UBS Group AG (UBSG) Earnings Call Transcript & Summary

Good afternoon. Welcome back, everybody. I'm really pleased to be with UBS this afternoon. We've talked a lot about your area and it's refreshing to look up and out into the rest of the world as well.

I have Ralph Hamers, Group Chief Executive. He's been with the firm a year, I'm going to ask him in a minute what's changed at UBS in that year not what's changed for the rest of us, it's been a dynamic time. But I do want to just sort of close off one topic that's recurred through this week if I can, Ralph. How should we think about the risks of an Evergrande insolvency to UBS? It's something that's been asked of many companies. Is it something that's -- is that what's keeping you up at night this week?

Well, it has not been keeping me up at night this week for many reasons obviously, but certainly also not for the reason of direct exposure. Our direct exposure is immaterial. There is some exposure from a more collateral perspective so in terms of our margin loans, but even that is rather small. And so to the extent there have been kind of margin loans, they generally have been well executed. So from that perspective, across all of our activities we've seen immaterial exposure of Evergrande. Also if you make it maybe a little bit bigger and you just look at the Chinese construction sector because I don't think this is an Evergrande issue per se only. Even there if you look at the exposure, it is all from us on the client side entrenched, which are widely diversified. So even there, that may -- that will not lead to real issues. Having said all of this, I think what is happening in terms of the policy change that we see in China in terms of driving affordable housing, driving affordable and accessible health care, driving affordable education. All is aimed at generating and delivering on the new policy of common prosperity, which in itself is something that I can fully understand is what they want to achieve and they really want to move away from I guess a pyramid distribution of wealth to a more oval distribution of wealth, which plays into our cause given the fact that we have activities across all of it. So we have activities at the wealthy individuals and through asset management, we also have activities that are aimed at the more affluent parts of the market as well where I think also there, the demand for funds that are less speculative, but much more diversified and professionally managed plays to our strength as UBS having been there for more than 6 decades in Asia and also in China for a long time. We see this as a good opportunity long term. And there may be some waves short term, we'll just have to see how that affects the market and whether there's investor sentiment being really impacted by it. But having said that, direct effect and direct exposure of Evergrande is immaterial, indirect it's also not something to worry about. The policy change over time I think can actually work to our strength.

Thank you, Ralph. So let's say you've been at UBS a year, it was a radical job shift geographically and business-wise. So what have you learned about UBS? What's been welcomed and what have you changed I guess that was less welcome?

Yes. I think so if you look at UBS and what we've been doing over the last year, there's a couple of things that have not changed. Let me put it that way. What has not changed is that when I arrived, we had real good business momentum, we had very focused franchises delivering to the customers. And it was very clear that with some of the tailwinds in the -- by virtue of the constructive markets that we were in and are still in, it was also very important that a CEO change would not lead to people starting to be more inward looking and take their eyes off the ball, the ball being the client and the business. I think we have been really successful there. It's just maintaining the business momentum, generating results like $2 billion of net profit in the second quarter, return on CET1 of close to 20% in the second quarter; and basically the first 3 quarters under my leadership, all of them have performed really well. And honestly that was really priority #1, make sure that the CEO transition itself will not lead to uncertainties, inward-looking activities and energy; but make sure people would keep their eye on the ball out there and keep the commercial momentum. And if you see -- if you then peel that onion from financial results to more the commercial results and see how clients have really reacted to our advice in these markets and the uncertainties that are still there and the need for that advice, you see that invested assets in the combination of Global Wealth Management and Asset Management has grown close to $4.5 trillion by the end of last quarter; that we saw in Wealth Management in the last quarter, $25 billion of net new fee-generating assets coming through. We saw strong client activity leading to an increase of 16% in transaction-based income as well. So, you basically see that focusing on that client -- on those clients and delivering on their needs, whether it's the $8 billion of net new loans that we have also provided, that was the core of the concentration. Now back to your question, what has changed? What has changed is that at the same time when a ship is in movement, it is much easier to change the direction of the ship rather than if the ship is not in movement. So we are in movement doing well. So the changes that we are making are the ones that are basically an extension of what we have been doing, but with more focus and with a more integral strategy if that is what I could call it. Now moving away from UBS, let us focus on 4 business divisions. As a strategy, I do think that you need business divisions for the execution of your capabilities, but the strategy should really be client-focused and developing this ecosystem of clients and contributors and connectors that if you get that one going that you can really generate and activate a flywheel effect. Now you've seen that on the client side, we've been really successful over the last couple of quarters and I just gave you the numbers. But we've also been successful at adding new contributors for example in terms of a partnership with the Partners Group in Switzerland, a partnership with Invesco in terms of contributing their products on to our ecosystem towards our clients. But then you also see that the more we have that, the more attractive we are for new clients, but also for partners who want to team up in distributing our, well, I think professional advice. And therefore, you see that the joint ventures that we have with Banco do Brasil and the ones that we started with Sumitomo in Japan, that's what you see on the other side of the ecosystem where you can actually grow clients and client activities. So that's what you've seen moving over the last couple of quarters and that's what I'm truly focused on and that will lead to a flywheel effect with more and more business. Now added to that asset is that geographically we feel that going forward, we should be even more focused on the larger wealth pools in the world because they tend to grow faster in the U.S. and in Asia. And the reason why they grow faster is that the underlying trend there in terms of entrepreneurial wealth creation is just faster and more prominent in these 2 geographies. Now clearly we're very happy that we have a very strong foothold in the U.S. and basically it plays to our position of strength here and clearly we can further improve how we work there and that's -- those are the plans that we are working on and the same goes for Asia. So additional resources being moved there, making sure that we get a further increase in those assets and a further improvement on the profitability there as well. And on the technology side, the steps that we have taken there. You know that I separated the operational activities from the technology activities and moved the operational activities back into the business divisions because I'm a firm believer in client-focused processes rather than radical processes. Client-focused processes, making sure that beyond the superb content that we deliver, the superb professional advice that we deliver, that we also deliver in a personalized, relevant, and on-time and seamless way to our clients; which generally you can only do if you as a business have a complete control over the delivery process. And therefore, the front-to-back way of thinking is something that I've been really working on, introducing that and for that also doing this reorganization. Now together with that, we promoted or I promoted the technology chief to my executive team making sure that we would also drive technology investments in the right way and becoming more and more efficient there and more effective there as well. So those are some of the things that we have been doing around the first 3 strategic imperatives. Then on the simplification side, we have been decreasing the number of policies very rapidly almost by 60% now over the last, well, 1.5 years really. We have further decreased the number of legal entities as well simplifying. With that also taking out structures and governance structures, speeding up decision-making, decreasing the number of people that you need in a decision-making mode in commodities, et cetera, et cetera, et cetera, et cetera. And with that, actually speeding up the approval time or reducing the approval time, let me put it that way, by 75%, which is an enormous efficiency and cultural improvement in my view as well. So, that's a little bit what we've been doing there. Then on the sustainability side, important for us as part of our purpose that we delivered, established the central group on the Sumi offer and making sure that what we do on the sustainability side, which is truly important to us not only because we believe in this, but also because there was a massive client demand for it and we need to do this in a very consistent way that we put that group together. That with that, we have been able to be even more successful in terms of generating sustainable assets. And you actually see that in terms of money flowing in through mandates that are sustainable driven or climate change focus mandates. That has been a real good business for our asset manager.

Okay. So you now have much in your plate plus COVID crisis and what have you. Thank you. So I think that integration, a more integral strategy is something that the market really welcomed. UBS has had quite a mixed strategy of confederation at various times in the past. But I'm going to ask you about the business lines because we kind of think about them as well. So starting with Wealth Management, I guess Q2 felt like the pieces are falling into place. There have been some good numbers in previous quarters, but perhaps there was noise how replicable was Q2 last year and so on. So it feels like margins, client shape, net inflows; all of those pieces have fallen into place. Is that the right way of thinking about it lined up now and that's a growth business for you?

No, it's absolutely a growth business for us. And I must say that clearly this business grows and has its challenges also despite with the backdrop of the markets, right. So if the markets are positive and constructive, then you have the tailwinds and otherwise you have a bit of headwind. Now having said that, apart from that, I think that the business has done really, really, really well and this just didn't happen because of good constructive markets. The team who -- that runs Global Wealth Management started a project called Elevate and in the project called Elevate, they really looked at okay guys, how can we really speed up decision-making in this firm? How can we get more structured products to our clients where the demand really is? How can we give our clients much more direct access to markets as well because you see that we have a whole -- we have a pretty pure group of clients from top clients that are semi-professional to clients that really need to be continuously confirmed on their investment decisions. What I have been driving really is to be much more professional and much more client-focused in Wealth Management and that has led to tremendous results already. Also looking for further collaboration within the firm and you know that in the U.S., we have launched the SMA business, which is basically the business that we -- through which we have separately managed accounts for our wealth clients managed by Asset Management. And we saw over the last 6 quarters -- we saw that growing by $70 billion I think -- $70 billion just in 6 quarters supported by across the globe also net new loans of $44 billion in the Wealth Management space as well because of collaboration between Global Wealth Management and IB in order to support some of those highly professional services that part of our clientele wants to have and needs to have. That collaboration is much more integral now. It's much more organic now. It's much more like a team now and we really been focusing on many of these steps here. So yes, we do realize that the markets do impact fortunes of that business to a certain extent, but there is a lot you can do yourself and that team has done a really good job over the last 12 to 18 months with these results. And I actually think that with this drive and with these changes and with some more changes with the new strategy there, we will continue to have this momentum. We will continue to grow. We will continue to reap the benefits of our strong brand, our strong distribution channels across. So you can expect the wealth business there to grow because we have really improved the way we do it.

Thank you. So I guess that's the key input and that was something that was missing for different reasons for many years at UBS and I presume then that brings you a cost challenge. You're doing better, it gives you more things to spend money on. So this year you've a clear discipline, underlying costs excluding overall compensation and nonrecurring charge about 1% year-over-year. Is that the right level or is an absolute cost goal something that makes sense when the top lines were less I guess? How do you think about balancing investment and cost discipline?

Yes. I think over the last year, we have shown that cost discipline also because I really pushed for it, I'm sorry to say because I felt it was necessary and what I wanted to achieve is the kind of -- is ensuring that we were just as much focused on costs as we are on revenues. So moving away from, I don't know, KPIs in P&L terms to KPIs in revenue versus cost terms, making sure that both areas attract the same kind of attention because I truly think that way. I truly think that to a certain extent, you can actually disconnect the development of one versus the other because the revenues you generate through client focus, revenues you generate through new products, revenues you generate through new channels and new business models on one side. Cost clearly to a certain extent you need in order to develop new products, to develop new channels. But on the other side if you just take the cost of delivering and you take as I just explained a front-to-back look as to how you manage these processes, how you further automate these processes; I think you can actually separate part of these effects as well. And therefore, we are absolutely committed to a further improvement in efficiency. As we have seen by the way, this year that the revenue line -- the top line is growing really fast and the cost line we have been able to keep to a very acceptable small growth if not flattish if you corrected for example foreign exchange and I do think that there's more possible. There's a reason why I announced in March and I think there is $1 billion more to do and that we will either deliver on that $1 billion in a net way or we will deliver it in a growth way and it will be largely in a growth way in my view because we also see plenty of opportunities to invest in a way to grow our business faster and to support our strategy. And we will only invest and that's what I've committed and that's what we will continue as a discipline, only invest in projects that will generate that return that is the minimum return that we want to deliver to the market, to you as shareholders. So very focused on efficiency next to focusing on revenues and not mixing them all together. I think that's the big difference that we've made this year and you see that in our results as well. And then there are certainly some cost categories where I feel that we can do even better. And I know people expect in a market like this and also in a business like this that we should maybe grow our tax expenses and technology expenses. And I actually think that we will grow the effectiveness of our technology expenses, but we don't necessarily have to grow massively the level of our technology expenses. And the reason why I feel that certainly for the first couple of years, we can do much more in effectiveness here is that I've introduced a quarterly review of all of the technology investments that we do at the top level in terms of where is the money going? Is the money being spent wisely? Does it make the returns? Where are we on milestones in these projects? Should we stop some of these projects as we have done? By the way already in the first year here, I've stopped some large projects there as well where we felt we're not going to make these returns that we need to make and therefore, it's a waste of money to go there. That's one part of further effectiveness of technology step. The second part here is that I think that if we do it wisely, we can actually do the same amount of work in technology with less people. I think there is an upside here and that's why my technology guy is also leading this is that if we introduce much more of an engineering culture in UBS, we can attract even better engineers. And if we make it more and more a professional engineering environment, you will see that the whole hierarchy will be driven by engineers rather than also a lot of managers and project managers, which is a way of doing it but that's not the chosen way for us. And we actually think that we can do with less people more and more effective technology work. And maybe last, but not least, one of the things that we have introduced here as well is the way we want to go about the development of technology, which is that if you develop technology and you do it in small steps, you do it on the back of the agile way of working as we are introducing as we speak and with every small step, you try to develop what I call micro services. And these micro services in terms of code, you actually put on your -- in your app store -- your internal app store and people who would need those pieces of code elsewhere in the world can reuse them. And if you make them small enough, they're very easy to reuse. And through that, we actually -- can actually decrease the double spend that we are currently running in because we are a global wealth manager, we are a global investment bank; but sometimes we are reinventing the wheel as well. And if you do reinvent the wheel, if you feel you need that, at least do it with stuff that is already on the shelf rather then also investing in it once more. So there's still some scope for further efficiencies and as said, I do want to separate focus on efficiencies and cost from top line to a large extent.

Thank you. Very clear. So is operating leverage one of the dropouts from that in effect that historically UBS was quite frequently a place that costs tended to grow broadly at the pace of revenues. Your -- what I'm taking is that because you're separating the 2 provided the wealth management top line growth comes through subject to markets et cetera, we could hope for a bit of operating leverage.

Yes, I think so. I think it will certainly be a contributor to scale in general and with that, a further improvement of operating leverage. Now I know that the market generally looks in terms of operating leverage as to cost to income. The true operating level from an operational perspective, you should really be looking at the business going through the system versus the cost of the system. And the margin and the management of the margin is a separate issue, right, and the pricing of new business is a separate point. But in terms of volume through the system versus cost of the system, this will certainly improve further operational scale and with that operational leverage.

Thank you. Now again one of the things that UBS has talked about in the past and it's certainly true. So you have a return on capital that's well above that of many banks in Europe. It's decently above any reasonable cost of capital at present. So you're in a stronger position here than many of your peers and of course capital versus cost is another trade off. So I'm going to ask that in a number of different ways number one in the investment bank. So it's been a very good couple of years also for UBS, but generally in the industry. I know what we do, which is we come back to you and say hey, boss, I've had a great year, can I have some more costs into balance sheet, please? I mean how do you think about your position also in the light that that is happening at a number of your competitors, right, they are putting more balance sheet to work in investment banking?

Well, clearly I mean you know that we're also here very disciplined, right? So in terms of ensuring that we size the activities to what we feel we need and also in order to keep the discipline to continuously look for further optimization of the usage of resources, we've put basically a limit as to the resources that go to the investment bank here in terms of the percentage of RWA or risk-weighted assets to be maxed at 1/3. And we can have a long debate whether it should be 1/3 or not. I think the message here is and I think our colleagues here do that really well and are happy to be here with many of my colleagues in the investment bank in London these days. I think the message here for them is and what they do really well is that they really have to think twice before they do a business, really think twice before they price a business, and really think twice before they even want to use some of these -- the scarce capacity and scarce resources. And obviously whether it is on cost and people or whether it is on balance sheet resources, you should always run a company that way and I think that my colleagues here showed that they do a really good job at it. So that discipline is installed. We're not going to move away from that discipline because it has shown that we have built a model that particularly in the last 6 quarters has done really, really well, right? So we have also seen not only from an asset management and a wealth management perspective in terms of banking activities, but also on the market side and the banking side have been able to uncertainties, a lot of flows, a lot of volatility coming through, and that is basically playing to our strength on the market side. And this year is a very good mix of markets, activities and markets performance as well as banking performance on the equity capital markets side and the M&A side. So size to read that opportunity. And if you then look at the performance of our investment bank, I know that, for example, in 2019, the returns were not so well. But if you just take it over a period of, say, 3 years, over the last 3 years, the return on allocated equity to -- of our investment, including that year then was 13%. Can it be better? It can always be better, but it's a good return. And this year, we're actually running at a much higher percentage, as you know. So from that perspective, that discipline in just allocation of capital is really -- is really working for us, and we should continue to do so. Now there is always this factor on top of that as to -- and the discussion on top of that, that you could have is, do you actually need an investment bank, right? So and we actually feel that if you -- and now I go back to the more integral strategy of UBS, although you want to go through the business efficiency is that, if you really want to play in the wealth sphere, you see that there is a category of clients that is in need of professional servicing. And that professional servicing in terms of direct access in terms of prime broker services, et cetera, et cetera, et cetera, for that, you need investment banking activities. And the next question is then, can you build an investment bank just for your wealth? Probably not because it will not bring you the scale through which you are then competitive. And therefore, scale as an element in terms of being a very good investment bank comes in as well. And that's what we have built with a top 5 position in cash equities and the top 3 position in foreign exchange globally. And clearly, you have to continue to work on that scale. You have to continue to invest in this, and that's why quite a lot of our technology investments are actually going also into the investment bank, making sure that we stay a step ahead in many aspects of these 2 markets, which are so important to us.

Thank you. So trying to put that together, Ralph, so you've choices many of the banks that presented this week haven't had choices with generating capital. And you're generating income growth. How do you then split that between what you give back to shareholders? What you reinvest in growing the business through technology investments and what you put on the risk-weighted assets? What's the driving framework for you there?

Yes. You know that we're a heavy capital-generative business. So from that perspective, the -- in general, the choice is not so difficult. There is enough for everyone. I could always say, in this case. If you just look at some of the numbers that we have, this year, we have already returned 2 billion to our shareholders, which is 3.5% of our market cap. And this is part of a larger share buyback program that we have announced, and we will continue to fall on that. If you look at what we're doing now, we have a high-return on CET1. And so we make high returns. So we are, apart from some of the activities, pretty capital-light in some of these activities. So we generate a lot of profit, which is generating there with that a lot of capital, and we don't need a lot of capital to grow per se. And so there is a lot left for all of us in terms of charter investments, but for the distribution. So we will be committed to -- and we are committed to distributing to the shareholders what we feel we don't need to run the business. And that's why we came out with a share buyback. That's why we have -- if you just take it over the last, I think, 5 years distributed about 77% of our capital as a payout ratio, we had. If you take it annualized, which is a very attractive return of capital to shareholders. So again, we're -- we have good returns. We're generally comparatively capital light. We are capital generative. So the choice for us on that one is not a scarcity choice, but we do with discipline nevertheless as to where we invest, where we want to grow. If there is opportunities to grow maybe acquire product capabilities or look for further improvement of scale, but always an attractive return to our shareholders.

Thank you, Ralph. Thank you, clear. Now going to questions from the audience. I thought you'd answer the China question quite clearly, but there is another one coming in. I guess does the change in policy imply volatile flows. So I suppose the underlying question is how dependent is your -- have your inflows been on China? And do they disappear if common prosperity is reorganizing the economy?

There may be some short term effects. But long term, I don't think so. Long-term, I'm a firm believer in Asia and China. As I said, we have been in Asia for 6 decades. We've always believed in that. The region as bough us higher growth than any other region. We're super committed to it. But if regions bring higher growth, you sometimes get these corrections, whether these are market corrections, policy corrections. And we've been there, right? We all have been there. And clearly, you have to weather through these corrections and see whether these are kind of small issues or whether they can actually lead to a further impact on investor sentiment. But in the end, you know that the direction is one of growth, just by virtue of demographics, just by virtue of people moving up the classes from low class to middle class. So demographics are always a strength of Asia. And just looking at that for the many years ahead, we should be there. And then you'll have to work through maybe a moment of more volatility or some capital flows in other directions. But long term, this is the right thing. We're fully committed there, and we think this is a good business and we will continue to invest.

Thank you. The next question in and I'm conscious, we're running short on time, I'll try and squeeze this in. Scale, so you've talked about scale. You are the world's largest global wealth manager. So in a way, it's self-evident, you've got scale. But perhaps there's some very large asset managers out there. So you're a very large asset manager, you're not the largest, and you're a very large U.S. wealth manager, but not the largest. How do you think about scale? Is the integral nature of UBS providing effective scale? Or are those areas that you might need to [indiscernible].

I actually think so. If I look at our asset management, we have scale where it matters. It's not like we're small, right? We have $1.1 trillion assets under management. As a firm, we have $4.5 trillion or $4.4 billion, rounding $4.5 trillion between the wealth manager and the asset manager. So scale is there. But throughout the scale, we can also create an insurer by insurer by looking at what can we do better between the wealth manager and the asset manager? Hence, the SMA business that we've grown so successfully in the U.S. We just passed through $110 billion mark there. And just in the last it 1.5 years, we moved from #11 position in the U.S. to #4 position in the U.S., if it comes to SMA business, which kind of shows you the unlocked potential that we have with UBS, if we only look at each other's capabilities between the different business divisions. And that's exactly how we started this conversation with you. I see there a lot of opportunity, and this is a testimony to that. And this helps on both sides, both on the wealth side as well as on the asset management side. But clearly, if we're looking at asset management separately still, if there is specific capabilities that are out there that can add to what we stand for and add to some of the maybe weaknesses that we have in order to further fulfill our capabilities, building that ecosystem, we will certainly look at asset managers as well. But it's not like we have a very kind of a -- we have a situation in which we need to do it because I feel that we have scale where it matters. We have good collaboration in order to develop new business between the different areas within UBS. But again, if we see there is a player out there that can add to our capabilities and add to the scale, then that will be very good for us, and we will certainly take a look at it. I think the third part here is -- and strength and basically a testimony to UBS, in my view, part of our purpose, reimagining the power of investing and connecting people for a better world is that sustainability is the center of our purpose here. And that's where we have a very strong offer in our asset manager and a winning one as well from that perspective. We do realize that we do know that 90% -- 90% of our clients want their investments to be aligned with their values. And that shows you the attractiveness of that business in which we happen to be present, in which we happen to be good. And so on the sustainability side, we have been growing our portfolio by -- for 3 years in a row now to a level of $129 billion in assets under management. So you see that the capabilities there really play to our purpose, play to customer demands, and helps our asset manager to grow faster. So there's a couple of elements that I wanted to touch here as to how solid our asset management and our asset manager is doing and that we have scale where it matters. Clearly, we will always be open for capabilities and scale improvement deals once they -- if they present themselves, but we certainly have a good future as part of the ecosystem that we're trying to build.

Ralph, thank you. We're out of time, unfortunately, but that's been to the force, I think of issues an opportunity.

So [indiscernible] everything I think so.

Well, in 41 minutes, it's all good. Thank you very much for your time this afternoon. It's been a great pleasure, and I hope we see you this time next year.

Welcome.