UBS Group AG Q1 FY2024 Earnings Call

Ladies and gentlemen, good morning. Welcome to the UBS First Quarter 2024 Results Presentation. Please note that this conference should not be recorded for publication or broadcast. At this time, I would like to hand over to Sarah Mackey from UBS Investor Relations. Please proceed, Sarah.

Good morning, and welcome, everyone. Before we start, I'd like to draw your attention to our cautionary statement slide at the back of today's results presentation. Please also refer to the risk factors filed with our group results today, together with additional disclosures in our SEC filings. On Slide 2, you can see our agenda for today. It's now my pleasure to hand over to Sergio Ermotti, Group CEO.

Thank you, Sarah, and good morning, everyone. A little over a year ago, we were asked to play a critical role in stabilizing the Swiss and Global Financial Systems through the acquisition of Credit Suisse and we are delivering on our commitments. This quarter marks the return to reported net profit and capital accretion, a testament to the strength of our client franchises and significant progress on our integration plans. Reported net profit was $1.8 billion with underlying PBT of $2.6 billion and an underlying return on CET1 capital of 9.6%. Our commitment to stay close to clients supported healthy revenue growth in our core businesses and flows across our asset gathering franchises. Meanwhile, we are executing on our restructuring plans at pace and actively winding down Non-core and Legacy assets. We also achieved another $1 billion annualized run rate gross cost savings during the quarter as we progress towards our $13 billion target. As for the next significant integration milestones, we remain on track with our plans to simplify our legal entity structure. The merger of our parent banks is expected by the end of May and the transition to a single U.S. intermediate holding company is expected to occur shortly thereafter. The merger of our Swiss bank entities is set to take place before the end of the third quarter. All of this is subject to final regulatory approvals. These critical milestones will facilitate the migration of clients onto UBS platforms beginning later this year and unlock the next phase of the cost, capital, funding and tax benefits from the second half of 2024 and more so by the end of 2025 and into 2026. Lastly, improvements in our CET1 capital ratio were supported by our optimization of risk-weighted assets. As a consequence, we remain well-positioned to deliver on our capital return targets for this year. Our underlying financial performance was driven by significant positive operating leverage at the group level with 15% revenue growth alongside a 5% reduction in operating expenses compared to the fourth quarter. Compared to a year ago, we reduced operating expenses by around 12%. We had excellent performance in Global Wealth Management as underlying PBT doubled sequentially to $1.3 billion. Personal & Corporate Banking delivered underlying profit growth quarter-on-quarter, driven by higher revenues and lower credit loss expenses. Meanwhile, Asset Management posted solid results, thanks to cost discipline. As a result of the restructuring efforts that we have undertaken over the last nine months, I'm particularly pleased that Credit Suisse's Wealth Management, Swiss Bank and Asset Management franchises are now all profitable and contributed to our financial performance. Investment Bank delivered a double-digit underlying return on attributed equity supported by lower operating expenses compared to Q4 and another strong quarter in Global Banking revenues. Lastly, we had a positive revenue contribution from non-core legacy as we accelerated position exits while further reducing costs. While we continue to deliver on the integration, helping our clients manage, grow and protect their assets remains our top priority. We maintained our momentum with clients in GWM. Invested assets have now surpassed $4 trillion as we generated $27 billion of net new assets. Socio-geopolitical volatility and macroeconomic uncertainty continue to weigh on client sentiment, but we observed an improvement in risk appetite and activity. We also saw an improvement in client activity within P&C, particularly among corporates. In Asset Management, our clients continue to value our separately managed accounts and sustainability offerings. We have generated $21 billion in net new money during the quarter. In Global Banking, we outperformed the fee pools in all regions, but most notably in the U.S., where the integration of Credit Suisse teams is progressing well, and our pipeline continues to build. Let's move to non-core and Legacy. As I said before, and you can see on this slide, we are making good progress in taking out costs and streamlining our operations as we wind down the portfolio. We accelerated the wind-down of several complex and longer-dated positions this quarter, supporting a capital release of around $2 billion and a material improvement in our natural runoff profile. We are well positioned to achieve our target to reduce non-core legacy risk-weighted assets to around 5% of the group by the end of 2026, and we remain focused on accelerating position exits in a manner that continues to optimize value. Turning to capital. As you can see, the combination of our highly capital generative business and the restructuring and active management of financial resources has further reinforced our balance sheet for all seasons. This permits us to follow through on our capital return plans for 2024. During the quarter, we began accruing for a mid-teen percentage year-on-year increase in our dividend. And as previously communicated, we expect to resume share repurchases following the completion of the parent bank merger, targeting up to $1 billion. Our ambition is to continue repurchases in 2025 and for our capital returns in 2026 to exceed pre-acquisition levels. Of course, all of this is now subject to our assessment of any proposed requirements related to Switzerland's ongoing review of its regulatory regime. In this respect, I'd like to address the recent proposals in Switzerland to strengthen the too-big-to-fail regime. It is clear both to us and several expert groups that too-low capital requirements were not why Credit Suisse needed rescuing. However, we agree with the Swiss Federal Council's view that capital and liquidity requirements on their own are not sufficient to ensure the resilience and stability of a systemically important bank. In addition to adding a strong capital position, it is key to maintain a sustainable business model centered around risk-adjusted profitability and a robust risk management framework. All of these are core principles for UBS. For over ten years, this approach has served our clients, employees, investors and the Swiss economy well. It is what allowed UBS to respond to the Swiss government's request in March 2023 to be part of the solution to stabilize the financial system. While some modifications to the regulatory regime may be necessary and we have endorsed many, the discussion around capital should be based on facts that include a full and transparent account of what led to the idiosyncratic failures of Credit Suisse. The ultimate and crucial objective of the too-big-to-fail regime must be to credibly demonstrate that a systemically important bank could be safe in a crisis largely through its own financial resources. We believe UBS has and will continue to demonstrate its resolvability from both an operational and capital point of view. With around $200 billion in total loss-absorbing capacity, our shareholders and structurally subordinated bondholders bear the significant costs and risks to ensure taxpayers would not suffer in the highly unlikely scenario that a major systemic event affects UBS. We appreciate that many of you would like a quantification of the potential impact of any new capital regime, but it's too soon to jump to conclusions. It would be inappropriate for us to speculate or respond to speculation on the potential impact. We were not involved in the consultation process leading to the publication of the Federal Council report, and we do not have clarity on any proposed changes and how they would be implemented. Nonetheless, one point on which we may offer some clarification is the topic of parent bank capital. Our parent bank was already well capitalized in both absolute and relative terms and is in a position today to absorb the removal of substantial regulatory concessions granted to Credit Suisse. By fully aligning the treatment of capital at Credit Suisse to our more rigorous approach, UBS has to provide the additional capital required for the phasing of risk-weighted assets for Credit Suisse participations. UBS had already done this for its subsidiaries when the rules were introduced in 2017. Further, UBS will not rely upon the regulatory filter historically applied to Credit Suisse. Overall, this requires additional capital in the amount of about $9 billion. When applied consistently and coherently, the Basel III rules that UBS and its global peers must follow are robust. They too are being significantly tightened. In addition, the phasing in of progressive capital add-ons will already lead to substantially higher capital requirements for UBS's parent bank, about another $10 billion. So overall, we are adding almost $20 billion in additional capital, which, of course, was already reflected in our previously communicated capital and financial targets. In our view, all of this must be considered when new requirements are discussed, defined and calibrated. In this respect, we will be constructively contributing our views to the relevant authorities and various policymakers. As the third largest private employer, one of the country's largest taxpayers, and as importantly, a significant provider of credit to households and businesses in Switzerland, we believe it is also our responsibility to share our perspectives with the wider public. This is an important discussion for the country, and I remain hopeful for a proportionate outcome. In the meantime, in addition to executing on our integration plans, we will remain focused on what we are able to control, serving our clients, following through on our strategy, investing in our people and remaining a pillar of economic support in the communities where we live and work. With that, I'll hand over to Todd.

Thank you, Sergio, and good morning, everyone. Before I begin, I would offer a reminder that the first quarter financial report published today includes select interdivisional changes we signaled last year. We shifted the Swiss high net worth segment from P&C to GWM and pushed out residual centrally held costs and financial resources to our business divisions, ultimately increasing the equity we allocate to them. These divisional shifts support continued resource discipline and accountability. They also align with the interests of shareholders by reflecting group performance as a whole through the reporting lens of the respective individual businesses. In my remarks today, I will refer to underlying numbers in U.S. dollars and compare them to our performance last quarter unless stated otherwise. As illustrated on Slide 9, our financial performance this quarter reflects strength in our core businesses as well as excellent progress across our integration work streams, resulting in substantial reductions in operating expenses and risk-weighted assets. Profit before tax increased significantly to $2.6 billion from strong operating leverage quarter-on-quarter driven by higher revenues and lower costs, both of which I will cover in more detail shortly. Net credit loss expenses declined by $30 million this quarter to $106 million. On a reported basis, the first quarter net profit was $1.8 billion, including a tax expense of $0.6 billion. The effective tax rate for the quarter was 26%, lower than previously guided, primarily due to the strong performance in non-core and Legacy that reduced the level of losses in select Credit Suisse legal entities. We expect the effective tax rate in the second quarter to return to more elevated levels from higher forecasted losses in these entities before the first of the planned mergers takes place later this month. We then expect the group's effective tax rate in the second half of 2024 to continue to normalize, ultimately falling to its structural level of 23% by 2026 driven by further legal entity optimization and cost elimination. Total revenues, on Slide 10, increased by 15% to $12 billion with strong sequential gains in Global Wealth Management, the Investment Bank and non-core and Legacy. The latter included a gain from the closeout of the main aspects of the transaction relating to the former Credit Suisse securitized products business, which was announced earlier in the quarter. Partially offsetting our top-line performance was a decline of $446 million in group items, driven primarily from hedging P&L, reflecting higher interest rates and widening currency basis spreads in the quarter. Total reported revenues reached $12.7 billion, which included $0.8 billion from purchase price allocation adjustments in our core businesses. Since the Credit Suisse acquisition, these adjustments totaled $3.1 billion, excluding the effects in NCL and mainly relate to loans that will pull to par if held to maturity. We continue to expect to report additional revenues of around $7.4 billion through the end of 2028 from these acquisition-related effects, of which $0.6 billion is expected in the second quarter. Moving to Slide 11. Operating expenses for the group decreased by 5% quarter-on-quarter to $9.2 billion, with the largest reductions in Noncore and Legacy, Global Wealth Management and the Investment Bank. Personnel costs, excluding variable and financial adviser compensation, decreased by around $120 million or 3% quarter-on-quarter. Variable and FA compensation expenses were up 11% sequentially on the back of higher revenues. Overall, personnel expenses increased by 2%. There were almost 2,000 fewer total staff at the end of the first quarter when compared to the end of the fourth quarter of 2023 and over 19,000 fewer versus the end of 2022, down 12.5% over the past five quarters. Non-personnel expenses were down $0.6 billion quarter-on-quarter, driven by lower real estate expenses, combined with the reduction in third-party spend. Additionally, the fourth quarter contained charges for the U.K. bank levy and the U.S. FDIC special assessment that were not present in our first quarter performance. Integration-related expenses in the first quarter were $1 billion, split roughly half-half between personnel and non-personnel costs resulting in reported operating expenses of $10.3 billion. On Slide 12, we report on the progress against our cost ambitions as described during the investor update in February. Exiting the first quarter, we realized an additional $1 billion in gross cost saves when compared to the 2023 exit rate. Since the end of 2022, we have achieved $5 billion gross saves or nearly 40% of our 2026 exit rate ambition of $13 billion. As I highlighted in February, we expect our integration work to intensify over the next several pivotal quarters. This will require appropriate staff levels to ensure efficient, effective and well-controlled execution. Accordingly, the pace of gross cost saves is likely to decelerate from the run rate savings output achieved over the last five quarters, with another $1.5 billion in gross cost saves expected by the end of the year. Following this intensive phase, we continue to expect the pace of gross saves to pick up again in 2025. Integration-related expenses linked to our cost-saving actions reached a total of $5.5 billion since the Credit Suisse acquisition, including the $1 billion incurred in the first quarter. As previously mentioned, we expect to incur around $13 billion of integration-related expenses by the end of 2026 or a ratio of about 1:1 between cost to achieve and gross saves. As these integration charges enable and unlock future cost reductions, we expect them to outpace gross saves through the rest of 2024, totaling $3.5 billion, of which we estimate $1.3 billion in the second quarter. Of course, what matters is turning gross saves into clear progress in our underlying OpEx performance. Our 1Q '24 underlying operating expenses of $9.2 billion signaled a significant improvement against our 2022 benchmark, meaning a majority of the gross cost saves we realized to date have translated into net reductions in our underlying OpEx. Thus far, most of these life-to-date net saves benefit Noncore and Legacy. I highlighted in February that we expect around half of the group's planned gross cost saves and a considerable majority of net saves to be achieved from running down NCL's book as well as eliminating expenses associated with maintaining Credit Suisse's many legal entities and branches. We are seeing this dynamic reflected in our cost performance. We also expect NCL to benefit further from the upcoming legal entity mergers and from continued position exits, working towards a 2026 OpEx exit rate of less than $1 billion. Finally, in our core businesses, we expect to realize a significant portion of integration cost synergies beginning in 2025 when client accounts and positions are moved to UBS platforms and applications and Credit Suisse infrastructure is shut down. Moving to the quarterly performance of our business divisions and starting with Global Wealth Management on Slide 13. In the quarter, GWM's pretax profit doubled to $1.3 billion on stronger revenues and lower operating expenses. Notably, on a combined basis, PBT increased by around 20% year-over-year with the Credit Suisse platform returning firmly to profitability. Overall, we see very good client momentum across GWM with net new assets of $27 billion and strong contributions from the Americas, Switzerland and APAC. Net new fee-generating assets reached almost $18 billion from healthy net inflows to SMAs in the U.S. and discretionary mandates in EMEA and Switzerland. The business achieved this full performance while focusing on financial resource efficiency and balance sheet management, seeking to reprice loans with sub-hurdle returns or to otherwise exit such positions. This ongoing work mitigates some of the headwinds from inherited Credit Suisse risk models and led to a decline in credit and counterparty risk RWAs of $4 billion in the quarter. We've also begun to see progress in GWM's revenue over RWA metric, particularly on the Credit Suisse platform. GWM also attracted $8 billion in net new deposits in the quarter, while our pricing increasingly reflects the group's strong liquidity profile and tighter funding spreads. I would note that we estimate seasonal tax-related outflows in our U.S. business in the mid- to high single-digit billions as a headwind to divisional net new asset performance in the second quarter. Now on to GWM's financials. Revenues increased by 10% sequentially with improvements across all lines, driven by higher client activity and increased average asset levels. Revenue performance related to client transactional activity was particularly strong across the business. NII increased by 4% sequentially to $1.6 billion as higher revenues from reinvestments as well as increased U.S. dollar deposit rates and volumes, offset the effects of tapering deposit mix shifts and client deleveraging. In the second quarter, we expect a low to mid-single-digit percentage decline in GWM NII due to moderately lower lending and deposit volumes and lower interest rates in Switzerland, partly offset by additional revenues, primarily from higher U.S. dollar rates, combined with our repricing efforts. For the full year 2024, we expect NII in GWM to be roughly flat versus 4Q '23 annualized. Specifically, we see NII and margins holding broadly steady in 2H 24. After the second quarter broadly reverses out the sequential gains we realized this quarter. This outcome, which models three U.S. dollar rate cuts, is helped by lower funding costs as well as our balance sheet initiatives. Recurring net fee income increased by 4% to $3 billion in the quarter from higher client balances and inflows in net new fee generating assets. This was partly offset by margin compression from more of the back book, reflecting greater penetration into lower margin mandates across higher wealth bands. Transaction-based income increased by one-third sequentially to $1.2 billion, driven by higher trading volumes across all regions. Combined transaction revenues were also 9% higher year-over-year. Our APAC franchise had a particularly impressive transaction revenue quarter, doubling from 4Q with strength demonstrated across all product classes despite the economic uncertainties weighing on sentiment for most of the first quarter. We also saw positive momentum in the Americas, where the introduction of our international model of joint coverage of GWM clients with the IB led to transaction-based revenue gains of 11% quarter-on-quarter and a mid-teen increase year-on-year. Expenses for the quarter were down 3% sequentially, mainly from decreases in salaries and non-personnel costs and with nonrecurring items in the fourth quarter falling away, outweighing increases this quarter in variable and financial adviser compensation. Turning to Personal and Corporate Banking on Slide 14. With good momentum and the front office team is now more closely aligned to strengthen client engagement, P&C increased pretax profit by 11% sequentially to CHF774 million, its highest PBT since before the Credit Suisse acquisition. Revenues were up by 4%, with gains across each significant revenue line, further supported by a 47% decline in credit loss expense quarter-on-quarter. Deposit balances in Swiss franc terms remain roughly stable with inflows in Personal Banking, largely offset by outflows in corporate balances with lower liquidity value. This was a strong outcome considering the current rates environment in Switzerland and the ongoing work in the business to gain share of wallet and to improve balance sheet efficiency, supporting our net interest margin in 1Q. NII increased by 3% sequentially to $1.1 billion, principally as higher reinvestment income more than offset declines in revenue from lower lending volumes and ongoing deposit mix shifts. In the second quarter, we expect a mid- to high single-digit percentage decrease in P&C's NII in U.S. dollars, more than offsetting the first-quarter sequential gains, especially as the effects of the Swiss Central Bank's March interest rate cut hit through for a full quarter. For the full year 2024, we likewise expect a mid- to high single-digit percentage decline in P&C's NII versus 4Q '23 annualized. We see NII holding broadly steady in U.S. dollar terms in 2H '24 as P&C's balance sheet management efforts to improve loan margins help to mitigate lower loan and deposit volumes as well as the modeled effects of two further 25 basis point rate cuts in Switzerland. The outlook also includes a $50 million annualized headwind from the effects of higher minimum reserve requirements at the Swiss Central Bank. Transaction-based revenues were up 9% in the quarter, principally on strong corporate client engagement. Recurring net fee income gained 5% sequentially on higher client asset balances supported by net new inflows in the quarter. Credit loss expense was $39 million as PPA adjustments offset a similar level of charges on impaired loans acquired from Credit Suisse. Operating expenses were up 4% quarter-on-quarter, principally due to higher staff costs in Switzerland and a lease accounting credit recorded in the comparable quarter. As illustrated on Slide 15, Underlying PBT in Asset Management decreased by 2% quarter-on-quarter to $182 million as lower revenues were only partially offset by reduced operating expenses. While net management fees were steady quarter-on-quarter, the sequential drop in the top line is explained by fourth-quarter revenues, which included the gain from the sale of an investment stake as well as seasonally higher performance fees. Net new money in the quarter was $21 billion, due to several big-ticket inflows in mainly passive equity and fixed income funds, including money markets. We also continue to see client demand for SMA, sustainable investments and our private markets capabilities. OpEx decreased by 7% to $594 million, mainly from lower personnel, technology and litigation costs. As I highlighted during the investor update in February, we aim to improve operating leverage and asset management by focusing on cost optimization across the entire division and realizing synergies from migration of clients on to UBS infrastructure over the course of 2025. On to our Investment Bank's performance on Slide 16. As in prior quarters, we compare the results of the combined IB with stand-alone UBS performance on a year-on-year basis. Operating profit was $404 million, marking the IB's first profitable quarter since the acquisition and broad completion of the restructuring of the parts of Credit Suisse's IB that are core to our own. Return on attributed equity also turned positive and reached 10% for the quarter. Underlying revenues increased by 4% to $2.5 billion. Underscoring our efforts to increase the IB's market share in the U.S., the IB's top line increased by 29% in the region. Banking maintained its strong momentum with overall revenues up by 52%. Notably, we also increased market share in the U.S. where banking now contributes one-third of total IB revenues, up from less than 20% a year ago. We continue to be pleased with our performance in Capital Markets, up 85% year-over-year as LCM, DCM and ECM, all saw increased activity levels, building on the momentum we saw in the fourth quarter. Advisory revenues increased by 11% as we continue to outperform the global fee pool. The recovery in M&A is continuing, particularly in the U.S. albeit with more subdued client sentiment and activity in APAC, where we have a large share of the market. With our banking coverage teams now fully integrated, our pipeline offers encouraging revenue potential in the second half of 2024 and into 2025. Revenues in markets declined 5% to $1.9 billion, but were up 6% year-over-year in the Americas. Equities revenues driven by cash equities were up 3%. FRC, where we remain underweight by design, was down 21% with both rates and FX affected by lower volatility and decreased client activity. Operating expenses rose 8%, predominantly from additional costs related to personnel onboarded from Credit Suisse's Investment Bank, but importantly, dropped 4% sequentially, while revenues were up 32% quarter-on-quarter. Moving to Slide 17. Non-core and Legacy pretax profit in the quarter was $197 million, supported by $1 billion in revenues, principally from gains on position exits. In addition to the securitized products transaction I mentioned earlier, the business recognized proceeds from the closeout of several complex and longer-dated positions above their book carrying amounts, including in its conduit and corporate loan books and within its longevity portfolio. Despite the strong revenue performance in the first quarter, we continue to expect the NCL book to ultimately close out across its various positions at more or less their current carrying values, meaning it is still appropriate to assume revenues of zero going forward, net of hedging and funding costs. It is also important to reiterate that in pursuit of our priorities in NCL, we may at times sacrifice P&L on position exits to eliminate costs and release sub-optimally deployed capital. Nevertheless, given the strong revenue performance in 1Q, along with the significant progress we've made on costs, we now expect NCL's full-year 2024 underlying PBT to be a loss of around $2.5 billion versus the expected $4 billion loss we signaled in February. As Sergio highlighted, we made substantial progress in reducing the NCL portfolio in the quarter, decreasing RWAs by $16 billion, principally in credit and market risk. In just nine months, we've run down $28 billion or almost one-third of NCL's risk-weighted assets. From an LRD perspective, the overall portfolio is down by roughly half from 2Q '23 after a further reduction of $49 billion in the first quarter. As I covered earlier, a significant portion of the group's overall OpEx decline this quarter was delivered by NCL, which saw a 26% sequential drop in underlying costs to $769 million, primarily due to lower third-party, real estate and technology costs. Moving to capital and financial resources on Slide 18. CET1 capital was broadly flat in the quarter, with profits generated in 1Q offsetting our dividend accruals and $1.3 billion in negative currency translation effects. As we've highlighted, we made significant progress this quarter in reducing financial resource consumption across the bank from both the active rundown of NCL as well as balance sheet management initiatives across the core businesses. This resulted in a 4% sequential decline in RWA and a 6% reduction in LRD. Credit and counterparty risk RWAs dropped by $11 billion from position sales and roll-offs as well as from risk model mitigation with currency effects contributing another $11 billion to the quarter-on-quarter decline. Market risk RWAs increased by $3 billion as asset size decreases were more than offset by the effects of model updates from the integration of time decay into our VAR calculations. Slide 19 illustrates our strong capital position with a CET1 capital ratio of 14.8%, increasing by 40 basis points over the course of 1Q. As previously highlighted, a surplus above our CET1 capital ratio target of around 14% is necessary to cater for expected volatility in our reported profitability as we execute on the various phases of the integration. Our LCR at quarter end was 220%, reflecting ample levels of liquidity to remain compliant with the new Swiss liquidity ordinance that went live at the start of the year. We remain focused on raising stable deposits with tenors, products and counterparty selection resulting in higher liquidity value. And we continue to apply discipline on pricing. Strong investor demand for our name in capital markets and improving conditions allowed us to complete nearly half of our full-year funding plan during the first quarter. We successfully placed over $5 billion in attractively priced HoldCo in January and $1.5 billion in AT1 across two transactions in February at spreads that were around 100 basis points inside our heavily subscribed November placement. Similarly, secondary market spreads continue to tighten post-acquisition, having now dropped to February 2023 levels and together with ongoing diversification of our funding sources are supporting our plan to lower funding costs by around $1 billion by 2026. As part of the broadening out of our funding sources, we structured two first-of-their-kind transactions for UBS, including an issue of $1 billion in euro-denominated covered bonds and a private placement for size via repo of a portion of our portfolio of Swiss franc-denominated covered bonds. I would highlight that these trades were priced below the spread on the outstanding ELA line with the Swiss Central Bank. As to ELA, we have now repaid $29 billion of this line extended to Credit Suisse pre-acquisition, including CHF9 billion just yesterday. We expect to repay the remaining $9 billion in the coming months. Overall, our balance sheet management initiatives, together with actions on the funding side that I just described, improved our loan-to-deposit ratio this quarter and narrowed the funding gap we inherited from Credit Suisse. Importantly, our efforts are helping us to offset NII headwinds and are contributing to the strength of our overall liquidity and funding profile. With that, let's open for questions.

The first question is from Ryan Alastair from Bank of America. Please go ahead.

Thank you. Good morning. Billion dollars beat in the quarter. I never did quite get the hang of this forecasting luck. Just on that non-core, very strong performance. I appreciate the updated runoff profile you gave us on Slide 6. Is there any reason that you're just reverting to natural runoff or can we expect continued sales if markets stay favorable, because clearly, there's quite a meaningful driver of the very favorable capital ratio, the interactions of all of those? And then secondly, the project to improve the revenue to risk-weighted assets in Wealth Management. I presume you wouldn't represent the Q1 performance as kind of the payoff of that project. It's too early. But just what's the profile of that project? How long is that repricing sitting on the net new asset generation and how has it started? Thank you.

Alastair, before I pass to Todd, I wanted to mention that you were the first to ask the question not by coincidence, since I understand it's your last day at the office.

Yes.

Well, enjoy your time off going forward. So, I'll pass it over to Todd. Thank you.

Alastair, thanks for the questions. So, on NCL, I mean first, reverting to the natural runoff, we've been consistent in just reflecting the natural runoff profile. What I think Slide 6 really does indicate is it really narrows the delta between where we started, as you could see where we set our ambition is to reduce to 5%. The natural runoff profile has really come in. And so now you see that the delta between the natural runoff profile and where our ambition is narrowed. So that should eliminate whatever uncertainty was considered. But I do think that it's appropriate still to reflect it that way. In terms of whether we can do more, of course, we're going to continue to do what we can. We'll try to exit positions at or above their book values wherever possible, but it's appropriate to continue to stick with our guidance on NCL in terms of our approach and in terms of our expectations around revenues. On GWM in terms of revenue over the RWA, I mentioned that we're starting to see progress, which, of course, does suggest, you asked as it started, and it has. In fact, it started at the end of last year, and the business is quite active in it. And so, we would expect that we're going to continue to make progress on driving up RWA efficiency with respect to revenues in that respect over the course of the next couple of years. You asked how long that will impact, how long will it go? How long will it impact net new assets? We said it's going to take the better part of two years, which is why we guided net new assets of around $200 billion over that two-year time frame, and we think that's the appropriate guidance still.

The next question is from Chris Hallam from Goldman Sachs. Please go ahead.

Yes. So, I have two questions. By the end of the year, you will be about halfway through the integration process regarding gross savings. As you progress, are you gaining a clearer understanding of what you can expect for the net savings figure in connection with the $13 billion? I recall you mentioned earlier that the majority is accounted for. Does this alter the timeline of the multiyear return you outlined for the full year? For my second question, Sergio, you mentioned that inefficient capital didn’t lead to the collapse of CS. Ultimately, we observed a crisis in client confidence that resulted in that liquidity shortfall. When discussing capital distribution, it’s common to assume that earlier or higher capital distribution leads to lower capital ratios, which may subsequently reduce resilience. How significant is that distribution ambition in terms of client perception and confidence in the business? Can you argue that aligning our distribution strategy more closely with the distribution policies observed in other European financial institutions could actually enhance client confidence and improve resilience? There is a notable perception difference between a company that is buying back stock and one that is issuing it.

Yes, Chris, I'll address the first part. Regarding whether our operating expense progress gives us a clearer outlook on the net we're aiming for, we're quite satisfied with our operating expense performance in the first quarter. We noted that we expect to achieve half of our $13 billion savings target by the end of the year, which is an improvement from what we projected in February, largely due to our first-quarter performance. However, our goal remains to achieve a cost-to-income ratio of less than 70% by the end of 2026, and that’s our primary focus. The pace of any investments we make, particularly in areas like infrastructure resilience and organic growth in our core businesses, will depend on the revenue environment. It's still too early to adjust that outlook, but we are happy with the operating expense results from the first quarter. Regarding the impact on the return on CET1 that you mentioned, I believe that combined with the updated full-year PBT guidance I provided, it would have approximately a 100 basis point or slightly higher impact on the return on CET1. Nonetheless, I would still suggest that considering the first-quarter performance, thinking of mid-single digits is appropriate for the full year return on CET1.

Yes, Chris, first of all, of course, having a strong capital position and a balance sheet for all seasons, as we call it, having a strict risk management approach and policies, and being very disciplined in the way we consume and manage all our resources is the pillar number one of our strategy. And I think it's almost a prerequisite to create the trust that clients need to have in any bank or any organization. So, in that sense, I would only add that another very important indicator, which sometimes is in conflict with clients, is your funding cost. Of course, our clients would like to have always a higher return on the deposits and the investment they place with us. But on the other hand, when they see our funding cost being as competitive as we have now, they have the ultimate confirmation of the strength and the solidity of our franchise. So ultimately, at the end of the day, it's always a trade-off between different dynamics by, I would say, emotional and psychological dynamics. But I can only tell you that, of course, last but not least, having a full alignment of client trust and satisfaction, having shareholders being happy and having your employees being happy is the ultimate way to create sustainable value and trust in any bank. This is our philosophy. So of course, having an ability to compete in terms of growth and our global ambitions but at the same time being able to deliver attractive returns to shareholders is very important to influence the three stakeholders I mentioned.

The next question is from Kian Abouhossein from JPMorgan. Please go ahead.

Thank you for answering my question. I have several detailed inquiries, but I wanted to ask two specific questions to Sergio. First, Sergio, you mentioned that you were tasked with a critical role in Switzerland. The important point is that you were asked to acquire a distressed asset, a G-SIB asset, which indicates that you are clearly in control of the process. Similar to an M&A deal, I assume there is a MAC clause involved. Given the financial crisis issues we faced in 2012 and 2013 concerning regulators and mergers, I would expect there to be an understanding that UBS won't face over-regulation following the Newco transaction. Is there anything like that? My second question is regarding your comment about evaluating capital based on the final outcome. I would like to understand what the eventual outcome of these regulations will be. One possible approach could be examining your legal entities and potentially shutting down some, especially since many in the U.S. generate lower returns. I assume that both the U.S. and LatAm have lower returns as well. Therefore, would restructuring or exiting certain markets be an alternative to reducing capital returns? Thank you.

Thank you for the question. Some of the conditions we discussed over the weekend were clearly defined and communicated. The aspects related to antitrust and competition in our local markets have been well defined and agreed upon. Others were also discussed and agreed. While I can't say much about a MAC clause, I can emphasize that we are fulfilling our commitments. Regarding the amount of capital, it's too early to speculate on that or any related rumors. I want to highlight that our parent company, UBS, already has one of the best capitalizations, and the quality of our capital is strong. This is part of our plan, which includes absorbing $9 billion in concessions granted to Credit Suisse along with necessary buffers due to market share and size. We believe this is manageable and integrated into our strategy. Before we address any potential changes in regulatory requirements, we need to fully understand the implications, as we haven't been consulted and lack complete information. It's important to recognize that being a competitive global player is what makes us appealing to our clients. Retreating to become smaller is not a strategy that benefits our clients or shareholders, nor do I believe it would support Switzerland's ambitions to be a leading financial center. This is clear to me.

The next question is from Giulia Miotto from Morgan Stanley. Please go ahead.

Good morning. So, two questions from me as well. The first one, just going back on the capital proposal again. And you said you were not consulted on this document, and you need to see what the final proposal looks like. So, looking forward, what are the next steps? Do we need to wait until June? Or are you now part of the discussion? Do you expect to have more clarity throughout the year? That's the first question. And then the second question more related to the quarter. There was a strong performance in transaction fees better than I expected in Wealth. I'm wondering, is this just a transitory Q1 theme? Or is this continuing? And what should we expect there? Thank you.

I'll pick up the first one, and then I'll pass it to Todd for the second. I mean, we are not yet clear if we're going to be formally a part of any consultation or any discussions. Of course, as I mentioned in my remarks, we will make sure that our considerations are heard by the regulatory bodies and policymakers, and so that we can contribute to a fact-based discussion. And of course, we also hope that the report of the investigating commission of the Parliament will highlight some of the reasons why Credit Suisse failed. And that should be a crucial element in contributing to a fact-based discussion on future regulations. So, June, as you mentioned June, June is not a credible date, because the commission is not expected to report before the end of the year. I also think that...

June '25 I meant, sorry.

I don't think we will gain more clarity on this matter regarding June 2025 before the end of this year or even in the early part of next year. Therefore, we must accept a certain level of uncertainty surrounding this topic in the meantime.

Giulia, regarding the second question about TRX in GWM, I want to emphasize that we had a very strong first quarter. When considering the overall situation and our outlook moving forward, there are a few key points to note. Firstly, the environment must support strong transactional flows, which it did in the first quarter. However, it's important to point out that the environment wasn't solely driven by beta; we also started to see risk come into play alongside some uncertainty. This setting plays to our strengths, particularly in advising clients across regions on more complex structured products, where we experienced a significant increase in volume. This situation reflects positive structural factors that give us confidence as we look ahead. One factor is the integration of the Align product shelf, with Credit Suisse and UBS working together to approach clients effectively. Additionally, on the U.S. side, we’ve successfully applied strategies from outside the U.S. to engage clients in collaboration with the investment bank. Therefore, there are several structural elements that bode well for us as we plan for the future. While the environment must remain supportive, the current conditions are favorable for us to enhance transactional flows.

The next question is from Jeremy Sigee from BNP Paribas Exane. Please go ahead.

Thank you. Good morning. Two questions, please. One is, you talked about the Investment Bank and the core businesses that you've retained from Credit Suisse and the people you've brought over, I just wondered, are they now fully productive in revenue terms? Or is there some lag still to come through as those people ramp up? Are they up to speed already at this point? And then my second question is sort of again on the capital theme. I saw in the report you reiterate your intention to do the $1 billion of buybacks in the second half of this year. I guess that's a small enough amount that you can do it pretty much regardless of the new capital proposals, but I just wanted to hear your thoughts on that.

Let me address the first question. Everyone is currently operating effectively and at full capacity. However, in the banking sector, productivity involves a phase of pitching and winning mandates, which then takes time to execute. So, if you're asking whether they are effective in pitching and engaging with clients, the answer is yes. The team is fully engaged, and we have good momentum in winning mandates. We saw evidence of this in the fourth quarter, and in the first quarter, many of those mandates have been executed. We are confident about our investments and growth trajectory moving forward, provided market conditions remain favorable for executing those mandates. Regarding the $1 billion, the only current limitation is waiting for the completion of the parent bank merger, which we expect to finalize by the end of May. If everything goes smoothly and we receive the necessary regulatory approvals, we plan to restart the share buyback of up to $1 billion in 2024.

The next question is from Andy Coombs from Citigroup. Please go ahead.

Good morning, two questions, please, and a follow-up. Firstly, on the non-core result. Obviously, a tremendous result both in terms of the RWA rundown, but also the gains that you booked during the quarter. Thank you for the revised guidance for the full year. I just wanted to better understand the source of those gains in Q1. I think you said conduit and corporate loan books and longevity portfolio, but you then don't expect that to repeat going forward. Is that because the low-hanging fruit has already been achieved or because you're now selling a different type of assets or anything you can elaborate there would be helpful? And then the second question. Thank you for the opening remarks, Sergio, on the parent bank capital. I just wanted to check the $9 billion you referenced. Is that in relation to a 400% risk weight on foreign subsidiaries? Or is it a 300% as it currently is phased? And then more broadly, a question to both of you. In the event that the risk weight on foreign subsidiary does go up, to what extent do you think you can mitigate that through the fungibility of capital dividend, you have capital, so forth?

Andrew, I'll address the first question. In terms of the source of the gains, as you mentioned and I highlighted, it came from several sectors within NCL, including conduit and corporate loans, longevity, and securitized products. We're also seeing strength in credit, equities, and macro areas. The team has done an excellent job unwinding complex, longer-dated transactions, which will continue to be their focus. The gains come from our ability to add significant value to these transactions and close them out at levels above book value. However, as I noted, we shouldn't expect this to continue indefinitely, especially since we may decide to exit positions that result in significant costs or have suboptimal capital at present. This approach will enhance capital efficiency. Therefore, several factors contribute to this, which is why we don't anticipate Q1 to repeat.

So, if I can add on that one before I touch on the second question. I think that first of all, there is definitely no low-hanging fruit. And if you look at our natural decay profile change, it shows you that we are not really going for easy to sell, but rather complex transactions that also help in many cases to unwind cost, because priority number one in non-core is to take down cost and not necessarily to take down risk-weighted assets and market or credit risk-weighted assets. So, in that sense, it's very important that in many cases, we are able, thanks to good work the team is doing in managing these unwinds, to leverage the fact that we are not a forced seller. We are only going to dispose of assets when they create value for shareholders. And that is a completely different position to be in, because our capital is strong. We can allow some delays or some time to elapse between the two. Now on the $9 billion, there are two factors and the elimination of the filter, of the regulatory filter that Credit Suisse had. The two combined account for $9 billion.

And the ability to mitigate any increase in the foreign subsidiaries going forward? I assume it's something you're already working on given the already base increase to what extent you think you could accelerate that?

No, we cannot speculate or analyze things that we don't know. What we do know is that as a result of the Credit Suisse acquisition, we will hold over $9 billion plus $10 billion, totaling almost $20 billion in additional capital, strengthening UBS's already strong capital position. That's the fact. The rest remains uncertain, and we will provide updates as we obtain more information.

The next question is from Anke Reingen from RBC. Please go ahead.

Thank you for taking my question. I apologize for the follow-up, but I wanted to clarify something. Is it accurate to say that due to the uncertainty, you are not changing any aspects of your strategy or the execution of the merger? Regarding the Q4 results, you mentioned the potential for amortization of additional details. Can you confirm that this is proceeding as planned? Also, concerning the $17 billion in new assets for Q1, if I am considering a target of $100 billion for this year, should I instead be thinking of $200 billion over two years, with a focus on the back-end loans towards 2025 to achieve that target? Additionally, has the decline in relationship managers affected the net new asset growth in Q1? Previously, you provided figures on departing relationship managers and the assets they took with them. Is that still seen as relatively low? Thank you.

I'll take the first question. Anke, this is a very complex integration, and we cannot afford to be distracted in executing it. We are committed to our strategy and plan, ensuring we remain close to our clients. Engaging in hypothetical changes of strategy or methodology related to capital would be very distracting and not in the best interest of any stakeholders. Our goal is to successfully complete this integration, so we will remain focused on our existing strategy and approach.

Regarding net new assets in Global Wealth Management, I want to emphasize that our expected trajectory over the next two years is significantly influenced by our financial resource optimization and balance sheet initiatives that our team is diligently working on. Achieving $27 billion in the quarter is a strong outcome, and we remain committed to reaching our goal of $200 billion over the next two years. Additionally, concerning the relationship managers who have departed, we have previously shared some figures, and the impact of their exits has diminished to the point where it is no longer a relevant topic. The assets they took with them represent a very small percentage, particularly considering that our RM workforce at Credit Suisse has decreased by 40% since the end of 2022. We have successfully retained the majority of the assets, so we view this as a story that isn’t significant to follow. Ultimately, we are concentrating on our plans and commitments.

Can I just ask on the DTA, please? Are you reiterating that you expect to convert the $2 billion and the $500 million you talked about with Q4 results?

Yes, there's no change in terms of our approach to DTAs at the current time, Anke.

The next question is from Benjamin Goy from Deutsche Bank. Please go ahead.

Good morning. Two questions, please. One on the capital. Just conceptually trying to understand because when in the press it is reported or the Ministry of Finance for capital, we naturally assume it's CET1 capital. But do you think it could also partially include efficiency on capital which might make a bit more manageable for you? And then secondly, on your Wealth Management, the net new loans in the quarter, another decline is very similar to the Q4 decline. Just trying to reconcile that with your risk appetite returning statement, being conscious of the yields are still favorable, but wondering that is also more of a risk alignment still going on in the background, which is why your spending remains negative?

Benjamin, the first point is brief. As I mentioned, we do not engage in speculation or respond to it regarding any figures that have been mentioned. Therefore, we are unable to clarify how those numbers were derived, and we choose not to comment on them.

Yes, Benjamin, on the GWM net new lending side, we are observing ongoing deleveraging. Some of this is influenced by market conditions and interest rates, while part of it relates to the resource optimization efforts we are undertaking. This is an outcome we are managing. As we focus on the latter, we aim to increase revenues, which is why I anticipate that the net interest margin will remain stable as we enhance revenue relative to risk-weighted assets. However, given the current interest rate environment, we are witnessing both the conclusion of deleveraging and a hesitance to re-leverage in certain regions. Therefore, I expect limited momentum for re-leveraging in the current interest rate setting until we see rates decline over the next 12 to 18 months, assuming that happens. In my view, this external factor will not significantly influence re-leverage decisions.

The next question is from Piers Brown from HSBC. Please go ahead.

I have two questions. First, regarding the cost issue in the NCL unit, I find it impressive that costs have decreased by 26% quarter-on-quarter. The cost reduction appears to be aligned with the asset reduction. Should we expect this linear relationship to continue, or was there something specific about front-loading cost reduction in the first quarter for NCL? My second question is about regulation. I'm not referring to capital but am wondering if there are any remarks or reports from the Competition Commission that we should be aware of concerning the domestic market shares of the new group. Thank you.

Piers, regarding your first question about the NCL cost takeout, I would say that there isn't a linear relationship. The relationship doesn't necessarily need to be linear because cost takeout often results from removing a portfolio tied to a specific system or supported by certain infrastructure or applications that we can shut down. However, there is a connection between the asset takeout and the cost takeout. It's not linear since you might be removing parts of the portfolio that still require a significant amount of headcount to support various functions, whether in the front office, mid-office, or back-office, around the larger portfolio. If you cannot decommission the related technology, you may not see the expected savings. So, it's not linear. Nonetheless, it's something we monitor closely, and we're happy to note that it shows a reasonably high degree of correlation.

Now on the competitive position, let's forget for a second that we have a crystal-clear agreement on that topic. Even if you go down to the substance, which is, I think, is relevant for us, for consumers, for clients or everybody to understand. When you look at facts, it's quite clear that we have no dominant position in Switzerland in banking. So, I think that's no matter if you look at deposits, at loans or mortgages, you look at branch, number of branches in any dimension, UBS is not the largest bank in Switzerland in that sense. I think we are the leading bank in Switzerland because of our capabilities, but that should not be confused with market share and size. So, in that sense, we are fairly comfortable that both the agreements and the facts support our position that our plan is the right one to pursue.

The next question is from Tom Hallett from KBW. Please go ahead.

Good morning. So just a quick one on Wealth Management NII. I think you were baking in three U.S. rate cuts for this year in your guidance. If that was zero, what was that? Or how would that alter your guidance? And then secondly, on the treatment of software intangibles, I suppose it's fair to say and get a bit more of a benefit relative to your European peers. I mean if you were to align the rules with Europe, what sort of impact would that have on your capital? Thank you.

So, on the second question, as I said before, we are not speculating on any change in our regulatory framework. The only thing I can say is that both in absolute global terms but also vis-a-vis the European peers, we have a pretty strong capital position, not only in absolute terms, but also the quality of our capital base.

Yes, regarding GWM NII, we accounted for three U.S. dollar rate cuts in our modeling. If there are fewer cuts, as Sergio mentioned earlier, there could be some upside in our NII. However, this is reliant on client behavior and the performance of our balance sheet. Statistically, if there were no rate cuts, we might see a slight increase in NII, but it’s essential to consider the dynamic relationship between client activity and our balance sheet, making it hard to predict. Overall, there is likely to be some degree of upside, assuming other factors remain constant.

Thank you. I think there are no further questions. So, with that, we can close the call and thank you, Sergio, and Todd for joining us today. We look forward to speaking with everyone again with our 2Q results.

Ladies and gentlemen, the webcast and Q&A session for analysts and investors is over. You may disconnect your lines. We’ll now take a short break and continue with the media Q&A session at 10:45 CET.