UBS Group AG (UBSG) Earnings Call Transcript & Summary

Thank you, ladies and gentlemen, welcome back. Great to be back with you. I'm really delighted to be hosting Sergio Ermotti, a long-time presenter here and long-time Chief Executive of UBS. Sergio has a few slides, and we then have plenty of time for Q&A. And as through the day, please feel free to type your questions in, and I will edit and present them. I can't guarantee to ask word for word, but we can certainly aim to get the spirit of the questions across. With that, Sergio, the floor is yours.

Thank you, Alastair. Happy to be here. And before I start, please take note of the important information on the first slide. Moving to Slide 2. The last few months put many of us to the test personally and professionally. It has been good to see the resilience of the banking industry as a whole so far so and the UBS, in particular. We were prepared. Of course, we didn't foresee the pandemic, but it was clear to us that the environment that we saw over the last few years was fragile. We used this time to build up strength. We continued to invest, despite headwinds and maintained our risk reward discipline. These choices are paying off now. Today, UBS is stronger than ever. We are highly capital-generative, with a balanced risk profile, well diversified revenue streams and a very strong financial position. We have always said, our business model works well in a variety of market conditions, and today is no different. Because of the financial and operational resilience we built up over the years, we are able to engage with our clients with no disruption. We quickly adapted to new ways of working while focusing on their needs with full intensity. Most of our clients' relationships are long term by nature and often span generations. Our commitment to helping them navigate these unprecedented times will be remembered. Again, with volatility up from all-time lows and liquidity's cursor, our clients tell us, they value our advice even more. They also seize investment opportunities and adjust allocations, resulting in higher business activity on our side. That isn't to say that today's environment is perfect. Credit losses have increased from all-time lows, too. These were comparatively modest at UBS as one might expect with our strategy and underwriting and risk reward standards, but large enough to offset much of the benefits from increased client activity. Headwinds from lower interest rates have become even more intense, too and regulatory costs remain a drag on bank's profitability. While it's too early for final conclusions on the lasting impact of the pandemic, so far, COVID has accelerated some preexisting trends. I would highlight 3 of them on Slide 3. We are well positioned for each of this and are adapting fast to the new normal. In my view, digital adoption and acceptance have gained between 2 and 5 years within a short time frame. Clients and employees alike, have quickly adapted to the new world of virtual meetings, presentations and conferences. We are making it easier for our clients to engage with us. For example, we are integrating voice and video calling as well as an AI-driven meeting scheduler into our digital banking app in the U.S. As the recognized leader in digital banking in Switzerland and with broad industry recognition for our Wealth Management platforms, we are able to build from strength. We just launched, key4, a mobile-first mortgage platform in Switzerland that connects retail clients with mortgage providers. In Wealth Management, outside the U.S., we are having early success with UBS MyWay, an intuitive portfolio management app for adviser to use together with clients truly hybrid. One of the defining issues for market this year has been the growing importance of environmental and social factors being weighed into investment decisions. This has been an area where UBS has been a leader for some years, and from that position, we are constantly innovating our offering with a number of important developments over the past few months. On the Wealth Management side, UBS is the first major global financial institution to recommend a 100% sustainable investment portfolio as the default for all clients. In Asset Management, we are following through on the promises we made at this year's World Economic Forum. We are rolling out climate aware strategies, previously only available in equities, across other asset classes. We have also created the UBS app for sustainable finance to bring together the best of what UBS has to offer in this space and facilitate the sharing of insights from experts across our firm and across our extensive network. These actions cement our leading position in sustainable finance, and I'm confident UBS will build on this leadership further in the period ahead. Lastly, the economic fallout from the pandemic is severe, and the monetary policy response means interest rates across developed markets will likely stay low or negative for longer. This is a challenge for us and for our clients. We see the returns on savings below the rate of inflation for the foreseeable future. Investing is in our firm's DNA, so UBS is in a great position to help them face this headwind. We are broadening our offering for private clients and providing a wide range of investment opportunities. Our Wealth Management and Investment Banking teams are working together to capture the opportunity in private markets. The potential here is substantial. Currently, our Wealth Management clients average allocation to this asset class with us is only just above 1%. Successfully managing this environment also translates into strong results, which you can see on Slide 4. Net profit for first half 2020 was EUR 2.8 billion, and PBT was up 9% year-on-year. Driving operational leverage is a firm-wide priority. That's why I'm pleased to see revenues before credit losses up 7% in the first half, whilst costs were only 3% higher as we seek to deliver for shareholders. Capital ratio remained above our guidance, supported by EUR 3.6 billion of capital generation. Return on CET1 capital was 15% or about 12% return on tangible equity. Turning to Slide 5. A guiding principle throughout my tenure has been and is to drive globally leading returns on active equity, CET1. It goes without saying, this includes the full cost of credit that comes with a cycle. As we look at the first half, we delivered the highest return on active equity of our global peers. But moreover, we compare very well over the cycle. When I started, I inherited a large stack of unutilized tax losses carried forward from the financial crisis. Our restructuring and business performance allowed us to recognize a substantial amount of carryforward losses into our tangible equity. For shareholders, this means higher capital generation that may first meet the eye, which helps drive capital ratios, dividends and buybacks. On the other hand, deferred taxes alongside accruals -- large accruals for annual dividend payments have created a gap between measuring returns on tangible equity. As you can see, both of these factors are idiosyncratic to UBS. As we continue to drive industry-leading returns and use DTAs, this gap will narrow over the coming years. Moving on to Slide 6. Again, throughout my tenure, we have been focusing on restructuring, building and maintaining a balance sheet for all seasons. Over the past 5 years, this meant organically building up EUR 9 billion of CET1 capital. Our attractive capital returns to shareholders have also been a cornerstone of our strategy. Through dividend and buybacks, we have returned EUR 16 billion over the same period. For the 2019 dividend, we are well positioned to pay the second tranche later this year, as previously communicated. We will give you an update on this and on any other potential capital returns plans for the rest of the year with our third quarter results in October. For 2020 and beyond, we will take a fresh look at the mix between cash dividends and buybacks, [ tying ] a dividend payout ratio more in line with our most relevant U.S. peers. Our intention is to continue to pay out excess capital and deliver total capital returns consistent with our previous levels while rebalancing the mix between cash dividends and buybacks. So to summarize, on Slide 7, UBS is in a position of strength strategically, financially and operationally. While managing the challenge of adapting to the changing environment, we are driving hard on the priorities we laid out at the start of the year, executing our strategy with discipline. Most importantly, we are staying close to clients with strong momentum across our franchises. UBS is stronger than ever today, and I'm confident, it will also thrive going forward. With that, we can move on to question, Alastair.

Thank you, Sergio, very clear and very powerful numbers in what's a difficult world. I guess, the first thing for me then is clients. The ultra-high net worth individuals, the real core of your business, have they been scarred by COVID? Or have they been on sidelines and missed out this wonderful equity rally and fantastic bond market? How would you characterize behavior's risk appetite amongst the COVID client base?

Well, thanks. I guess, I would say that 2020, already late '19, but to be honest, 2020, as we speak, is still the case. We saw a complete change in investor attitude towards their asset allocation in general. '18 and '19, it was very, very sticky. So clients were happy about their asset allocation in principle. They saw almost all asset classes going up and while concerned about geopolitical risk and macroeconomic questions, they were basically passive in that sense. 2020 has brought a big change. As I said, partially was due to come in any case, but COVID has definitely increased the need and the necessity of clients to interact with us and to seek advice on how to reposition their portfolios. Because, again, the economic consequences of COVID, but also the tensions from a geopolitical standpoint of view. The upcoming events are seeing investors and clients starting to position and take also advantage of the volatility in the market.

Thank you, Sergio. And does that translate into asset flows? I mean, I guess those have held up very well through the crisis in UBS, but do you see people bringing more money to the bank as your stability has been emphasized or after a period of reallocating portfolios, does that kind of calm down the things to go quiet for a while?

Well, in the first half, we saw very solid trends of inflows, partially driven by new mode, partially driven by even some pickup in leverage and risk by clients if -- I think that, as you know, we are looking at inflows over the cycle, and most importantly, we want to also preserve the so-called quality of the inflows in terms of, is this money coming to us because there is an intention to invest. Or it's because we are seeing as a safe haven. And this is something that I don't need to explain to you that in this environment, cash sitting on the side, almost in any currency by now, including the dollar, it can be costly. And therefore, we are also paying attention, again, as we did in the past on the quality of the inflows.

I'm just smiling because I recognize it's been a very consistent message over your time. And I guess, then thinking about doing business, so COVID's deeply affected clients, changed the way the industries operate, you can do much more remotely, pushing companies to look for efficiencies and pressuring their revenues. What do you think about the operational side that you can do to offset the revenue pressures from low rates and smaller GDP? Are there other things that UBS could be stepping up? And I mean real estate is one thing this brings to mind, but there is a world, you've been investing digitally. You mentioned this moves you forward. How do we think about that?

Look, to be honest, I don't -- COVID, as I mentioned in my remarks, COVID has [ de facto ] more confirmed the trends, and what we were anticipating would come over the years through digitalization and then different ways to interact with clients. The COVID emergency on how we operate within the bank has indicated that, of course, there are lessons to be learned about how to manage our internal processes, maybe in the future in a more effective way because I think that without compromising on control and regulatory requirements, we have seen areas where we are able to function more efficiently. And so we will need to see how this can be translated into a more around the bank, normal time activity whenever they come. In terms of footprint, and I have to say that, first of all, of course, this acceleration of digitalization and the fact that clients and employees are embracing technology is definitely highlighting even more the necessity to invest in technology as we did in the last few years. Even if we see some headwinds on the top line, we cannot run short of investment in technology. In the cloud, for example, we made very good progress against our targets of getting up to 33%, 1/3 of our data being managed through the cloud and in the private cloud. So we are almost halfway on -- sorry, on the -- we are almost halfway on the public one at 15%. We see that coming more and more. But -- so that translates all into -- you mentioned the footprint and the physical footprint. Yes, this will also accelerate, of course. And it's not just about the usual topic of branches. I mean we have around 270 branches in Switzerland, and of course, there is an ongoing review of what to do. But by the way, we do it always looking at the P&L and the bottom line and not to lose clients and profitability while executing the long-term strategy. But it's very important to understand that the flexibility we gain through technology in managing our footprint is there, and it's going to probably take down the necessity of real estate over the cycle. But by the way, I don't believe that the current situation is sustainable with 85% of the people working from home. Eventually, it's going to swap the other way around with a lot of the -- 20%, 30% of the people regularly working from home and very few people always working from home. I don't believe you can run a bank and keep a culture and create the right dynamics with people working always from home.

Thank you. Well, that's even [ commented ] technology, which I count myself, but thank you. I guess one of the hallmarks of your time with UBS has been a real focus on building the Asian Wealth Management business, and you've been particularly successful in Greater China. Clearly, the market leader there now, which cuts to ways at a time like this. China, U.S., Hong Kong, I mean, I can hardly keep up with who's sanctioning whom and all the rest. How does that drive your business? Because you've both sides of flows. There is, I guess, some people might want to look inwards. There is other people who might want to move money away from Mainland China into Hong Kong, from Hong Kong to elsewhere. I mean, how are you thinking about people's actions? How are you seeing them protecting their wealth or taking opportunities to invest because of course, if trade flows are going to be different, then there might be -- otherwise, you're making money for your wealthy clients.

Well, generally speaking, as you know, we have been a pioneer in Asia and in China, in particular. And so our commitments to the Greater China topic is there to stay, and we always said in the last few years that in the next wave of growth in Greater China and China itself, definitely going to be more bumpy, more -- less predictable than we saw in the previous 10, 15 years. But it's still very promising, a lot of opportunities there for our franchises to grow and develop. So in essence, of course, we have to be tactical in the way we look at how we implement our plans, but 3 years, 4 years ago, we said we're going to double our headcount in China, and we did so in the last 3, 4 years. In the foreseeable future, I do expect continuous interest in China. Of course, these dynamics that you described may or may not slow down the pace, I don't think they're going to stop the pace, and we are definitely committed to both China and Hong Kong in that sense, still a very strong and valuable part of our business. And we also see our clients in the region. Of course, they are concerned about those geopolitical developments, but they didn't really took measures to basically exit. Of course, they may consider what kind of contingency plan they need to have in place. But if I also look at the business environment in the first 9 months of the year, I have to say business is quite robust and positive.

Thank you. Then shifting to the other side of that. And in the U.S., I guess -- so Morgan Stanley made a big move the day before COVID kicked off. It's -- so it's almost a delayed question, there's been a lot of aggressive hiring by competitors. You've had a very clear focus on protecting profitability, which has been successful. But then there is -- the industry may be changing, certainly one of your competitors that threw a lot of money at the idea that the industry was changing. I mean, how do you see the U.S. Wealth Management market for UBS right now?

Well, look, first of all, I think that in terms of our leadership in Wealth Management globally, U.S. is the largest market, by far, in terms of Wealth Management. And the fact that we are one of the leader there, it makes it an integral part of our narrative on our leadership in Wealth Management. It's also profitable in terms of both the quality of our performance, but also when -- particularly, I referred before about the deferred tax assets advantage, every dollar we make in the U.S. goes down to the bottom. So in that sense, it's both strategic, but also a very compelling financial case for us. Now in terms of strategy, of course, we watch constantly our competitors' strategic moves. We have defined, our space has been a large player there, but with a very focused emphasis on high net worth and ultra. So you see many of our competitors because of pre-existing capabilities or opportunities they see, they go probably more downstream. We are looking to be more upstream and focus alongside our global strategy. Of course, we know we need to capture the opportunities to improve our margins in the U.S., which we are working on, and I'm confident that over the cycle, this will come. Better mandate penetration, enhancing our banking products' capabilities, having a deeper penetration with our ultra clients and lending and so on. So -- and last but not least, by the way, this issue about scale, we always find it a little bit interesting debate because we have scale globally. We are able to take some of the scale effects from outside the U.S. into the U.S. and vice versa. And last but not least, we are also investing in technology with Broadridge, an external provider, in order to create a platform that we believe is going to be extremely competitive also for other people, other asset and wealth manager to join on, so giving us, in the future, that scale effect.