Ladies and gentlemen, good morning. Welcome to the first quarter 2021 results presentation. At this time, it's my pleasure to hand over to Mr. Martin Osinga, UBS Investor Relations. Please go ahead, sir.
Good morning, and welcome everyone. As usual, I will draw your attention to our cautionary statement slide at the back of today's results presentation. Please also refer to our SEC filings, including the risk factors in our 2020 annual report. On slide two, you can see our agenda for today. It's now my pleasure to hand over to Ralph Hamers, Group CEO.
Thank you, Martin. Good morning, everyone, and welcome to the first quarter results. I hope you and your families remain safe and healthy. When we had our last update call three months ago, we said that our 1st priority coming into 2021 would be to build on our momentum by remaining laser-focused on our clients. As you can see by our results in the 1st quarter, we did just that. Client activity was high across the businesses. They continued to draw on our on us for trusted advice and relevant solutions. This resulted in record assets in Wealth and Asset Management, record loan balances and transaction-based revenues in Wealth Management.
Before I go into the results for the quarter, I'd like to first to cover a idiosyncratic situation that took place in the second half of March. The default of a prime brokerage client led us to incurring a $774 million trading loss. The net profit impact for the quarter was $434 million. We subsequently risk-managed the tail of the exposure and closed all remaining positions in April, which has led to a $87 million trading loss in the second quarter. We're clearly disappointed by this, and we're taking this very seriously. One of the reasons that UBS has a balance sheet for all seasons is to handle unforeseen events, although this is not the kind of event we ever want to have.
This buffer served us, our clients also, because we were able to continue with our plan and with our program and our growth and providing credit and execution, well through the pandemic, but also through this event. In the first quarter of this year, despite this loss, we further increased our CET1 capital ratio to 14%, and that's a true testimony to the strength of our franchise and the results in the first quarter. The earnings power and the regional and business diversification further adds to that resilience. In the first quarter, we made a return on CET1 capital of 18%. Also, the Investment Bank produced a double-digit return on attributed equity even after this loss.
Speaking for the management team and myself, while we can't say there will ever be an unexpected loss, as risk is part of our business, we can assure you that we'll be transparent about mistakes. We'll fix them. We'll learn from them. The organization came together quickly to risk manage this challenging situation in a very constructive way. Equally, there are lessons to learn from this. We're reviewing our Prime Brokerage relationships, have already improved some of our risk controls. At the same time, Prime Brokerage remains strategically important for UBS, for our clients, and this also for the Investment Bank. We're also open to dialogues with regulators on potential changes that could improve the market transparency around some of these businesses. Lessons being drawn, lessons learned being implemented as we speak.
With that, let's continue our review of what we do best, which is serving our clients around the world. I'm now turning to the next slide. The backdrop of this first quarter was one of great investor optimism, improved economic indicators, constructive market sentiment, with long-term dollar interest rates off their historical lows, momentum shifted from growth to value stocks. Fixed income assets came under pressure, as you've all seen. We advise our clients how best to position their portfolio for that environment, through investment solutions, financing, underwriting, execution with strong results, which you can all see on this slide right here. We saw strong net asset flows across our businesses. In institutional segment, low or negative rates continue to drive demand for alternative and emerging markets.
We also continue to capitalize on our position as a leader across the global frontier of sustainable investing. Wealth management clients remain active with record transaction revenues, fee generating assets and loan balances in the quarter, as you can see here as well. On the Swiss side, the Swiss economy is holding up quite well in the face of the continued COVID measures. With robust loan and deposit growth in our Swiss business, the persistent negative rate environment means personal clients are increasingly using our investment platform to invest excess deposits for a return. Meanwhile, corporate institutions are taking advantage of the positive funding environment, and we're helping them to do so. Equity capital markets had one of its best quarters on record. Turning to the next slide.
Here you can see that, you know, investments are truly at the core of our DNA. Our investment ecosystem is a cornerstone of our strategy, and I will explain you more when I give you our strategy update. You see the invested assets growing, year-on-year by 33% here. The separate managed accounts initiative that we launched between wealth and Asset Management last year continued also this quarter to attract assets. I think it is a textbook example of what we can achieve for our clients and shareholders when we work together to deliver the best of UBS to our clients. It's a great springboard to build out our customized offerings as well. Demand for sustainable products continues to be high. That trend continues, our flagship Asset Management attracting another CHF 5 billion of inflows in the quarter.
Some of this is driven by My Way. That's our easy-to-use, moderate, and personalized discretionary managed offering. This quarter, we successfully launched this product outside of Switzerland as well, and we aim to scale it quickly. In Asset Management, sustainable strategies were once again a driving force behind a very strong net new money quarter, attracting CHF 8 billion of net inflows just in that category. This continued momentum with clients, combined with a positive market backdrop, as I said, resulted in the financial results, as you can see on slide six. Operating income growth is 10%, broad-based, across regions, across divisions. That drove a 18% return on CET1 capital. We strengthened our balance sheet, increased our capital ratios, and repurchased $1.1 billion of shares.
These results, again, demonstrate the strength of our franchise as we're refreshing our strategy to unlock UBS full potential. Before I go to my strategy, I'll hand me over to Kirt, who will give you some more details on our performance in this quarter. Kirt, over to you.
Yes, thank you, Ralph. Good morning, everyone. Net profit for the quarter was CHF 1.8 billion, translating into a 18.2% return on CET1 capital and 14% return on tangible equity. PBT of CHF 2.3 billion was up 14%, driven by 2 percentage points of operating leverage. Our cost-to-income ratio was 74%. Updated macroeconomic factors would have informed an incremental CHF 92 million stage one and two release in credit loss expenses or an aggregate CHF 208 million over the last three quarters. We deemed any release premature and applied a management overlay. Both revenues and costs saw FX-related increases of around CHF 150 million-200 million compared with a year ago, although on a net basis, the positive effect was small at below CHF 30 million for PBT. Turning to expenses.
As we've said many times before, under operating income growth scenarios, we aim to manage to flat costs, excluding variable compensation and larger one-time items, in order to drive positive operating leverage. Year-over-year, first quarter operating expenses, excluding variable compensation and FX, were flat. Looking out over 2021, we expect to see our full-year costs, excluding variable and FA compensation, restructuring, and litigation, up around 1%, adjusted for currency movements and excluding any potential investments related to our strategy refresh. We entered 2021 with a higher run rate cost base than we had originally planned due to the pandemic. As economies continue to open, we expect to book restructuring expenses of around CHF 300 million in the second quarter of 2021.
I would also like to flag that for this year, we would expect our retained loss in Group Functions to reduce to around CHF 150 million per quarter, absent any accounting and one-time items will further decline in future years. Moving to our businesses. GWM recorded pre-tax profit growth in every region, with APAC and the Americas reaching new highs and both nearing CHF 500 million PBT. The diligent execution on the plans Tom and Iqbal set out earlier last year are an important driver of these results. PBT increased 16% to CHF 1.4 billion, driven by transaction activity and loan growth, as fee-generating assets, a new metric I'll explain in a moment, grew with market performance and on strong net new volumes. Revenues grew 7% year-on-year.
Expenses were up 3%, mainly related to top-line growth, and GWM's cost-to-income ratio decreased by 1.4 percentage points. We had another quarter of high net new loan volume at over 10 billion, mainly in Lombard loans, with most of the growth in the Americas and APAC reflecting continued client demand. We have achieved substantial loan growth over the last year while maintaining the quality of our portfolio. As Ralph Hamers mentioned, we've introduced net new fee-generating assets, a new performance measure for GWM this quarter. We see this as a better indicator of future profitability than net new money, as it captures changes in assets with more of a direct impact on GWM's recurring revenues, as well as contributing to transaction revenues.
We are no longer reporting net new money for Global Wealth Management on a quarterly review. You will still be able to find the full year flows in our annual report. Compared with net new money, net new fee-generating assets exclude flows related to assets that from trading or new issuance predominantly generate transaction-based fees in the form of commissions and transaction spreads. Unlike net new money, net new fee-generating assets exclude deposit flows that generate net interest income. This new KPI captures net flows related to mandates, investment funds, hedge funds, and private markets alt- investments, and include dividend and interest payments into mandates. The underlying assets and products generate 90% of Global Wealth Management's recurring fees and 30% of its transaction-based income. Moving to income.
Net interest income was down slightly, in line with the guidance of around $1 billion we gave back in January, as the impact of lower U.S. dollar rates continued to taper, and we benefited from ongoing loan growth. Sequentially, it would have been roughly flat, excluding the lower day count effect. For the second quarter, we anticipate a slight increase in net interest income sequentially, with positive lending net interest income combined with the absence of further interest rate headwinds quarter-on-quarter. Recurring fees grew 8%, driven by higher average fee-generating assets. Sequentially, recurring fees were up 7%, supported by CHF 36 billion in net new fee-generating assets. Transaction-based income rose 6% even against the strong first quarter 2020.
The Americas delivered higher transaction revenues, and APAC reached a new record as clients engaged with our advisors on new and existing content, solutions, and CIO offerings in markets that provided a constructive backdrop. Our gross margin from fee-generating assets was 86 basis points, decreasing by 4 basis points compared with the first quarter of 2020, primarily driven by flows into mandates and funds with lower fees, including single share class funds in the U.S. without 12b-1 fees and sustainable investment mandates with less exposure to hedge funds. Sequentially, the fee-generating asset margin increased by 4 basis points, primarily reflecting higher transaction activity and mandates. PBT for P&C increased by 11% to CHF 358 million. Operating income was up 9%, reflecting a credit loss release versus a credit loss expense a year ago, along with a revaluation in our investment in SIX Group.
NII came down on lower deposit revenues related to dollar interest rate headwinds on our corporate and institutional clients, but also reflecting continued drag from negative Swiss franc and euro rates. Sequentially, we have now largely absorbed the impact of lower U.S. dollar rates. Transaction-based income was down mainly on around CHF 20 million lower income from credit card and foreign exchange transactions as a result of reduced travel and leisure spend abroad by clients due to COVID. Partly offsetting these two, recurring net fees reached a new high this quarter, primarily on higher custody mandate and fund fees. As part of our continued focus to digitize our Swiss Universal Bank in recognizing accelerated preferences of our clients to access our services through digital channels, we announced that we would close 44 smaller branches in the first quarter after having already closed around 30 branches last year.
real estate costs, therefore, elevated in Q1 due to accelerated depreciation. This combined contributed to the 8% rise in operating expenses, as did higher investments in technology. We will ensure that our clients remain well-served with continued enhancements and broader access to our leading digital channels and other improvements in our remote services. Asset Management delivered its eighth consecutive quarter of year-over-year PBT growth. First quarter PBT was up 45% to $227 million, the highest Q1 level since 2008. AM delivered 9% positive operating leverage, driving our cost-to-income ratio down 5 percentage points to 64%. Performance fees increased $56 million to $92 million, mainly driven by our hedge fund businesses, partly offset by a reduction in equities.
Net management fees were up 14% as we benefited from the combination of higher market levels and continued strong net new run rate fees, which are in excess of CHF 200 million over last year. We had inflows of CHF 26 billion, driven by positive contribution across all regions, channels, and asset classes, and invested assets rose to over CHF 1.1 trillion. Asset Management's separately managed accounts initiative with Global Wealth Management saw inflows of CHF 8 billion in the quarter, or a total of CHF 70 billion since the start of our program. Our SMA ranking rose from number 11 two years ago to number four in the U.S. at year-end 2020. The IB delivered PBT of CHF 412 million, down 42%.
As Ralph mentioned, this includes a CHF 774 million loss relating to a U.S.-based prime brokerage client, which the IB was able to fully absorb and still report a 13% return on attributed equity. It would have been a record PBT quarter without this event, with returns above 30%. Global Markets revenues decreased by 27%. The main driver was the prime brokerage loss. Excluding that, we would have posted an 11% increase year-on-year, driven by higher equity derivatives and cash equities revenues. This was partly offset by lower revenues from rates and foreign exchange products in the more normalized market conditions compared with the prior year, where we saw substantial volatility related to the COVID pandemic. Global Banking was up 48% with a significant increase in equity capital markets and to a lesser extent in advisory.
The 174% increase in ECM was helped by record SPAC IPO issuance in the U.S. market and an increase in follow-on issuance in APAC. Operating expenses increased by 7%, largely driven by higher personnel expenses, mainly reflected increased headcount in foreign currency translation effects. On an FX neutral basis, operating expenses for the IB were up 3%. Our capital requirements remain unchanged at 9.66% and 3.375% for our CET1 capital and leverage ratios, respectively. During the quarter, we increased our CET1 capital ratio to 14% and our CET1 leverage ratio to 3.89%. We completed CHF 1.1 billion of buybacks year to date and will resume repurchases shortly. On that note, I would like to hand back to Ralph.
Yes, thank you, Kirt. You just heard about our first quarter results, which continue our strong momentum from 2020. It speaks to the solid position that we're in as we start on the next phase of our journey. When I first joined UBS, I said that the first thing that we should do is to articulate our purpose and map out our strategic journey. In January, we walked you through some of that and some of the initial focus areas that I then kind of detected. It's clear that we are in a unique position. Our global scope and business model mean that we can take advantage of current trends and opportunities. It all starts with purpose, our purpose. Our purpose will unite all of UBS behind a common goal. Our purpose will give us direction to our path forward.
It will help us build on our current strength. It will support our momentum for growth. I also think that purpose can help us guide in difficult and volatile situations. When teams are united and aligned under one purpose and strategy, there's so much more that we can achieve. What is our purpose that will guide us going forward? Reimagining the power of investing, connecting people for a better world. I'm sure you've heard it from other players, a purpose is and will never be a slogan. It's not something we're saying to make ourselves feel good, but it is something that will help us develop our business. It's been designed to allow us to capture the opportunity that we see to grow our already strong position. It will guide us, and if we do it well, it will guide people to us.
We'll reimagine by the development of solutions that change how people look at finance and investing, will show that the power of investing can support one's life, whether it is by buying a house or growing a company, you know, acquiring a company, seeking capital, supporting future financial goals. That's the power of investing. We'll connect people, both internally and externally, to convene an ecosystem. We're truly unique at that, I think, at UBS. To bring ideas and opportunities together, to make a difference, to create value for our clients, but also for society at large. That's where helping to build a better world comes in, by thinking sustainably and creating opportunities that reduce rather than contribute to inequalities. We have an ability to make real impact here.
Now, sustainability is at the core of our purpose. We have been one of the pioneering institutions in our industry when it comes to standardizing the topic of sustainability, and we're not slowing down. Quite the opposite. Our clients want their investments to deliver both financial returns and have positive impact. It's why our portfolio of sustainable finance products is one of the fastest-growing areas of this firm. Our strategy is to focus on planet, people, and partnership. Last week, we announced our net zero ambitions for the group, as well as our commitment to address wealth inequality by sharpening our philanthropy and employee engagement around topics like health and education that are going at the root of fighting inequality.
We're also setting tougher environmental standards for ourselves. For the parties that want to deal with us, we're promising to deliver a detailed roadmap to net zero with science-based targets, setting ambitious targets for sustainability and helping clients transition to a low carbon world. Suni Harford, Head of Asset Management, will be the Group Executive Board member sponsoring the lead firm-wide in sustainability. Sustainability targets are also now part of each and every GEB member's KPI set. All this, together with the things we're already doing, means that we'll be better positioned to grow our strong leads. As I said, you know, our purpose will guide us. It will guide us in how we serve clients before, for example, we've built a strategy around that because our clients' expectations are changing.
They're used to being part of a global network, being able to connect with others whenever from wherever. They are used to being offered solutions before they even know they need them, they expect that from us too. That's why we're also making a promise to our clients. Today, we excel at delivering unique insights and analysis that informs how our clients invest for the future. Our thought leadership is the core of what we do. It's what we're known for. It's why clients come to us. However, we need to improve on how we deliver our ideas and content to our clients. We will consistently deliver a client experience where our products and services are as personalized as our client needs. They are as relevant, which basically means we don't offer solutions that don't suit their needs.
They have to come on time, not too early and not too late. When they elect to go for the solution, we should be able to execute on that one intuitively and seamlessly. That's what makes our client promise, and I am convinced that we can differentiate ourselves from our peers on this one as well, just like our thought leadership. We will improve, show that we are a firm that adapt to clients' lives rather than that we expect clients to adapt to how we organize. We have the purpose and we have the promise, and the question is: What is the big picture? What are we going for? What is our vision? We want to convene the global ecosystem for investing, where it's easy for our clients to get connected with the people and ideas that can make their goals happen.
Right now, we're good at managing client relationships and providing solutions. We're much bigger than one person or one solution. When clients are able to access all of UBS through a single client interface, get a differentiated, personalized experience, are connected to other areas of the firm, as well as other people who have similar goals, that's when we are at our best. That's what we can deliver. UBS has this unique opportunity to bring these people together in an ecosystem. We've already done that from our own organization perspective. You know, we have already kind of worked on our Global Capital Markets activities for all. We have created one global lending unit, so that all of our clients can now have access to institutional services that they have a broader and deeper expertise available to them.
On the back of that, we saw the lending volume growing by CHF 26 billion and transaction revenue increased by 20%. Basically, through this, you know, clients discover opportunities and realize these opportunities they didn't even know they existed. We can build that network, even if the solution does not come from us, but from a contributor to our network, a third party. That's what we're trying to build. If we wanna be successful in that, we need to be clear as how we're doing this and how it connects to our purpose and vision and the virtuous circle they create. Therefore, we have identified five strategic imperatives that will actually help us to take advantage of the client trends, the growth dynamics that we see, build on our strengths and overcome challenges, and create space for us to grow.
They are the following. The first one is all around being focused on clients, contributors to the ecosystem, and connections within the ecosystem. The second one is about focusing where we can win. Where can we truly make a difference? Where are we so strong that we can benefit from the growth in that area and be a really good competitor? The third one is about technology and moving from technology as an enabler to technology as a differentiator. The fourth one is all about can we be more simple? Can we be more efficient? How can we use the resources that come available through this efficiency and simplification drive to support the growth in the areas that we can see if they make the returns that we want to make? The fifth one, very important in any strategic program, is culture.
As we know, culture eats strategy for breakfast. I'll take you through all of these. The first one, clients, connections, and contributors, and you see the slide here. Here you see basically the virtuous circle that I'm talking about. This is the flywheel that we already have in motion, but that we can actually stir up in speed. We excel in our thought leadership and advice. Through our client promise, we will continue to be the leading customized investment and financing solution provider to our wealth clients. You see that they're very satisfied with that, but we can do better. The more clients we get, the more liquidity comes through our system, and the more scale can we build in the execution of all of that. That's where the Investment Bank benefits.
They have the liquidity, they can create the scale, you know that liquidity attracts liquidity. That in itself is already a virtuous circle. More liquidity and scale and execution attracts new players to the same ecosystem who want to have access to those services and to our clients. With that, we can actually attract contributors to the system, but we have to ensure that we curate those contributors in a way to protect and guard the integrity and the quality of what we offer to our clients. All of that will generate profit that we can use to invest, to grow, and build on thought leadership and advice and grow our client base, and that's how the flywheel goes. That's the idea. That's what we want to keep putting in motion. The second one is around focus.
From a focus perspective, we have looked very closely at the underlying trends in wealth accumulation in the world. If you take that and you take a step back, you see basically the following trends. You see the trend in the biggest wealth pools that are already there, which is the U.S. and the Asia-Pacific. They're already the biggest wealth pools, and they will grow the fastest as well. We are uniquely positioned to benefit from it. We'll have to focus on those. Within those, there is some underlying trends that grow faster than others as well. For example, entrepreneurial wealth is growing faster than any other wealth. Women-controlled wealth is growing one and a half times faster than man-controlled wealth as a trend that we see and that we should work on.
ESG is a trend underlying as well that we should work on as well. Private clients, basically, you know, the client base that has up to $5 million with us, is a trend where we expect further growth and fast growth. Those are the unique opportunities that we will focus on. That's where you can expect our resources to go. The third one is about technology, and I'm sure you had expected this one to be part of our strategy going forward. Technology is ever so important. What we've done really well here at UBS over the last couple of years is building a real sound base for technology, a real foundation. In that way, technology is still an enabler for us to do the business that we need to do.
We see that our clients, just like yourself, in day-to-day lives, they see their client experience, their experience improve through technology as well. Not just the predictability of it, not the stability of it, not the availability of it, but the true experience of it. Think about how you interact with Netflix. Think about how you interact with Spotify, services you use every day. You do it without even thinking about it. You get a recommendation that you actually think is relevant to you and personalized. You click on it, and it's right there. You can listen to the music or you can watch the series. If we can make our content available in that way, we can differentiate ourselves. Clearly, the content has to be good.
In our plan, we'll actually make technology the first step in how we deliver and improve client experience. We'll digitalize what we can. We have to become more agile in the way we work. We'll have to deliver faster speed to market, and we'll enable better maintenance of resources and manage resources more efficiently as well. Today, we announced two things. The first one is that as part of all of this, in order to create a joint capability of products and operations, we are moving the corporate center operations into the business divisions. That's step one. That's a prerequisite to build capabilities that as a whole can be available to our client base. It is also a prerequisite to start working agile front to back, which is how we will look at our client journeys going forward.
I'll come back to that. The second announcement that we made today in this field is that if we truly wanna see technology as a differentiator, we need to have a person on the board that knows technology very well. With that, you know, we're happy that Mike Dargan will be the head of Chief Digital and Information Office. He will basically come to the board and support the board in making this work. That gets me to the next imperative, which is all about simplification and efficiency. As I said, you know, by bringing the operations closer to our client-facing teams and the products, we'll break down the barriers to collaborate and be more effective there. We'll simplify decision-making.
We'll allow budgets to be planned in an integrated manner with the business areas. In that way, it's very much in alignment with our fourth imperative here, which is simplification, but also efficiency. This is where we'll streamline and standardize so that we can reinvest in our future with about CHF 1 billion of cost savings per year by 2023. How we will do that? First, we'll take a closer look at the way our business has been set up. We need to rethink our governance, the organizational structure to see how we best support some of the plans for the future. How can we ensure that our employees can spend more time with our clients and less time internally with some of the processes that we have in place?
Second, we'll have to optimize our processes in everything we do, aiming to deliver a seamless client experience so that we can truly fulfill the promise that I was just talking about. We'll have to do that front to back, starting with the client understanding into the product area, into the operational area, into technology, and creating these agile teams to improve continuously with small steps. The third area of this imperative is all about the discipline that we need in order to ensure that if we have too many policies, that we can join policies and that we can reduce some of the bureaucracy that comes with having many policies or legal entities.
If we don't use legal entities anymore or we can actually do the same activity from another legal entity, can we reduce the legal entities? It's also about the discipline about cleaning up the product shelf. If products are not in use anymore or we don't have scale in a specific product anymore, or it is a product that is subject to new compliance requirements, then we better migrate clients to a next best offering, reducing the number of products, and actually with that also reducing our legacy, and with that, reducing compliance risk as well. It's all about the discipline of that as well. The last one, as I said, is all about culture. We have a very strong culture here at UBS that is very omnipresent. We can build on that strong culture.
As I said, we are moving the business aligned operations to the divisions so that we can actually build these product capabilities. These product capabilities should be available for each and every client segment. We have to be more client-centric, independent of the divisional structures. We're also looking at the KPIs in order to support that. We have to be faster to adapt, as I said, I was already talking about agile, so I covered that most of that. Be more idea-oriented and embrace disruption. Although we already have a strong, experienced, diligent, and committed risk team, risk, in the end, has to come from all employees as risk managers. Therefore, we have to be vigilant about the risk.
The risks that are at the horizon, that can be spotted in societal trends, that can be spotted in regulatory trends, but making sure that we're ahead of these trends and that we already adapt and adjust in order to reflect some of that coming at us. Another area where we have to be more risk aware is in changing things, making sure that we do realize that with every change, there is a bit of an increase in risk. Make the analysis and accept the mitigants before you actually make the change. Making sure that we guard our control environment while we change.
As a third one, it has proven us really well again in this first quarter, is that part of our risk focus is and will be maintaining a balance sheet for all seasons so that our service to our clients is not interrupted by events. That's important. To close all of this, I'll remind you know, the purpose, that's our true North Star. It will drive future deliverables. You can see and you will see that we'll manage consistently after that purpose. We're deepening our client relationships. We'll grow them. We're investing in attractive growth markets and focusing on those pools of wealth that are already large for scale, but that are also growing the fastest in the market, in the world, and also the underlying trends.
We'll focus on leveling up technology. We'll focus on becoming more efficient, improving operating leverage, and we'll enhance our strong culture as well as our accountability. We remain committed to deliver to you. Now, I do realize that, you know, this is a strategic framework with a purpose, a vision, a client promise, and five imperatives. That you may still have questions as to what do you do about this and do about that. I can tell you that with the strong momentum that we have and with the focus that we wanna keep on our clients, we are not changing everything at the same time. We are developing plans for other areas as well. If and when these plans are finalized, we will come to you to update you on it.
With our 2021 full year results, we'll provide a strategic update, including the financial targets. Thank you for this. Let's open the floor for questions.
We will now begin the question and answer session for analysts and investors. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Jeremy Sigee from Exane. Please go ahead.
Morning. Thank you. Two questions, please. One is about Archegos and prime brokerage and kind of what it means going forward, and the other is about the corporate center. The first one, I just wondered how you think about prime brokerage after this incident. On the one hand, you could have an opportunity to take market share as Credit Suisse withdraws. You could say, "This is our moment," but on the other hand, I'm sensing that you're also viewing this with a bit more caution than before. I just wondered if you could sort of talk about how you balance those thoughts post-Archegos for prime brokerage. The second question was to just ask for a bit more detail on your plans for the corporate center, which sounds very promising.
What is allowing you to reduce the drag to CHF 150 million a quarter this year? Where do you see that drag next year, and will you allocate all of it to the division so that in future you'll be a sort of zero corporate center?
Okay. I'll take the first question and Kirt for the second one. Jeremy, thanks. As such, you know, we're disappointed by what happened. We are seriously reviewing the relationships, both on the prime broker side as well as on the GFO side and the way we go about this business. Having said that, we do see and do think that this was an unusual case, pretty idiosyncratic in its, and you know, and one that provided for a high risk given concentrated positions that the market was not fully aware of. To come from this one and then kind of come to a general conclusion around this business, I don't think is wise for two reasons.
First, the prime brokerage business is strategic to us. It has been. It has been a good business to us. It's important for our franchise, and the prime brokerage capabilities are also crucial to build the relationships with some of the family offices. Again, you know, you'll have to look at it client relationship by client relationship, situation by situation, transaction by transaction, and that's the way we'll go about it. Kirt?
Yes. Thank you, Ralph. Jeremy, just to address group functions in terms of where we are. I guided that I expect us to be below CHF 150 million and then continue to see that come down over the next couple of years and clearly have lined aside to get that nicely below CHF 100 million in a couple of years, and then we'll see where we go beyond that. What is allowing us to actually achieve that reduction? Firstly, NCL is shrinking and it's coming down considerably. Secondly, if you look within the service side, we've largely built out most of our reg entities from a regulatory perspective. We were holding those costs. Thirdly, our DTA asset and its funding cost is lower than it was.
Finally, we are finding ways just to improve our treasury efficiency, and those will all be the drivers going forward to continue to bring that down.
Do you plan to fully allocate it to the divisions? So like some of the U.S. banks, you'll have a 0, corporate center?
Yeah, I think our intent is over time to get that as close to zero as possible when we fully sunset NCL. I think there'll always be some pluses and minuses. Just as a reminder, there is some accounting noise and asymmetry that is always gonna be absorbed that we wanna keep away from the business divisions.
Okay. Thank you very much.
The next question is from Alastair Ryan from Bank of America. Please go ahead.
Thank you. Good morning. A little bit on Archegos, please. You say it's idiosyncratic, but, you know, UBS has been here before. IB revenue's down 12, costs up 7. Zurich writes the check when New York blows up. You know, it's not clear from any of the risk disclosures that I've had, 50 pages in the annual report, where I could have found this risk. UBS talks a lot about being low risk. It hopes to get a multiple for being a low risk institution. $900 million is an extraordinary figure. I mean, it's higher than your credit losses for the whole of a very severe year. If you take page 98 of the annual report, the risk management control principles, five principles, protection of financial strength, fine.
Looks like this is on the wrong side of four of the others, all four of the others. Protection of reputation, business management accountability, no mention of that. Independent controls, no evidence and risk disclosure, clearly not there. Can you give us a sense of how serious this is, what the consequences have been, why the market should look through CHF 900 million from a single name? It's only idiosyncratic because he's the only one that blew up in the quarter. I mean, it's intrinsic to the business, and the risk management has been found wanting relative to some peers, although clearly not as bad as Credit Suisse. Thank you.
Well, thank you, Alastair. As I said, you know, I can hear the disappointment in your, in your speech, before the question was asked. I, you know, I understand your disappointment. We are disappointed as well. That's why we are doing a detailed review of the relationships, of the individual relationships, specifically on both sides, prime brokers, or GFO relationships, as well as the processes, the risk management processes surrounding all of this. You know, that's, you know, that's what we're currently doing. We are taking it seriously, you can expect it from us.
Having said that, if you look at the situation and look at the buildup of a highly concentrated position across many different players, it was idiosyncratic from the perspective that this was not a market event. It was an event to a specific case with highly concentrated positions. Now, again, you know, it should have been detected. I understand that. It's not the point that I'm trying to make. But that's also why we're just as disappointed as you sound as well. Thank you.
The next question is from Magdalena Stoklosa from Morgan Stanley. Please go ahead.
Thank you very much. Good morning. I've got two questions. One, still about Archegos but from slightly different perspective and another one on costs. First, as the, you know, as the reviews start, you know, and the kind of industry looks back at what went wrong, on the regulatory side, particularly in the U.S. when you're having this conversation, what comes up from the perspective of the potential changes to the regulations, to the disclosures that may, you know, that may come through post this post this event? Also, you know, how has your conversation with a kind of Swiss regulators about it kind of gone? That's my first question. My second question is really about the costs.
You know, of course, costs also within the kind of strategic was, kind of, update, well, update, strategic kind of, framework that you have just communicated. I'm gonna kind of use slide eight as a, you know, as a, as a little bit of a framework. You know what? It kind of explains to us what happened in 1 Q, and that's fine. You know, I never have an issue with the kind of variable costs when they come with revenues. Ralph, when you look at the fixed cost base, so your cost base excluding the variable side, and when you think about, kind of potential changes, particularly from a perspective of technology, from the perspective of automation, simplification, do you think that medium term, that cost base can actually be attacked in absolute terms?
I.e., you know, is there an argument to be made that that cost base could actually go down, but also within the context, of course, of your revenue ambitions? Thanks very much.
Hey, Magdalena. Thanks a lot for these questions. The first one, you know, you know that we don't comment on our interactions with regulators. Clearly, you know, we are in daily contact with our regulators across the globe on these matters, big or small. Also on this one, I think if I may summarize it in one word, it is the call for transparency. On this one, that is the big learning and that we are basically looking at to either increase with our clients in a bilateral way, or where, you know, regulatory requirements could or should come in.
On your second point, I actually do think that if you would keep all things equal, there would be scope to reduce your cost. If you keep all things equal. Having said that, as you know, we have a brand out there that can grow to an exclusive brand for wealth and asset management that is already known for it, specifically in the markets that I mentioned. These markets provide for growth opportunities. If we were not to go after growth and we would only look at cost, then the programs that we have started to get to that CHF 1 billion on an annual basis, would actually be programs to that would decrease that cost base. Again, if we wouldn't go after the opportunities that we see in the areas where we see the growth the fastest.
Again, you know, this is not about, okay, we have the CHF 1 billion, if we can generate it as a savings and let's spend it. It is not about that. Where we wanna spend it and where we wanna support the business, we will be really focused. That's why they come together in this presentation. It is about we do see the opportunity to save cost, and we do see the opportunity in a very focused way to grow. Again, if we feel that that growth does not make the returns that we demand, we will not spend it and we will not support that business. That is what you can rely on.
Thanks very much.
The next question is from Kian Abouhossein from JP Morgan. Please go ahead.
Yes. First of all, thanks for taking my questions. Two questions. The first one, coming back to strategy, it sounds like, Ralph, you're quite happy with the businesses and geographies that you operate in. Can you talk a little bit, first of all, is there anything that you're unhappy with in terms of business geographies, mix? In that context, any areas that you feel are subscale, either on geography or on business that you need to review in the future more strategically. The second question is related to Archegos again. I cannot understand fully that you're losing roughly the same amount as Morgan Stanley, which is claiming to be one of the top prime broker. Actually, I think they said they believe they were the number one player.
You must be relatively small in terms of underlying exposure, and it takes you into the second quarter to take all the hits, and you have the same amount of losses against a smaller underlying exposure. Can you explain that to me? Because you're probably making the analysis against your peers. Secondly, can you explain to me how much of PB business you have overall in terms of exposure? How much of that is family office? Lastly, why there was not the decision to unwind the positions by Friday? I, for example, one of the peers as Goldman and Morgan Stanley more or less were done on Friday or Sunday.
Thanks again. We're not disclosing the specific exposures on, on these subsegments. I can't go into the event itself. I can, though, tell you that we are a top 5 player in the prime broker business. It is not like we have come from a different position than some of our peers. That is, that is, that is not the kind of the comparison you can make. Now, back to your first question. I think there is always places where you are not sufficiently happy, regardless, by the way, of the geography or the business line or the capability that we are managing.
For starters, you know, it may be very clear that for also from this presentation, that the wealth and Asset Management business are really important businesses to us. Having said that, there are certainly areas where we feel that we can't generate the scale, and that will lead to decisions like we took on Austria. Some of the businesses that need more local scale, we will find difficult to really scale up and improve in profitability, certainly if they are in geographies where the growth is also not coming through. That should give you a hint.
The other one is around, for example, the Investment Bank, where we actually think that in terms of the capabilities that we need for that in order to build our wealth business, we're kind of right sized. Clearly, you know, we can always improve, but it is certainly a business that we wanna manage in a very capital efficient manner, as you know, and needs improvement all the time, needs alignment all the time. That goes for all businesses as well. Again, you know, there will always be areas where we're not happy and where we need to improve. We see scope for improvement across.
Scale will be a factor in all of our businesses, whether it is wealth, in which we are the globally the number one, and we still have scale challenges in some of the areas that we feel we can improve on. If not, then the asset is not strategic. It's all over the place. I really think you should never rest on your laurels, even if the business is strategic.
May I just ask on regulatory impact on Archegos? Should we think, as some of your peers have done, that there could be counterparty and upwards graded, risk graded asset add-ons or capital add-ons in any form in relation to Archegos? Just coming back, one more question on Archegos. Why would you lose the same amount of money as the player that claims to be number one to Archegos in terms of underlying exposure?
I can't comment and won't comment. You have exposure, and you have collateral, and you have positions that may be different. You may have margins that may have been different going into the situation. I can't really draw a comparison there. On your first one, regarding capital, clearly, you know, we are discussing with regulators, as I said. You know, I can't give you anything more. I can just tell you that even in this quarter, we have further improved our capital situation to a CET1 of 14%, and that shows the strength, and with that, also kind of the confidence that we have in being able to build and also to weather some of the challenges if they may come along.
I would just add that there's been no such add-on at present, but, as Ralph said, we don't know what's to come, and I would reemphasize that our current, capital requirement is 9.66%.
Thank you very much.
The next question is from Nicolas Payen from Kepler Cheuvreux. Please go ahead.
Yes, good morning. Thanks for taking my question. I have three. The first one, a quick follow-up on capital requirements. Beyond Archegos, can you update us perhaps on the risk-weighted assets regulatory inflation that you expect for the next couple of years? The second one is really on your IT budget. With insights of the COVID-19 crisis and in light of your new strategic framework, do you expect your IT budget to be revisited upwards most probably? The last question is on sustainability, which seems to be a big focus now. In your discussion with clients, are they willing and ready to accept a lower profitability for better sustainability in their mandates? Thank you very much.
Could you repeat the last question, please?
Yeah. On sustainability, when you discuss with clients about sustainable mandates, are they ready to accept a lower return on their investments for better fitted sustainable mandate, for instance?
Okay. Very quickly on the last one. To the extent it really depends what they're looking for. Some really go for impact in specific areas, and then they may actually accept a lower return. Others want to have a real good combination. We see that sustainable investing does not necessarily mean lower returns. From that perspective, it really depends on the client and the client wishes and the impact he or she wants to have through the investment portfolio. On your second question on IT, Nicolas, honestly, there may be a bit of uptick. Generally, you know, we'll go with, you know, the 10%-ish rule of revenue that we look for on the IT side.
I think that with that budget in dollars, there's a lot we can do. You should realize that we're going to manage our IT investments much more strict at the top level on a quarterly basis. What we're going to put in place here is that each and every project that needs a change budget, whether it is IT change or business change, as we call it, that we review that at the top level, that we crowd the ones out that don't make the right returns, not in comparison or in competition with somebody else or with some of the other ones. Clearly, the compliance and regulatory ones always go first. You know, they Often you can't really look at a return there.
Beyond that, everything that has to do with the business will have to meet return hurdles. With that, we will crowd out some of the projects that would otherwise receive purchase because we take it, we manage this beyond the business divisions. That's also why Mike Dargan joins the GEB. Thirdly, on that one, we actually think that we can further improve in the productivity of our technology professionals and really leveling them up as we said, and use that and bank the improvement of that productivity in order to do more. We're not planning a big budget increase in order to support some of this.
It is really about being very strict as to how you manage it, being managing it across the business divisions rather than within the business divisions in terms of the allocation, doing it on a quarterly basis and leveling up the technology from a professional perspective so that we can improve the productivity.
Maybe, Nicolas, in terms of your first question, we have around a residual CHF 6 billion-CHF 7 billion of increases due to reg model updates that we're making through the rest of this year before we absorb the full impact of Basel III finalization. You know, we've guided before that estimated impact is somewhere between CHF 20 billion-CHF 30 billion. We continue to refine that. That is, of course, given there's still some uncertainty around FRTB rules. In addition to a couple of areas where FINMA has discretion, we expect that discretion to be clarified as we go through the rest of this year. Finally, we still believe we have an opportunity to look to optimize so that we bring that impact down, and we'll update you as we have clarification on all of those points.
Thank you very much.
The next question is from Tom Hallett from KBW. Please go ahead.
Hi. Morning, guys. Just a couple from me, really. Could you just elaborate on the restructuring expenses to be taken in the second quarter and what that specifically relates to? 'Cause it sounds like you're reinvesting all those growth benefits there, so there's no obvious benefit from the outlay on investing in the restructuring plan. Secondly, on strategy, I'm just curious as to why there was no financial targets disclosed or there won't be until the end of the year. Thank you.
Well, I will answer the first one. Clearly, you know, if we're doing well, we have financial targets out there. We are reviewing some of the activities still, for which we need to update you, and therefore we have not concluded on everything, and therefore, I don't think this is the moment to come out with new financial targets. We are working to comply and address and fulfill the targets as we have given. We do expect to perform this year towards the more positive ends of these ranges that we have given.
That's what I can say.
Tom, just on your first one, the restructuring of around CHF 300 million, it's broad-based across the group and across geographies. Also just to clarify, and you heard this from Ralph, very importantly, the CHF 1 billion we indicated, we will only reinvest that if we actually see growth opportunities at more than hurdle. Otherwise, that would be an opportunity to reduce our costs. Just to be very clear about that. As we've guided before, the real intent is to maintain our costs around flattish, grow the top line and deliver positive operating leverage.
Okay. Yep. Thanks, guys.
The next question is from Jon Peace from Credit Suisse. Please go ahead.
Thank you. Just to follow on firstly on the comment on financial targets, I mean, should we expect a reform of some of the big group targets like return on CET1, which maybe are not looking ambitious enough at the moment? Or, will it be a roll forward of some of the more divisional targets for pre-tax profit growth and buybacks, et cetera, or a combination? My second question, please, is on the new measure of net new fee-earning assets. How would that compare to net new assets over the last year or two? When prospectively, would you expect it to be slightly higher because you're now including some of the dividend flows? Thanks.
Yes. Just in terms of the financial targets overall, it would be inappropriate for us to comment what they might be because we still have to go through the work. Meanwhile, as we've said, we keep our current targets intact for this year, and we tend to operate at the positive end of those targets. In terms of fee-generating assets overall, just mathematically what is excluded there are deposit flows, and also other client inflows that really don't have an impact on our recurring revenue. Principally, that includes large stock inflows. In general, on most quarters, you'd actually see a higher net new money number than you would fee-generating asset number. But having said that, the composition is different.
I'll, yeah, I'll just point out a fact. For example, on a fee-generating asset basis, net new fee-generating assets, the Americas would have been positive over the last five quarters, but that would not have been the case on a net new money basis. You do see that there are some differences overall in terms of regional patterns and also the composition overall.
Great. Thank you.
The next question is from Andrew Coombs, from Citi. Please go ahead.
Hi, good morning. A couple of follow-ups on Archegos from the Investment Bank. Firstly, I haven't seen anything, but perhaps you can confirm whether FINMA has opened enforcement proceedings. Obviously, it had for Credit Suisse. I haven't seen anything against yourselves, but perhaps you could confirm that. Secondly, when you talk about risk management, on the prime brokerage business in future, could you elaborate a bit more there about the steps you are taking? Is that focused on the initial and variation margin? Is it on the leverage amount on equity swaps? Perhaps you could clarify a bit more there. Finally, you've retained your guidance of RWAs and leverage exposure within the Investment Bank, being around 33% of the group.
Obviously, Credit Suisse has gone from an absolute target to a proportion of group target and now back to an absolute cap target. What are your expectations there? Do you expect to maintain that 33% figure? If so, given that you are expecting the broader group to grow, where do you see the asset growth coming from in investment banking? Thank you.
In terms of your first question, there is no current enforcement proceedings from FINMA. As we've already said, though, we can't judge what they might likely do in the future. In terms of your second questions overall, clearly the key lessons learned from this particular event is all around concentration. Concentration in specific overall exposure, synthetic concentration, combined with the lack of transparency. The changes overall and the learnings and what we will incorporate into and already are incorporating into some changes overall in our risk processes is specifically to address those topics. In terms of our RWA and LRD guidance, the one-third of group doesn't change.
Purposely, I won't indicate exactly where I would expect the Investment Bank to deploy that because they are very dynamic. They will continue to deploy that in terms of where they see the opportunities in the market and where they can generate the best returns overall. Importantly, where they can best support our wealth management business.
The next question is from Jernej Omahen from Goldman Sachs. Please go ahead.
Yeah. Good morning from my side as well. Thank you for this comprehensive call. I guess that what gets lost on calls like this is the bottom line result. I just wanna say well done on a 14%.
Stated return on tangible equity after all the various hits from your businesses. This said, even I can't deviate from what seems to be the theme of this call. Can I just ask one last question on the FINMA response. You have confirmed that FINMA hasn't ordered any enforcement action so far. Can I just ask, has FINMA requested any risk-reducing measures at this point? It's a simple yes or no. The second question I have, when it comes to this Archegos, was it carried within UBS as an institutional client in your equities operation, or was it carried as part of your PWM operation, i.e., as a family office?
The last question I have is on U.S. rates, which I suspect would have featured more prominently in normal times. You've commented that the effect of lower U.S. rates has been absorbed. Can you just confirm what you think the sensitivity to higher U.S. dollar bond yields is, and what is the time lag between bond yields moving higher and a higher reported revenue number? Thank you very much.
First of all, thank you for the first comment. I agree that often you lose context here. The fact is we did deliver a very strong quarter after absorbing the event that we're talking about. Just in terms of FINMA's overall response, there's been nothing that they've added on at all, nor any requests as of yet in terms of reducing our exposure or our positions across the group. In terms of the client itself, importantly, it was a prime brokerage client. It was, and I think you are aware, it was classified as a GFO, which also leads to some of the disclosure issue that all of us are struggling with.
Finally, in terms of your U.S. rates, question, what we mentioned is we fully absorb the impact, quarter-on-quarter, so there's no residual overall drag due to deposit margins related to U.S. rates from the first into the second quarter. I didn't quite get the final part of the question, the fact that we've seen the longer end, we've seen the 10-year rise a little bit.
If the curve shifts higher, what do you think the what do you think is the revenue sensitivity broadly? And then what's the time lag when you expect to see the impact in your numbers?
Yeah, you know, naturally we see immediate effect in the lower end of the curve. Anything that's 10-year, it takes longer for us to kind of work that through our overall replication portfolio, both the synthetic as well as the cash replication. We certainly wouldn't see it. Of course, I think while the long end has actually spiked up a bit, there's still a lot of uncertainty around inflation expectations and how rates will behave going forward. If we were to see an improvement and an increase in the shorter end, that would immediately flow through. You've seen our guidance overall, 100 basis points parallel shift across the businesses would contribute CHF 1.6 billion overall of net interest income.
Perfect. Thank you very much, and well done again on the 14% ROE.
The next question is from Adam Terelak from Mediobanca. Please go ahead.
Morning. Thank you for the questions. I wanted to follow up on capital return and the buyback. Last quarter, you set a target or an indicative target for how much you wanted to buy back during the quarter, but we've got no such repeat today. I noticed in your AGM documents that the CHF 2 billion accrual actually relates to the 2020 distribution. I was wondering whether you have to run through that full CHF 2 billion before you're really thinking about it being a 2021 distribution on the buyback, and if so, why we're not discussing an extension of that CHF 1 billion a quarter run rate. Second, I wanted to go further into NII. You've mentioned that the loan spreads were good again in the quarter.
I just want to understand how much lending revenues are you adding Q o Q, and how far could we extrapolate that through the rest of the year? You said NII clearly up into 2Q, but would you expect that again, 3Q, 4Q and beyond? As such, is this now a time to think about NII growth from this CHF 1 billion a quarter run rate? Thank you.
The next question is from Andrew Lim from Societe Generale. Please go ahead.
Hi, good morning. Can you hear me? Hello?
Mr. Lim, we can hear you.
All right. Okay. I'll proceed with my questions. I actually wanted to talk about the French tax evasion case. That hasn't yet concluded, in the sense that we haven't had a fine, if any, determined. We have to wait till September. It seems like, we have to wait for the courts to decide on the application of law. I guess that encompasses how we view any fine, in relation to whether it's dependent on the tax assets shielded or the tax revenue is not paid. Just wondering on whether you could give your view on how the courts are viewing this.
That, if there's any more specific timing in advance of September when we might get more information on their decision here. That's the first question. Then the second question is relating to your strategy. I realize you know, you spent a lot of time trying to outline your thinking here. You know, we should spend some time thinking about your views on this matter. You've talked about being more agile and spending more time on risk management. In some sense, that we can analyze here numerically. It seems important in terms of, like, the potential cultural shift for the bank.
I'm just wondering, Ralph, from your point of view, how big a cultural shift that entails for UBS in terms of like different businesses, the number of people involved, and how they think about how they interact with clients.
You first with the answer.
Adam.
Of Adam, yeah, the questions of Adam, and then I will take Andrew's questions that he just raised. You, Kirt, you finish.
Yeah. Adam.
Adam's questions, and I will take Andrew's.
Adam, are you? Yeah. Yes.
Yeah? Okay.
Adam, are you back?
He's in listening mode.
We didn't cut you off because we didn't like your questions. In terms of capital returns, as we highlighted, we actually expect to be back repurchasing shares tomorrow. You can track us weekly. We will modulate the volumes just based on what we see in the market as we progress. I would just note, if you look at our 14% current CET1 ratio, that would imply about a CHF 3 billion buffer above the around 13% that we guide. Plus there is a residual CHF 900 million still in the reserve that we built up last year.
In terms of your question on NII, yeah, indeed, specifically what you've been seeing is our lending NII growth has been helping to offset the overall headwinds from U.S. dollar rates specifically. I'll just mention year-on-year, if you look at the increase in lending-related NII from a combination of volumes as well as margin, we saw $108 million in the quarter year-on-year increase. The quarter-on-quarter impact was $21 million. How that progresses going forward, of course, will continue to depend on the overall net new lending volume, but certainly the around $11 billion that of net new loans in the first quarter will help us in the second quarter.
Okay. Hey, to Andrew's questions, the first one on the French case. Andrew, yeah, the way we read this, also in terms of the evidence that was provided, we have not seen any kind of argument there to change the provisioning and the level of which you know it is, and we don't expect any further information before the court actually comes out with their decision. That's one. On the second one, on the cultural one and how to support Agile. I think that, you know, people sometimes think that Agile is some kind of a way to work in some kind of an anarchy or create a bit of chaos. Agile is quite the opposite.
Agile is a very disciplined way of working in which you keep things very clear, very disciplined, with a multidisciplinary team that works on two weeks sprints, small teams, two weeks sprints, and every two weeks you come to the decision as to whether progress has been made, progress has not been made, whether you want to continue, whether you don't want to continue. It is a very strict way of management. Within those, within a framework like that, there's a lot of empowerment to those teams as to doing the continuous improvement. Now, as with, you know, with the experience I've had before and the experience that we have here as well, you know, Agile can work everywhere, also here. You have to introduce it over time.
We have been working Agile here in some areas, already. With a lot of success, we have been working Agile in what we call hybrid pods in the Investment Bank, and they're doing a really good job in developing new business opportunities, in disrupting some of the activities, but also in the continuous improvement of some of our electronic platforms and UBS Neo. There is quite some experience with this, but very specifically and more so within the Investment Bank than anywhere else.
What we're doing is we're drawing on that experience and rolling it out, and first piloting it in new areas, two or three areas, specifically now in the Swiss business, and some more areas, one in the finance function, and we have one in the risk function as well. We'll draw on those experiences to see how we can further develop what we call then the UBS way of working, before we introduce it to all and everyone. We'll take it step by step.
That's great. Thanks a lot.
The next question is from Anke Reingen from RBC. Please go ahead.
Yeah, thank you very much for my question. It's just two follow-up questions. The first is on costs. Thank you very much for your guidance on the longer-term cost control. Just for 2021, did I understand you correctly, you're expecting an underlying increase?
Pre-available compensation and so on by 1%. I just wonder what would be driving this. Secondly, on your slides on strategy, I understand that's premature, given you're giving us the update with 21. I just wanted to confirm when you talk about committed to delivering higher returns, do you refer to industry standards or higher than you currently deliver, which, I mean, would be surprising or higher than the target? Thank you very much.
I guess in terms of your question on costs, you did indeed hear us correctly. We do expect around a 1% full year-over-year increase, excluding variable comp, one-time items and also foreign currency translation effects. The reason for that versus the flattish that you've seen from us over the last couple of years is that we did come into the year with slightly higher run rate costs overall because we have now postponed any layoffs for several quarters just in response and also just to ensure that we were considerate of the pandemic.
On the strategy side, in terms of our overall return targets, I think what we're referring to is we do expect to deliver consistently high and sustainable returns. That's really our area of focus above our overall cost of capital, clearly. Right now, that's captured within our 12%-15% overall return on CET1 range, and we said we intend to operate at the upper end of that. Then we'll have any further update on targets as we highlighted as we go through the rest of our build-out of our overall strategy plans.
Okay, thank you.
The next question is from Stefan Stalmann from Autonomous Research. Please go ahead.
Good morning, gentlemen. Thanks for taking my questions. I wanted to quickly follow up on Archegos with two aspects, please. You have a CHF 774 million pre-tax loss or revenue loss, sorry, and you have a CHF 434 million net loss. Is it fair to assume that you have actually made a around CHF 200 million variable compensation reduction in regards to Archegos, to bridge this distance between the revenue hit and the net loss? Also regarding Archegos, do you look at this more as a market risk event or a credit risk or counterparty credit risk failure, or is it more of an operational issue in your point of view? Also wanted to quickly follow up on the restructuring expenses, to come in the second quarter.
Do I understand this correctly, that this is essentially a legacy item related to measures that you wanted to take already for a couple of quarters? Or has it anything to do with the CHF 1 billion gross savings that you're targeting for 2023? If not, is there a restructuring or cost to achieve budget for these CHF 1 billion additional cost savings, please? Thank you.
Yeah. In terms of Archegos, you are correct. That's accounted for overall as a trading loss. Well, actually your first question first. If you look at the CHF 774 versus the CHF 434, we're gonna ask you to do a little bit of work and you can reach your own conclusions.
You know our tax rate, so.
There is a tax rate there as well, of course. It just in terms of overall, it is accounted for as a trading loss. We do view this as a market risk event, not an operating risk event and not a credit risk event overall. In terms of your restructuring question, you can look at the CHF 300 million as an initial start on the overall CHF 1 billion. There's a little bit of legacy there that we've incorporated into that, but it's really been packaged, and it also reflects some of the work that we've already done to make it advance towards the CHF 1 billion. Naturally, the full CHF 1 billion will have a cost to achieve.
As we progress through the delivery of the CHF 1 billion, we'll give you transparency on what those costs are.
Okay. Thank you very much.
The next question is from Amit Goel from Barclays. Please go ahead.
Hi. Thank you. Yes, I've got a couple of follow-ups. One was just a clarification. In terms of the alignment of corporate center costs to the business divisions, just on some of that, is that going to be a kind of a change in how you present the results with the reallocation? Is this something that will be done kind of internally, but from an external reporting basis, there wouldn't be a change? Secondly, just on the broader strategy. I guess as I understand it, you know, the commentary that the business is doing well, the IB is the right size. Clearly there's some time until the full year 2021 results.
I just wanted to try and understand the other areas that you're focused on, and how significant is the review that you're undertaking. Just to get a sense of, you know, how much change or how, you know, how much action we could anticipate at that point beyond some updated targets. Thank you.
I'll start with the second question. The areas that we that clearly everything we review, and you should expect us to continuously review areas. You know, we have indicated first that we see growth opportunities in the U.S. and in China and Asia. Plans for those are also under review and under discussion. It's about a further alignment of other activities in order to support the wealth business. Also if it comes to what is it that do we exactly do across the firm, also in investment banking as to how can we further align some of these activities in order to support our way forward. That's that's where you can also kind of expect us to review.
Clearly also here in Switzerland, we know that the performance, commercial performance is good, but the financial performance continues to be under pressure because of the negative rate environment. We will have to invest on one side into in digital and digital services. The other side, it will have to reduce our cost also further. Those are a couple of areas. I mean, there will be more, but, I mean, we're literally. You should expect from us to review each and every area continuously anyway, even if it is top strategic, it has to make the returns, it has to make the scale, it has to make a difference.
As I said, you know, the second strategic imperative is a very important one, which is that we should focus on where we have, as what I call, sustainable share, which basically means is the market attractive? Is the market large enough? Can we differentiate ourselves in that market to make a difference in the market? That's what we apply to every market and every capability.
Yes, Simon, in terms of your first question, you will see no difference in the presentation and from our disclosures. I mean, right now we're only disclosing 1 operating expense line. Of course, those costs were already fully allocated to the business divisions.
Okay, got it. Just to be clear then on that point, the CHF 150 million per quarter, it wouldn't be a case that in the future or that number going down to CHF 100 million, that CHF 100 million would then be reported within the divisions, that would still be reported as a corporate center item?
Yeah, that's correct. In terms of the group functions, overall retained costs, there is no operations cost per se that sits in that, below negative CHF 150 million. The operations costs related to all the business division activities are already fully allocated to the business divisions and are not retained.
Okay. There wouldn't be any changes, for example, within internal rewards, metrics, et cetera, to employee staff, et cetera, for, you know, to reflect any change in alignment of corporate center costs?
Well, the shift is already.
Right.
The 7,000 or so operational headcount, they were aligned with the business divisions, but now they will report directly into the business. Therefore, as Ralph outlined, it just gives the businesses a much better ability to look at the integrated overall solutions and capabilities they provide to their clients and to continue to optimize those. That's really what's behind the intent.
Okay, got it. It's more a revenue opportunity as opposed to a further cost-saving opportunity.
Well, I would say both a revenue and as well as a front to back efficiency opportunity. We think that they're both opportunities.
Both.
Okay.
It's really both, Amit.
Okay, thank you.
The next question is from Patrick Lee, from Santander. Please go ahead.
Hi, good morning. Thanks for taking my questions. I have one clarification, one on the prime brokerage, sorry, and one on the new KPI disclosure in wealth management. Firstly, related to the prime brokerage losses, I wonder if you can help me with the understanding on this. Because if I, let's say, take the $774 million losses disclosed, is there some sort of a notional exposure to put that loss in perspective? You know, for example, to get a sense of loss as a percentage of exposure, or is that not the right way to look at it? Also, how do we think about the risk reward of this product? Because like, hypothetically, if there wasn't a market dislocation, what would have been the fee generated from this product or trade?
I guess I'm just trying to get a sense of the nature of the product that seemed to have not very big upside in the good days, certainly a very substantial loss on the downside. Secondly, relating to Wealth Management. Thanks for the extra disclosure on invested assets. Interesting to see how it splits, you know, between fee-generating versus others. Is there some sort of interactions between the solution, direct investment, and then the fee-generating assets? You know, could the non-fee-generating be seen as a parking space for clients before you upsell other fee-generating products, effectively converting it from no fee to fee-generating sometime in the future? Should we think of the direct investment by nature, a very different type of business?
Is there any geographical bias, you know, I think you alluded to it earlier, whether the U.S., for example, is the vast majority of this, non-fee generating portion? Thanks.
Yes, Patrick, in terms of your first question, the CHF 774 million, as we mentioned, was overall an operating loss. It includes two components. One, it's just the overall net residual position from the defaulted client, and then it's the overall loss related to the de-risking process. In terms of your comment on KPI, you're exactly right. If you look at the current overall client positions that we have in solutions and direct investments, that includes, for example, large overall single stock positions from wealthy entrepreneurs that would initially be booked as within the solutions and direct investments. Subsequently, we might provide some leverage to that client, some advice they might diversify and invest.
Part of those investments might include investments into mandates or alternatives, which would then sit in fee-generating assets. This is really critical. It's not to at all diminish the value of solutions and direct investments. They, on their own, generate attractive transaction revenue. They also result, and they provide opportunity for us to provide the full benefit of our solutions to our clients. You do see quite a bit of interplay between solutions and direct investments in fee-generating assets.
If I go back to the prime brokerage bit, I guess From the outside, you're just saying that we can't really get a notional amount or just the size the risk is impossible for us to ascertain from the outside then.
That's correct. Let me also just comment on one of the points that you mentioned. This has been a highly attractive business for us. We have not seen a loss in this business since before the crisis, as we highlighted. It is a very good returning business. It's also one that's extremely strategic to serving our institutions as well as our global finance GFO clients. It is part of our franchise. It's also a valuable part of our franchise. It has been, and it will be going forward.
Thank you.
The next question is from Piers Brown from HSBC. Please go ahead.
Yeah. Good morning, gents. Most of my questions have been answered actually, but maybe just a couple of small clarifications. On the expense guide for this year, I think you said that 1% was pre- any potential investment spend for the strategy refresh. I wonder if you could just quantify what sort of margin above the 1% we should be thinking about for investment this year. Secondly, on Sorry, just going back to Archegos. You said you're reviewing relationships in prime broking, but it sounds like the overall strategy there, you're sort of happy with. Are there any relationships outside of prime broking, outside of the Investment Bank, which might be impacted by this review? I'm thinking particularly family offices within the wealth business.
You obviously have very strong loan growth in wealth. Is there anything in terms of risk review which might be impacted by what's happened in prime this quarter? Thanks.
Piers. On the second one, I can be very clear. Yes, we are also reviewing the global family offices that we have exposure to, just to be sure and that, you know, the lessons learned that we have from this one, that we also apply those and that we, on a relationship-by-relationship basis, we get a better sense for where we are. On the first one, I'll give that to Kirt.
Yeah. In terms of what I highlighted just regarding the possible investments and the execution of our strategy overall, the reason why I call that out is our intention, as Ralph said, is actually the saves we generate from the CHF 1 billion will certainly cover and offset the investments we intend to make. There could be some timing differences. We might see a very attractive opportunity as we finalize all the diligence that we're currently doing in the different areas highlighted by Ralph. We might decide that we actually think there's an investment that's really attractive that we wanna make now. The saves that we generate from the billion to cover that may not materialize for a couple of quarters. It's really just to highlight those timing differences.
Again, we'll provide that transparency as we disclose that going forward.
That's very clear. Thanks very much.
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