UBS Group AG (NYSE:UBS) Q4 2023 Earnings Call Transcript

UBS Group AG (NYSE:UBS) Q4 2023 Earnings Call Transcript February 6, 2024

UBS Group AG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 filed with our Group results today, together with our additional disclosures in our SEC filings. On slide two, you can see our agenda for today. It’s now my pleasure to hand over to Sergio Ermotti, Group CEO.

Sergio Ermotti: Thank you, Sarah, and good morning, everyone. 2023 was a defining year for UBS as we acquired Credit Suisse in one of the largest transactions in banking history, setting a new long-term trajectory for our franchise. It was also an intense year that required exceptional focus from all of our colleagues during periods of significant change and uncertainty. We stayed close to our clients, helping them manage a rapidly evolving geopolitical and macroeconomic backdrop, as well as the turmoil that occurred in the financial system last March. The strength and stability of UBS provides is a direct result of our decade-long sustainable strategy, an unwavering commitment to maintaining a balance sheet for all seasons and a focus on risk and capital efficiency.

For these reasons, clients reward UBS with their extended trust and confidence during periods of volatility and market uncertainty. And it allowed UBS to credibly step in and stabilize the Swiss and wider financial system by taking over Credit Suisse. We have acquired an enterprise that has suffered from many years of unsustainable capital allocation and underinvestment in its businesses and control framework. This resulted in cost and capital inefficiencies, significant losses, and ultimately, substantial franchise erosion. However, the acquisition accelerates our strategic priorities by providing UBS with a complementary client base, stronger regional presence, more products and services, as well as many talented people. This gives us great confidence in our ability to meet our ambitions and deliver long-term growth and consistently higher returns.

We made great progress on our plans in 2023. We successfully won back, retained and grew clients’ assets while beginning the restructuring phase. We have also substantially reduced funding costs and run down non-core books. In our first full quarter as a combined firm, we stabilized Credit Suisse’s client franchises and achieved underlying profitability. This permitted us to pay down the extraordinary liquidity support and voluntarily terminate the loss protection agreement guaranteed by the Swiss Government. We also provided important clarity for all of our stakeholders as we finalized our target operating model. Notably, we established the perimeter for non-core and legacy and moved forward with fully integrating our Swiss domestic operations.

Our progress continued in the fourth quarter. We maintained momentum with our clients with $22 billion in net new assets in GWM, bringing our total to $77 billion since the closing of the acquisition. In the quarter, we also cut another $1 billion in exit rate gross costs as we move forward on our restructuring plans. Nearly 80% of non-core and legacy $12 billion decline in risk-weighted assets in the second half was driven by our active wind-downs. We achieved all of this while maintaining our capital strength. Our CET1 capital ratio increased to 14.5%, helping us to build capacity for higher capital returns, while at the same time, preparing to absorb integration charges and tax inefficiencies. A great and often overlooked measure of the Group’s resilience and self-sufficiency is our total loss-absorbing capacity, which now stands at $200 billion.

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Q&A Session

Given the ongoing debate following the events of last March, this is particularly relevant to me. Lastly, let me highlight some things I’m especially proud of and which I believe is the essential driver of what will make this successful journey a great story. Our people have embraced both our culture and the opportunity ahead while collaborating on the integration. This will allow us to continue to serve clients and fulfill our growth initiatives. Before I take you through our plans for the next phase and of the acquisition, I will hand over to Todd to cover our four quarter results.

Todd Tuckner: Thank you, Sergio, and good morning, everyone. You’ll recall that with our third quarter earnings, we introduced underlying performance metrics that strip out items that we don’t consider to be representative of underlying performance, primarily pull-to-par effects from the purchase price allocation process and integration-related expenses. In this respect, when assessing the progress we are making in our underlying performance, it is important to remember that our underlying operating expense baseline is the combination of the cost stacks of two globally systemically important banks, such that our underlying costs in absolute terms remain elevated and will for some time. This quarter, our underlying performance also excludes a material loss relating to our ownership interest in SIX Group.

In my remarks, I will refer to these underlying numbers in U.S. dollars and compare them to our performance last quarter, unless stated otherwise. Starting with the P&L on slide six, PBT in the fourth quarter was $592 million, a decrease of $322 million from the third quarter, mainly driven by lower client activity and billable invested assets, as well as the U.K. bank levy and a U.S. FDIC special assessment relating to last year’s U.S. bank closures. Credit loss expenses were $136 million this quarter, mainly relating to P&C and the IB. On a reported basis, the fourth quarter net loss was $279 million, including a net tax benefit of $473 million, primarily resulting from a revaluation of our deferred tax assets as we completed our business planning process.

As we continue to execute on our integration plans at pace and benefit from seasonally higher client activity, we expect substantial improvement in our first quarter reported net profit as compared to 4Q 2023. Moving to revenues on slide six. Group revenues decreased by 3% sequentially to $10.4 billion, driven by lower recurring and net management fees on a reduced average invested asset base, lower fair value and exit gains in non-core and legacy, as well as decreased transaction-based revenues across the divisions. Total reported revenues reached $10.9 billion, which included $944 million from pull-to-par and related effects in our core businesses. As mentioned, we also marked down our investment in SIX by $508 million to reflect the lower valuation of SIX’S stake in Worldline, as well as SIX’S goodwill impairment relating to its ownership of the Spanish Stock Exchange.

Moving to slide seven. Operating expenses for the Group increased to $9.7 billion, up 1%. Our combined workforce was reduced by around 4,000 in the quarter, bringing year-to-date reductions to 17,000 or down 11% versus the workforce of both banks at the end of 2022. These reductions contributed to our achievement of around $4 billion in gross run rate cost saves exiting 2023 when compared to the 2022 baseline. Integration-related expenses were $1.8 billion, of which $794 million were personnel-related, including a pension benefit equalization charge of $245 million and $604 million from real estate and technology asset expenses. The pension charge did not affect CET1 capital as we recorded an offsetting gain in OCI. On a reported basis, including integration-related expenses, OpEx was $11.5 billion.

Turning to the performance in our businesses, beginning with Global Wealth Management on slide eight. As mentioned last quarter, to align with peers, we now report net new money plus dividends and interest under the label of net new assets. We will also continue to disclose net new fee-generating assets now for the combined franchise. We saw continued momentum and flows with $22 billion in net new assets, with particularly strong performance in APAC and the Americas. We also attracted $16 billion of net new deposits with net inflows across both the UBS and Credit Suisse platforms, and including deposit inflows in the Americas for the first time since 2021. Despite the significant outflows of Credit Suisse in the first half of 2023, we generated around $54 billion of net new assets across the platforms for the full year as we stabilized Credit Suisse and grew our combined franchise.

Moving on to GWM’s P&L, profit before tax was $778 million, down 31% sequentially, driven by lower revenues and higher operating expenses. Credit provisions were a $7 million release in the quarter. Revenues of $5.4 billion were 3% lower with decreases in NII and recurring fees, and with transactional revenues overall impacted by lower client activity, but nonetheless strong on the UBS platform, up 10% year-over-year. Net interest income was down 2%, reflecting tapering deposit mix effects in the U.S. and ongoing deleveraging, partially offset by stronger deposit revenues on higher volumes. Recurring fees were down 2%, reflecting a lower average billing base. Operating expenses increased 5% to $4.6 billion, mainly due to the FDIC special assessment, litigation provisions and higher marketing and branding costs.

Important to note is that we continue to see progress in taking down costs across GWM, where we are integrating Credit Suisse. Specifically, in the parts of our Wealth business outside the U.S., underlying operating expenses, ex-litigation and FX, ticked down in the quarter and have dropped 8% compared to 2Q23 on an exit rate basis. In the U.S., where a year-over-year comparison is more relevant, costs were down 2%, ex-financial advisor compensation, the FDIC assessment and litigation. Turning to Personal and Corporate Banking on slide nine. In its first full quarter since the announcement of the Swiss decision at the end of August, P&C generated a pre-tax profit of CHF794 million, up 3%, with lower revenues more than offset by lower operating expenses and credit charges.

As I highlighted last quarter in connection with September trends, the focus on win-back and coverage alignment across both Swiss platforms continues to contribute to strong financial performance for P&C, including over CHF7 billion of net new deposit inflows in the fourth quarter and revenue resiliency. Net interest income was down 1% as the benefits from deposit inflows and higher rates were slightly more than offset by the effects of lower loan volumes and clients shifting deposits into higher yielding products. We expect NII for P&C and GWM combined, and in U.S. dollar terms, to be roughly flat sequentially in the first quarter, with higher rates broadly offsetting the residual effects of deposit mix shifts and the initial impact of financial resource optimization, which Sergio and I will cover in greater detail shortly.

Non-NII revenues in P&C declined by 11%, mostly driven by transaction-based income, including lower client activity, particularly in corporate and institutional clients. Credit loss expenses in the quarter were CHF72 million, mainly related to defaults across several names on the Credit Suisse platform and from aligning provisioning approaches pertaining to Credit Suisse’s watch list credits. I would also note that PPA adjustments have reduced the level of CLE this quarter. While we have now substantially aligned provisions and methodologies across both books, we could see a continuation of the elevated levels of CLE in P&C for the foreseeable future, given Credit Suisse’s higher historical credit risk profile and the current economic environment.

OpEx dropped by 5% on lower personnel and real estate expenses. Moving to slide 10. Underlying PBT and Asset Management increased 16% to $180 million on seasonally higher performance fees and from gains on disposals that closed in the quarter, notably our joint venture in South Korea. Net management fees were down slightly on lower average invested assets in the quarter. OpEx increased 4% to $625 million, mainly from higher personnel expenses and litigation charges. Net new money in the quarter was negative $12 billion, predominantly from two large outflows in indexed equities, while we continue to see client demand for SMA and private markets capabilities. Turning to the Investment Bank on slide 11. As we said last quarter, since IB has taken on only select parts of Credit Suisse’s Investment Bank, we continue to consider year-over-year comparisons to be instructive in describing the performance of the business, in particular regarding revenues.

The operating loss of $280 million primarily reflects 34% higher costs, mainly personnel and technology related, while revenues from onboarded Credit Suisse staff are only beginning to build. Underlying revenues, not including $277 million of pull-to-par accretion and other effects, increased 11% year-over-year to $1.9 billion. Global banking revenues increased 69%, with fee pool outperformance across key products and across all regions, and particular strength in leveraged and debt capital markets, as well as strong performance in the Americas. Global Markets revenues were down 4%, reflecting declines in rates and FX, more than offsetting growth in equity derivatives, cash equities and financing, the latter of which topped off its best full year on record.

I should highlight that cash equities gained Global Market share over the course of 2023. During the fourth quarter, we completed the Credit Suisse banking team integration, which is already showing in our M&A pipeline. Similarly, for markets, we expect to substantially complete onboarding of the team and the majority of its trading positions to UBS infrastructure by the end of 1Q. With improving market activity, a growing banking pipeline and advanced progress on integration, we expect the IB to return to profitability in the first quarter. Moving to non-core and legacy on slide 12. Underlying PBT was negative $977 million. In the quarter, we reduced RWA by $6 billion, with three-quarters of the decrease from active wind-down. LRD dropped by $19 billion and is down one-third since 2Q 2023.