UBS Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2024

There are 11 speakers on the call.

Operator

Ladies and gentlemen, good morning. Welcome to the UBS Second Quarter 2024 Results Presentation. The conference must now 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 included in our 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, and good morning, everyone. It has been a little over a year since the closing of the acquisition. We made significant progress and UBS continues to deliver on all of its commitments to stakeholders. Putting the needs of clients first during a challenging market environment has allowed us to maintain solid momentum while we fulfill our objective of completing the integration by the end of 2026. As a consequence, not only we have dramatically reduced the execution risk of the integration, we are also well positioned to meet all of our financial targets and return to the level of profitability UBS delivered before being asked to step in and stabilize Credit Suisse.

Speaker 2

I'm particularly proud to note that across the combined organization, our people are embracing the pillars, principles and behaviors that drives UBS's culture. This includes client centricity and collaboration and enable us to successfully manage with and act with accountability and integrity. I'd like to thank all of my colleagues around the world for their dedication and hard work. Our second quarter results contributed to a strong first half performance reflecting the strength of our client franchises and disciplined implementation of our strategy and integration plans. Reported net profit for the first half was €2,900,000,000 with underlying PBT of DKK4.7 billion and an underlying return on CET1 capital of 9.2%.

Speaker 2

We strengthened our capital position and maintained a balance sheet for all season with a CET1 capital ratio of 14.9% and total loss absorbing capacity of around $200,000,000,000 Our parent bank is well capitalized even after withstanding the removal of significant regulatory concessions previously granted to Credit Suisse. As a result, we are executing on our 2024 capital return plans. And as I mentioned last quarter, we are committed to delivering on our mid- to long term ambitions for dividends and buybacks. Turning to the integration. We have captured nearly half of our targeted gross cost savings as we restructure our core businesses and wind down non core and legacy, where we have materially reduced risk weighted assets over the last 12 months.

Speaker 2

As part of our de risking efforts, we have also made good progress addressing Credit Suisse's legacy legal issues, including the supply chain finance funds and Monza big matters. Following these intense months of execution during which we obtained more than 180 approvals from roughly 80 regulators in more than 40 jurisdictions, We completed the mergers of our parent and Swiss banks and transitioned to a single U. S. Intermediate holding company. This clears the way for the next set of critical milestones that will support the realization of further integration synergies.

Speaker 2

But let me reiterate something you have heard me say before. We still have a lot of work ahead of us to address Credit Suisse's structural lack of sustainable profitability. While we are encouraged by the significant progress we have made across the group, the path to restoring profitability to the pre acquisition levels won't be linear. We are now entering the next phase of our integration, which will be key to realizing the further substantial cost, capital, funding and tax benefits necessary to deliver on our 2026 financial targets. We are following through on our plans amid heightened uncertainties in the markets.

Speaker 2

These are the moments in which UBS proves its strength, resilience and superior ability to serve and advise clients. This is reflected in the trust that our clients have placed in us every quarter since the close with a total of 127,000,000,000 dollars in net new assets. We have also remained focused on our strategic objectives to enhance our client offering and leverage the breadth, scale and synergies of our combined franchises. In the Investment Bank, I'm pleased by the client's response to the strategic additions we have made to reinforce our capabilities and competitive position. The first half performance is a positive signal that the investments are paying off.

Speaker 2

In global markets, we saw the highest 2nd quarter on record. And in Global Banking, we have captured sizable market share gains. Importantly, we have achieved these results without compromising on our risk and capital discipline. We are also increasing collaboration across the firm as GWM clients continue to benefit from our IB products and capabilities. This drove the majority of wealth management expansion of client activity this year, particularly in the Americas and APAC.

Speaker 2

Another example is our newly created Unified Global Alternatives Unit, which combines our alternatives investment capabilities across GWM and Asset Management. In fact, this is not just an internal corporation. We are reshaping the competitive landscape by effectively creating a top 5 global player and limited partner with DKK250 1,000,000,000 in invested assets across hedge funds, private equity, private credit infrastructure and real estate. Unified Global Alternatives will offer our institutional, wholesale, wealth management clients a more comprehensive offering and enhanced access to exclusive co investment opportunities. It will also provide general partners with a single point of access to the full distribution power of our firm.

Speaker 2

In Asset Management, we are offsetting margin compression by increasing operational efficiency, which is one of the key focus areas for the business. In Switzerland, we continue to enjoy the trust of our clients despite a very competitive and at times less than constructive environment. With around CHF 30,000,000,000 in net new deposits in the last 13 months and approximately CHF 350,000,000,000 of loans extended to clients, we continue to maintain our role as an important engine of credit. Since the acquisition, we granted or renewed around CHF 85,000,000,000

Speaker 3

of loans.

Speaker 2

Higher interest rates, the cost of increased regulatory capital and liquidity requirements, a changing macroeconomic outlook and last but not least, the necessity to reprice some loans granted by Credit Suisse at unacceptable risk returns are having an impact on pricing of new credit. Of course, those are not always easy discussions to have with clients, but we are constructively engaging with them, and I believe the vast majority understand the rationale. Switzerland is a key pillar of our strategy, and we are fully committed to maintaining our leadership. Swiss clients and the economy benefit from UBS's unparalleled competitive global reach and capabilities. In turn, our swiftness is a unique differentiator when serving clients around the world.

Speaker 2

A testament of this symbiosis, we were recognized by Euromoney as Switzerland Best Bank for the 10th time since 2012 and the world's best bank. As we continue our integration journey in the Swiss business, we believe it will be important to further communicate with all our stakeholders about our approach and strategy. To that end, in September, our Head of Switzerland Sabine Kellerbuse will present at our flagship Best of Switzerland conference, which brings together investors and corporate clients. Looking ahead and more broadly, ongoing geopolitical tensions and anticipation ahead of U. S.

Speaker 2

Elections will likely result in heightened market volatility compared to the first half of the year. In this environment, we have 2 key priorities. 1st, we must continue to help clients manage the challenges and opportunities that arise. 2nd, we must stay focused and not allow short term market dynamics to distract us from achieving our ultimate goal, which is to continue to execute on the integration and invest strategically to position UBS for long term value creation. The mentoring appointment we announced in the Q2 will enable us to continue to progress on this journey.

Speaker 2

At the same time, we can put even more emphasis on our priorities and prospects for sustainable growth, particularly in the Americas and Asia Pacific. We are confident this will also help us to deliver better outcomes for our clients and the communities where we live and work. With that, I hand over to Todd.

Speaker 4

Thank you, Sergio, and good morning, everyone. In the Q2, we delivered strong underlying profitability, and we made further progress in reducing costs and optimizing our balance sheet. Net profit in the quarter was $1,100,000,000 Our EPS was 0 point $3.4 and our underlying return on CET1 capital was 8.4%. Throughout my remarks today, I refer to underlying performance in U. S.

Speaker 4

Dollars and make comparisons to our performance in the Q1 unless stated otherwise. From the Q3 onwards, we'll revert to making year on year comparisons as by then, the prior year period will fully capture combined performance post the Credit Suisse acquisition. Turning to Slide 6. Total revenues for the quarter reached $11,100,000,000 with top line performance in our core businesses holding up nicely from a strong first quarter, down 2% sequentially. Net interest income headwinds were partially offset by higher recurring fee income in our Wealth and Swiss businesses and by improving activity in IB Capital Markets.

Speaker 4

Revenues in our non core and legacy business were positive in the quarter, albeit $600,000,000 lower versus an exceptional first quarter. On a reported basis, revenues reached $11,900,000,000 and included $800,000,000 of mainly purchase price allocation adjustments in our core businesses, with an additional $600,000,000 expected in the 3rd quarter. Underlying operating expenses in the quarter were $9,000,000,000 decreasing by 3%. Excluding litigation and variable and financial advisor compensation tied to production, expenses were also down 3% as we further progressed our cost cutting and workforce management initiatives despite the intense integration agenda. At the end of the second quarter, there were about 3,500 fewer total staff compared to the end of the first quarter and 23,000 or 15 percent fewer since the end of 2022.

Speaker 4

Integration related expenses in the quarter were $1,400,000,000 resulting in reported operating expenses of 10,300,000,000 dollars Credit loss expense was $95,000,000 driven by a small number of positions in our Swiss corporate loan book. Our tax expense in the quarter was $293,000,000 representing an effective rate of 20%, helped by NCL's performance and the initial positive effects of completed legal entity mergers. In the second half of twenty twenty four, excluding the effects of any DTA revaluation, we expect the effective tax rate to be around 35%, mainly as expected pretax losses in legacy Credit Suisse entities can't be fully offset against profits elsewhere in the group. The tax rate could benefit if NCL continues to perform better than expected. We continue to expect the ongoing optimization of our legal entity structure to gradually support a return to a normalized tax rate of around 23% by 2026.

Speaker 4

Turning to our quarterly cost update on Slide 7. Exiting the Q2, we achieved an additional $900,000,000 in gross cost saves when compared to 3 months earlier, bringing the cumulative total since the end of 2022 to $6,000,000,000 or around 45% of our total gross cost save ambition. We estimate that around half of this quarter's saves benefit our underlying OpEx, with the other half reinvested as planned in our technology estate, as well as to offset increases in variable and financial advisor compensation tied to production. To date, we've generated around $4,000,000,000 of net saves, primarily driven by NCL, which has shed around $3,500,000,000 of its 2022 cost baseline. Following the legal entity mergers, we now turn our focus to the critical client account and platform migration work planned for our core businesses.

Speaker 4

We start in the Q4 with GWM's booking hubs in Hong Kong, Singapore and Luxembourg, followed thereafter by client account transitions in our Swiss booking center, which supports both GWM and P&C. Along with our ongoing cost rundown efforts in non core and legacy, these initiatives represent the most material drivers of future cost savings as we decommission technology systems, hardware and data centers, while also unlocking further staff capacity. As I highlighted last quarter, the pace of saves is expected to moderately decelerate from the quarterly run rates observed over the last several quarters, while we prepare for and initially undertake these significant integration activities. We expect to pick up the pace as we implement these transitions throughout 2025 and into 2026, particularly benefiting the cost income ratios of GWM and P&C. The rate at which we are incurring integration related expenses, which Frontrun underlying OpEx saves, is also indicative of the headway we're making on costs.

Speaker 4

In the second half, we expect to book $2,300,000,000 of integration related expenses, of which $1,100,000,000 in the Q3. By the end of this year, we expect to have incurred around 70% of total cost to achieve our 2026 exit rate efficiency targets. Moving to our balance sheet. In the Q2, we reduced risk weighted assets by a further $15,000,000,000 of which $8,000,000,000 from the active rundown of positions in our non core and legacy portfolio, which I will come back to shortly. Over $8,000,000,000 of the decline was seen across the core business divisions, mainly resulting from the financial resource optimization work in GWM and P and C.

Speaker 4

As I highlighted earlier in the year, this work is addressing sub hurdle returns on capital deployed, including by reducing deposit and loan volumes. The upshot is additional capacity to absorb headwinds from regulatory and risk methodology changes, model harmonization between the two banks and the implementation of Basel III Final, now confirmed for January 2025. While we continue active dialogue with our supervisor on various aspects of the final rules, at present, we continue to expect the day 1 impact of Basel III Final to be around 5% of RWA, driven mainly by FRTB. We'll update our estimates by no later than the Q4 as requirements firm. Our leverage ratio denominator decreased by $35,000,000,000 in the quarter.

Speaker 4

This reduction was driven by several factors, including full repayment of the Central Bank Ella facility granted to Credit Suisse, lower lending volumes mainly from our financial resource optimization efforts, and the active rundown of our NCL portfolio. We ended the 2nd quarter with an LCR of 2 12%, reflecting the Ella repayment and TLAC of 198,000,000,000 dollars Turning to Slide 9. Our CET1 capital ratio as of quarter end was 14.9%. The numerator reflects accruals of this year's expected dividend and a reserve for 2024 share repurchases, of which we have executed $467,000,000 of the plan $1,000,000,000 as of last Friday. Additionally, our CET1 capital includes all relevant portions of the purchase price allocation adjustments made to Credit Suisse's equity as of the acquisition paid last June.

Speaker 4

With the 12 month measurement period now concluded, total PPA adjustments against the purchased equity of Credit Suisse amounted to negative $26,500,000,000 of which about 70% reduced CET1 capital. Following completion of the parent bank merger earlier in the quarter, next week, we'll report UBS AG's consolidated and standalone capital ratios and other information for the first time on a combined basis. UBS AG standalone CET1 capital ratio at quarter end is expected at 13.5% on a fully applied basis. To put this capital ratio in perspective, it's important to compare the way we manage our parent bank capital versus Credit Suisse's pre acquisition practices. We provide for the complete transition of the risk weight rule changes applicable to UBS AG's subsidiary investments, which overall are valued prudently.

Speaker 4

Moreover, we don't depend on any affiliate valuation concession from the regulator. This was not the case with Credit Suisse before the takeover, where its approach overstated the parent bank's resilience and ultimately limited restructuring optionality. In this context, our merged parent bank already provides for around 20,000,000,000 dollars of additional capital resulting from the acquisition, including the progressive add ons from growth in balance sheet and market share that will be phased in over 5 years starting in 2026. The result is apparent bank capital buffer of around 100 basis points above the current fully applied requirement by 2,030. Moving to our business divisions and starting with Global Wealth Management on Slide 10.

Speaker 4

GWM's pretax profit was $1,200,000,000 on revenues of $5,800,000,000 which were up 3% year over year on an estimated combined basis. Against the complex economic backdrop, clients sought our differentiated advice and solutions as evidenced by continued strong momentum in net new asset inflows and transactional activity. Overall, we generated 27,000,000,000 dollars of net new assets, a growth rate of 2.7 percent with positive inflows across all regions. I'm particularly pleased with this result, considering the variety of headwinds to net new asset growth that the business successfully navigated in the quarter, including around 6,000,000,000 in seasonal tax outflows in the U. S.

Speaker 4

Let me unpack this further. To date, we've retained the vast majority of Credit Suisse's invested assets, notwithstanding that more than 40% of Credit Suisse's wealth advisers have left since October 2022. I would also note that these relationship managers advised on only 20% of assets, meaning that overall, we've retained the more productive Credit Suisse Advisors, a testament to the appeal of our platform. We've also kept around 80% of the first large wave of maturing fixed term deposits from last year's win back campaign with the peak in maturities expected in the Q3. Furthermore, we made strong progress this quarter in our efforts to increase profitability on sub hurdle relationships.

Speaker 4

Higher returns come from both driving increased platform revenue and proactively exiting subpar loans. With these actions in the quarter boosting the revenue over RWA margin by around 30 basis points sequentially. Lastly, from a macro standpoint, the equity capital markets and in particular IPO activity, ordinarily a significant driver of wealth creation and net new asset generation have only recently started to recover. These dynamics underscore the basis of our short term annual guidance of $100,000,000,000 for 2024 2025 and equally the resilience of our net new asset achievement in the quarter as well as the high level of client conviction in our advice and solutions. Now on to details of GWM's financial performance.

Speaker 4

Revenues declined 2% sequentially as lower NII and the expected sequential drop in transactional activity were partially offset by growth in recurring net fee income, supported by higher average levels of fee generating assets. Net interest income decreased by 2% sequentially to 1,600,000,000 dollars driven by ongoing deposit mix shifts and declining loan volumes, partially offset by our repricing actions, which as mentioned support higher returns on capital and net interest margin. Looking towards year end, we maintain our previous guidance that full year 2024 NII will be roughly flat versus 4Q 'twenty three annualized. This includes a lowtomidsingledigitpercentagesequential drop in the 3rd quarter, driven by a decrease in volumes, mix shifts in anticipation of falling rates and the impact on our replication portfolios. In arriving at this outlook and in light of recent rates volatility, we're modeling 100 basis points of U.

Speaker 4

S. Dollar policy rate reductions by the end of 2024. The outlook for net interest income in our U. S. Wealth business is expected to be influenced by competitive dynamics affecting the pricing of sweep deposits.

Speaker 4

By the middle of 4Q 2024, we intend to adjust the sweep deposit rates in our U. S. Advisory accounts, which net of offsetting factors are expected to reduce pre tax profits by around $50,000,000 annually. Looking across our Wealth business beyond year end, we expect an inflection point in GWM net interest income around the time implied forwards reach a structural floor and stabilize, and clients begin to re leverage, driving loan balances and NII higher. Moreover, it's essential to consider that GWM's diversified and CIO driven fee generating business model has proven both its appeal to clients and ability to drive profitable growth even during past periods of low or negative interest rates.

Speaker 4

Consequently, in addition to increased lending, it's reasonable to expect that lower interest rates will spur increased transactional activity, mandate sales and investments in alternatives across our Wealth business. Recurring net fee income increased by 3% to $3,100,000,000 from higher client balances. Net sales in our UBS managed account offerings showed continued momentum, contributing to a sequentially higher recurring net fee margin in the quarter. Transaction based revenues decreased quarter on quarter to $1,100,000,000 but notably increased around 14% year on year on an estimated combined basis, with APAC up around 30% and the Americas up over 20% and broadly flat sequentially versus a strong Q1. Both regions performed exceptionally well in structured products as clients sought customized investment opportunities in an environment of low volatility, high interest rates and continued global tech appeal.

Speaker 4

I would also highlight that our investments in combining GWM and IB Markets and Solutions capabilities in the Americas are paying off as evidenced by our transactional revenue performance over the first half of the year, up around 20% versus the same period in 2023. Expenses were roughly flat quarter on quarter. Excluding compensation related effects, underlying operating expenses dropped 2% sequentially. As highlighted earlier, the upcoming client account migration work is expected to be a significant driver of cost reductions in GWM throughout 2025 and into 2026. Turning to Personal and Corporate Banking on Slide 11.

Speaker 4

P&C delivered a 2nd quarter pre tax profit of CHF645 1,000,000. Revenues were down 4% sequentially, driven by an 8% decline in net interest income that was partly offset with increases in recurring net fees and transaction based revenues. P and C's NII in the quarter was primarily affected by higher liquidity costs and the SNB's 25 basis point interest rate cut from March as we kept our Swiss clients deposit pricing unchanged. In the 3rd quarter, we expect NII to tick down sequentially by a low single digit percentage, mainly due to the effects of the SNB's 2nd 25 basis point rate cut from late June. In U.

Speaker 4

S. Dollar terms, we expect NII to be roughly flat sequentially. Despite these effects, as well as higher costs related to the SNBs move earlier in the quarter to raise minimum reserve requirements, we nevertheless reaffirm our full year 2024 guidance of mid to high single digit percentage decline versus 4Q 'twenty three annualized, supported by our balance sheet actions. In arriving at this outlook, we are currently pricing in up to 2 further Swiss franc policy rate reductions of 25 basis points each by the end of 2024. Assuming Swiss franc interest rates stabilize next year as the forward rate curve presently implies, we expect shortly thereafter to see steadying volumes and an inflection point in P and C's net interest income.

Speaker 4

We also expect by then that our balance sheet optimization work will be largely complete with loan pricing reflecting a more appropriate cost of risk across the Swiss credit book. These efforts are necessary to restore returns on capital deployed and net interest margin in our Swiss business to pre acquisition levels. In this respect, we saw net new lending outflows of CHF3.4 billion this quarter, driven by repricing of sub hurdle volumes, despite having renewed or granted new loans to our Swiss clients of around CHF30 1,000,000,000 in 2Q. Transaction based revenues were up 2%, mainly from higher credit card usage. Recurring net fee income gained 3% on higher custody assets.

Speaker 4

Together, these non NII revenue lines, up 2%, demonstrate the business' effectiveness in staying close to clients and minimizing merger dis synergies. Credit loss expense was $92,000,000 driven by a small number of positions in our corporate loan book, as I mentioned earlier. Even with the increased focus on risk based pricing for maturing loan positions, our Swiss credit portfolio remains at very high quality with an impaired loan ratio of 1.1%, down sequentially, albeit up versus pre Credit Suisse acquisition levels. For the foreseeable future, we expect CLE to remain at broadly similar levels given increased book size post merger, the relative strength of the Swiss franc and some economic softness in the main Swiss export markets. Operating expenses were flat sequentially.

Speaker 4

Similar to GWM, future cost reductions in P and C will be closely tied to the client account platform migration work for Booking Center Switzerland planned to commence by the Q2 of 2025. On Slide 12, pre tax profit in Asset Management increased 26% to 228,000,000 dollars This quarter's result included a gain of $28,000,000 from the initial portion of the sale of our Brazilian Real Estate Fund Management business. In the Q3, we expect to record an additional $60,000,000 in underlying pre tax profit on gains from disposals, mainly from closing the residual portions of this transaction. Net new money was negative $12,000,000,000 with continued client demand for our SMA offering in the U. S.

Speaker 4

And positive contribution from our China JVs, only partly compensating outflows across asset classes, particularly equities. While our integration efforts to consolidate platforms may constrain AAM's net new money performance over the next few quarters, we expect our enhanced global reach and increased scale in alternatives and indexing to at least partially offset these headwinds. Net management fees dropped 5% as outflows in select active products weighed on margins. Performance fees were roughly stable in the quarter. During 2Q, AM made strong progress in improving operational efficiency, a key focus area I highlighted during the investor update earlier this year.

Speaker 4

Operating expenses were 9% lower sequentially on reductions across both non personnel and personnel costs, partially supported by lower variable compensation. Some of the sequential decline in variable comp is expected to normalize in the 3rd quarter. Onto our Investment Bank's performance on Slide 13, which as in prior quarters, I compare on a year over year basis. The IB delivered a strong 2nd quarter result with improving capital markets activity supporting an excellent banking quarter. Our Markets businesses performed well in an environment reflecting mixed market trends, in particular, low volatility in equities, rates and FX, as well as lower cash equity volumes in APAC, where we're overweight.

Speaker 4

Operating profit was $412,000,000 up from an operating loss of $14,000,000 a year earlier and up 2% sequentially as the investment banking backdrop continues to improve. Investments to deepen our U. S. Presence are having a positive impact on revenues as our contributions of Credit Suisse talent across key sectors of banking and markets. Underlying revenues grew by 26% to 2,500,000,000 dollars with nearly 2 thirds of the increase coming from the Americas.

Speaker 4

I would highlight that our revenue growth was achieved with broadly similar levels of RWA as the IB continues to manage within the group RWA limit of 25%, excluding NCL. Banking revenues were up 55% as we outperformed global fee pools, both in Capital Markets and Advisory. Since the end of 2023, we have gained over a percentage point in market share in each of our strategic banking initiatives, including M and A and sponsors in the Americas. Regionally, APAC saw revenues nearly double, while the U. S.

Speaker 4

Was up 83%. EMEA declined by 3% against a very strong prior period. Capital Markets revenues were up 82 percent year over year with an outstanding LCM performance, reflecting an increase in refinancing activity, mainly in the U. S. Advisory revenues increased by 23% as we leveraged our strong position in APAC to benefit from increased activity and perform well in the Americas.

Speaker 4

The strength of our fully integrated coverage teams is visible in our ability to win new mandates, where we ranked 7th globally in announced M and A volumes, making for an encouraging deal pipeline. While we expect to continue capturing market share, macro and geopolitical factors are likely to weigh on continued sequential Banking revenue growth in the near term. Revenues and Markets reached $1,800,000,000 the best second quarter result in over a decade, up 18 percent year on year and driven by the Americas, up nearly 40%. Equities revenues were up 17%, driven by both derivatives and cash, where we have seen material gains in market share. FRC was up 20% with broad increases across FX, credit and rates benefiting from higher client activity, particularly in FX and rates options, partially offset by lower activity and spread compression that affected our rates flow business.

Speaker 4

Operating expenses rose 12%, predominantly reflecting higher variable compensation linked to improved performance. Moving to slide 14. Non core and legacy's pretax loss in the quarter was 80,000,000 supported by around $400,000,000 in revenues, principally from gains on position exits across corporate credit and securitized products and further reductions in the NCL cost base. Underlying OpEx was down 37% sequentially, helped by releases and litigation reserves of $172,000,000 Excluding litigation, operating expenses declined by 17% as we made strong progress driving down personnel costs and third party spend. NCL's 6 month pre tax profit of 117,000,000 dollars which far exceeds earlier loss expectations demonstrates the business' skillful management in derisking its portfolios and rapidly cutting its costs.

Speaker 4

For the second half of the year, we expect an underlying pretax loss of around 1,000,000,000 dollars reflecting moderate short term upside to revenues and continued sequential progress on cost reduction, albeit at a slower rate than observed over recent quarters. Moving to Slide 15. Over the last four quarters, NCL has made impressive progress running down its costs across all lines, cutting its underlying operating expense base by over $2,000,000,000 or around 50%. NCL has also excelled in running down its balance sheet positions, significantly contributing to group capital efficiency, releasing $5,000,000,000 in capital as a result of its efforts. Additionally, NCL has cut its non operational risk weighted assets by almost 60% over the last year, including by another $8,000,000,000 this quarter, mainly from actively exiting positions across its portfolios, notably in investment grade and high yield corporate credit, securitized products and macro.

Speaker 4

Similarly, NCL's LRD is down by over 60% since 2Q 'twenty three, dropping another $40,000,000,000 of leverage exposure this quarter, reflecting lower notional as well as lower levels of HQLA. In terms of book closures, NCL shuttered another 10% of its active books in the quarter, bringing the total since last June to around 45%. Looking ahead, the progress we're making is visible in the natural roll off profile, significantly narrowing the gap to our active rundown expectation of around 5% of group RWA by 2026. Further supporting this and as additional evidence of NCL's proficiency in derisking its balance sheet and driving down costs, yesterday, we agreed to sell Credit Suisse's U. S.

Speaker 4

Mortgage servicing business. This transaction is expected to close in 1Q 'twenty five and would reduce RWA by around $1,300,000,000 LRD by around $1,700,000,000 and annualized costs by around 250,000,000 dollars To summarize, the 2nd quarter demonstrated the power, scale and secular growth potential of our franchise as we delivered strong underlying profitability and continued to make substantial progress across our integration agenda, while reinforcing a balance sheet for all seasons. With that, let's open for questions.

Operator

We will now begin the question and answer session for analysts and investors. The first question is from Giulia Rora Miotto from Morgan Stanley. Please go ahead. Hi, good morning. Thank you for taking my questions.

Operator

I'll ask 2 please. So my first one, thank you very much for the guidance on NII in GWM, which was something that the market was looking forward to. Can I just ask a clarification? If you look at the current forward curve, when do you expect NII to bottom exactly? Do you think second half 'twenty four and then we can grow or possibly first half 'twenty five?

Operator

So that's the first question. And then the second question is instead on the capital of the parent. And in particular CSI seems to have a lot of excess capital and upstreaming that could reduce the impact the potential impact from the proposal in Switzerland. Can we expect UBS to stream some of that capital? Or how are you thinking about excess capital at subsidiaries?

Operator

Thank you.

Speaker 4

So regarding the NII guidance, in terms of the implied forward curve, so as I mentioned, we ended up pricing in, as you saw in modeled, for 25 basis point rate cuts through the end of the year. If you look out in terms of when the implied forward curve would suggest bottoming out, probably pricing in more like 7% depending on what you're looking at. So I mean, from here, while difficult to speculate, it could be sometime in mid-twenty 25. But I spent time, what I think is really important to recognize is that in a lower NII lower interest rate environment, there are significant offsets and tailwinds in the business that we expect to see. And that was a point that we wanted to really ensure is well understood because ultimately transaction revenues, re leveraging and driving up NII from re leveraging and also recurring fees from mandate sales all have upside in an environment of lower interest rates.

Speaker 4

In terms of the parent bank capital, you mentioned our U. K. Credit Suisse is U. K. Subsidiary that has excess capital.

Speaker 4

Of course, we're working on restructuring and on all of our subsidiaries where we can. And ultimately, we will, as appropriate, upstream the capital in any of the subsidiaries in order to alleviate the capital at the parent bank.

Operator

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

Speaker 5

Good morning. If I could just drill down to 2 of the areas where you perhaps delivered ahead of expectations. So firstly, on the noncore, another successful quarter of actively reducing the RWAs, some further gains on some of those position exits. You're now talking about narrowing that gap to the natural runoff. So based on the natural runoff, you'd be at 6%, you're aiming for 5%.

Speaker 5

So I think that is only another 5,000,000,000 inside of active RWA management in that business. And as you alluded to, the close of the U. S. Mortgage servicing business will get you some way towards that. So should we assume that active management within the NCL book is now largely complete or will be largely complete by the end of this year?

Speaker 5

And then my second question is just on costs. Previously, I think you expected to be at 50% by end 2024. You're now at 55% guiding by N24 of the total cost save target. That's an extra $500,000,000 cost saves you realized earlier than expected. Which divisions is it that those cost saves are coming through earlier than expected?

Speaker 5

And in your mind, is it purely just a timing issue that coming through earlier as opposed to a quantum issue that you're delivering more cost saves than expected? Thank you.

Speaker 4

Yes. Thanks a lot, Andrew. So on the second one, in terms of on the costs and the performance and outperformance we're continuing to see. I mean, that's really driven, as I highlighted in my comments, by NCL, for sure. NCL has driven the lion's share of the gross cost saves to date.

Speaker 4

While the other divisions have contributed, it has been really a function of their active rundown of positions, but also the restructuring of various parts of Credit Suisse as a GSIB that we've highlighted in the past is an important part of taking out costs and a lot of those costs reside in NCL. So they've been really the benefactor of the cost performance. And as we look out towards the end of the year, the additional progress that we anticipate, even though as I suggest, we expect a bit a moderate deceleration in the gross cost saves that's expected to be yielded also by NCL. And as I highlighted, the core business divisions will then the ratio of core to non core or non core to core in terms of cost takeout will invert as we get into the second half of the integration agenda. We'll start to see the significant cost reductions hitting through, in particular, GWM and P&C.

Speaker 4

And just on the first, in terms of how we see the natural runoff and the success we've had in the quarter. Of course, we're not counting on extrapolating and we take economic decisions as they arise and the opportunities arise. So difficult to extrapolate the great outcome that we've had to date to suggest a different outcome than the natural roll off. That's why we continue to disclose it. So that becomes clear.

Speaker 4

What is important and Sergio commented this in his remarks that the uncertainty delta continues to narrow. And that's what I think is important that ultimately, while we can't count on anything in particular in terms of what can come off the balance sheet of NCL in terms of extrapolation, what we can say is that the uncertainty delta has narrowed very significantly.

Speaker 5

That's clear. Thank you. I guess the follow on would be just the your previous guidance was for a typical run rate of close to 0 revenues from NCL per quarter? And presumably that's unchanged.

Speaker 4

Yes. As I said, Andrew, that we see in the long term, that's for sure the case. In the short term, I. E. The 2H guidance that I offered, we see some modest upside to current book values on the revenue side.

Speaker 4

So some modest uptake in driving the $1,000,000,000 underlying PBT loss guidance that I offered in my comments.

Speaker 5

Thank you.

Operator

The next question is from Jeremy Sigee from BNP Paribas. Please go ahead.

Speaker 6

Hi there. Thank you. Two questions, please. First one just follows on from just exactly what you were talking about there, the guidance for the P and L drag from NCL. Obviously, it's going better than expected, which is great to see.

Speaker 6

What would we expect now? Previously, you were talking about €2,000,000,000 P and L drag exit rate in 2025 and then €1,000,000,000 exiting 2026. And obviously, it's going much better than that with sort of a €1,000,000,000 dollars drag in the second half that you're integrating. What should we expect for 2025? And could the NCL drag be finished within 2025 rather than carrying on into 2026?

Speaker 6

Any updates on that would be really helpful. And then my second question, just a more sort of specific one on Investment Banking costs. They drifted up a little bit more than revenues in the second quarter. It's not a big move, but the cost income deteriorated against those strong revenues rather than perhaps you might have hoped it could have improved a little bit. So any comments on the drivers, whether there's any one offs in there or anything unusual, just how we should interpret that IB cost number, please?

Speaker 4

So Jeremy, thanks. On the second one in the comp on IB costs, it's the comp quarter, of course, only has Credit Suisse personnel in for a short period of time for just the 1 month when you look at the year on year comp, whereas the current quarter has the people we've added for the full quarter. So that's driving that variance.

Speaker 6

Sorry, I was thinking Q on Q, I think the costs are up 3% and the revenues are up 1%, so I was thinking more Q on Q?

Speaker 4

Yes, on Q on Q, it would be just some compensation related effects that we're hitting through driving the Q on Q. But I'd have to go back and look at that. But really it's more of the year on year that we're focused on. On the in terms of the guidance on the P and L drag in NCL, in terms of what we should expect, look, I mean, we're really pleased with the performance we've had to date. As I said in my last comments, there's no way to extrapolate from that performance a straight line and to assume that that's the pace of which we'll continue.

Speaker 4

So, we our guidance remains. That's where in terms of the P and L drag at the end of 'twenty six is right now still our best estimate. When we come back and talk about an outlook in the Q4 going forward, potentially we update that and see where we are. But for now, that's our best estimate in terms of where we land.

Speaker 6

Understood. Thank you very much.

Operator

The next question is from Kian Abou Sen from JPMorgan. Please go ahead.

Speaker 7

Yes, thanks for taking my questions. The first one is related to Wealth Management. First of all, thanks again, Todd, for the disclosure. I hope some of the U. S.

Speaker 7

Peers are listening, as this was very helpful relative to what I heard before from U. S. Peers. Sweep deposits last disclosure was €35,700,000,000 I was wondering where we are roughly right now in the U. S.

Speaker 7

Entity.

Speaker 8

If you

Speaker 7

could also share with us the advisory part of that, so we can kind of understand the adjustment factor and what rate you are paying now versus what rate you will be paying for the fleet deposits on these advisory mandates? And in that context, if you could briefly talk about lending, which was down ex U. S, just to understand how much of that is related to adjustments of your offering to the CS clients versus actually losses in lending? And then the second question is on legal entity on Page 19, it's a very useful chart. And you talk about further legal entity simplification in the U.

Speaker 7

S. As well as the U. K. Legal entity going into a branch. I was wondering what capital relief you expect from that or maybe even in subjective terms, if you can talk a little bit about the changes that will happen when you describe it here on the page?

Speaker 4

Thanks, Ken, for the question. So on in terms of the second one, first, the simplification that we talk about is continuing in the UK and in the U. S, but also in other parts of the world to continue merging subsidiaries out of existence to create and unlock more capital funding and tax efficiencies. So that's what we're getting to. So we're working all through that.

Speaker 4

We just, of course, did the big parent bank and Swiss bank mergers. We re parented the IHC, but now there's still a lot of work that will continue to unlock these benefits. So in terms of capital relief naturally to the extent that and this goes a little bit to the question that was asked earlier in terms of the repatriation of excess capital say in a subsidiary, of course, that is part of the analysis that we go through as we work through it. But it's there are contingencies to the timeline in terms of what triggers and what the timing could be to merge some of these entities out of existence. In terms of GWM, so what I could say on the sweep deposits, first of all, advisory is about a third of the total that we have in sweeps.

Speaker 4

So just to give to dimension that a bit, I think that's probably useful to understand. And then as far as the pricing it goes, of course, the way we're 1st of all, it's a function of interest rates because I mentioned we're going to introduce the new rates in advisory in the Q4 because we have to change systems and go through some transitional work to get there. So we have to see also where interest rates are so in terms of an absolute price that I can offer. But what I can say is that, we will for sure price in the value of the insurance coverage we offer on deposits that benefit from multiple programs, multiple bank programs and reciprocal programs that we've invested in, and that will feature into the price of the rate we ultimately offer. In terms of lending balances ex U.

Speaker 4

S, the main driver of that, I mean, clearly, we've seen deleveraging in a higher interest rate market for outside the U. S, particularly in APAC for several quarters running. We're looking forward and seeing some signs of tapering there, but we continue to see that. As I highlighted, as rates come down, we do expect that that should taper and then start to see clients re leverage. But so the rate environment is driving some of that, but the other part of it, perhaps the more significant driver is the financial resource optimization work we're doing that a consequence of that is that loans will roll off our platform, which is one of the points I highlighted in connection with the net new asset report.

Speaker 7

And Todd, just on sweep, I know that Morgan Stanley has confirmed 2% rate to be paid. Should we look at similar rates? And could you just also remind us of where we are on the sweep volumes at the moment? Last number we saw was $35,700,000,000

Speaker 4

Yes. What I could say, Gene, is that the number is probably come in a little bit. It's driven is in also some of the comments I made on mix is driving the 2Q results. So you could assume that number has come a little bit lower. And all I could say, get anything further on the rate is, as mentioned, competitive dynamics will ultimately feature in how we want we ultimately settle on a price for the sweep deposit.

Speaker 4

So, as I said, I gave some views on considerations that we will factor in. But as far as an absolute price, that's not at this point something that we have settled on.

Speaker 7

Thanks.

Operator

The next question is from Anke Rangan from RBC. Please go ahead.

Speaker 8

Yes, thank you very much for taking my questions. The first one is just on the Basel IV impact on the €25,000,000,000 on the 1st January 2025. I guess you said you will give us a bit more detail potentially before year end. But I mean you previously talked about a €15,000,000,000 net of non core rundown. Can you give us a better indication of how the SEK 25,000,000,000 will actually look on the 1st January 2025?

Speaker 8

And then sorry, coming back on the NII guidance, just confirming the P and C reiterating of guidance that's on the U. S. Dollar basis rather than CHF? And just conceptually, I mean, let's see I mean, you now assume more rate cuts than before, but the guidance is reiterated. Can you just maybe highlight what the missing piece is that allows you to reiterate guidance?

Speaker 8

Thank you very much.

Speaker 4

Thanks, Anke. So on Basel III final, as mentioned, we still expect $25,000,000,000 impact ish 5% of risk weighted assets, so in that range. As you mentioned, we guided in the Q4 in our investor update that $15,000,000,000 in the core, dollars 10,000,000,000 in non core. I think for now that split remains pretty robust in terms of how we're thinking, how we're seeing it. And naturally, we'll continue to work down the NCL portfolio to make that impact lessened over time.

Speaker 4

In terms of the NII guidance for P and C, just to you asked for clarity on it isn't Swiss francs, so we're guiding in Swiss francs. We'll offer both in the future to sort of help. As I mentioned in 3Q, we see a low single digit down in Swissy, but flat sequentially in USD. And as I mentioned, I think that's a good outcome that we've had a number of headwinds that we've been working through sort of reaffirm the guidance for the full year is also a function of some management actions that have been taken, including some loan repricing actions that have helped. Those are the drivers of the NII guidance for P&C.

Speaker 8

Sorry, just to follow-up. So on the 1st January 25, it's a 25 percent increase in RWA or should it be lower because some mitigation NCL rundown has already kicked in or reduced the impact?

Speaker 4

No, no. The estimate is on the same basis we gave it in 4Q in terms of the impact because it's mainly FRTB driven. So for now, assume the guidance remains. And as I said, if we have an update before we go live with it, of course, we'll come back and provide it.

Speaker 8

Okay. Thank you very much.

Operator

The next question is from Chris Hallum from Goldman Sachs. Please go ahead.

Speaker 9

Yes, good morning and thanks for taking my questions. So first, you've guided for banking to generate almost twice the baseline revenues by 2026, assuming supportive markets. So obviously, performance was very strong in the Q2, but then we've had this period of elevated volatility at the start of August. Has that changed anything in terms of how close we are now to supported markets? And how would you expect the recovery to progress through the second half of this year?

Speaker 9

And then second question just on profitability. At the start of the year, you said you'd expect to get around 45% of the €13,000,000,000 gross savings by the end of and you've got there by the end of the first half. And you also guided for a mid single digit underlying return on core Tier 1 for this year, mid to high for next year. Consensus is at 6% for this year, 9% for next year. But in the first half, you're already above 9%.

Speaker 9

So how should we be thinking now about the path for underlying return on Core Tier 1 through 20242025?

Speaker 2

Thank you, Chris. I'll take the first question. So look, I think, of course, the market environment is it's quite volatile and there are element of fragility that we see. But what is most important for us is to look through the short term market dynamics. And I can tell you that I'm very confident that we are building up a very compelling pipeline in terms of mandate that we win, still not announced, and things that can be then executed in a normalized market environment.

Speaker 2

So of course, if we see the kind of volatility we had in a couple of weeks ago, that would not be very helpful for the pipeline. But in general, I'd stay I would say that positive in respect of our momentum. So again, good pipeline and good momentum in winning mandates, but of course, it will also depend on market conditions.

Speaker 4

And Chris, hi. On the second, in terms of return on core Tier 1 and how it relates to our guidance. So as you mentioned, we initially guided it mid for mid single digits for 24 and mid to high for 25. So naturally, if there's an update, we'll bring it to you when we talk about our 25 expectations later this year. In terms of where we are, as Sergio highlighted in his comments, the 1st 6 months, we generated an underlying return on CET1 of 9.2%.

Speaker 4

So obviously, we're comfortably ahead of the target of mid for 2024.

Operator

The next question is from Amit Goel from Mediobanca. Please go ahead.

Speaker 10

Hi, thank you. Thanks for taking my questions. So one just to follow-up just to make sure I also heard some of the previous guidance correctly. I think you mentioned the cost of the reprice on Suite to be about $50,000,000 annually. So I mean, I guess given the onethree advisory disclosure, that would imply only just over 40 bps of incremental cost on that portion and effectively nothing on the rest.

Speaker 10

So I was just kind of curious, I mean, in a way then you could continue to see outflow. So I'm wondering what the capacity is for the group to replace that funding at similar costs. And then also just linked to that, if I look then at the total sweep and the cost of sweep, it seems like the earnings are pretty similar to what Wealth Management Americas generates. So I'm just kind of also curious how you think about Wealth Management Americas profitability and with some of these headwinds, how you think you'll get back to that mid teens operating margin? And then secondly, just curious on the parents.

Speaker 10

Is there any scope to shift exposure from foreign participations to domestic in addition to capital repatriation and whether that can be reflected in participation values if there is potentially rule change coming? Thank you.

Speaker 4

Thanks, Amit. Yes, in terms of the second one, shifting exposure domestically, whether that helps, it's way too early to speculate on how we're going to address and what actions we take. We don't know what the standards are. So and where they'll move I mean where the standards will move, assuming they move. And so to speculate about what mitigating actions might be available to us is way too early.

Speaker 4

In terms of sweeps, yes, I disclosed that the impact on pretax profit is expected to be around $50,000,000 annualized in the U. S. Wealth business. I did say that that's net of offsetting factors. So that includes an array of banking initiatives and expense programs across various categories.

Speaker 4

So there I wouldn't take the $50,000,000 as gross income, but actually, as I said, it is a net impact. And I think, look, I saw interesting that you asked the question and then leap to how we're going to address the pretax margin issues. We nothing has changed on that. We focused on that. We know what we have to do.

Speaker 4

The sweep deposit issue is a modest hit on that, of course, because it's something we're saying is adverse to PBT. We think it's manageable. And now we're getting on with the work of improving the margins on the basis of how we've described that in the past. So we know we have to do there and we're taking steps to achieve that.

Operator

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

Speaker 4

Yes.

Speaker 3

Hi, good morning. Two questions for you. So the first one on GWM, in particular America, the costincome ratio remains above 90% then. It was better during low interest rate times. So just wondering with the mix shift from NII falling more towards cheap most likely, does it see upside to year end 'twenty six costincome ratio improvement target?

Speaker 3

And then secondly, on the capital side, you obviously have the group guidance of 14% CET1, but you've seen the 12.5% more of the binding constraint and that's the first half of the question. The second is with Switzerland being essentially only geography introducing FRTB and not delaying it. Do you think that's the final piece of the puzzle in terms of higher capital requirements for you?

Speaker 2

Let me take the second part of the questions. Of course, the 14% guidance we have right now stays as it is at the 12.5% you mentioned is a look through fully applied 2030 current requirements. We will see exactly how things developed in the next few quarters in terms of future requirements. From an FRTB standpoint of view, of course, as you mentioned, Switzerland will introduce that on January 1. It will be short term a competitive disadvantage.

Speaker 2

We don't believe it's we believe it's manageable short term. Of course, if this should other jurisdictions not converge, not to converge to Basel III full implementation over the next couple of years, then of course that would be a little bit more problematic and we would need to think about how to address this matter. So we remain confident that we will be able to have a level playing field in how we operate and compete globally, but it remains to be seen.

Speaker 4

And Benjamin, here's how we think about the your cost to income ratio question for GWM, where we have a look through costincome ratio presently of around 80%. Naturally, when we plan the $13,000,000,000 of gross cost saves and the less than 70% cost to income ratio, GWM factors in quite prominently in that piece of work. And that's why I've highlighted that the cost to income ratio will be benefited by the work that's just going to get going in the next quarter or 2, which is the client account migration work and platform consolidation starting in APAC and parts of Europe before the Swiss booking center. That will drive significant cost down and ultimately, which is why I believe that wealth and P and C will benefit significantly in the latter half of the integration work. So in terms of where we get our cost to income ratio, it will GWM's cost to income ratio in the end will be a big contributor to the group meeting its target of less than 70% by the end of 2026.

Speaker 3

Thanks, Constant. This was in particular on the Americas, GWM Americas, where you probably won't see much of a cost based benefit, but correct me if I'm wrong.

Speaker 4

Question was on the Americas. Sorry, I didn't

Speaker 3

Yes. Indeed, from the 90% right now, more towards the 85% where we can accelerate with the different revenue mix.

Speaker 4

No, as I said, look, as I said also to the before and I've said previously, we're working towards a mid teens profit margin over the next couple of years. That's where we know we have to narrow the gap where we are. That's where we are working towards. And that also features into the less than 70% cost income ratio by the end of 2026 getting to that level. So nothing that I've guided to today has changed any of that.

Speaker 4

We're very focused on taking the steps to achieve that by that in that timeframe.

Speaker 3

Understood. Thank you.

Operator

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

Speaker 10

Hi. Thanks for taking my questions. I'm just curious what do you assume in terms of loan and deposit growth in the Swiss business NII guide and your GWM guide in the second half of the year? And then secondly, how do you see deposit mix shift and deposit betas evolving within that guide as well? Thank you.

Speaker 4

Yes. Thanks, Tom. So in terms of volumes in each of the businesses, I expect loans in both of the businesses through the end of 2024 to come slightly in largely because of the balance sheet work that I highlighted in my comments. So I think in both cases, loans would come in. I see deposits as well through on the GWM side as well towards the end of the year, I mean roughly flat at this point.

Speaker 4

I see P and C growing deposits whether through the rest of this year, but certainly as we look out over the longer term. So I would say a little bit of downward pressure in terms of loans in large part just given the balance sheet work that we're doing. On the deposit side, I see more sort of flat to growing in the near to midterm in terms of the balance sheet. In terms of deposit mix shifts, look, I think in the end, we've been seeing as many banks have the effects of deposit mix and cash sorting and rotation for some period of time. As rates start to come down, we expect that the cash sorting will continue to taper and will be less of an impact in terms of the NII.

Speaker 4

And that's a little bit of what we're seeing in our outlook is just given the fact that we expect and are modeling rates coming in that we are seeing sort of in a way the last vestige of mix shifts as well rates remain a bit higher. So that's how we see the deposit mix shifts evolving.

Speaker 2

Okay. There are no more questions. Thank you all for calling in and your questions, and see you in end of October for the Q3 results. Thank you.

Operator

Ladies and gentlemen, the webcast and Q and A session for analysts and investors is over.

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Earnings Conference Call
UBS Group Q2 2024
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