Great. Good morning, Todd. Good to have you at our conference.
Thank you, Kian.
Yeah. Thanks for making time. Todd, it's been an interesting year. This building, we used to have Steve Black, who used to be our co-head of the investment bank, and every six months he would have the scary scorecard of what we have achieved. It would be A+, Ds as well, a lot of Ds. He's a very honest guy. He's now the Chairman of Wells Fargo. And your scorecard, if Steve would be here, would be a lot of A+ because the integration is going extremely well. I personally have never seen a merger that is going so smoothly when you think about client retention, asset retention, legal entity mergers, etc. At the same time, there's clearly a big discussion around capital and capital requirement. And maybe we start there, if I may.
Maybe you can talk a little bit around your buyback and also your total capital return expectations going into 2025, and also how that fits into the discussion around capital requirements in Switzerland.
Sure. Thanks, Kian. Good morning, everyone. Great to be here. Thanks for the opportunity. Thanks also for recognizing the progress. I think we'll get into that a little bit more. Look, let's talk capital because I know that's always an important question. Let me be as clear as I can. Nothing has changed since we talked about our capital return expectations at the beginning of this past year with our 4Q 2023 results in February of 2024. In terms of what we said, the expectations around 2024, which we've executed on, we said for 2026 we expect to return at a level greater than pre-acquisition amounts. And we said we wouldn't stop and go. And that also includes, importantly, 2025. So with our fourth quarter earnings in February of next year, we fully intend to come out and offer a view on our 2025 capital return and share buyback expectations.
As far as the debate on capital in Switzerland, first of all, I recognize that it creates uncertainty, creates uncertainty for us. I can tell you that we're very engaged in discussions. There are technical discussions. There's a lot of education that takes place because a lot of the rules are quite technical and detailed, especially when you talk about this notion of parent bank capital that isn't something, for sure not, that politicians. It's not an intuitive notion, and so there is a lot of education, but in terms we don't control the timing of when we may see proposals. Ultimately, all we can do is continue to engage in those discussions actively, and that's what we've been doing.
Do you expect at that point, on February 4th, I believe, for your result date to have a discussion point where you have ranges that feed into your total capital return story? Do you think from your perspective you have a better idea of how much capital you require?
I mean, it's too early to speculate. I mean, we're still working on the plan for 2025 to 2027. We have to get the board to approve, so I don't want to speculate on what we'll say at this point, nor would I ever anyway, even if this capital debate wasn't ongoing, but I would think that by February 4th, to know where this is headed, I'm just speculating, but I think it's going to be early. I just can't imagine that we have to still get the parliamentary report that has to come out that was expected by the end of the year, and that can get delayed maybe into the front part of next year, and so to think that the capital proposals will be understood and known by February 4th, I suspect, is a stretch.
So maybe we can pivot on capital a little bit to what you can do to mitigate potential impacts. Clearly, you have certain subsidiaries such as CS International. You discussed already that this is a rundown, and you're moving some of the assets to the branch. The Tier 1 ratio of that subsidiary at the third quarter was 76%, and you have $12.9 billion in that division. Can you talk about repatriation potential there and also around the U.S. subsidiary?
Yeah. So it was always our plan, regardless, even before, of course, before even the Too Big to Fail white paper came out in April of this past, earlier this year, always our intent to repatriate the capital out of the Credit Suisse subsidiaries. And you can see, as you say, from the Tier 1 capital ratio, we have clearly excess capital because these entities are being wound down. That is our intention to have as much capital as possible repatriated out of those entities in the U.K. and the U.S. in particular. It requires regulatory approval, and we've been going through that process.
I could say that the fact you highlighted, perhaps in your A+ from where you sit, scorecard for us, I can tell you that the regulators and their assessment of us view our ability to implement all these integration milestones, particularly de-risking our balance sheet, merging entities, doing all the things that we said we needed to do, cutting costs. All of that is of critical importance for the regulators to signal their support to effectively empty out these subsidiaries and have the capital repaid to the parent bank, which effectively owns either those subsidiaries directly or indirectly. So that's our plan, our intention, and we're making very good progress on that.
And clearly, this all has to be approved by regulators. Do you think that I think CS International sits in the U.K.?
Correct.
And then clearly, then we have the US subsidiary where you always hear that maybe it's a bit more difficult to take capital out. Is that also practically something that you think is achievable? And in particular, in CS International, do you think you have to run more or less the whole book down to take everything out, or you can do it in stages?
Fair questions, but PRA and the Federal Reserve are the drivers of the governance of our ability to repatriate capital out of those entities, but as I said, the discussions have been very constructive, and I fully expect that we'll continue to progress that, and I can offer, with 4Q earnings in February, more details about where we stand because these discussions, I think, at that point, we'll have more clarity on.
Yeah, that would be very helpful. Maybe you pivot away from capital and talk about integration. As I mentioned, Steve would give an A+. You have merged the legal entities, or most of them. Can you talk a little bit about what's outstanding, how the integration process is going? And in that context, also talk about the non-core, which has performed extremely well, much better than expected, both in terms of rundown and profits, how we should think about that going forward.
Yeah. So Kian, I'd say in terms of integration milestones, I mean, what we did in 2023, sort of quarter on quarter, I think is well heralded at this point. And then as we came into 2024, the focus was on the legal entity mergers, the parent bank, the Swiss banks, the IHC reparenting. All of that was accomplished either on time or ahead of time. Then in the second half of the year, we turned our attention to client account and data migration from Credit Suisse platforms to UBS platforms. And I mentioned with 3Q earnings that we have already, we had just finished in the prior week or two, Luxembourg and Hong Kong. And in fact, this upcoming weekend, we'll execute on Singapore. By the end of the year, we'll have done Japan, Italy. So most of the international locations for wealth management will be complete.
And then that will start this process of ultimately being able to shut down all of that technology, hardware, software, data centers, unlock staff capacity, and costs will come out. So that's in terms of the near-term milestones. I'd say that's on the radar. Looking out a little bit further in 2025, the big platform migration work is what we call Booking Center Switzerland, which is our Swiss platform, which services our Personal and Corporate Banking and also Global Wealth Management. That has over a million clients. So that's a different deal and dimension altogether because it has a lot of the Personal and Corporate Banking clients of P&C in our Swiss business where you have the volumes of clients. So that's going to take place over multiple waves, beginning around the end of the first quarter of 2025 through the beginning of 2026.
That too will give rise to significant cost saves beyond that. Maybe we'll come back to cost saves. You asked about non-core and legacy. If you think about our performance year to date in 2024, while I love talking about the core businesses, and of course, I want to be able to come back to that because that's where the strategic advantages are. In terms of just the financial metrics in 2024, it's been the outperformance of Non-core and Legacy relative to our expectations, outperformance versus what we thought. Because I guided, and they continue to beat my guidance, and they were just able to effectively exit positions really skillfully in terms of volume, getting it down fast, but also exiting positions above their book value, i.e., where we marked the book, very impressively.
They did it fast, in some cases very profitably, and also took costs out. I would say, though, that in terms of 4Q 2024, it's just important to reiterate the guidance I gave in 2Q, where I said for the second half of the year, I expect pre-tax underlying loss in NCL of about CHF 1 billion. In the third quarter, we generated around CHF 300 million pre-tax loss. So I would just reiterate that we expect in 4Q a CHF 700 million pre-tax loss. Why is that? The revenues that we expected as we guided at the end of 2Q largely materialized in 3Q. And indeed, we actually expect negative revenues of about CHF 100 million in the fourth quarter contributing to this CHF 700 million pre-tax loss guidance. The other thing I would just mention is the tax rate, reiterate the guidance I gave.
Our effective tax rate at group level is highly sensitive to NCL performance, and I'm going to talk much more about that in the fourth quarter when I have the forum to do that in terms of how the correlation between sort of NCL reported losses, including integration costs and our tax rate, but I wish to reiterate that in 4Q, our group effective tax rate is expected to be around 35%.
Okay. That's clear. Very helpful for modeling purposes as well. And you mentioned the cost and your legal entity mergers are going well, the transformation, CHF 13 billion of gross cost, you achieve 52% based on the latest data. Now with the legal entity integration and a lot of the costs actually seem to have come from the non-core, how should we think about cost development going forward?
Exactly, Kian. We're halfway done. I would say the second half, two things. One, will benefit the core business divisions far more significantly than the first half did. The first half was driven by the speed at which Non-core and Legacy was de-risking its balance sheet, for sure. While we've been sequentially deflating the tech stack, you don't have the big catalysts of the tech reductions until these platform migrations get completed. And that's all happening and will happen. So when I think about the two halves, that's certainly how I think about it. So the first half, largely NCL-driven, that's correct. Second half will be largely core business-driven, mainly as a function of the technology costs that are going to come out, among other things, real estate people, et cetera, of course.
I would just reiterate that we've always said that the cost savings. It won't be a straight line in terms of the progressivity of cost savings. We've had some quarters where we saw big drops quarter on quarter because I always provide the sequential view in my updates, just trying to give the markets just a view of our sequential progress. I mentioned as we came into the second half of this year that sequentially we'll probably decelerate a bit because we're really focused on these platform migrations now in some respects with respect to integration. It's all hands on deck. So getting through these platform migrations is really critical as a big catalyst for cost savings that we'll see more towards the end of 2025 into 2026 when we have the catalyst for much lumpier, bigger cost savings as I look out.
I think that's more in line with the guidance you gave at the time of the integration. We should see that really in 2025 to have an impact.
And I would just point out that in 4Q24, on this point of sort of not being a straight line, we actually expect actual underlying OpEx. So not the way we're measuring sort of run rate saves on a gross basis, but actual, as I said in 3Q, to tick up slightly, mainly for seasonal items, for example, the U.K. Bank Levy . So we would expect to see a tick up in our underlying OpEx 4Q, 3Q.
Okay. And staff reductions in respect to the legal entities that would be also more, would you say, second half 2025, first half 2025, we will see some of that already?
The legal entities themselves, I'd say, were more sort of predicates for things that had to come beyond. For example, the platform transitions we're undertaking now in wealth management and then we'll do in P&C couldn't have happened but for our ability to do the legal entity mergers. That said, when you're absorbing a GSIB sort of piece by piece into another GSIB, unprecedented, there are a lot of sort of costs of running a GSIB governance process, technology. And so as we merge entities, for sure, that is giving rise to our ability to unlock staff capacity.
Very clear, going in the right path, and clearly still very much on track for the sub 70% in exit 2026, based on what I'm hearing.
Correct.
Moving to U.S. Wealth, going a bit divisional, 10% pre-tax in the nine months, probably not an A+, at least from our perspective, and I think from the market's perspective. Can you talk about how you gap towards the mid-teens guidance that you've given?
So yeah, thanks, Kian. I mean, I would say that, first of all, we're going to focus organically on getting to this pre-tax margin by driving up, doing two things, I'd say. We have to focus on our revenue mix, and we have to drive increased operating leverage in that. And that's the way we do it. And there's a lot of pieces, and we'll come talk with 4Q earnings in February about the plans to do that, both on the revenue mix side as well as on the operating leverage side. We have new leadership, as you know, and we've given them a chance to work through their evolving the strategy of wealth in the U.S. They've come and talked to Sergio and me about it. We'll be discussing it with the board, and naturally, we'll come talk to the markets about it in February of next year.
But the focus will be, in order to organically improve the pre-tax margin over the next couple of years, we'll be focusing on those two things. Just to maybe talk a little bit about the first on the need for the revenue mix. In our U.S. business, as you may know, the compensation model is such that the advisors are paid differently on certain types of revenue. In particular, on non-NII revenues, they're paid typically on the so-called financial advisor grid that is fairly bespoke to each of the competitors in the U.S.. But it's by and large a similar concept. And so as revenues are generated, they get paid a certain level on the grid. We, in our U.S. business, have just when I look versus peers, we have proportionately higher levels of non-net interest income, which is to say proportionately lower levels of net interest income.
Net interest income is the area which is compensated the most lightly of the different revenue lines. And so really an easy way to explain why our margins lag peers is that's one of the key reasons, is that when you compare the level of net interest income as a percentage of total revenues, it's a much lower percentage. So therefore, you're not getting the margin benefits because you're paying the higher levels of compensation on recurring fees and on transaction-based revenues, which are big focus areas for us, and we're doing quite well. So that having been said, there are a lot of the U.S. business, and you mentioned you wouldn't give it an A+. I will say, and we know we have work to do, but there are a lot of fundamental strengths in that business.
If you look at AUM over two trillion, if you look at the level of mandate or fee-generating asset penetration, quite strong. You look at their gross margins, have always held up quite well. There are a lot of fundamentally really sound things. You look at our client base, the wealth bands we serve in that business, there are a lot of things that can excite, certainly excite me and can excite those who follow us, but we know we have to improve the pre-tax margin, and so we will talk a bit more about that in February.
Maybe just to touch on sweep, clearly this has been due to higher rates, as in all players, we have seen the sweep deposits declining quite significantly. Now that rates are coming down, do you think that will reverse? And in that context, you've given some guidance on sweep repricing. Is that still on track as guided earlier?
Yeah. So as I mentioned, the last couple of quarters, we expect to change the prices we pay on sweep deposits in our advisory accounts in the fourth quarter, which is to say next month. The lag between when I initially talked about it in August to now, which I flagged even back then, was all based on just technology, our ability to differentiate between brokerage and advisory accounts from a technology platform standpoint to be able to price and distinguish. So that was the reason we didn't come right out and do it, say, September 1st, and instead it's in the December timeframe. That, of course, means that the impact on NII specifically will be negligible in 4Q. You mentioned the guidance that I gave for the full year. I said - $50 million on a pre-tax basis in the U.S. business as a result of higher SWEEP rates.
Naturally, if dollar rates come in, as the implied forward curve would imply, then that we can perform better than the - $50 million PBT impact on the sweep issue.
Is there a level where you would think, okay, at that level of interest rates, actually sweep will come back rather than putting into money markets or?
Absolutely. I mean, the sweep.
I think they're down 70% if I just look at the legal entity account. I mean, it's a huge decline.
Exactly. Huge. When rates were zero, we had around $100 billion combined advisory brokerage sweep deposits because investors, clients were indifferent. As rates moved up quickly, not only were they not indifferent, but our advisors were not indifferent and pushed them into alternative liquidity solutions or other solutions. So you just saw the fast rundown. But as rates, what is the sort of where would rates need to go to have that sort of dynamic repeat? Probably close to zero. If rates settle more 100 or 200 basis points down from sort of where they are, you probably don't see that come back. But we are seeing, for sure, we saw the outflows from sweeps taper for some time now, and even recently started to see some growth in SWEEP.
So you're absolutely right that that dynamic should at least reverse, just not to the extent that we saw it in 2020-2021.
That can help your pre-tax margin over time as well. Looking at APAC, we clearly have US elections, so some concerns about what would it mean in terms of tariff impact on the business. At the same time, you had the China stimulus, which hasn't really come through all through the third quarter. So maybe some of that will come through. And then we had the NPCSC meeting. Can you talk about the environment, how you see net flows, client engagement?
So first, I'm very excited about our APAC business. And with these, finally, with the migrations taking place to have all of our clients on the UBS platform, we've been acting, as I've said, over the last year, the way we've merged teams and product suites. We've done everything we could, but I mean, when you can put all the clients on the same platform and all the advisors are working off just their UBS clients, you're not having red and blue statements and everything. I think we upside ahead. I thought 3Q in a constructive environment in APAC showed some of the proof points of the strategic advantages that our wealth business in general offers clients and investors. But in particular in APAC, I thought we had great transactional revenue. Again, a constructive environment, but great. We saw volumes up.
We saw mandate sales improving because APAC has always been very transactional driven, and I've said, you probably remember I've said that I think on the Credit Suisse side, as that comes in, the opportunity to sort of bring in and improve mandate sales on that client base offers us upside, and we saw that in 3Q. We certainly are seeing deleveraging taper, and obviously, with the expectation of rates coming down, we see upside in releveraging. We have about 700 billion in AUM in APAC, and so I'm very excited about that business. Overall, I'd say for the business overall, as we entered the fourth quarter, client sentiment remained very good. We saw an environment that continued to be risk-on pre-US elections, but then even post.
I think the announcement of China stimulus also created a lot of activity in the region in APAC, also for the business more broadly, but particularly in APAC, but also the investment bank that we saw in 3Q benefited on the market side. So we saw that constructive environment continuing into the front part of the fourth quarter.
Maybe we touch on the investment banks briefly. You want to make 15% through the cycle. If I look at the results year to date, around 9%. Can you talk about the integration of CS and the ability to get to that 15? What has to happen? Is it a market growth story, or is there more underlying market share assumptions that you have?
So we're clearly focused on bridging that gap that you talk about, Kian, to 15% by 2026. The key to us will be to do what we said, double banking revenues from 2023 to 2026. That comes from getting the banking teams that we inherited from CS, and we've also been built up. So I think it was effectively, in some ways, a refresh of our whole banking franchise. So there, it's about ramping up the productivity fully. We're making great strides. You just see in just the results that we've printed really since the fourth quarter of last year, you could see where that productivity, that's not yet fully there, as evidenced by the return on equity not being where it needs to be. But it gives you, to me, it's evidence of where we can take this because I know that the productivity isn't fully there.
Some of that's market-driven too because, for example, if you look at, say, the ECM pipeline, it's a little bit first in, first out. And so where there hasn't been that 2023 was really poor and 2024 started to come back a bit, there's a little bit first in, first out. So with us coming in, our pipeline is building nicely, but it probably speaks a bit more to 2025. But I'm really pleased with where banking is in the current quarter. And I think the pipeline will support continued growth into 2025. And I just would say that I think the other points for the business, first of all, Credit Suisse has been just a huge boon for our IB. It just has been.
When I've asked Marco and George what the driver has been for, say, the strong quarters that they've had, they'll say Credit Suisse because they have integrated really, really good people.
In particular, the U.S., I assume.
In particular, in the U.S. to drive market share and growth in the U.S., it's exactly right. So for me, it's continuing to chip away on that productivity measure to continue to gain market share, outperform peers in our priority markets and sectors, which is fundamental to our strategy for the IB to support our Global Wealth Management clients.
Shifting to your P&C business, large market share, you're optimizing the book. Can you talk about the impact that has had and is going to have? At the same time, also, we talk a lot about credit quality deterioration in Germany and France. How is it actually impacting Switzerland that you're in?
So our P&C business, they have, as you say, Kian, been very focused on returning their returns on risk-weighted assets to levels that we had before the acquisition. It's evidenced in the measure of revenue over RWA, where you see that there is upside to effectively restore those levels to sort of what UBS enjoyed before the acquisition. How are we doing that? We've been really trying to broaden the service offering on a lot of the Credit Suisse clients that were inherited, in particular in the corporate banking side of P&C. If we're not able to broaden the service offering, we have, in certain cases, tried to reprice lending. And those are the things that we have been focused on. Repricing lending, it goes to your point, is A, helpful to restore the margins on RWA to where they need to be.
But B is also you could see that evidenced in the credit loss expense numbers that we've had literally since the acquisition. Even with the purchase price allocation shelter, partial shelter, the numbers have been significantly higher than the UBS. So basically, two businesses that are very similar, but you're seeing five and six times the level of credit loss expense on the Credit Suisse side. So that still has to play its way through because these are not new exposures. These are the older exposures we had, but it still has to sort of work its way through. And indeed, for 4Q 2024, as I highlighted last quarter, still seeing elevated levels. 4Q is typically higher than 3Q. And we're actually expecting CLE in our Personal and Corporate Banking business in the fourth quarter of around 150 million CHF this quarter.
That's more repricing related rather than environment related?
In terms of some of that is just proper.
Allocation.
Yeah, and proper pricing on the capital deployed and the credit extended. But you're right. I hadn't touched on, and thanks for the question, I hadn't touched on the environment. The environment in Switzerland is okay. The macro environment is okay. But some of the Eurozone economies around it really have been sluggish. And a lot of the Swiss corporates to whom we lend have export-import businesses, and they're affected by the economies around them. So if Germany is sluggish in terms of growth, then it's not unusual to see a bit higher credit loss expense, but it's exacerbated a bit by the sort of the Credit Suisse dynamic I highlighted.
Very clear. Maybe we open up for questions at this point. You should have a mic on the table. Maybe I can ask another question around which we haven't touched on, which is tariffs and what impact that could have on your wealth business. And there's a lot of debate how that's impacting China. Does it impact wealth creation? And does it impact UBS in that sense? Can you talk about your experience the last tariff round? Although it's probably going to be very different, much bigger, and how you guys are preparing thinking about this from a business perspective?
Yeah, absolutely. Look, I think our wealth business, as I mentioned, I won't really speculate on whether the Trump administration will introduce the tariffs and what impacts that will have. And we all have our own views on that. But if one thinks about an environment that becomes a bit more either protectionist, a bit more localized, if that's an outcome from higher tariffs, I think our business is an all-weather business. I really believe our wealth business is set to support our clients and grow and gain share of wallet, market share, however that's measured in the wealth business, really in whatever environment. So the impact on tariffs that that has naturally, of course, if markets, equity markets react to that and come in, of course, that's not a supportive beta factor for the business. But of course, that's an industry issue.
So I really think for us, it's staying focused on serving our clients in all-weather environments. And I think we have the scale and reach to be successful really in whatever economic environment we may see.
See, there's a question.
Hi, I'm Arturo from ArrowMark. You touched on revenue and RWA. We just heard Christian from Deutsche Bank speaking about hedging his midcap exposures with CLOs mainly. Credit Suisse was a big user of that technology as well. How do you see that in the Swiss market? Are you going to carry over that technology? Are you planning to hedge more? Stop doing that?
Maybe you can take that quickly because I want to just get two questions in. Yeah.
Yeah, just quickly. Look, I mean, the CS activities, for example, with CLO largely have been moved into our Non-core and Legacy business. So these are not things that we have continued. I'm not suggesting there aren't aspects that we may undertake, but in general, that business is not something that we've continued.
Back on the US Wealth Management business and the change in the franchise there that you're thinking about how to take it forward for the long term, is it plausible that you can do that without having some sort of J- curve on the profit margin there? Or can you absorb the incremental investment and keep the profit margin trending towards the target, or do you first need to go lower before you go higher?
Fair question. We're going to invest in that business, continue to invest in the business for sure. But I have talked about the need to improve operating leverage. So that's going to be the challenge for the business is to develop a number of things that will effectively self-fund the investment. But as you know, there could be timing issues where investments are made before you see returns. So there's a J-curve dynamic sometimes that are in these businesses to manage. So yes, it's possible that that can have sort of an offsetting impact on the pre-tax margin as we're putting all these things into place. But we have to manage it in a thoughtful way that we're able to show.
But that could certainly be an impact on the level of progression, especially at the beginning, because we will continue to invest to drive, in particular, certain operating leverage improvements that we'll come talk about, but also to improve the revenue mix, in particular on the banking and net interest income side.
Great. I'll stop here. Todd, it's been a pleasure. Very insightful. Thanks for the updates also around the fourth quarter. Steve would probably rate this an A+ overall in terms of operational performance. And hopefully, see you next year.
Great. Thank you, Kian. Thank you, everyone.