UBS Group AG (UBSG) Earnings Call Transcript & Summary

Thank you for joining us. Welcome to our 28th Annual Financials CEO Conference. Twenty-eight, so it's a resident number. You wouldn't have thought it was a resident number. It's how long I've been doing this. Not all the time, it's my 11th year here. It's 28 years ago, Sergio was with Merrill and the first of these conferences back in a former life. And 28% is bank share price performance in the 12 months since we were here last. I had to check that last night because it doesn't feel like it was a really good 28%. It feels like somehow it's been emotional and quite stressful, but bank shares have been generally pretty good. Most banks that you'll meet in the next 3 days will be the same bank that they were a year ago with a lot more profit as interest rates have moved. Bank debts didn't happen. Energy prices have stabilized. Banks have just made a lot more money. So we've seen not 28%, but about 35% earnings upgrades at the banks over the past 12 months. So hopefully, the banks will generally have a robust story to tell you. The rating of the industry is now close to a 50, not a 28-year low, close to a 50-year low. But I'm delighted to be starting today with a bank that is pretty different one to last year. And I think this time last year, Sergio may not have been expecting to present as he was enjoying a well-earned partial retirement as well as being Chairman of another major Swiss financial institution. So I'm going to invite Sergio up onto the stage, and we're going to start this week's conference. Sergio? So I hope it's a pleasure for you to be back. It's an absolute pleasure to be welcoming you back and such extraordinary circumstances.

And I think good timing because your second quarter results 3 weeks ago really seem to shift the market's perception from whether all -- whether UBS had almost wanted to do the deal with Credit Suisse, whether it was a thing that had come up outside of your control, but whether it's something that the company wanted to do. I think the market has been able to see that it's something you're very pleased to be able to do. But on the back of that, just a little, please, on your short-term and medium-term priorities now that you've sort of established the base of the scale of the opportunity here.

Thank you, Alastair. Well, it's great to be back, totally unexpected. But of course, it's a great opportunity, great challenge for the bank, for Switzerland, for myself. I guess, yes, I think that this is a transaction that, you mentioned, UBS probably didn't wanted to do it or -- well, of course, it's a complex transaction, but a transaction that now is there, we believe it's going to create great value not only to shareholders, but also I'm totally convinced to employees, to clients and to -- broadly to the society. Now in terms of where we stand, of course, the first top priority for us was to stabilize Credit Suisse franchise, both in terms of clients and winning back clients has been an important focus from day 1. And particularly after closing, we put a lot of effort in doing that. I'm very pleased with the outcome. The integration is going very fast. It's only 3 months. We truly closed the transaction on June 12, but we already took several actions both at -- from a target operating model standpoint of view, we defined the organizations at 3 levels, 4 levels of -- actually 4 levels of responsibilities within the bank. We returned -- the guarantee was very important. We returned all the facility -- emergency facility that were granted. We announced the integration of the Swiss operation. And now we are in full speed in executing on this year's synergies, but also preparing for the 3-year plan, the '24-'26 plan that we will announce in February with our full year results. And last but not least, of course, we also manage for growth. Our ambitions in the U.S. and APAC are only reinforced through a critical mass. We are now managing between the private and the institutional part, $5.5 trillion, and this is a great platform that gives us economy of scale and allow us to grow for the future. So very, very pleased with the outcome. A lot of work to be done still, but the momentum is pretty positive.

And then just on the stabilization, and I guess that was one of the things in Q2 that stood out that I pictured that there must have been quite a great deal of uncertainty about whether the assets and the deposits and the funding that Credit Suisse had on the day you were still going to get further outflows. And actually, that turnaround -- from the outside, it turned around pretty quickly. Did you know that, that was going to be smooth or has that been a pleasant surprise?

No. It was a pleasant surprise, to be honest. I think that actually you saw -- we also saw in April and May still outflows. I mean it was still the long tail of policy announcements, partially people that already decided to take out the [indiscernible]. Still some uncertainty around the transaction because until the transaction was closed, some people were not really sure about the outcome. As soon as we -- I would say the turning point was probably the handing back of the guarantee and then -- but from a momentum standpoint of view, but already in June before announcing the closing of the transaction, we started to see positive inflows. Yes, probably 1 or 2 quarters earlier than I expected. But in my point of view, it's really down to the testament of the strength of the franchise and we have the credibility we gained. And also, last but not least, very hard work by all the people on both sides. Particularly from our new colleagues from CS, from Credit Suisse, they went through very tough times. And I'm quite impressed with the energy level they put despite all this in going out and regaining share of wallet and clients.

So the integration then. So the principals done the legal merger, the acquisition done. I mean how does one -- perhaps Swiss Bank and Wealth Management. Starting with the Swiss Bank, how does one actually do that? How long does that take? What milestones should we be looking for to judge the progress you're making and put in those 2 comparable businesses together. And UBS was obviously much bigger at the end, but a couple of years ago they were quite comparably scaled.

Well, I guess, look, we are not doing anything special that hasn't been done in the past. The big difference I went through myself in the past in M&A., but usually you have at least 2 months to prepare before the announcement. Then you have de facto 9 months before you get all the regulatory approvals. So in that period of time, you are managing -- you are preparing for the target operating model, the fine-tuning and everything that goes on. In this case, we have been doing that in a fast track, right? So basically, in 3 months we did the preparation work that led to also the closing. And then in the following 3 months, as we speak, we are now already in execution. The complexity was that Credit Suisse was structurally losing money. Usually, you go through M&A and you have -- you look for synergies and you look for -- you accept top line negative synergies and you manage somehow for the best outcome. Here, we had to immediately step in to reduce cost, stop the outflows and was a mix between a traditional M&A and emergency situation. So we have an integration office that takes in consideration all the major items that are group-wide relevant, but then we let each business division and group function go through their integration. The target operating model is UBS. The IT that we choose is UBS. So we try to facilitate as much as we can the integration. It doesn't mean that necessarily all the time, the UBS technology and target operating model is the right one, but it's the one that we can execute faster. Of course, as we go through that, we look at areas where we can pick up best practice. For example, there are 3,000 IT applications at Credit Suisse. We're going to keep 300 because we believe they are essential to make our business stronger and/or may be better than the one we had. But for the rest, we need to go very fast on one system. The name of the game here is to not to try to go for perfection, but rather a good balance between efficiency and effectiveness in the process.

Clear. So in Wealth Management then. I mean, I joined UBS kind of in the aftermath of the Swiss Bank merger. So we've switched -- I was at UBS, Sergio was at Merrill. And that was actually a very successful deal in the end, but particularly Wealth Management, there was a lot of clashes. For quite a long time, there was factions, the old UBS guys, the old Swiss Bank guys. And the question is how do you avoid sort of lingering complexities now, I guess? And is that the most important thing or is it, again, bringing confidence back to clients to stabilize the assets and the liabilities there?

Well, look, that's definitely not an easy task, but having said that, we try to be as sensitive as possible in making sure that the new colleagues are integrated in the way we operate and we do the best out of it. You mentioned back then, I remember it was 1998 or so, right, but I'm going back to what I said before. You're talking about 2 banks, Union Bank of Switzerland and Swiss Bank Corporation that were de facto going concern, profitable banks. And the emotions when you bring together 2 businesses that are somehow still operating well, it's much higher, I would say. Here, there is a lot of frustration, of course. But on the other hand, it's crystal clear that Credit Suisse in their -- was not a viable business any longer. So in a sense, what we try to do is to get our new colleagues to fully understand and the clients that now there is a chance to flourish again within UBS and make UBS stronger. It's all about them understanding that this is now the best option possible for their future, for their clients. And so in a sense, it's a different issue.

Clear. And I guess, as a result of the way that things worked out at Credit Suisse, there's a bit noncore and legacy book now. These are funny, this room is sort of connoisseurs of noncore and legacy because every bank's had one. Certain banks presenting later in the week have had 3 or 4 over the last 15 years and they've often been long dated and very expensive to run off. So can you tell us about the process there? Capital trust, you gave us some disclosure in Q2 about the natural runoff of the business. But how you're approaching noncore and legacy, how people should think about the drag of that or otherwise?

Well, that's an important element. But for me, while taking down the noncore assets, it's a priority. You really need to go back into our presentation and maybe some of the people in the room may remember that we put as a priority in noncore and legacy cost reduction and then rundown of the risk-weighted assets. The reason being that the biggest value creation for us is to shut down the IB infrastructure and the noncore infrastructure as fast as we can. This is half of the savings that we are forecasting between now and 2026 will come from that. And when you look at the natural decay profile of the noncore, half of it will be out by 2026. Of course, we're going to focus and try to do better and we will do better than that. But the value creation from a shareholder standpoint of view, it's by decommissioning the IT and the infrastructure that supports all those assets. Now we have a big advantage because, most importantly, we are not concerned about taking losses, if necessary, from a revenue standpoint of view if they are not -- if the positions are not economically sustainable or we don't believe they are fitting any longer in our strategy or risk appetite because we have the cash generation of every other businesses that allow us to do that. So -- and of course, the most important issue is also to understand that synchronizing the runoff -- proactive runoff of noncore with decommission is also very important because there is a marginal benefit. And keeping some of those positions, not all positions, actually the vast majority of the positions are good positions. There is no credit or toxic kind of profile around them. So we need to really measure what is the best economic outcome for shareholders because we -- if we go too fast, without being able to decommission, we may destroy value. So it's a fine-tuning exercise, but I really emphasize that the most important topic to -- around non-core, which is not what everybody wants to talk about, but it's cost, it's not the risk-weighted assets.

Just a point about it. So I've got a ton of questions here. There will be the opportunity for you to put your hand up and ask. We're not going to run down the clock. We're going to -- we're asking every company to leave a bit of time for you to throw what you want. I mean, obviously, my aspiration is I've asked all your questions before then, but feel free in 10 minutes or so, just put your hands up if you have anything pressing. I'm going to move on. Back to the cost, Sergio. This ambition to take out more than $10 billion sounds like an extraordinary number. I guess you've given us half of that. How hard is it to take that much out of business the size of UBS?

Well, It's hard because at the end of the day, no matter what, in our industry, it's around people. So that element is pretty hard. But it's necessary because as I mentioned before, CS was structurally losing money and then we need to extract the synergy. So the exercise here is all about restructuring first and then synergies. But of course, if you look at the starting point, our view is if you take end of 2022 cost base, combined, and you look at this combination as a domestic merger although it's much more than a domestic merger. It's true that we operate in the same locations [ floor-wide ]. So we need to start from there and say, what can you expect there in terms of synergies out of such an issue? And then we do that on a gross basis and then we look at how much money -- we look at how much money is necessary to make our infrastructure more resilient. We added back what we expect between now and 2026, inflation and growth that we aspire. As I mentioned before, growth, we are still looking to invest in our business. So to try to come with a net number, which drives our ambitions to be below 70% cost/income ratio by 2026, excluding the pull to par and the cost to achieve effects of the integration. So that's the way we look at it. So we look at gross and then we need to add back cost and then we need to add back costs for inflation and growth. And IT, I mentioned the IB and noncore infrastructure, the synergies that we do expect from Wealth Management, onboarding all the Credit Suisse clients into the Wealth Management platform of UBS. We announced the Swiss integration, real estate footprint, corporate center synergies, you name it. So there is a lot of things that have to be done. Credit Suisse has 1,000 legal entity. We have around -- UBS at around 300. So there is a lot of scope for reducing costs, but most importantly, to optimize capital consumption and liquidity trapped into different legal entities.

I'm pleased you mentioned that. I've got your fixed income presentation, legal structures and some great numbers here. So let's just touch a little on capital, if we could. I've got Investor Relations looking terrified here. One of the things that I've and the market wanted to talk most about is the common equity Tier 1 ratio that your bank will have to have. And part of that is the math says the Swiss too big to fail regime, as it exists, and part of that has been a source of general concern that regulators tend to ask for more capital. But you've been quite clear that you think 14% is a good number for the bank. So could you talk about the moving parts of that sort of this year and over the next couple of years. What gives you the confidence, 14% is a pretty high number, but the market seems to keep coming back to what if it's more and what gives you the comfort that 14% is the right level for the bank?

Well, I can only comment on what I know, right? But first of all, let's go through exactly why we set the 14% and why I believe it's the right number for us to operate in the foreseeable future. It is clear that as we go through the restructuring and we are out really winning back clients, it's absolutely critical that our capital position is strong and undisputed, right, and in that sense, particularly when we look at the mismatch that we have between pull-to-par positive effects and cost to achieve, will create volatility on CET1. So we can't -- we don't want to have our CET1 falling below a certain level and potentially even creating -- you never know which environment you will have, right? So it's very important because the strength of our balance sheet is a critical pillar of our strategy and has to be. When you are the leading wealth management franchise around the world, you can't afford to have discussions around your capital. So just to give you an example. For the rest of the year, we're going to have positive pull-to-par effects of around $1.5 billion and we expect cost to achieve impact of around $3 billion. So you see that already that one creates volatility, right? The second element is the 14%, in my view, is likely to be -- around that number is likely to be a good landing zone. Why? Today, we have a minimum capital requirement of 10.6%. The Swiss finish that will be applicable to us from '26, '27 onwards, so not before then, '26, '27 onwards, will add around 200 basis points because of market share and balance sheet size. So that will make us landing at minimum capital requirement of 12.5%. And I believe that our business should run between 1 and 1.5 points of buffer between minimum requirements and -- I mean, like many of our -- more -- peers, 1 to 1.5 points of buffer is the right way to land. So for different reasons, 14%, in my point of view, is that. By the way, Basel III has been almost implemented in Switzerland. Of course, we see that for many other banks, maybe it's not yet the case, particularly in the U.S. I saw numbers going around 20% inflation for us. I don't believe this number will be as high as that. Actually, we expect these numbers to be closer to 5% in aggregate. So Basel III is also not a huge headwind in that sense.

Yes. Jamie Dimon said it was 30%. So the Fed says it's 20%, Jamie says it's 30%. But Fed is in U.S. then yes.

As you know, Alastair, I mean, we have been saying that in the past and people were skeptical, but Switzerland has been implementing Basel III very coherently, very fast compared to many other jurisdictions. And you still see everybody reporting under Basel III, but I'm not so sure. I mean, actually, now we are sure. It was not always the same Basel III, right? So now we are now getting to the end of the game. Fine. I think that's -- we are well prepared for that.

And then you've also ended up with a great deal of going-concern capital as a bank, which is probably a function that Credit Suisse at the end was much smaller than expected to be. Is there any opportunity for you over the next couple of years to create efficiency in that part of the capital stack? It's quite a big cost as a Swiss bank because there are such big numbers there outstanding.

Yes, it's a big cost. And actually the answer is that, if any, it's marginal because, of course, when you look at group level, the stock is very big. But the truth of the matter, you need to go down below the group in the subsidiaries and look at the capital requirements there translates into these additional buffers coming on the top. So I don't think that there is a lot of scope to reduce that. It's a cost. By the way, yesterday, we had a very successful transaction in the market. We attracted -- we raised around $6 billion, $7 billion -- $6 billion of capital -- of new funding, if I remember correctly, $6 billion, $7 billion. And with demand -- actually, sorry, $4.5 billion and with demand for $16 billion. And yes, the cost is there, which shows that there is a definitely a premium, right, for these TLAC instruments that are there to absorb capital, which I think is the right structure. So the answer is that I don't believe there is a lot of scope to reduce that. There is a scope for us to deploy our capital and our resources more effectively, but not now to reduce those buffers.

So that's the platform established, 14% is a good number. I think, hopefully, that's been broadly closed down. So the other number you gave us is 15%, which is a return on common equity Tier 1 as a run rate by the end of 2026. So I guess putting a lot -- how confident are you in that? And then what's the shape, broad terms, of getting there? Because it's the most unusual deal because you've got this pull to par, which -- not by quarter, but overall, you've said should pretty much offset the impact of the noncore rundown.

The pull to par should broadly cover for the restructuring. Yes. Sorry, yes. yes. Yes.

So 15% 2026, easy. Two days a week off. And then what's the shape of that? Do you move to that number? Or is that very much...

No. Look here, that's exactly what you're going to hear in February. So now we -- I think that we have enough confidence. And with today's starting point, or let's say, June second quarter data to drive what we believe is the exit rate in 2026. What we are now working on is exactly how to connect the dots between now and then because of this volatility we will have or mismatch between -- in executing that. But this is going to be part of what we present in February.

It's worth a try. And then in your previous years running UBS, growth was a big part of what you delivered in the Wealth Management business. I suppose the question is how quickly can you move on from integrating Credit Suisse to growing the business again? Is it not quite that simple because winning back assets that were lost is fantastic growth in some ways. And then what are the investments you need to make? You mentioned briefly the U.S. and Asia. What are the investments you still need to make to round out the franchise? I mean, you've made a big step forward, but there's always work to do.

While winning back -- for us, winning back is not part of growth. Winning back is winning back and is resetting our starting moment. I think that -- and then from there onwards, of course, we're going to look at our combined growth aspirations. Look, Asia -- particularly in Asia, I think that we do expect definitely a less linear growth path, much more volatility and sentiment swings that we -- compared to what we saw in the last decade, it's quite clear. The economic conditions, the geopolitical conditions are creating much more uncertainty and that's reflected in clients' sentiment. So there -- but we still believe there is a lot of growth opportunities, not only in China, but in the entire Asian perimeter. The combination of the two franchises are giving us an extra boost there. In the U.S., I think it's very important to look at the integration of the investment bank in the U.S. and how those capabilities will allow us to give our client adviser, financial adviser in the U.S. even more access to opportunities to help clients to monetize or to go through M&A transactions for their own businesses is very important. So we now have finally a critical mass in the U.S. in terms of bankers. And also, we look at ways to diversify the revenue streams in our Wealth Management business in the U.S. Right now, of course, we are going through a little bit of a tougher time there. The NII is under pressure. Of course, market is high, but the client activity is not the one that we saw in the past, right? And therefore, we need to really keep investing for diversification there and then making our revenue streams more diversified.

We'd all like you to trade more as well. Maybe that's likely. There will be roving mic, friends. We've 5 minutes for questions. The lights are in my face, but I will be able to see -- first question, yes.

My question is simply on a new AT1, the whole of Europe has equity conversion or something similar. It may be worth considering that your cost level may go down for a new AT1 if you revise and have equity conversion, the question.

Or a statement. We are assessing all the options around the AT1. AT1 is an important part of our capital stack. And I mean, of course, we will do what makes sense for us, but also what makes sense for investors. And we are examining the situation. We are not under pressure at this stage. We have been around in -- with fixed income investors, Alastair mentioned before. Our priority was more on the OpCo and holding company funding, and we are assessing the optionalities on AT1.

The base case guidance for the size of the cumulative CTA is a very large number. But I think I hear you discuss that a lot of the head count reduction is going to be through natural attrition. So it takes time, but it's cheaper. So my question is, can you give us some idea of what you're going to spend the CTA on if it's not restructuring costs to exit head count? And is there some possibility that actually the total CTA amount might be meaningfully less than the base case that you've set out?

It's too early to go through that analysis. I think that we will need to assess exactly the exit situation in 2023 of head count based on natural attrition. Our look-through, we already have a good view on retirements, right? We are putting some, I would say, reasonable assumptions on -- reasonable in terms of not too aggressive assumptions on attrition for the next couple of years. We may have also to use in some cases early retirements. And then we know that we have -- part of it is going to be more proactive. It's also very important that we are going through and exercising and reshuffling our -- in technology, for example, our permanent head count-to-contractors ratio, I think it's around probably 55%, 60% right now, permanent to external. And we will definitely use this opportunity to increase the ratio, much higher and reduce our dependency on the contractors, which, of course, are costing more and our turnover is much higher. So it's a little bit early to make that assessment. As I said before, we are working on all the details. Some of them will be things that we can communicate or want to communicate and others are not going to be -- for obvious reasons, we will not want to communicate.

Question at the back?

Yes, thanks. So look, in the spreadsheet, it's really easy to model this out, right? I can put synergies through, I can put cost to achieve. I can pull and par. And it all looks wonderful, right? But in reality, you're merging 2 different cultures, different people, your key assets get off the elevator every day. So can you talk a little bit -- my understanding is that you put some retention bonuses in place for the top 20% of private bankers at both UBS and Credit Suisse. Can you talk a little bit about what you're doing to address some of those cultural issues and some of the change management at a point in time that's pretty critical?

Yes, that's very important. I mean the retention was there in some areas to -- not only on client adviser, I think that one cannot underestimate the amount of people that are still necessary to run 2 parent company. So I mean, we have to really make sure that going from finance to risk management to compliance, we need to keep a critical mass of people around as we go through the merger. So in that sense, we had to give comfort to some people that they would have a job for the foreseeable future, for example. The retention was not only retention so-called awards, but also, in some cases, the retention was making a statement that for a year, for 18 months, you have a job. Don't worry. So that's probably even more important than, in some cases, giving a bonus retention. Look, the culture -- the most important element in pulling together the 2 banks is really to look at what at Credit Suisse doing better than we did at UBS and vice versa. And last week, I had -- or 2 weeks ago now, actually meeting with the top 250 people at -- in the new group, 1/3 of them were Credit Suisse people. It's very important that when you look through in the organization in the first 2 or 3 layers, we have between 20% and up to 1/3 of Credit Suisse people. So it's a very important element because we went through -- we do our best to go through a meritocracy process in giving the new roles in the combined organization despite the fact that, as I mentioned before, we are running the integration as a UBS-led integration. The very important cultural elements that we need to bring -- to convey to our new colleagues, in my point of view, is not around the behaviors element. I think the Credit Suisse people are good people. And I don't have -- if you take out some exceptions that are unfortunately common in our society, I would say, not only in our industry, the real element is the cultural elements on how to deploy resources, how to use balance sheet, how to price the balance sheet and making more people aware what it means to have a balanced relationship with our clients in terms of being fast in making commitments and giving resources like lending, but at the same time expecting a sustainable return. If not on that transaction, in the overall relationship. Because I do think that at the end of the day, the best -- one of the biggest opportunity we have in getting to the 15% you mentioned, it's not just the cost winning back clients, but also to manage more efficiently the $240 billion of risk-weighted assets that we got, right? And that's a cultural issue that every -- more people in the organization must be aware of the economic contribution they do below the bottom line, I mean in terms of capital deployed versus expected returns.

Perfect. Sergio, 6 seconds over. Thank you very much, Sergio Ermotti. Thank you for your time this morning.

Thank you.