UBS Group AG (UBS) Earnings Call Transcript & Summary

Thank you very much for being here. First of all, thanks Conner for the kind introduction. And Sergio, it's really great to have you here.

And maybe I just kick off right away with your view around the global environment for banking, especially in areas that you're operating in and especially Asia as well, clearly a lot of interest by the audience, how you see that, more your top down view overall.

Well, thank you. It's great to be back here. And well, first of all, I think, that the macro picture has changed for the good in many areas. If I go back only in Q2, at least the tariffs topic has been somehow addressed, but when I look at inflations, it's quite sticky in the U.S. again. And other kind of topics have emerged, which makes me to believe that this quarter and next quarter are probably going to be a little bit challenging from a macro standpoint of view, although we see the rest of 2026 and '27 probably then having a slight recovery. So in that sense, when I look at market activity and the situation, I'm very pleased to see that clients are still quite active across the board, also in wealth management, broadly speaking, client activity has been quite solid. When you speak about capital markets, the pipeline is building up quite significantly. I think the engagement with clients is very high, not only with strategically, but also with sponsors. Having said that, if you look at this current quarter, the fee pool is as we -- at this moment, is down around 5%, 6% year-on-year. So if you look at leverage capital markets, it's down 25%. So it's fair to say that last year, in Q4, we had a quite positive environment, very atypical for Q4. And I think that, overall, this quarter is going to be a quarter in which it would be challenging to get back into that kind of quarterly results because if you look at, particularly in the U.S., we lost 6 weeks of window. So deals are there, ready to be executed, but there is a delay. So in markets, the environment has been quite constructive in the first few weeks. But again, the second half of the year, I don't know exactly what's going to happen. But remember, last year, we had a very, very exuberant environment in November and December. So overall, still positive. But of course, this year, the seasonality comparison is not going to be favorable.

When we look at Asia, the environment that you see in Asia, impacting your wealth business, feels extremely good around Asia, but tell us how you feel about Asia generally now and going forward.

Well, in Asia, of course, we have been -- in general, I think the environment is very constructive. You see the amount of IPOs in Hong Kong, and the activity is really, really strong. And for us, IPO and capital markets activity is highly correlated with our net new assets, net new money in wealth management. So that's really when you really see the nexus of IB and wealth management working well together. You look back at Q3, with almost $40 billion of inflows was a quite testament of that situation. So we still see good momentum. What I really like about the Asian story right now is, not only that we consolidate our position as a leading wealth manager and asset gatherer with almost -- we have more than $1 trillion of assets right now, $700 billion -- $800 billion in wealth, and $200 billion in the institutional side. But it's really the diversification of the Asian franchise. I mean in the last decade or so was pretty much a China story. Right now, if I look at our growth in Australia, India, I look at Taiwan, Japan, which I was there recently, and I've been going to Japan for the last 34 -- 35 years. And this is the first time I really saw a level of confidence and positivism. And this is the third largest wealth management market in the world. And there are plenty of opportunities. So what I like about Asia right now is a much more diversified story.

Interesting. especially around Japan. And if we then switch over to the integration of Credit Suisse. We are having done the bulk of the integration at fields. We have one more year to go to really finalize that to some extent. Your return on CET 1 exit '26 is 15%. I guess that's still on track. Tell us about how the integration has progressed in terms of culture, synergies, people.

Well, look, I'm very pleased, and I think I'm very also thankful to all the people in the bank for really managing this integration while still delivering for clients. Because at the end of the day, I think that -- and by the way, so in a very changing environment, thinking about what's going to happen in the next 5 years. So the complication is very high. But of course, the big lessons learned out of this is that in an integration of this scope and size, you need to be quite clear from the very beginning that perfection is not going to be the best way to address it. So we went for what we believe was a clear advantage of the operating model of UBS, the infrastructure of UBS and avoiding the complexity of merging IT systems, but rather taking the chance of migrating clients to one platform, which has proven to be successful and the right decision. Not to say that Credit Suisse didn't have good infrastructure, but the reality is that the luxury of spending time in assessing the best of them would have been quite costly. Well, by the way, things that we believe are good and were good at Credit Suisse. We kept only 10% of the 3,000 applications and ITs, right? But some of them are in a fide. They're going to be taken out as soon as we finish the integration and then deploy them. So the second topic is the culture. I mean I think that was -- you mentioned the culture because I think it's a very important element. From the very beginning, we made it very clear that we would run the bank as in a matrix organization despite the fact that we still had legal entities and operating banks being separated. And by the end of 2023, all the people at UBS and Credit Suisse, they were on the same HR system for year-end processes in terms of valuations, promotions and compensation, end of 2023. That was a very strong signal. We kept based on meritocracy around 20%, 25%, of the second, third level in the organization are former Credit Suisse employees. So the cultural integration in the matrix organization from day 1, plus the fact that we have been giving significant positions to the Credit Suisse made it clear that we wanted an integration, although it was an acquisition, right? And the fact that today, the level of satisfaction of UBS employees versus Credit Suisse is at the same level, and it's 10 points above industry standards. So this is a huge element of -- this is the KPI I have to tell you, I'm most proud of. Because at the beginning, there was a big debate on how our -- those 2 culture going to match. And the truth of the matter is that they are quite successful. Now the second -- and managing also the capital stack, the efficiency because, of course, we inherited a bank that was loss-making. So it was not just an integration of 2 growing-concerned banks that are trying to optimize. One was gone, right? So restructuring cost, balance sheet was a big topic. I'm very happy with the noncore trajectory, both in terms of risk-weighted assets and cost. And now we are completing the journey. During the quarter, you saw that we did a big LME program. We bought back $8 billion of debt that was quite expensive debt issued by Credit Suisse. It's going to cost us $0.5 billion in this quarter that we're going to book in group items, but it's going to be very -- and 10 basis points of CET1, but it's the most important issue is to say, try to get as close as we can to the exit rate so that in 2027, you have a true visibility on what is the power of the underlying core operating bank without legacy issues. So very happy, but still, it's not over. We still have to migrate 15% of the 1.2 million clients, so around 250,000 clients in Switzerland. It was a very successful migration over the weekend. So we are now at 950,000 clients migrated. But the complexity is going up because we are now migrating the last chunk of wealth management clients, very complex products, but I'm confident we're going to get there.

And your return on CET 1 target of 15%, exit '26, well on track from what we...

We are on track with our targets. I have to say that when I look at also in terms of cost, you saw we already achieved $10 billion out of the $13 billion. So the last $3 billion is really all about finishing the 15% because until the last client is out, we can't shut down applications and data centers and IT systems. So we already took off 50% of the legacy applications and 60% of the servers and so on. But the last $3 billion are coming late. And clearly, when I look at consensus, I mean, people still don't understand that it's rather in the second half of 2026 that we can shut down the systems. Because end of Q1, we finished the migration. Then you need all the preparation and then you start to shut down and then you get down to the exit rate. But I'm still very comfortable that we're going to deliver on our exit rate targets.

I mean it is from our perspective. I mean, it's the only large -- huge G-SIB merger that we've seen since the GFC. And it's, from my perspective, at least, the best integration I've ever seen in terms of mergers. So it's been extremely smooth so far. Now taking a different shift. Clearly, there's been a lot of regulatory issues coming up as well. So we want to talk more about integration and operational issues, but I think we also need to address for the audience some of the regulatory issues that are coming up. And maybe I can start with the whole issue of ordinance. I just tried to understand the ordinance charge of roughly $11 billion DTA, software, PVA. How do you see yourself in a position relative to global peers as a result of this? And how do you think about the time frame? And give us your general view around the ordinance issue.

Well, look, when I look at -- the ordinance is part of a package that is going to -- I mean, we have 25 or plus kind of proposals on changes in the regulatory framework. But when you look at the capital, there are basically 2 topics. One is the ordinance, and one is the one that is mainly addressing the subsidiary, capitalization of the subsidiaries. The ordinance, it's really something that -- from a competitive standpoint of view, it is very difficult to understand because if you look at what really happened at Credit Suisse, this has very little to do with what happened at Credit Suisse. Actually, you could argue that many of the proposals have little to do what truly happened at Credit Suisse. Not what is talked about happened at Credit Suisse, but what truly happened at Credit Suisse is that software and DTA for sure, didn't play any role. And group capital, for sure, didn't play a role. So it's very, very difficult to understand a proposal that are so far away from international standards and that's so little to do with lessons learned. But it's not just my opinion. I mean, probably it's your opinion and many other opinion. And anybody who is looking at this topic in a very unemotional way comes to the conclusion that these are excessive and not internationally aligned. And if it's not internationally aligned, to answer your question, it means that you are not competitive. So for us, it's really important to make sure that facts drive the decision on how to potentially improve matters. There are lessons learned out of this crisis. Potentially, you can always improve. But particularly when you go about DTA and software, going too far is definitely not something that is reflecting of the underlying nature of our bank work and our international regulation work. And we, as UBS and we, as Switzerland, we are in competition. We are not operating in our crystal glass -- under a crystal bell in which we think that we can do things on our own. Our clients are international, no matter if they are booked in Switzerland or internationally. And therefore, we need to be competitive.

And if we look at the legislative process, which you could get to roughly $24 billion of capital impact for you. Where are we there in the debate? And how do you see from your perspective, a reasonable outcome? Is there a reasonable outcome really in this respect?

Well, you see the risk in talking about what a reasonable outcome is, is that there is so much subjectivity depending on how you look at things. For me, reasonable is only something that allow us to be competitive and -- but also really being able to be competitive while being a source of stability and strength to the system. So that's the reason why, just looking simplistically at capital without, for example, considering that a major element in my point of view that should be a focus and will be a focus, I hope, of the future regulation in Switzerland, is to understand the true recovery and resolution plan of a bank and how you minimize the risk for taxpayers in that issue. So when you look at a reasonable capital outcome, you need to look at a reasonable understanding for not only experts, but also for people out there, for politicians to understand, is the bank resolvable without creating collateral damages to the economy? And how is then a public liquidity backstop helping avoiding even the risk of a run? And so you have to create an ecosystem that goes beyond just going down, as we mentioned before, purely discussing about one item, ordinance, what does it mean. So the compromise is the ability to really look holistically on how you make the financial system stronger. And the lessons learned from the financial system is that past the financial crisis, take out Credit Suisse, which was a clear idiosyncratic situation, big banks, G-SIBs were a safe haven, an anchor of stability during all the crisis we had since then with COVID and even -- the proof points of that, UBS' ability to step in and rescue a G-SIB within hours. And within weeks, stabilizing it is the proof point that something is right in the system. Now we always can learn, but we should do evolutions, not revolutions.

And do you feel they're listing? Because from our perspective, I can tell you we have -- we get quite a lot of incomings from the Treasury, the Feds, the Bank of England or the ECB, but I have never had a call from the FINMA or Swiss Government to just discuss, "Okay. How do you guys see it from a market perspective?" Do they really understand in your view? And what is the balance of discussion at this point? How do you actually prevail your view?

Maybe because they already know everything better.

We'll see how this will develop. In terms of your perspective, you have said that we are not going to give a piecemeal optimization of our potential outcome and how we mitigate potentially some of this. We're going to do it once we are ready. What has to happen for you to say we are ready at this point to give you a little bit more detail how we think about how UBS will be run going forward?

It's only, as you expect me to do, is when I know facts and I can make statements and I can make commitments. And in absence of clarity on what it is exactly, it's very difficult for me to go into mitigation discussions or any other item because depending on what it is, you may have different options. And starting to discuss about speculating or going through hypothesis, it's really, in my point of view, even more confusing. Of course, we're going to have to take actions. The current proposal are not acceptable. Let's be very clear. I mean, they are not going to work for us. We're going to respect whatever the outcome is, but they're not going to work for us. So things have to be taken. And I can assure you that there is no low-hanging fruits. Because we have been planning carefully in 2023, '24 on what needed to be done to make sure that out of such a tragic unnecessary event, we could do something good for UBS shareholders, for clients, for employees and for the country. But the issue is that we can't go beyond a certain level of efficiency. There is a point in time in which it's impossible to be -- I mentioned that jokingly, but it's quite serious in my point of view. We are not magicians, right? So I mean, I'm sorry, we can't just go as far as optimizing the situation. And then we're going to have to really look at what are other actions we have to take. But at this point in time, I don't really want to speculate about what it is.

Understood. And clearly, one question, and I'm going to phrase it a bit differently is, do you really need to be a Swiss bank? I mean, could you be a U.S. bank? Could you be a U.S. operation headquartered in a different country, from Switzerland or even Germany? Is there optionality? Do you see that actually as an optionality? It's been speculated, I know, a lot in the press. But just from a kind of practical perspective, is that actually possible to move headquarters?

Look, again, talking [Audio Gap] I say about this topic is going to be instrumentalized and interpreted in [ ways]. Every day, almost everybody is lecturing us on how we should say and what we should say. And the truth of the matter is that we want to be a Swiss bank. We believe that being a Swiss bank is very -- has been good over the last 150, 170 years and for both the bank, the clients and for Switzerland. So this is the best possible outcome. And this is what myself, my Chairman, Colm Kelleher, we are working on. This is the only -- the rest is BS. So we never ever tried to leave the country. This is absurd, right? And even implying that we are doing that is totally respectful. It's not true. Having said that, nothing can stop you to ask me the question, right? And so everybody can come to his own conclusion. Nothing can stop shareholders to voice their view on what we should do. But our solely focus right now is to make sure that out of this process, we get something that works for both UBS and for the country.

It's amazing how operationally you have performed, and it's a bit -- it's overshadowed by what's happening. I think it sets a precedent for G-SIB mergers going forward, I think. And also we get questions clearly from clients, will ever somebody buy, for example, Julius Baer. I don't think anybody will touch a Swiss bank after the way you have been treated, frankly. So we will see how this develops. And if you have your opinions about that topic, very interested as well.

No. Look, I think, I'm hopeful that a reasonable outcome can be reached, reasonable that works for both, for shareholders, for clients. Because at the end of the day, it's also very important that our clients can bank with somebody that is able to serve at an attractive not only quality, but also pricing point. There is a lever in which you can pay up for a certain service but another one that you can't. And so for us, it's important to understand that pricing our services is a outcome of how much capital we need to hold. And so I'm hopeful that we can find a solution that combines the right things for UBS' shareholders, clients but also for the country.

I hope they're listening. So moving back to the operational side and where you're doing extremely well. Maybe start at the U.S. wealth management business. You reached in the third quarter pretax of 13% plus. You want to move towards 15%. Tell us about the operational side and how you're improving. There's been clearly quite a few changes in the U.S. business, how you're positioning it on the U.S. wealth side? And the end game really, how you see the U.S. wealth business, not just to get to 15%, but what is the end game of the U.S. wealth business?

Yes. Look, I'm very pleased with the progress we made in the last 18 months or so. This is a big journey. It's de facto a 3-year journey to get to the 15%. And frankly, it's not going to be a straight line. It may be a little bit bumpy because when you make so many changes like we are doing right now, inevitably, you have some collateral consequences. But I'm very pleased with the fact that in terms of, first of all, capabilities. Our focus is really to make our client adviser who are the most productive in the industry, very focused on the segment of clients that we are focusing on, the ultra net worth family offices, even more efficient and successful with their clients by rolling out IT capabilities and enhancing the products we give them, both from assets, but also from a banking standpoint of view, banking services, credit, deposits. You saw that we filed for -- the banking licenses in the U.S. So I'm very hopeful that we're going to get to the 15%. But the 15% is not the end of the journey. It's the first plateau we need to achieve, right? And the goal is really the same, to narrow the gap between us and the local players. I'm still convinced, and actually, it's a fact that it's going to be very challenging and probably even impossible for us to have the same pretax margins of our U.S. peers on a like-for-like basis, considering the nature of their businesses in the U.S., which allows them to spread fixed cost of the banking infrastructure across different businesses. So as a business segment, you always get a pro rata of the fixed cost of the bank. So we have only 3 businesses in the U.S., and therefore, we have a natural disadvantage. That's okay. Our U.S. peers have a natural disadvantage with us outside the U.S. So they are unlikely to match our margins outside the U.S. in the foreseeable future. So we need to look at the U.S. as the biggest market in the world. in which we are a big player in a differentiated manner and allowing us to create diversification and value creation for shareholders and not to be too paranoid about having like-for-like comparison. We are paranoid, but in the right way, in a balanced way. So I'm very hopeful that the journey is in the right trajectory, but it's a midterm journey, 3 years, 4 years.

Yes. On a sustainable basis, basically. Yes. And you mentioned your other wealth management operation outside of the U.S. And maybe you can talk about a little bit the regional performances that you see, also how you see the -- your view around those regions, Asia, Middle East and Europe. We've seen some Lombard lending picking up as well, finally. Do you see releveraging coming back? Or is it still too early? Do you see any other activity levels which you would highlight, considering you've done extremely well?

No, we touched on Asia. I would say that I'm also pleased to see something that we don't really talk a lot about, but also the EMEA franchise has been also developing quite well. It's fair to say that it's not because of wealth creation. Unfortunately, in Europe, there is a little of that. But working through the integration, gaining a share of wallets, looking at optimizing our portfolio of what we do. Also from a legal entity standpoint of view, infrastructure standpoint of view has allowed us to improve the profitability in the EMEA. And so I'm very hopeful that we can also make a good progress there. In terms of releveraging, no, I don't see a lot of that happening at this point in time. I do believe that if rates comes down and the markets are stabilizing a little bit, I would say you will probably see some things coming back. At this stage, clients are more focused on hedging downside protection. And in the next few months, I don't really expect a lot of leverage to come back. I mean you look at what happened in the last few weeks, I don't really believe is a moment in which people -- also from a seasonality standpoint of view, it's unlikely people will leverage up before the new year.

Yes. Maybe I have lots of questions, and I could keep your time all day, Sergio. But we'll open up maybe for questions on the floor at this point and who would like to ask a question. Otherwise, I have lots of questions. There's one in the back. There are mics on the table. Please help yourself.

Sir, could you share your views on the domestic retail and commercial business of the bank as well as your intermediate-term vision for this, in particular, focusing on the relative importance of this business and the overall banking strategy?

Thank you. Actually, it's a very good complementary question because it's a very important part of our business. I mean if you look at our strategy, it's centered really towards a comprehensive and competitive and offering in the Swiss market and leadership globally on wealth management. And both are complemented by having a focused investment bank and the asset management businesses. So the Swiss business is definitely going through, at this stage, a very challenging environment in terms of top line developments. You saw with rates now going down to zero, we had a big headwind on NII. But other than that, I'm very pleased to see how we have been able to keep a big chunk of our market share. We lost market share, which was almost inevitable as a consequence of merging the 2 large banks. But in relative terms, I'm very happy that we have been able to go through the migration. The destruction of the migration and integration in Switzerland, I mean, if it's complicated for the IB and wealth management, you can imagine what it means for the local markets in which we had basically 200 branches at UBS, 100 at Credit Suisse. They are small numbers, but it's a small country, right? But still quite challenging to operate. The fact that the business hasn't really suffered in that sense is quite remarkable. And that makes me look very optimistically to the future because post the integration, people will go back into being able to grow the business and really unlock the full potential of an even more comprehensive offer that we can give now to clients because the combination of UBS and Credit Suisse in Switzerland is, it was not just overlapping all the time, both from a client standpoint of view, but also from a capabilities standpoint of view. So I think, I'm very positive about the fact that we will be able in a normalized cycle to get to our below 50% cost/income ratio and gain back some in selective areas, some market share.

And I assume the guidance of exit 50% -- below 50% cost income by year-end '26 in that division should be still well on track from what we've seen.

Well on track is a little bit of a stretch because, of course, back then, we had a completely different rate environment.

That's true.

But still, we are working hard to get -- basically, on everything that is alpha, I'm pretty convinced we're going to execute. The beta factor, I mean, the drop in rates is quite substantial. Now it's fair to say that anything that moves ups or down on rates from here onwards is positive. So status quo is not good.

Yes. And considering we are almost out of time, but I wanted to ask about the IB because -- so we can wrap almost everything up.

I was about to beat the record of not getting an IB question.

No. Sorry, Sergio, we have to. The IB, just very briefly in terms of your views around the IB, but also are you happy with the footprint, geographically, business mix?

Look, I'm very happy with the progress we are making in a very competitive environment. Of course, you know well how competitive the situation is not only from the U.S. banks, but also more and more European banks wants to beef up again their own capabilities, and it's a deja vu. I mean what I really think that is very important for us, for our clients, for our shareholders is to fully understand that for us, nothing has changed. We have a strategy that is very focused on not being a one-stop shop. We want to be good in the areas where we believe we can add value to clients and to shareholders. And so I'm very pleased to see the good momentum we are having in equities, in FX, in research, in capital markets activities. And also in the banking part, the investments we made by retaining a big chunk of the banking capabilities of Credit Suisse are starting to pay off in terms of -- you saw last quarter numbers. The pipeline is developing in the right way. We want to continue to operate within our defined capital allocation targets. We believe there is a scope for us to be relevant in our own way without being too paranoid about how other people are operating and their ambitions. So the trade-off there is clear that we're never going to be the best-in-class in terms of cost/income ratio, but we want to be the best-in-class in return on risk-weighted assets. So our philosophy is the same. And size is not all. And clients, they like our -- we are -- our focus and our capabilities, and this is the winning way for us to go forward. And it's also the right way for us to stay focused on serving the wealthy clients and the corporate clients in Switzerland.

Thank you very much for your time, Sergio. I think we've gone around every topic that we wanted to discuss. And hopefully, we have you with us next year again.

Thank you.

Thank you.