UBS Group AG (NYSE:UBS) Q4 2022 Earnings Call Transcript

UBS Group AG (NYSE:UBS) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Ladies and gentlemen, good morning. Welcome to the fourth quarter 2022 results presentation. The conference must not be recorded for publication or broadcast. . At this time, it’s my pleasure to hand over to Sarah Mackey, UBS Investor Relations. Please go ahead, madam.

Sarah Mackey: Good morning and welcome, everyone. Before we start, I would 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 in our annual report together with disclosures in our SEC filings. On Slide 2, you can see our agenda for today. It’s now my pleasure to hand over to Ralph Hamers, Group CEO.

Ralph Hamers: Thank you, Sarah. Good morning, everyone. Great that you’re all on the call. I will take you through the results like I used to. In 2020, we delivered for our clients and shareholders, and that was in challenging market conditions. We provided sound advice to our clients, partnered with them to help achieve their goals. Our strategy and what differentiates UBS is clear. And as shown on this Slide 3 here, we are globally diversified with leading positions across the U.S., Asia Pacific, EMEA and Switzerland. We have outstanding client franchises, and they’re unpinned by a balance sheet for all seasons, a strong risk culture and an intensified focus on costs. As you know, our business model is highly capital generative, supports both strong returns on capital as well as return of capital.

If I move to Slide 4, you got basically a full year of hard work on one slide. Good financial results in 2022. We achieved our group financial targets for the full year, net profit of $7.6 billion, and our return on CET1 capital was 17%, and our cost-to-income ratio was 72.1%. Turning to Slide 5. Throughout 2022 , we were a source of strength for our clients, and we relentlessly focused on their needs while delivering for them across our platform. And you see the proof points here laid out across the different areas, invested assets, deposits, loans and the global markets activities. Across our $4 trillion in invested assets, we provided advice at bespoke services, seamless solutions. We helped our clients to reposition their portfolios in a world that was changing quickly, take advantage of longer-term opportunities as well.

Net new fee-generating asset flows were $23 billion for the fourth quarter, representing a growth rate of 8%. This resulted in $60 billion of flows for the full year, which translates to a solid 4% growth rate in the context of a global equity market declines. We continue to capture for our clients. We continue to capture our client demand for higher-yielding products through our savings, our certificates of deposits, our money market funds. Money market inflows in Asset Management were $16 billion for the quarter, and 3/4 of that came from GWM clients. And this brought Asset Management total net new money to $25 billion for the year. Net new deposits turned positive in the fourth quarter driven by Switzerland and Asia Pacific. And for the full year, we delivered 17% net interest income growth in Wealth Management and P&C.

In the Americas and Switzerland, we delivered positive net new lending in every quarter without relaxing our strict underwriting standards. And this resulted — this result more than offset the continuing deleverage activity that we see in Asia Pacific. For our institutional clients, 2022 was a tale of 2 halves really. The first half of the year was driven by strong equity markets activities with foreign exchange and rates then taking spotlight in the second half. And through a wide range of market conditions, our diversified product mix in Global Markets and our agile way of allocating capital and resources where it needs to go, that allowed us to provide comprehensive services to our clients. Record performance in our equities franchise and second-best FRC performance on record helped offset the impact of industry-wide slowdowns in activity across Global Banking.

As the leading global wealth manager, our diversified footprint empowers us to execute our strategy across regions to drive growth and efficiency. And you see an overview of the regional performance here on Slide 6. The regional picture is very important where that’s where the business comes together for our clients. Just starting in the Americas, where our clients continue to turn to us for advice and solutions, client demand for our separately managed account offering remains strong with another $4 billion inflows in the fourth quarter. Net new money in SMAs totaled $21 billion for the full year. We also saw continued interest in alternatives, leading to $10 billion in net private market commitments for the year. In the U.S., we already have over 20% of the Barron’s top 100 private wealth management teams, and we continue to recruit high-quality advisers in the second half of the year to support our industry-leading advisers productivity.

Our recruiting efforts also supported $4 billion in net new fee-generating assets added in the fourth quarter and $17 billion for the full year. Our economists are projecting that ’23 will be a challenging year for the U.S. economy as inflation and higher interest rates create headwinds for economic growth. And nevertheless, our priority for the region is to drive organic growth and build on our scale with our core wealth and GFIW clients. We will leverage our Investment Banking and Asset Management capabilities to deliver the whole of UBS to these clients. We will continue to invest in our digital capabilities to improve client connectivity to our advisers, and we will look to become the primary bank for our core clients by improving our banking capabilities.

At the same time, our efforts to simplify processes and invest in infrastructure and controls will be complemented by strategic and tactical actions on cost to support improvements in our cost/income ratio. Now moving to our home market, Switzerland. The stability of the economy and our #1 position continues to support a record level of deposit and loan volumes, strong profitability and growth. Net new fee-generating assets flows were $5 billion in the fourth quarter, $9 billion for the full year, and that’s a growth rate of 7%. We also saw $8 billion in net new deposits in the fourth quarter and $9 billion for the full year. For ’23, our focus in Switzerland is to deliver above-market growth. We will continue to invest in our strategic technology initiatives and support our clients’ transition to mobile banking while remaining disciplined on expenses.

In EMEA, we maintained our momentum with clients in the fourth quarter as well with $11 billion in net new fee-generating assets for the quarter. We brought in $20 billion for the full year, and that’s a 6% growth rate. That’s supported by strong flows in the Middle East. In the Investment Bank, we had our best year on record for both revenue and profit before tax, supported by a record in Global Markets and outperformance in Global Banking as well. Elevated and volatile energy prices continue to have a significant impact on macroeconomic activity, although our economists are becoming more and more optimistic about the downturn being shallow. Our optimized EMEA footprint positions us well in the current macro environment, and this affords us the ability to be focused on targeted growth opportunities across Europe and the Middle East.

So a strong year for EMEA. And lastly, Asia Pacific, the residual impact of the pandemic and concerns of economic growth consistently weighed on investor sentiment throughout the year. However, our clients’ trust in our advice and capability led to 12% growth in net new fee-generating assets for the year. In the IB, we moved up 5 spots to claim the #1 position in equity capital markets for nondomestic banks for the full year. We delivered the best M&A on record. And we were recently named the Best Investment Bank in Asia and Australia by Finance Asia. Now the easing of COVID-related restrictions in China has led to a more optimistic outlook for 2023. We believe 5% economic growth is back on the table for China and are accelerating beginning in the next few — acceleration of the growth beginning in the next few months.

While client segment — sentiment has improved, they are taking a wait-and-see approach so far. We remain well positioned to support our clients, both onshore and offshore, in China and the rest of Asia Pacific as activity resumes. Longer term, we remain focused on executing our strategy to capture growth. In October, we launched WE.UBS, the first digital wealth management platform from a global wealth manager in China. And in Southeast Asia, we are focusing on expanding our GFIW business to serve family offices, entrepreneurs, Asian technology firms to drive growth. And as you can see, technology is key to many of our achievements this year, and next year will be no different. So I’d like to take you through our technology delivery on the next slide.

You can see some examples here on Slide 7, how we are investing our $4 billion technology budget to make technology differentiator through simplification, automation and by improving our clients’ experience. And this transition also directly contributes to the bottom line with approximately $200 million in cost savings for 2023, and our plan is to continue to reinvest this. Let me give you some examples of how we’re driving this. We now have 18,500 employees operating in Agile. In technology, 68% of these are engineers, and that compares to 55% when we started Agile. So basically, you see a 13% point increase, which is a 20% productivity improvement. And next to the efficiencies and the productivity improvement that this brings, it also delivers a faster delivery of technology change.

So quicker time to market of improvements. We’ve also decommissioned 600 applications in 2022, and we have now 65% of our computing power on the cloud. As you can see in the next slide, we remain very well positioned for the current environment and maintain a balance sheet for all seasons. In ’22, we generated $7.5 billion of capital, of which we distributed $7.3 billion, including a $5.6 billion share repurchase. Our capital liquidity ratios are strong. Our balance sheet is healthy. Our strong balance sheet and risk management discipline allows us to support our clients, meet regulatory requirements and deliver attractive and sustainable capital returns to shareholders. On Slide 9, you can see our progress on sustainability. As you know, sustainability is a core part of our strategy.

We reduced our greenhouse gas emissions — our own greenhouse gas emissions by another 11% as we upgrade buildings and continue to source 100% renewable electricity globally as well. We’re proud of the progress that we’re making on our objective to better reflect the diversity of our workforce and leadership positions. And we expanded our sustainable product offering, and we’re proud to maintain our industry-leading ESG rating here as well. So the summary of the financial results, you see that on Slide 10. I’ve already mentioned the good performance for the full year. And for the quarter, we had strong flows and we managed it with discipline. We had solid results considering seasonality and the macroeconomic backdrop, which enabled us to wrap up the year comfortably within our targets.

Slide 11, which is more or less looking forward, we leave our financial targets unchanged for ’23. We’re confident in our ability to deliver 15% to 18% return on CET1 capital and to stay within the range of 70% to 73% of cost/income ratio. Our capital guidance is also unchanged. At our current capital levels, we are in a strong position to fund business growth and a progressive dividend while returning excess capital to shareholders via some share repurchases. During the first 4 weeks of this year, we bought back $500 million worth of shares, and we are targeting at least $5 billion for ’23. With that, let me hand over to Sarah. Sarah?

Photo by Van Tay Media on Unsplash

Sarah Youngwood: Thank you, Ralph. Good morning, everyone. Starting on Slide 13. In 2022, we delivered a good performance in a challenging environment. Our global franchise enabled us to meet our group financial targets both on a reported and underlying basis with strong cost control, risk management and capital returns. Now moving on to the quarter on Slide 14. Net profit was $1.7 billion with a reported return on CET1 of 14.7% and a cost/income ratio of 75.8%. The underlying performance is on the page, and the delta between reported and underlying is in the appendix. Revenue was down 8% and expense was down 13%. FX impacted both by approximately $200 million for a net effect of negative $25 million. The net credit loss expense was $7 million compared with the $27 million released last year, reflecting great stability in our credit metrics and strong risk management.

The effective tax rate in the quarter was 14% plus compared with 21% a year ago due to deferred tax assets. For 2023, we expect it to be around 23%. Let’s start with fourth quarter revenue on Slide 15. In addition to the usual seasonality, the macroeconomic environment led to depressed equity markets and low levels of client, M&A and capital market activity. However, we saw increased activity in fixed income and the benefit of higher rates. As such, our underlying revenue ex FX was down 9% with an increase from NII in GWM and P&C more than offset by lower asset-based and transaction fees as well as lower IB revenue. Moving to NII on Page 16 and starting with the top chart. In 2022, we added over $1 billion in net interest income with the benefit of higher rates partially offset by deposit volume and mix.

In the bottom chart, you see the quarterly movements. NII of $2.1 billion was up $263 million or 14% quarter-on-quarter. This strong result reflects the benefit of our global franchise with every region contributing across GWM and P&C. Almost half of the increase was in Swiss francs and the rest mostly in euros and in U.S. dollars. As you would expect, the benefit of rates shown in the second bar was the main driver. Moving to deposit volumes. Total deposits rose 6% sequentially. This included $9 billion of net new deposits, which reflected a 7% annualized growth rate and with strong contributions in Switzerland and in APAC. We have seen continued demand for our products in both P&C and Wealth Management with the demand for our savings products exceeding sweep outflows.

Moving to deposit mix. While the level of sweep outflows was similar to last quarter, we are seeing a deceleration of mix shifts in U.S. dollars, but some acceleration in euro. We haven’t seen any shifts in Swiss francs yet, but we expect deposit mix impacts across currencies. Looking ahead, based on the current forwards, our exposure across Swiss francs, euros and U.S. dollars means we expect 2023 NII to be higher than 4Q ’22 annualized. For 1Q ’23, we anticipate a low to mid-single-digit increase versus 4Q ’22. Now turning to costs on Page 17. For the full year, as you can see on the chart, expense was down 4% or up 0.7% ex litigation and FX. If you also exclude variable comp, expense was up 2.6%. Decisive and immediate actions on cost in the second half of the year have contributed to us achieving our cost/income ratio target for the full year despite a challenging revenue environment.

Moving to the table at the bottom. This quarter’s operating expense was down 13% year-on-year. Excluding litigation and FX, the number was up 1%. Inflationary pressures on salaries, higher technology costs and T&E were mostly offset by efficiencies. For 2023, we expect cost, ex litigation and FX, to increase by 2% to 3% year-on-year. We are managing the cost base and giving guidance, considering a range of economic scenarios. The guidance also reflects the annualization of last year’s elevated inflation, continued investments and the expected benefit from efficiencies. Let’s turn to these efficiencies on Slide 18. In 2021, we announced a $1 billion gross savings program to be achieved by 2023. I am pleased to report that we have already achieved $700 million to date, $100 million ahead of plan.

To deliver that result, we effectively implemented a number of measures across the board, including restructuring, structural compensation adjustments, optimizing our footprint, reducing consultant and vendor spend, and executing our tech strategy with discipline. Through the addition of new initiatives, we are now expanding our gross cost savings program by 10% to $1.1 billion, and this is while absorbing FX headwinds of $100 million. We remain laser-focused on costs and committed to delivering the structural and tactical measures necessary to achieve both our guidance and our target cost/income ratio. Let’s move to our businesses, starting with GWM on Page 19. GWM profit before tax in the quarter was $1.1 billion, down 14% on an underlying basis.

Revenue was 5% lower than last year with asset base and transaction revenue down in all regions, partially offset by net interest income. We continue to actively manage deposits across margins, volumes and mix, driving NII up 35% year-on-year with positive net new deposits and continued impact of deleveraging on net new loans. Operating expense, ex litigation and FX, was flat year-on-year. Net new fee-generating assets were $23 billion in the quarter, an annualized growth rate of 8%. We had positive flows in all regions, mostly into advisory mandates and SMAs. For the past 12 months, we attracted $60 billion of net new fee-generating assets, which represents a 4% growth rate. Moving to Asset Management on Page 20 with a profit before tax of $124 million.

Total revenue decreased 31% with lower net management fees driven by market headwinds and FX and lower performance fees. The cost/income ratio was 75% with lower revenue and expense down 4% as we benefited from FX and had lower personnel expenses. Net new money in the quarter was $11 billion, of which $16 billion went into money market funds as we successfully captured client demand for cash-like solutions. Excluding money market, we saw $4 billion inflows into sustainability focus and impact investments and $4 billion into SMAs, which were offset by outflows in our active equities and fixed income businesses as clients continued to rebalance portfolios. While the Asset Management business has been impacted by markets, the franchise has important capabilities in key areas of focus, namely sustainable investments with $178 billion of invested assets, real estate and private markets with over $100 billion and SMAs totaling $125 billion.

Now on to the IB on Slide 21. The IB delivered $112 million in profit before tax and a 4% return on attributed equity. Revenue in Global Markets of $1.4 billion was down 8% ex FX against a record fourth quarter last year. In equities, high correlation and the ongoing macro uncertainty dampened client volume, particularly in derivatives and cash equities. Our performance in the U.S. was weaker year-on-year, and we are continuing to invest in the franchise to bolster our capabilities. However, we delivered the best 4Q on record in our FX, rates and credit business. Global Banking revenue was down 52%, in line with very low levels of industry activity across advisory and capital markets, but with strengths in APAC and EMEA. Operating expense was up 12% ex litigation and FX due to compensation adjustments that we made in 4Q ’21.

Despite a challenging 4Q, the IB has delivered another year of strong results with a return on attributed equity of 15%, better revenue on RWA than any U.S. peer and record revenue in equities, derivatives and solutions, financing and prime brokerage. This was achieved in a rapidly evolving market context and with one of the lowest banking fee pools on record, yet we had record M&A in APAC and we outperformed in EMEA. Wrapping up on the businesses with the excellent performance in P&C on Page 22. Profit before tax in the fourth quarter was CHF 504 million, the best quarter in over 10 years when excluding one-off gains. This result was largely driven by 21% higher NII combined with strong cost discipline. Overall, total revenue rose 10% year-on-year with small decreases in recurring net fee income and lower transaction-based income.

We consistently engage with our clients and were able to deliver CHF 2 billion of net new investment products over the past 12 months, an annual growth rate of 8%. We also saw CHF 7 billion of net new deposits and CHF 4 billion of net new loans. We delivered a cost/income ratio of 54%, and costs were up 1% on an underlying basis. Included in these results are strong efficiencies and technology investments. A good proof point is the increase of 10 percentage points year-on-year in the share of Personal Banking clients that are active mobile users, which benefits our clients and creates operational efficiencies. Moving to capital on Page 23. At 14.2%, we maintained a strong capital position while delivering attractive capital returns. On the walk, starting at 14.4% at the end of last quarter, net profit contributed 50 basis points, offset by capital returns to our shareholders, also at around 50 basis points.

The net currency effect was close to 0 quarter-on-quarter as the FX impacts on CET1 and RWA offset each other. Looking ahead, our guidance on regulatory-driven RWA remains consistent with last year, as shown in the appendix. Separately, we expect the introduction of the minimum tax in the U.S. to increase our cash tax rate and affect our CET1 capital accretion. Based on 2022 profitability, this would translate to around $250 million lower CET1 accretion, which would come back over time, as mentioned in our report. Wrapping up on Slide 24. For 2022, we are proud of what we delivered for our clients, for our employees and for our shareholders. We returned $7.3 billion of capital for a payout ratio of 95%. We are committed to our strategy, to disciplined execution and to creating value for our shareholders.

We entered 2023 from a position of strength. We expect to support our client franchises and invest for growth while remaining committed to a progressive dividend and repurchasing over $5 billion of shares. With that, let’s open up for questions.

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Q&A Session

Operator: . The first question is from Kian Abouhossein from JPMorgan.

Kian Abouhossein: First question is regarding Asia. And can you just talk a little bit about what you’re seeing in Asia? You made a very brief comment, Ralph, but maybe a little bit more. Do you see any re-leveraging change? Do you see any change in transaction volume pickup or net new fee-generating asset pickup? And what should we look out first in that respect in Wealth Management? Secondly, in respect to forward curves, can you discuss what interest rates you use for the key markets in your assumptions on NII guidance for first quarter, but also more importantly, for ’23? And what — can you talk a little bit about betas in that respect and net interest income forward assumptions for ’24, ’25, what rates you’re using at this point?

Ralph Hamers: Thank you, Kian. So the color I can give is limited, honestly, given the fact that beyond closing the year and this update, there’s only like 3 weeks, 3.5 weeks of experience of what we see. But what we can tell you is that you did see also in the fourth quarter further deleveraging in Asia Pacific. We sense that towards the end of the quarter, that came to a halt there. So too early to say whether that is a stop or not, but that’s what we saw. Then in terms of the mood in Asia, I think it’s more upbeat. The markets, clients are surprised by the quick opening of China and the action-oriented approaches by the Chinese also to embrace the openness, to get the economic growth, to get investors in, regulators reaching out as well.

So I think that’s all very positive on one side. Then clearly, the new year started, everybody has their festivities. So the question there is really, how does it kind of — how does this continue then? So for the moment, what we have seen in the recent rally is from our wealth clients, actually a wait-and-see-approach. So in terms of activity level and flows, wait-and-see as well. Sarah?

Sarah Youngwood: Yes. In terms of the forwards, we are following the forwards, and we look at them all the time. And so you can use the forwards that are available now or as of Friday for your analysis. So when you think about the right expectations that we are seeing in the different markets, we are seeing that the Fed continues to increase probably until the first quarter and then stabilizes from there. And then that is SNB going to the 1.5% level, the SCB around the 3% and then coming down a bit. And the bank a bit learned a bit about that. So we are going exactly with the forward analysis as we do our analysis. In terms of the betas, what I can tell you is that we are really considering the mix of our businesses. We don’t disclose specifically the betas.

But we are considering all of the mix across GWM and P&C at the granular level. And what you are seeing is the experience that we have had is reflective of actually, so far, our models have been predictive on the better side. We have seen a fair bit of mix in the U.S. And as I mentioned, in terms of euro, we are seeing to see some mix. And in Swiss francs, we would expect it to come, but it hasn’t come.

Ralph Hamers: Mix shift.

Sarah Youngwood: Yes.

Operator: The next question is from Flora Bocahut from Jefferies.