UBS Group AG (UBSG) Earnings Call Transcript & Summary

Okay, I'm getting started here. Personally very, very happy to welcome you to the conference this year, first time attending here, which is great. I hope you're enjoying Florida so far. But of course, Sergio Ermotti, CEO of UBS.

Thank you.

Of course. So would love to start. We just reported 2024 results. So -- and clearly, 2024 was a pivotal year for UBS. So what I'd love to hear is maybe your thoughts on 2024 overall? And what are the priorities for us as we integrate Credit Suisse and move into 2025?

Well, first of all, I think that the fourth quarter was a particularly strong quarter, both -- if you look at seasonality that is usually fairly negative to Q4, we saw good momentum, which I would say is a reflection of the good market conditions we saw in the second part of the quarter, but also a good momentum in us gaining market share in 2024. And in a sense, we made very good progress. As you mentioned, it was a pivotal year. I would say that 2023 was as important but 2024 was a year in which we clearly demonstrated the power of the franchise in terms of revenue generation and us starting to deliver on our strategic objectives in the areas where we want to invest and grow. But also in reflection around the integration, we significantly derisked the integration both in terms of what we did on balance sheet. In the noncore activities, we achieved a significant reduction of risk-weighted assets. We also decommissioned almost 40% of the applications that were supporting noncore and the fact of the former Investment Bank of Credit Suisse. And also, very importantly, we achieved almost 60% of the gross cost savings we have in mind. We need to save around $13 billion of cost. If you take the baseline as end of 2022, we achieved $7.5 billion by the end of 2024. So overall, very good progress. And now at the same time, we are also investing for the future because, of course, the integration will last until the second half of 2026, but we are preparing also for the future.

Right, okay. Well, thematically, capital markets recovery is very much in vogue right now. So I'd love to hear you talk to investors. Everybody is very, very excited about it. Of course, facts are January hasn't started out amazingly. But it's just 1 month. So how is UBS positioned for continued capital markets recovery? And what are you hearing from clients and investors?

Well, look, I'm not going to go into commenting on the current quarter. It's not our policy, but it's fair to say that when you look at until the middle of January and of course, still now, we see very good momentum in terms of the pipeline building up. Our ability to get mandates is intact. And I would say probably it's fair to say it's across the board in the industry. As you mentioned, when you look at banking, the truth of the matter is that according to public data, there is anything between 20% and 30% reduction of the fee pool year-to-date -- sorry, not year-to-date because through the end of January.

Yes, yes, yes.

So I can say that I'm happy to see that we are making good progress in terms of our strategic objective to increase market share. So in that sense, I'm happy so far. But it's not 1 quarter or 1 month that makes the story, but this is following up on 2024. This momentum is still there. The uncertainties that we see from a geopolitical standpoint of view, around tariffs are -- is definitely creating a little bit of uncertainties that may dent the capabilities for us, for everybody to execute on the pipeline. So the issue is not the pipeline -- is now do we have a market environment that is constructive enough to allow the execution of the pipeline. Offsetting this, you can see probably -- it's fair to say that we see continued good momentum in markets in trading and activities. So I would say that so far, so good, but it's premature to call out for the quarter.

For sure. Yes, yes. So as you mentioned before, the fourth quarter was quite a good note for us to end the year on, very strong. But it did seem as though the stock reaction might have been a bit of a concern around uncertainty around the capital requirements. So when do you think we'll get clarity on this? And do you have any expectations for that outcome?

We will get -- first of all, I would note that the market has reacted well to our Q4 results. And of course, our remarks around what it means if certain options materialize in terms of capital requirements, what they mean in terms of shareholder return and return on capital and so on and so forth, a little bit cooled down the situation. In terms of clarity, we will not get much clarity until May. In May, according to the Swiss Finance Minister Communication, we should expect a public consultation on any new proposals to be presented. And at that point in time, we will know more or less where the debate goes to exactly. Having said that, this is going to still take months to then become eventually a formal proposal. So I would say between May and the end of the summer, probably in start of autumn, we're going to find out much more.

Okay. Any expectations or too hard to know?

No. The expectations for us -- our expectation are that whatever announcements, which, by the way, we do believe that fine-tuning of the current regime is necessary to avoid what happened at Credit Suisse. We believe that focusing on the quality of capital is much more important than focusing on the quantity of capital. We expect and hope that we will have a proportionate outcome that is coherent with the strategy of the government to allow a global bank to be successful in its operations and having a competitive financial center in Switzerland. So having excessive requirements is definitely a contradiction to that kind of strategic desire. So I hope, and we will make sure that we contribute to this debate in order to make sure that a balanced outcome is there. So I keep saying that we are not only competing for clients, we are not only competing for best-in-class return on capitals with shareholders, but we are also competing for capital. So it's very important from my standpoint of view that once -- if you really want to achieve a good balance between prudential focus and sustainability of a business model, you need to make sure that we, a bank, can be an attractive value proposition in moments of stress if shareholders should be the first one being motivated to step in, in a scenario in which a bank can need capital for idiosyncratic reasons or more macroeconomic considerations. At that point in time, you are in competition for capital. And it's very important that people understand that how to calibrate that aspect and not only focus on extreme scenarios from going concern, everything is fantastic to gone concern. So there has to be a middle ground in which people understand how to calibrate those 2 elements.

Remarkably well said. So as you just touched on, UBS is a very global firm, right? We have Swiss roots, but a global firm. And here we are in Miami, watching the American football game last night, so a very American theme here. What are the thoughts on the Americas and the opportunity set that we have here? And how does that fit into the long-term strategy?

Yes. First of all, I have to say that soccer is a little bit more global than -- in that sense, well, look, the Americas has been, for decades, a key market and a key priority for UBS. But also, if you look back at UBS, not only the most recent history, the big acquisition of PaineWebber, [indiscernible] but also the legacy we are getting from the very good capabilities we took on from Credit Suisse through the first Boston historical has been and will continue to be a core market for us. I'm not saying anything new, but we all know that even more than 10 years ago, this is the biggest pool of fees in terms of banking and capital markets activity. It's the largest wealth management market in the world. So in a sense, it's almost impossible to be a successful global player without having a strong presence in this part of the world. Now of course, we know that we cannot compete across the board in every single aspect of banking. That's the reason why we need to stay very focused on our strategy, very focused on our equity story. We are the only true global wealth manager. So there is no other player that, I would say, has such a comprehensive footprint and capabilities in Wealth Management and having a strong presence in the Americas and Latin America, where we are #1, helps that kind of equity story. So our focus is to continue to develop the market. We know we have to do better in terms of our profitability in Wealth Management. We need to show that the power of UBS and Credit Suisse coming together in banking can create indeed added value to the entire group, but also to shareholders. And I'm very pleased with the progress we make but it's still some way to go.

Yes. I'd love to double click on that because many of our competitors are here at the conference today and many of the partners. So I would love to drill in a little bit to Wealth Management Americas. Made some changes there recently. You touched on the focus on enhanced profitability. So could you maybe expand a little bit on the changes that we made recently with [indiscernible] Americas and your expectations for the improved profitability?

Well, look, we need to narrow the gap to our competitors in terms of pretax profit margins. We need to recognize that we don't have a scale issue per se because we are managing $2.1 trillion of clients' assets in the U.S. So it's a pretty significant business. It's not -- it's #5, #6, but still a significant amount of assets. We don't have, to be fair, all the ancillary businesses around Wealth Management, like our peers, but we should have an ability to narrow the gap in terms of margins and profitability. So in order to achieve that, we need to definitely work on at least 4, 5 levers. There is no silver bullet that fixes everything. We need to work on further enhancing, which I believe has always been one of the most successful ways to improve businesses is to focus on doing better with your existing clients. We can do much better with our ultra net worth clients. We can do much better with our family offices clients in terms of developing a more comprehensive, broader relationship with them, with institutionalizing more of those relationships. We need to probably also slightly enhance our segment penetration. We can do better in the high net worth space and affluent space without compromising our status as a leading ultra and GFO bank. We can work on enhancing our banking products capabilities. We are now in the process of getting the license for having a national charter so that we can do more deposit businesses more. We can do more banking businesses like lending that are not necessarily part of the tool in an efficient way today. We need to work on cost. We are improving our technology capabilities. And when you address all these issues and our organizational structure with less complex management structures will allow us to deliver and execute on the strategy. So a lot of things that needs to be done. Our first objective is to get to a 15% pretax profit margins in the next couple of years and then from there onwards to narrow the gap to best-in-class. Now our subpar margins in the U.S. have to be also be seen in the context of the global competitive landscape. Our margins outside the U.S. are very high, and, I would say, quite challenging for our U.S. peers to match. So we have to recognize that each of us brings to the competitive environment a different DNA and different business mix. And we need to work on this portfolio rather than trying to be paranoid about only looking at one country because the critical mass that we have allows us to be an efficient global player and not necessarily just as a single region or competitor.

Yes, single market focus. And it's a great segue to the next question, which is to think about the global business. It is definitely a differentiator against a lot of our U.S. peers, for sure to have that. So what are the priorities for the Wealth Management business around the world outside the U.S.? And how is the integration going? And where do you see it going from here?

Well, the big priorities are for us to continue to see -- we see secular trends supporting Wealth Management and asset gathering across the board. The people in the room knows that as good as I know that this is something that is likely to continue. When I look at Asia, when I look at Europe, no matter if you look at growth that may come from wealth creation coming from GDP growth or if you look at the topic of helping clients to manage their assets in a challenging geopolitical environment where they need to probably reconsider how they book those assets globally. You think about succession, next generation, you think about wealth planning, you think about philanthropic desires of many of our clients. We can really drive growth by being together with clients in this journey. And Asia is definitely a business that continues to grow, very promising, despite -- if you look at last year's results, despite the fact that our people were very busy in managing the integration, we managed to have a very impressive growth. So I see Asia continuing to be an engine of growth. Of course, we will need to see -- in terms of net new assets, we need to see also monetization coming back. The environment has been okay-ish in the last couple of years and not really to be compared to what we saw in the last 10 years. We all know that capital markets activity needs to come back in order for us also to drive net new assets. We really capture through the work of the IB and Wealth Management, we capture the outcome of monetization of entrepreneurs or general investors. They tend then to keep chunk of their assets with us once they go through that kind of process. So for us, it's very important to see also the capital markets activity coming back to a more normalized level compared to what we saw in the last couple of years.

Yes, back to the beginning of the discussion, right, this first order and second order impacts for us. Yes. Thinking about the competitive landscape, we hear just regularly, U.S. competitors talking about investing and growing their wealth business. So how do you -- given all of that, what gives you confidence in our ability to compete?

Well, look, I think that we definitely always need to be somehow focused and not complacent about the competitive dynamics. But it's fair to say that some of our main competitors are building up very credible propositions in the space. Having said that, if you look back at UBS, we have been doing Wealth Management for 160 years. So it takes more than just an ambition to build up what you have. It takes investments, it takes a culture, it takes a focus that we have. As I mentioned before, our advantage is that asset gathering -- Wealth Management is at the core of our strategy. I mean, not only in terms of revenue, you look at our balance sheet, we really drive this business at the center of what we do. So we should not be complacent about competitors. Actually, it would be a real big mistake, but we know that particularly outside the U.S., the barrier to entry are pretty high. How we defend that position is by continuing to invest. From my standpoint of view, that's the reason why I'm so focused on making sure that we don't just spend too much time talking only about yesterday business and today, or the integration, but also thinking about how is the future going to reshape in terms of capabilities, what can you bring to the table to clients, what can you do in order to improve your efficiency and effectiveness in how we manage our balance sheet, but also our cost because one thing is quite clear to me, the top line is not going to grow as a function of margin going up. Margins are likely to continue to be under pressure in our industry. So you need to really have a higher penetration. You need to do more with your existing clients, and you need to also create operating leverage by doing things better and more efficient because one angle that where, of course, you may become vulnerable over time if people can come up with the same business model more or less at a much lower cost. And that's the reason why we are investing heavily in the new generation of capabilities to our people. Artificial intelligence is something that we have been doing for 10 years. Of course, now it's even easier to do it. We deployed 50,000 Copilot licenses late last year and right now, this is the largest rollout of Copilot licenses in the financial services industry. I don't expect things to change overnight. But as people start to embrace different ways to do their job, we will see also the benefit of efficiencies coming out either by cost reduction or enhanced productivity, which will then sustain growth in a more profitable way going forward.

Right, yes. I like that part of your answer. You need more than just ambition, it's well said. Private markets are a big theme. There's a strong secular growth driving private markets. Just had Apollo earlier this morning chatting and they're very excited about growth in the wealth channel. Can you talk about how UBS is positioned in order to benefit from that trend?

Well, in different ways, I think it's fair to say that when you look at the asset allocation of our client, it's still fairly modest across private markets, of course, has been growing, but there is still a lot of scope to go. One way we are trying to do now is to really leverage the existing capabilities. Many of you may know that as of January 1, we have pulled together all our alternative businesses that we had in Wealth Management Americas, in Wealth Management International in the asset management under one roof. We created, overnight, the fifth largest LP with almost $300 billion of assets across all asset classes. This is helping us reinforcing our relationship with GPs as a one-stop shop that allows them also to leverage and coming into the Wealth Management network we have. So with $4.1 trillion of client assets, we can offer an easy entry point and is also very coherent with our ambitions to have an open architecture. So we really focus always on giving our clients the best at the best price possible. So that's the way we pursue the strategy. We also need to pay attention here on the quality over time and the sustainability of how to invest in private markets. It's fair to say that we -- so far, so good. We saw growth. We see a lot of commitments, but we need to also make sure that we remember that we have to also look at suitability and making sure that the right clients by the right investment and assets so that we prevent any misunderstanding on that front going forward.

Right. And hearing people talk about private markets in the wealth channel, it's often quoted, it's low single digit now. Do you have a sense or an estimate about how high you think that, that could or likely to get?

Well, I mean, as you mentioned, we are now talking about mid-single digits. I would say that if we get, in the next 5 years, to mid-teens. It's probably going to be a reasonable place to be. As I said, we should pay attention not to go too fast. And I mean, there are no free lunches. I don't really believe that private markets, per se, can offer on its own a solution to everything, and we need to really use it in a very focused way. But the potential is pretty high in terms of asset allocation, diversification. And so -- yes.

Yes, that's impressive growth. Yes, we'll open up to audience after one last question. You touched on Copilot. And so AI is another big topic right? What are your thoughts on how AI can, of course, beyond the initial steps of the big launch of Copilot, which is important, but are there any other intermediate plans? And what do you think ultimately is the impact of the industry from that technology?

Look, I'm not an expert and I will not claim to be an expert. I only understand enough to say that it's unlikely that this is going to be an immaterial event. So I think that in history, maybe it's the same at this time. We have been probably too enthusiastic or too focused on the immediate changes and underestimated the long-term effects of technology. Probably this time, it's fair to say that things can indeed go a little bit faster than we saw in the past. But I do believe that it's quite clear, I see that there is a scope for enhancing productivity and making the job of everybody easier, in some cases, even more interesting. And our focus right now is when we invest, it's 80% efficiencies, 20% top line. And I don't know if this is right or wrong, but I think that I can measure efficiencies very quickly. The top line is always a little bit more difficult to argue. And in that sense, our ambition is to be a fast follower. There is also a risk of trying to be too enthusiastic and overinvest in things that are likely to change very rapidly. So being a fast follower, considering our franchise, is good enough for us to tackle the next 3 years.

Okay, got it. Well, we got about 10 minutes left so if there are any questions in the audience, I'd be happy to take those. All right. Well, I guess I'll come up with another one. So when you think about -- we just did the big acquisition of Credit Suisse. We've gone through the integration. When you look back on that journey, what do you think was most surprising that we learned from going through that? And maybe what did you expect that maybe didn't come to play?

I have to say that positively surprising, although I always felt that the so-called difference of culture between UBS was a significant risk on the integration. I was still very positively surprised about how quickly the 2 teams have been coming together and working together. That has definitely helped the execution of the integration being smoother than we could expect. So that's probably -- when you go outside the financial KPIs, this is probably the best achievements we had. So also considering that, of course, for -- mainly for the Credit Suisse colleagues, but also for some UBS colleagues, the acquisition was a traumatic event. I mean, and in that sense, having so quickly a common culture, a common view on how to bring things forward was a very positive development.

Yes, very true. We'll go one more try for the audience. We have a question here. We have a mic runner.

[Question Inaudible]

So I'll just repeat the question for the webcast. So APAC used to be a big source of growth expectation, particularly Hong Kong and China. And do you still expect that going forward? You certainly did reference it a little bit in your Wealth Management discussion.

I still see China and Hong Kong, from a secular standpoint of view, to be a growth opportunity. Of course, I would say, the level of growth and the volatility, unpredictability of that growth is going to -- has been already for the last few years and will continue to be, much more volatile. But still, you still have a lot of wealth creation. And the ancillary repercussions of that changing paradigm in China and Hong Kong had also some repercussions on the rest of the Asian business in which you can see offsetting growth opportunities. So if you look at the broader Asian topic, the APAC topic, it's been quite impressive growth even last year. So yes, I mean, I don't see a lot of other places where you can see true growth and wealth creation. If you still look at the amount of people who are living below poverty and going to the next level of wealth status and then in turn, becoming wealthy people or multimillionaires and billionaires, the numbers are quite impressive. And also the demographic trends in some of those countries really drives the necessity of wealth planning, savings and investments, which is very constructive to our business model. So Asia is still an absolute engine of growth, although more volatile, mainly driven by geopolitical consideration than fundamental issues.

Any other questions from the audience? Okay. I can do one more. Why not? So I've been at UBS for 14 years, so I've actually seen 2 Sergio CEO eras. In your first, accelerate when we changed around the trading business, that was transformative. And it seems -- I might be off on this, but it seems like, it's the most I can remember, cross-divisional cooperation is probably the highest that I can remember. I mean, the amount of time that we try and partner with wealth and vice versa seems to be increasing. Is that a strategic imperative? And what kind of opportunity do you think that, that would present?

Well, when you go through the transformation of the capital allocation we went through post the financial crisis in 2011 and '12, and also, it's fair to say that back then also our Wealth Management business was going through a lot of changes in terms of our position and the way we were looking at clients' assets and many regulatory aspects of what we did was driving a necessity for the group to focus, first of all, on fixing each business on a very vertical dimension. So basically, focusing on becoming very good at what you do, best-in-class in what you do so that eventually, when you finish that journey, which we are doing now, you can then start to look at the horizontal dimension, i.e., when you look at clients and you look at how can you best serve clients by leveraging the capabilities of the group across Asset Management, Wealth Management, the Investment Bank and our Swiss business where we also have a lot of ancillary synergies coming through. So what you see right now is a change that is almost the outcome of having finished the job in making as efficient as possible the vertical dimension and now working on the client dimension. And that kind of horizontal dimension is very important for us because we are not setting our strategy based on size of balance sheet or scale in our businesses, but we play a more focused approach, and it's very important for us when we face larger and more competitors that we are more flexible and more agile on how we look at relationship with clients, and so we can offer something that is differentiated. So it's a necessity. It's not only an opportunity. It's a necessity for us to be very close to clients and offering the best because we cannot afford just to leave out of the vertical dimension.

Great. Got it. Well, Sergio, thanks a lot for your time. It's a very interesting discussion.

Thank you.