UBS Group AG Q1 FY2024 earnings call

Key Managerial Messages

• Financial Performance: Reported net profit was $1.8 billion, underlying PBT $2.6 billion, underlying return on CET1 capital 9.6%. Revenue growth in core businesses, flows across asset gathering franchises. Achieved $1 billion annualized run rate gross cost savings, progressing towards $13 billion target.
• Integration Milestones: On track with simplifying legal entity structure. Merger of parent banks expected by end of May, transition to single U.S. intermediate holding company shortly after, merger of Swiss bank entities before end of third quarter (subject to regulatory approvals).
• Business Division Performances: GWM pretax profit doubled, P&C pretax profit increased, Asset Management saw solid results, Investment Bank turned profitable, Non-core and Legacy reduced RWAs and costs.
• Capital and Dividends: CET1 capital ratio 14.8%, expected to deliver on capital return targets for 2024. Began accruing for mid-teen percentage year-on-year increase in dividend, expect to resume share repurchases following parent bank merger, targeting up to $1 billion.
• Regulatory Discussion: Addressed Swiss proposals to strengthen too-big-to-fail regime, emphasized need for sustainable business model, strong capital position, and robust risk management framework.

Global Wealth Management (GWM):

• Pretax profit doubled to $1.3 billion in the quarter, with combined PBT up ~20% year-over-year. Revenues increased 10% sequentially. Net new assets were $27 billion. Net new fee-generating assets reached almost $18 billion. Attracted $8 billion in net new deposits. Credit and counterparty risk RWAs declined by $4 billion. Revenue over RWA metric showed progress, particularly on the Credit Suisse platform.

Personal & Corporate Banking (P&C):

• Pretax profit increased 11% sequentially to CHF774 million. Revenues up 4%. Net credit loss expenses declined 47% quarter-on-quarter. NII increased 3% sequentially. Transaction-based revenues up 9%. Recurring net fee income gained 5% sequentially. Operating expenses up 4% quarter-on-quarter.

Asset Management:

• Underlying PBT decreased 2% quarter-on-quarter to $182 million. Net new money was $21 billion. OpEx decreased 7% to $594 million. Focus on cost optimization and client migration to UBS infrastructure.

Investment Bank:

• Operating profit was $404 million, marking the first profitable quarter since acquisition. Underlying revenues increased 4% to $2.5 billion. Banking revenues up 52%, Capital Markets up 85%, Advisory revenues up 11%. Revenues in markets declined 5% but up 6% year-over-year in Americas. Operating expenses rose 8% but dropped 4% sequentially.

Non-core and Legacy:

• Pretax profit was $197 million, supported by $1 billion in revenues from gains on position exits. Reduced RWAs by $16 billion. Expected NCL book to close out at current carrying values, with revenues likely to be zero going forward net of hedging and funding costs. Underlying costs in NCL dropped 26% quarter-on-quarter.

Forward-Looking Guidance

• Cost Savings: Expect $1.5 billion in gross cost saves by end of 2024, pace of gross cost saves likely to decelerate from current run rate. Integration-related expenses expected to total $13 billion by end of 2026, with around half of group's planned gross cost saves and majority of net saves from running down NCL book and eliminating expenses from Credit Suisse's legal entities.
• GWM NII: Expect NII in GWM to be roughly flat versus 4Q '23 annualized, with NII and margins holding broadly steady in 2H 2024. Seasonal tax-related outflows in U.S. business expected to be a headwind to divisional net new asset performance in second quarter.
• P&C NII: Expect mid- to high single-digit percentage decline in P&C's NII versus 4Q '23 annualized, with NII holding broadly steady in U.S. dollar terms in 2H 2024. Outlook includes $50 million annualized headwind from higher minimum reserve requirements at Swiss Central Bank.
• NCL: Expect NCL book to ultimately close out across positions at current carrying values, with revenues likely to be zero going forward net of hedging and funding costs. Target to reduce noncore legacy risk-weighted assets to around 5% of the group by end of 2026.

Risks Discussed

• Regulatory Uncertainty: Uncertainty around proposed changes to Switzerland's too-big-to-fail regime, including potential impact on capital requirements. Lack of clarity on specific regulatory changes and their implementation.
• Market and Client Sentiment: Socio-geopolitical volatility and macroeconomic uncertainty continue to weigh on client sentiment, affecting activity and risk appetite. Seasonal tax-related outflows in U.S. business could impact GWM's net new asset performance in the second quarter.
• Non-core and Legacy Execution: While making progress in winding down Noncore and Legacy assets, there is uncertainty around the timing and impact of position exits, including potential sacrifice of P&L to eliminate costs and release sub-optimally deployed capital.

Q: On non-core, is there any reason to expect continued sales if markets stay favorable and what's the profile of the project to improve revenue to risk-weighted assets in Wealth Management?

A: Todd Tuckner responded that on NCL, they've been consistent with natural runoff profile, and the delta between natural runoff and ambition is narrowed. On GWM's revenue over RWA project, it started at the end of last year, business is active in it, and they expect to continue making progress over the next couple of years with net new assets guidance of around $200 billion over two years.

Q: On whether there's a MAC clause in the Credit Suisse acquisition and alternative to reducing capital return like exiting markets?

A: Sergio Ermotti stated some conditions were discussed and agreed over the weekend, but not a MAC clause. On exiting markets, he emphasized that having a global franchise is key for serving clients and the Swiss economy, and it's too early to speculate on exiting markets as a response to capital return concerns.

Q: On next steps regarding capital proposal and whether transaction fees in Wealth Management are transitory?

A: Sergio Ermotti said they are not yet clear on formal consultation or discussions regarding capital proposal, and June 2025 is too early for clarity. Todd Tuckner stated transaction fees in GWM in 1Q were strong due to risk coming on, client confidence in UBS's strengths, and structural factors like Align product shelf and joint coverage with IB, indicating it's not transitory but reflects ongoing momentum.

Q: On Investment Bank productivity and share buyback plans?

A: Sergio Ermotti said everyone in Investment Bank is up and running and productive, with strong momentum in winning mandates. He stated they expect to restart share buyback with up to $1 billion following parent bank merger expected by end of May.

Q: On source of gains in Non-core and Legacy and mitigation of foreign subsidiary risk?

A: Todd Tuckner said gains in 1Q came from various sectors like conduit and corporate loan books and longevity portfolio, but 1Q performance won't repeat due to factors like cost takeout and suboptimal capital. Sergio Ermotti mentioned $9 billion of additional capital due to elimination of regulatory filter and other factors, but couldn't speculate on mitigating foreign subsidiary risk changes as details are unknown.