once we determine the Scope and perimeter of the activities we will run, particularly in respect of non core activities And also with the businesses that we will exit, this will of course have an impact on op risk capital charges and so on. So I think this is one of the issues that Sara Sure to when we have more clarity on all those aspects, we will communicate, but I don't expect this to be Some things substantial that will take away the merits and the value accretion and creation of this transaction. In respect of the guarantee, we have a little doubt that what we have agreed with the government is enforceable.

Speaker 2

Of course, there is a process in place to define exactly the details of this guarantee, And we do expect that this to be done in the next couple of months, but we are not concerned about the enforceability of the guarantee as part as an integral part of our agreements over the weekend to step in, in this situation.

Speaker 4

Very clear. Thanks.

Operator

The next question is from Kian Abou san from JPMorgan. Please go ahead. Yes, thanks for taking my questions. The first one is related to the book value per share guidance that you gave of a 74% increase at day 1. Just wondering if that still holds, first of all, at this point or has that changed post your further analysis?

Operator

And in that context, should we assume that the purchase accounting, restructuring, asset markdowns, etcetera, Should be captured by the reserves that is being built of what we estimate 21,000,000,000 The second question is in relation to more top down. How we should think about The impact on clients at this point and also retention of clients, especially in wealth management At this point already and how we should think about retention of clients post the event the clients that have left? How should we think about Your position after that.

Speaker 2

So Sarah takes the first question. I'll take the second.

Speaker 3

So when we give you the 74%, we focus intentionally on what we view as economic impact, I. E, what impacts CET1. And if you Continue to do it that way. Actually, the numbers are very stable. Of course, we're continuing to do the work on the PPA, and we're going to continue to do so.

Speaker 3

And the PPA was, of course, included in the estimates that we had given you.

Operator

And sorry, just to sorry if I may, the $74,000,000 also includes but clearly not includes additional charges to the P and L and the rest all comes to the P and L we should assume.

Speaker 3

That's right. The initial PPA comes into the CET1 or the tangible book value per share. And anything that is beyond that comes through the P and

Operator

L. Okay.

Speaker 2

So on client retention, I maybe let me reiterate that if you look at our inflows And in general, we don't have an issue with our current clients. And We do believe that in many areas where we were underweighted on a share of wallet basis, we will be able Convinced clients that the combined organization is offering a better value. In some areas, course, we will lose clients because their concentration is going to be too high. And Last but not least, I do believe that while history doesn't really always repeat itself, we are also convinced that many of the clients that We're maybe nervous or concerned about what happened at Credit Suisse in the last few months, But also, past the transaction, we'll regain faith and we will be able to get some of these assets back. So I'm totally convinced that our growth and our ability not only to retain, but to regain clients We'll be there once we are able to articulate the value proposition that the combined organizations can bring to fruits.

Operator

Thank you. The next question is from Ryan Allister from Bank of America. Please go ahead.

Speaker 5

Yes, thank you. Good morning. Welcome back, Sergio. On the comments you made on the Bloomberg TV interview Earlier about the importance of centrality of ongoing profitability, which was absolutely borne out in recent months. Clearly, the combined group has an exceptionally strong capital position On a pro form a basis, which gives you the opportunity to move quite quickly in 2 ways, 1 in sort of actual And affecting the merger and taking financial reserves against that.

Speaker 5

So should we think about Going quickly, essential to your plans because you've got the financial conditions to do it. Clearly, that was something that Credit Suisse Did not enjoy they had some ambitions to restructure they needed to pass through the P and L over time, which constrained their profitability a long way into the future. Thank you.

Speaker 2

Thank you, Ryan. It's good to be back to interact with you as well. Look, yes, what we need to do now as we go through the PPA assessment and the marks of The position we find, you can assume that the philosophy of running down non core assets will be the same you saw in the past based on cost of capital. So if we are able to dispose, to Restructure any transaction that create a loss that is lower than the cost of our capital, we will do so without any doubt, Any fears of taking upfront losses. So it's precisely so as you mentioned The profitability and the strength we have in our underlying business combined allows us this flexibility to Control our destiny.

Speaker 2

I think it's very important not to treat those positions as distressed assets, but rather non core assets. And therefore, an economic consideration has to be put in place. So every time we can do a transaction that, In our view, reduces risk, but also frees up capital below our cost of equity, we will do that. And I guess, this is It's something that now we it takes time for us to go deeper into the analysis of what it is, but This is something I'd like to clarify as quickly as possible what it is. So you can assume that one of our top priorities to clarify a path of for us to take down those free up this capital going forward and also reduce risk.

Speaker 5

Thank you.

Operator

The next question is from Flora Borkahut from Jefferies. Please go ahead.

Speaker 6

Yes, good morning. The first question I wanted to ask you is regarding the net new money, so The net new FGA, you gave us some details, including post the 10 business days that followed the Announcement of the deal, and thank you for that. I don't think I've seen any comments around the trend in April. So Just wanted to ask you what trends you've seen in terms of the customer behavior and especially regarding the NN, FGA as well as Customer deposits since the quarter ended about 3 weeks ago. And then I just wanted to come back to the risk around the concentration risk around clients and the overlap on the client base.

Speaker 6

You made interesting comments regarding the fact that You are underweight certain client segments versus TS and where you can gain from that transaction versus other client segments which could lose. Can you maybe provide us more details? Do you mean in Wealth Management specifically, also in P and C? Can you maybe comment on those client segments? Thank you.

Speaker 3

So on the first question In terms of the trends of April, we really haven't seen anything that is particularly abnormal or special. And so as such, it is not our Accustomed to guide and we will stay with that.

Speaker 2

Yes. On the client side, I mean, if you look at, For example, in Asia, I think it's clear that UBS has perhaps a stronger franchise in North Asia and Credit Suisse has a stronger franchise, relatively speaking, in Southeast Asia. So I think that the combination of the 2 is very complementary. Latin America, I mean, in Latin America, we definitely have a situation in which Credit Suisse brings Significant value to our platform and there that will make us, If not the leader of non Latin American players, very close to that, so a significant step forward. In respect to Switzerland, I would say that usually SMEs have a relationship with maybe 1 of the large Bank and with a Cantonal Bank or a regional bank.

Speaker 2

So it's there is a high likelihood that The same SMEs don't really have equal relationship with the 2 large banks. For that reason, we believe that many of them can be captured. Same issue for retail and personal clients banking. If people have 2 relationship, usually they have it with a local bank And with a large bank, so also there. And last but not least, I would say that it's fair to say that Credit Suisse has a strong franchise in large corporates in Switzerland, which is also complementary to our own.

Speaker 2

So after all, as I say, both in terms of current business mix, But also going back to my remarks, in Switzerland, there are 250 banks, plenty of competition, plenty of Cantonal banks, Plenty of Raiffeisen banks and therefore, we believe that we will be able to manage This competitive landscape, which is not easy for us through service, quality and what we can do differently than others rather than just purely size.

Speaker 6

Thank you.

Operator

The next question is from Andrew Coombs from Citi. Please go ahead.

Speaker 7

Good morning. Two questions. Firstly, just on Slide 10 in your revised net interest income outlook. Q1, you've seen a slight increase in NII. So you're then guiding to a mid single digit decrease For Q2, so it implies Q2 will be slightly below the Q4 run rate.

Speaker 7

Implicitly, this seems to suggest that Q3, Q4 is roughly then going to be stable based on your full year guidance. So I'm interested in your thoughts on the offset between rate hikes And then most important of all, deposit migration to money market if funds in future quarters. Given that we're closing in on peak rates, it It seems to imply you're assuming that the deposit migration also slows, but would welcome any commentary on that. And then my second question is actually on the liquidity coverage ratio. I think there's an active debate as to whether it's calibrated correctly In light of recent events, particularly the 10% weighting that's applied to less stable retail deposits, So interested in any conversations you've had on that, either with FINMA or the Basel Committee.

Speaker 7

And likewise, Does that mean you're going to continue to run with an LCR of north of 160% given the potential that that Ratio might be recalibrated. Thank you.

Speaker 3

So on the Q1 the first question, What you've seen is some very significant mix shift throughout the system. So $600,000,000,000 of Fed Data shows that the whole system had a 3% sequential decrease that we saw. So that is not expected to be It should be that dramatic going forward, but we certainly have planned for the Annualization of that in our numbers. And then after that, you see some normal That happened, but we continue to see some mix shift as you would expect, but potentially not at the level that was seen at the beginning of the year. It's also important to know that for us it was really the beginning of the year that was that pattern.

Speaker 3

So actually January, February where we saw a lot of mix shift and actually some of the net inflows into the platforms from deposits were in March. In terms of the second quarter guidance, You've noted that we're going to be down and that is exactly correct with P and C being slightly up and GWM, which is where those Just happening being a bit down. And then as you pointed out mathematically, that does mean that there is some level of stability over the course of the year thereafter. In terms of LCR, we believe that we are calibrated correctly because What you're seeing also is that for us, the changes in deposits have actually not done very much in terms of the change of LCR because We very much know what type of deposits are going to be sticky versus not sticky, and so we calculate as such. And of course, you've seen us very consistently being at those high levels, and we don't have an intention to drop sharply regardless of the dialogue that could happen around the LTL calculations.

Speaker 8

Thank you.

Operator

Next question is from Adam Terak from Mediobanca. Please go ahead.

Speaker 9

Good morning. I've got 2. One is a bit of a follow-up on LCR and on your long term funding strategy. Clearly, LCR standalone is pretty strong. If you look at the business you're acquiring and it's really propped up by a big SMB liquidity line, The deposits are very, very low.

Speaker 9

Loans deposit is, what, 157%. So I was just wondering how you're thinking about your long term funding strategy through the acquisition and how you might deal with kind of the flight of deposits that they've seen And how you can integrate that into your liquidity model going forward? And then second, on a slightly different topic. In GWM, you've got flat costs on lower revenues and a favorable revenue mix with NII up And fees down, normally a good mix for your cost base. Could you just discuss a little bit more what's going on in there?

Speaker 9

What sort of inflation you're seeing, whether there is an increased competition for relationship managers and whether that's changing given the new environment? Thank you.

Speaker 3

So on the LCR and more generally the funding plan, as we integrate CEAS, Today, they are user of the SME facilities. It will be our intention certainly to manage that down as quickly as possible, but recognizing the gap that you're pointing out, and we will indicate that as soon as ready. In terms of the GWM, sorry, what you're seeing is, as noted, a very strong NII performance. In Asset Based, it's the combination of the market levels as well as a little bit of the margin Compression that has happened over the year, which is just a mix topic that we have discussed. And then in terms of the transaction activity, not yet very elevated just based on the level of uncertainty that our clients are dealing with.

Speaker 3

And then what you have seen though is on the expense side that we have good rigor where the expense ex FX is and litigation is flat. And so you are offsetting those inflationary pressures And by the good weather that we are seeing, and this is what continuing to be on the offense in terms of our FA recruitment and organic growth.

Speaker 9

Okay. So the inflationary pressure there sounds quite high to be managed there?

Speaker 3

That's right. It's being managed by the offsets. And we've done some actions, which I've mentioned, which in total are helping us More on the forward quarters than in the current quarters and are also affecting the quarter and are still included in our costs being flat. So really a good performance.

Speaker 10

Thank you.

Operator

Next question is from Jeremy Siggy from BNP. Please go ahead.

Speaker 11

Good morning. Thank you. And welcome back to Sergio from me as well. I just wanted to pick up on a couple of topics that you've touched on already. Firstly, you talked about the Swiss Bank's combined market share.

Speaker 11

I wanted to clarify, is your plan to fully integrate the 2 networks under a single brand, single product range, single network, back office, head office? And then secondly, you also touched on the risk shelter. If I read the documents, it seems narrowly defined so that it won't cover Things like litigation, restructuring or indeed the operating costs of non core, only asset disposal losses. So it seems relatively unlikely to be drawn. So I just wanted to ask, is your base case that you will draw on that risk shelter or that you also agree it's unlikely that you will draw on that risk shelter?

Speaker 2

Thank you, Jeremy. Look, The base plan that we announced on day 1 when we announced the transaction was, of course, the full integration. But we Reiterated afterwards and I did it also before that we are now evaluating what is the best option for the combined businesses going forward. I personally and we believe also that There is no real issue in terms of oversized presence in Switzerland or market share Topics, I mean, for the reason I mentioned before, we may have to balance what is the best things To do from a shareholder standpoint of view with other aspects, we will take in serious consideration, what is the best interest of clients, what is the best interest of employees and overall for society. Having said that, what we need to do is also to make those decisions based on facts and not emotions.

Speaker 2

Right now, the discussion is totally based on emotions, in many cases, totally uninformed. And we need ourselves to understand better those issues before we come to a conclusion. And it's very important not to jump into any conclusion. Whatever we do has to be sustainable and viable. And therefore, it takes a little bit of time, but it won't take forever.

Speaker 2

We know that Both employees, clients and in general, you as well, you want to have and we want to have as quickly as possible clarity on what to do. So be patient and in the next few months we will create more clarity on the matter. In terms of risks, of course, You're right. I mean, 1st of all, we have to realize that any losses that are coming outside the non core unit Our part will be absorbed by the UBS. So the only item that is subject to the guarantee is the non core unit.

Speaker 2

And the first $5,000,000,000 of losses coming from that unit is on UBS. So we have almost By default, an interest to be prudent in the way we mark this position And sustainable in the way we look at how we dispose those positions. But At the same time, we are also the one that want to preserve value for our shareholders. So But at this stage, it's premature to discuss if we have to do it, when we have to do it. This is also a matter that needs to be closed as quickly as possible in terms of creating clarity.

Speaker 2

So the next couple of months there It will also be very important for us to fully understand the exposures, and I'm convinced that this can be done in the timeframe that I just outlined.

Speaker 5

Great. Thank you very much.

Operator

The next question is from Anke Rangan from Royal Bank of Canada.

Speaker 12

The first is just about The mechanics as you pay with the treasury shares, if there's a difference versus your new shares Just conceptually and in terms of the impact. And then secondly, just a different question. On your commercial real estate Soja, can you give us a bit more detail on the regional mix, potentially maturity profile, LTV and so on? Thank you very much.

Speaker 3

So on the treasury share, what happened is we actually repurchased some of the shares and they are Available, they could have been canceled. And what we're doing is we're using them for the purpose of this acquisition. So we are not issuing any new shares. In terms of commercial real estate, we have a very conservative portfolio that is That has exposure to Switzerland in particular, but and all of that is according to what you The high collateralization that you would expect and when we give you all of our On levels of reserves, we certainly reflect on the very high quality of those portfolio.

Speaker 12

Okay. Thank you.

Operator

Next question is from Amit Goel from Barclays. Please go ahead.

Speaker 8

Hi, thank you. And welcome back, Sergio, 2 for me. So two questions. The first, again, just on the transaction and the announcement on day 1. I just wanted to check-in terms of the cost savings and The time line for EPS accretion, whether or not your conviction levels have changed based on the information that you've had or seen since then?

Speaker 8

And then secondly, I was a bit surprised by the amount of, I guess, deposit outflow on a reported basis for GWM in the quarter. Do you mind just going through that in a bit more detail? Because obviously, that's net of the inflows that we're seeing towards the end of the quarter. So I appreciate there was a bit of shift in mix and so forth. But If you could give a bit more color, that would be helpful.

Speaker 8

Thank you.

Speaker 3

Sure. So in terms of the cost Savings and EPS, the assumptions that we gave you stand. And What is important is for the EPS question to remember that we gave you what would be reported numbers. So we are not Excluding non core, we're not excluding restructuring charge. And given that we're dealing with non core assets that could have a time line, It could be that some of that comes over time, which is why we gave ourselves until 2027.

Speaker 3

Certainly, the core EPS appreciation in our models was faster than that. And then in terms of the deposit outflows for GWM, It is really very much the client repositioning that you are seeing at the beginning of the year. And so people came in and even with our advisers actually, we looked at their portfolios and especially in the U. S. And you've seen that phenomenon, as I mentioned, Our deposit sequential liquids is exactly the same one as the Fed data.

Speaker 3

It's a result of people really looking at The difference in particular between what you can have on an after tax basis between the treasury bonds or money markets versus Any savings products, so our products are very attractive, but nevertheless, the treasury bonds and money markets end up being more attractive. And therefore, there have been mix shifts that are very, very logical for that type of clientele and this is absolutely the right advice for client. That is really the majority of the driver and then it's offset by the inflows that we have gotten since we were brought in the storm during the period of March after things became a bit more difficult for others.

Speaker 8

Okay. And just on the cost savings, Is that kind of, I guess, conditional on what the outcome is for the Swiss business? Or is the conviction still there on the greater than €8,000,000,000

Speaker 3

So the $8,000,000,000 plus was done based on the base case. And of course, anything beyond that would be done in the context of what Sergio said in value creation.

Speaker 8

Okay. Thank you.

Operator

The next question is from Benjamin Goy from Deutsche Bank. Please go ahead.

Speaker 10

Hi, good morning. Two questions, please. The first, we reiterated the 25 Percent of the new group going forward will be the Investment Bank. If I combine UBS and Credit Suisse as of Q1, I'm already at that number before fully transferring Securitas products and so on. So does it mean you're already happy with the perimeter of the group and Essentially happy to diversify your fixed income business via the credit space and trading?

Speaker 10

Or is this number ultimately going lower towards maybe 20% or whatever the number is. And then secondly, wondering about Global Wealth Management. Do you reunderwrite The Credit Suisse client from a risk perspective, I. E. Is there a new onboarding process?

Speaker 10

Or Do they just join as of the deal completely? Thank you.

Speaker 2

Well, on the 25%, I mean, it depends how you make the calculation. But directionally, what we are saying is that The 25% on a normalized basis will be the maximum. And from there onwards, we will look into What fits into our risk profile? There are many areas where Credit Suisse will Bring new capabilities that are good and enhancing our franchise and investment bank. So we are not concerned about Those activities.

Speaker 2

And as you know, there is also some kind of correlation with risk weighted assets being a function Of markets movements and volatility, so we can't really right now point as a normalized number that we are happy with, Other than saying, 25% will be the maximum and no matter what. So that's a good starting point. I think that if you look at the combined organization, we will reduce the weighting of going forward. And most importantly, we have a more diversified business. So there is also one of Going to be part of our offering.

Speaker 2

The on boarding will be done in a pragmatic way unless we have red flags. We will onboard clients. We want to make the journey and the experience of clients as smooth as possible. But of course, The operating model in principle is the one of UBS. So then as we then onboard clients, we will then Look at the suitability and making sure that they fit into our Standards, I don't expect major differences, but here and there, we may have different views on certain client segments or people.

Speaker 10

Understood. Thank you.

Operator

Your next question is from Tom Hallett from KBW. Please go ahead.

Speaker 13

Good morning, everyone. So just a couple from me. So I mean, firstly, how concerned are you Around the revenue attrition already taking place at Credit Suisse. I guess where I'm coming from is based on the current revenue The €8,000,000,000 of cost reductions might not actually be enough. So could we be in a situation where a deeper restructuring is required?

Speaker 13

And then maybe secondly, around buybacks. I mean, part of the issue there is People are trying to time it and obviously work out the capital and so forth. I suppose you've got one side you've got the government guarantees and then on the other, You've got a very politically sensitive situation. And I suppose regardless of your capital position, Is it fair to assume that buybacks are very much kind of at the back of mind for now and we're talking 18 plus months away before you can even consider that between the link between, obviously, your strong capital position, expected capital position and the government guarantees? Thanks.

Speaker 2

Thank you, Tom. Look, of course, the revenue Attrition is a function of what happened in the last couple of months. And also, if you look at the profitability is highly impacted by the cost of funding they had experienced in the last few months. I think that once things are together and normalized, We will also create some tailwinds in respect of lower cost of funding and an ability to re attract I'm convinced that a lot of other clients will see the value added of Combined businesses and some of those flows will revert. So of course, we are at the same times not Complacent, if we see that this is not enough, we will need to take actions.

Speaker 2

And of course, we want to, At the very least, bring back the profitability ambitions that we had as a UBS standalone with 1 of the combined entities. So Cost focus on efficiency on cost and capital returns And value creation is part of the equation and we will do the necessary steps to do that. Look, in terms of buyback, it's way too premature Assuming that it takes 18 months for clarity, it's a guess that I fully understand Your point, but believe me, we don't know yet ourselves. So but we will give you clarity as soon as we have clarity on this matter. We need to be sensitive to many aspects, but I'm also convinced that it won't take quarters or years to create that clarity.

Speaker 2

So the trajectory of freeing up resources, of creating clarity around the guarantees, creating clarity around the business model and our capacity to combine A dividend policy that sees a constant improvement in the cash we pay out combined with Share buyback is an important element of our equity story, and we will be very focused on that In our communication.

Speaker 13

Great. Thanks, Edgier.

Operator

The next question is from Nicolas Payan from Kepler Cheuvreux. Please go ahead.

Speaker 14

Yes. Good morning. Thanks for taking my question. I have 2. The first one is for you, Sergio.

Speaker 14

I would like to know if you had noticed anything which was radically different at UBS And its processes, organization or anything between your departure in 2020 and today? And the second question is regarding Americas in There was quite a significant drop in advisers, and I would like to know if there was any underlying reason for this drop. Thank you.

Speaker 2

Thank you, Nicholas. No, to be honest, it felt that I never left. So I think that's you don't see any meaningful change. Of course, some things like it's normal. They should change.

Speaker 2

They should have changed. Not everything I left was perfect, so things needed to be addressed. And other things are very personal and then very a question of style. But No. I mean, the strength of the franchise was only reinforced over the last 2 years.

Speaker 2

And this is the reason why we were able to be part of the solution over the weekend, so which is a huge achievement for UBS. Even if when you go back into Where we were during the financial crisis, in my point of view, this was the ultimate payback to Switzerland. The fact that UBS Part of the solution was the ultimate payback on what the government had to do, and we were always very thankful for that. And so in that sense, nothing has changed, if anything has been reinforced. And Sarah?

Speaker 3

On GWM, you actually have a technicality, which is that We put in our FAs both the very high end FAs, but also the people that are in the Client Advice Center. And so it came really Mostly from the Client Advice Center. And so really focusing on the flows and the productivity of the FAs is where we are, and We are not seeing any issues here. In fact, you have seen the very good flows that we have experienced in the U. S.

Speaker 3

This quarter.

Speaker 14

Thank you.

Operator

Next question is from Andrew Lim from Societe Generale. Please go ahead.

Speaker 15

Hi, good morning and welcome back Sergio from me as well. So my first question is on NII. I appreciate the more integrated disclosure on the beat and the migration. I was wondering if you could talk More specifically about how that plays out on a geographical basis. Is That's the greater pressure on the beta migration mainly from the U.

Speaker 15

S. Side? Or are we seeing any changes in Europe And Asia as well. And maybe you can give some color on how your NII should pan out based on forward curves into 2024? And then my next question is on the IB.

Speaker 15

I appreciate you've yet to outline the premise of what means of what goes into non core. But at the same time, you've been very specific about your IBD and A for the past few years now. And so it leaves a question mark over the left in business, Which see if the lumps with IBD, I guess the question is, how do you see that business within your IB structure.

Speaker 2

Okay. Thank you, Andrew. I'll take the second question. And I think that, yes, the DNA won't change. What we do It's part of the equation and having a diversified portfolio of businesses does include also having leverage finance.

Speaker 2

Of course, we will stay very focused on how we are present in that business. We want to be meaningful to our clients, but also to be mindful that this cannot be the driver of the profitability of the Investment Bank with all associated Volatility and risks. So you can count on us or our clients can count on us being A relevant player, but definitely we are not our ambition is not to be at the top of the league just for And to make it a central part of our model. So Expect the margins a little bit more, but in a very, very focused way. And we will also look at ways to Be creative around that business because there are opportunities for us to also partner with other institutions on how to manage Residual risk.

Speaker 2

So our ability has to be the bridge in the investment bank between different sources of capital And not necessarily originate and store risks.

Speaker 3

So in terms of the NII, So looking at it by region and really by currency is how we think about it. What you have, 1st of all, as a broad statement is that For each product category in each region, the realized data are at or below the model better But then what you have is you have mix shift within the deposit products, which are yielding those high overall It's basically repricing. And what we are seeing is then based on where we are in the cycle. So in the U. S, we are at those very high rates where we are at very high incremental betas And that's continuing with the mix shift that I discussed in the best interest of the clients.

Speaker 3

Then you have in Europe, we went from being really at fairly low levels You are now moving into a place where there is price sensitivity, especially for GWM clients. So you have seen an increase, which is totally planned, but a little bit of mix shift also there, but a bit less on the mix shift there. And then in Switzerland, you've got a mix where you've got the P and C, especially on personal banking, where you still have a very low level of rates in all of Switzerland. And we have put in place Appropriate levels of pricing actions, but yet have been are still in that place in the cycle where you're seeing less of air shifts or repricing just based on where the currencies are. So going into the Next year, we are you're continuing to go higher for all of the currencies, and 2024, it will depend on the right path.

Speaker 2

Okay. Looks like there are no more questions. Thank you for being with us this morning. As I said, Despite the very uncertain market conditions, we delivered solid underlying results for the quarter. We have been maintaining our capital and liquidity And we were also able to get very close to resolve a legacy matter that has been with us for 15 years.

Speaker 2

We discussed also the unique opportunity that the acquisition of Credit Suisse presents, not only for our shareholders, but I believe also for All the rest of our stakeholders, employees, clients, society at large. And of course, this is not going to be A straight line journey. It's going to be a challenging one, but it's a complex one. But I do believe that The benefits outweighs by far all those factors. So I know that you are looking for more details.

Speaker 2

We are also looking for more details and We will really do our best to keep the communication channels open over the next few weeks So that we can provide the necessary information to have a better understanding of this great Equity story ahead of us.

Speaker 10

Thank you.

Operator

Ladies and gentlemen, the webcast and Q and A session for analysts and investors is over. You may disconnect your lines. We will now take a short break and continue with the media Q and A session at 10:45 CET. Thank you.

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Earnings Conference Call
trivago Q1 2023
00:00 / 00:00