UBS Group AG Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Integration Progress: Nearly half of targeted gross cost savings captured. Completed mergers of parent and Swiss banks, transitioned to single U.S. intermediate holding company. Addressing Credit Suisse's legacy legal issues. Still work ahead to restore Credit Suisse's sustainable profitability.
• Financial Performance: First half reported net profit $2.9 billion, underlying PBT $4.7 billion, underlying return on CET1 capital 9.2%. CET1 capital ratio 14.9%, total loss absorbing capacity ~$200 billion.
• Client Franchises: Strong net new asset inflows ($127 billion since close), Global Markets had highest second quarter on record, Global Banking captured market share gains. Unified Global Alternatives unit created.
• Cost-Cutting: Achieved $900 million additional gross cost saves, cumulative since end-2022 $6 billion (45% of total ambition). Integration-related expenses $1.4 billion in Q2.
• Balance Sheet: Reduced risk-weighted assets by $15 billion in Q2, leverage ratio denominator decreased by $35 billion, LCR 212% at quarter end.

Segment Performance

• Global Wealth Management (GWM): Pretax profit was $1.2 billion on revenues of $5.8 billion, up 3% year-over-year. Revenues declined 2% sequentially, with net interest income down 2% but recurring net fee income up 3% and transaction-based revenues up 14% year-on-year. Generated $27 billion of net new assets.
• Personal & Corporate Banking (P&C): Pretax profit was CHF 645 million. Revenues down 4% sequentially, net interest income down 8%, but recurring net fees and transaction-based revenues up. Full-year 2024 guidance is mid- to high single-digit percentage decline vs 4Q '23 annualized.
• Asset Management: Pretax profit increased 26% to $228 million. Net new money was negative $12 billion, net management fees down 5%, but operating expenses 9% lower sequentially.
• Investment Bank (IB): Operating profit $412 million, up from a loss a year earlier. Underlying revenues grew 26%, banking revenues up 55%, capital markets revenues up 82%.
• Noncore and Legacy (NCL): Pretax loss in the quarter was $80 million, but underlying OpEx down 37% sequentially. NCL's six-month pretax profit was $117 million.

Guidance

• Net Profit: First half reported net profit $2.9 billion. Second quarter net profit $1.1 billion, EPS $0.34, underlying return on CET1 capital 8.4%.
• Capital: CET1 capital ratio 14.9% at quarter end. UBS AG's standalone CET1 capital ratio expected 13.5% on fully applied basis next week.
• Cost Savings: Cumulative gross cost saves since end-2022 $6 billion, aiming for $13 billion total. Integration-related expenses $2.3 billion in second half.
• NII: GWM full-year 2024 NII roughly flat vs 4Q '23 annualized. P&C full-year 2024 guidance mid- to high single-digit percentage decline vs 4Q '23 annualized.
• Return on CET1: First half underlying return on CET1 capital 9.2%, guiding mid-single digits for 2024, mid-to-high for 2025.

Risks

• Geopolitical Tensions: Ongoing geopolitical tensions and U.S. elections likely result in heightened market volatility.
• Market Volatility: Anticipated market volatility could impact short-term performance.
• Regulatory Changes: Impact of Basel III final implementation, expected day 1 impact on RWA around 5% driven by FRTB.
• Interest Rate Fluctuations: Impact on NII, particularly in GWM and P&C from deposit mix shifts and loan repricing.

Question and Answer

Q: Good morning. Thank you for taking my questions. I'll ask two, please. So my first one, thank you very much for the guidance on NII in GWM, which was something that the market was looking forward to. Can I just ask a clarification? If you look at the current forward curve, when do you expect NII to bottom exactly? Do you think second half '24 and then we can grow? Or possibly first half '25? So that's the first question. And then the second question is instead on the capital of the parent. In particular, the CSI, it seems to have a lot of excess capital and upstream impact could reduce the impact -- the potential impact from the proposal in Switzerland. Can we expect UBS to upstream some of that capital? Or how are you thinking about excess capital at the subsidiaries?

A: So regarding the NII guidance, in terms of the implied forward curve, as I mentioned, we ended up pricing in, as you saw modeled for 25 basis point rate cuts through the end of the year. If you look out in terms of when the implied forward curve would suggest bottoming out, probably pricing in more like 7 million, depending on what you're looking at. So I mean, from here. While difficult to speculate, it could be sometime in mid-2025. But I spent time on what I think is really important to recognize is that in a lower NII -- lower interest rate environment, there are significant offsets and tailwinds in the business that we expect to see. And that was a point that we wanted to really ensure is well understood. Because ultimately, transaction revenues, re-leveraging and driving up NII from re-leveraging and also recurring fees from mandate sales all have upside in an environment of lower interest rates. In terms of the parent bank capital, you mentioned our U.K. Credit Suisse's U.K. subsidiary that has excess capital. Of course, we're working on restructuring on all of our subsidiaries where we can. And ultimately, we will, as appropriate upstream the capital in any of the subsidiaries in order to alleviate the capital at the parent bank.

Q: Good morning. I'd like to just drill down two of the areas where you perhaps delivered ahead of expectations. So firstly, on the non-core, another successful quarter of actively reducing the RWAs, some further gains on some of those position exits. You're now talking about narrowing that gap to the natural runoff. So based on the natural runoff, you'd be at 6%, you're aiming for 5%. So I think that is only another $5 billion implied of active RWA management in that business. And as you alluded to, the close of the U.S. mortgage servicing business will get you some way towards that. Should we assume that the active management within the NCL book is now largely complete or will be largely complete by the end of this year? And then my second question is just on costs. Previously, I think you expected to be at 50% by end '24. You're now at 55%, guiding by end '24 of the total cost save target. There's an extra $500 million of cost saves that you've realized earlier than expected. Which division is it you view those cost saves are coming through earlier than expected? And in your mind, it's purely just the timing issue, that you commented earlier, as opposed for quantum issue that you're delivering more cost saves than expected?

A: Yes. Thanks a lot, Andrew. So on the second one, in terms of on the cost and the performance and outperformance we're continuing to see, I mean, that's really driven, as I highlighted in my comments, by NCL for sure. NCL has driven the lion's share of the gross cost saves to date. While the other divisions have contributed, it has been really a function of their active rundown of positions, but also the restructuring of various parts of Credit Suisse's GSIB that we've highlighted in the past is an important part of taking out costs, and a lot of those costs reside in NCL. So they've been really the benefactor of the cost performance. And as we look out towards the end of the year, the additional progress that we anticipate even though, as I suggest, we expect a bit moderate deceleration in the gross cost saves, that's expected to be yielded also by NCL. And as I highlighted, the core business divisions will then -- the ratio of core to non-core, or non-core to core in terms of cost takeout will invert as we get into the second half of the integration agenda, and we'll start to see the significant cost reductions hitting through, in particular, GWM and P&C. And then -- and just on the first in terms of how we see the natural runoff and the success we've had in the quarter. Of course, we're not counting on extrapolating and we take economic decisions as they arise and the opportunities arise. So difficult to extrapolate the great outcome that we've had to date to suggest a different outcome than the natural roll off. And that's why we continue to disclose it. So that becomes clear. What is important, and Sergio commented this in his remarks, that the uncertainty delta continues to narrow. And that's what I think is important that, ultimately, while we can't count on anything in particular in terms of what can come off the balance sheet of NCL in terms of extrapolation. What we can say is that the uncertainty delta has narrowed very significantly.