Earnings Call: Q3 2019

Oct 22, 2019

Ladies and gentlemen, good morning. Welcome to the UBS Third Quarter 2019 Presentation. After the presentation, there will be 2 separate Q and A sessions. Questions from analysts and investors will be taken first, followed by questions from media. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Martin Ozinga, UBS Investor Relations. Please go ahead. Good morning, and welcome to our Q3 2019 results presentation. I would like to draw your attention to our slide regarding forward looking statements at the end of this presentation. It refers to cautionary statements, including in our discussion of risk factors in our latest annual report. Some of these factors may affect our future results and financial condition. Now over to Sergio. Thanks, Martin. Good morning, everyone, and thanks for joining. We had a solid Q3. Even with mix market conditions adding to the usual seasonality, we delivered over $1,000,000,000 in net profit. As the investment environment evolves, we continue to position ourselves for future growth and clients continue to turn to UBS. In Global Wealth Management, we had a good quarter. Our broad client relationships have driven net inflows of $16,000,000,000 and we now look after $2,500,000,000,000 of their assets. This scale allow us to invest, drive innovation and provide choice to even better meet their changing needs. In personal and corporate, strong net new business volumes growth this year is helping us mitigate interest rate headwinds. Asset Management had a 3rd consecutive quarter of year on year profit growth or 4 on an adjusted basis and saw strong net new money inflows this quarter. The Investment Bank faced market conditions that were not favorable to our geographic footprint, business mix and the strategic choices that we have made for the business as well as tough comparisons with very strong results a year ago and in the previous quarter. That said, we are not satisfied with the Investment Bank Financial performance this quarter. In response to trends and developments in the industry and reflecting on our recent performance, we are implementing a number of actions to evolve our business model. These actions will better position our IB to serve our clients, leverage investments we have made and capture important growth opportunities in the areas where we are strongest and returns are the most attractive. These changes will also support our efficiency drive and help fund critical investments in both technology and talent. Our goals remain unchanged. 1, to deliver best in class services to our institutional and corporate clients for their evolving needs and 2, to support our corporate and wealth management clients across other business divisions. Similar to prior quarters, business and market conditions were challenging with lingering questions over global GDP growth outlook and persisting geopolitical tensions. Despite U. S. Markets hitting all time highs in the summer, volatility volumes and fee pools remain muted. Many of these challenges were especially visible in our traditional areas of strength, Asia and Europe, affecting our overall relative performance in the institutional space. With low or negative rates looking increasingly permanent, we are taking actions to improve our profitability. We are optimizing our deposit base and, where appropriate, increasingly sharing the burden of negative rates with our clients. Investors' attitudes have not changed significantly. They are generally happy with their current asset allocations, remain evenly split on global economic outlook, and they are keeping high cash holdings. That said, investors continue to look for opportunities to invest, opening doors for us to win them over with high quality service, a wide range of investment products, ability to protect their wealth and meet their investment goals during these uncertain times. To achieve this, we will keep fostering collaboration across the bank. As the world's only truly global wealth manager, we are in a position of strength to meet clients' changing needs. They continue to demand greater value for money, a choice of public and private investments, and are looking for help in navigating the challenging markets. Our global family office is a very good example of how we meet these expectations by leveraging close collaboration between GWM and EIB. We are onboarding more clients under this model. In the Q3, our GFO clients were visibly more active in the markets than our older Ultra high network clients, especially in APAC. We also helped them to carry out several significant transactions that required GWM's relationships and the expertise to go end in end to succeed. We are also working on closer collaboration between the IB and GWM in our U. S. Middle market offering and fostering cooperation between the IB and P&C in the corporate space in Switzerland. We continue to deepen our partnership between GWM and asset management. In the U. S, we are announcing today that we will be bringing together our asset and portfolio management and execution resources. This will allow us to expand access to asset management solutions, drive net new money and mandate growth and will come at a reduced cost to our clients. An important part of our plan to grow efficiently is to increase our presence in attractive international markets through strategic partnerships. Last quarter, we announced a deal in Japan with Sumitrust, and as previously announced, we have signed a memorandum of understanding with Banco DO Brasil to create a leading investment bank in South America. We will give you an update on this latest by our 4th quarter results. We keep investing in technology, which in this day and age is both an enabler of growth and a facilitator of efficiency and effectiveness. You can see a few example on the slide, but let me point to UBS Advise Advantage, our digital advice platform for wealth management clients in the U. S, which allows us to serve affluent clients in the U. S. In a very effective way. It has been live for 1.5 years, and we are encouraged by clients' initial activity and the platform's growth momentum. Increased focus on sustainability principles when making investment decisions is one of the biggest and most important shifts in clients' needs. Our commitment to sustainable finance is aimed at delivering value to clients in an area they are becoming more and more passionate about. Clients have allocated over $4,000,000,000 to our sustainable oriented family of mandates within UBS Manage so far this year, making it the fastest selling mandate product with over $7,000,000,000 in assets. These mandates also outperformed year to date. For me, the fact that UBS was the industry leader of the Dow Jones Sustainability Index for the 5th year running is a great achievement. But our ambitions do not stop here. Our goal is to strengthen our leading position by expanding and delivering to clients a pipeline of innovative, commercially attractive solutions in coming years. Looking back at the 1st 9 months of the year, we had a good performance considering the environment we have been operating in. Our return on CET1 capital was 13.8%, and we decreased our costs by 3% while still investing for growth. Our balance sheet strength for all seasons supports our ability to invest, generate shareholder returns and also navigate whatever uncertainties the world will throw at us. We have accrued for a growing cash dividend and bought back $600,000,000 worth of shares. For the remainder of this year, we intend to continue to execute on our capital returns plans as previously communicated. Lastly, as we finalize our rolling 3 year plan, we will provide an update on our targets in January with our full year results. Our immediate focus is to execute on our strategy in the 4th quarter, leveraging our outstanding franchise to create value for clients and our shareholders. Now, I'll turn over the call to Kurt to discuss this quarter in greater details. Thank you. Thank you, Sergio. Good morning, everyone. As usual, my comments will compare year on year quarters and reference adjusted results in U. S. Dollars unless otherwise stated. We adjusted for foreign currency translation losses on sales of $46,000,000 and restructuring expenses of $69,000,000 Year to date, restructuring expenses were $139,000,000 and we still anticipate around $200,000,000 for legacy programs for the full year 2019. In addition, we expect the IB reorganization that Sergio just mentioned to lead to around $100,000,000 of restructuring expenses in the 4th quarter. Excluding litigation, we expect an uptick in adjusted costs of around $200,000,000 sequentially in the Q4, which is broadly in line with 2018, reflecting normal seasonality, including the UK bank levy, as well as buildup of regulatory related expenses. Excluding the bank levy, we expect the vast majority to be reflected in GWM. Moving to our businesses. Global Wealth Management delivered good results. PBT was down 2% or up 2%, excluding litigation. We saw healthy volumes across key growth levers, net new money, mandate sales and net new loans. For the quarter, operating income increased by 1% on higher transaction based income, offsetting lower recurring fees and net interest income. I'll cover revenues in more detail in a moment. Costs increased by 2%, driven by higher litigation expenses and strategic investments in the business, partly offset by our savings initiatives. As part of our cost management and in response to the environment this year, we have been very disciplined on the hiring front, resulting in a reduction in personnel expenses, excluding FA and variable compensation, while still funding strategic priorities. We're continuing to invest in strengthening our controls, including our AML programs in particular, which will persist into the 4th quarter. These costs were spread across all business divisions, but primarily GWM and the IB. Mandate penetration was stable at 34.4 percent with strong net sales offsetting the increase in total invested assets. On the lending side, we had $2,000,000,000 net new loans, but loan balances were unchanged due to the offsetting currency effects. Back to revenues. Recurring fees were up 2% sequentially and down 2% year on year. Year over year, fees were impacted by margin pressure from client preferences for mandates with lower fees, which we already noted last quarter, along with higher concentration in ultra high net worth. Recurring margins have been stable over the last three quarters and fees increased quarter on quarter due to strong mandate sales and record invested assets. Net interest income was down 3%, driven by lower revenues from both deposits and loans, partly offset by higher investment of equity income following our switch to U. S. Dollars. While net interest income was slightly up sequentially, persistent negative rates along with additional expected Fed rate moves posed net interest income headwinds. A 25 basis point cut by the Fed would reduce NII by around $60,000,000 a year, excluding any volume changes or pricing actions. Transaction based income increased by 14%, partly reflecting a weak 3Q 2018, but also supported by our focus on helping clients to manage their investments in this particularly complex and challenging environment. For example, our advisors and product teams have been working together to provide alternatives to traditional investments, allowing clients to diversify and enhance yield in a suitable way. Just to call out a couple of examples. We've attracted around $2,000,000,000 year to date into private real estate and we've had $500,000,000 of inflows in Q3 into our systematic allocation strategy, which tactically shifts between equities and bonds. Other income increased by $40,000,000 primarily due to the repositioning of the liquidity portfolio in the Americas and a gain on legacy securities positions. Moving to the regional view. In the Americas, income increased to a record $2,300,000,000 driven by higher transaction income. This, however, was more than offset by higher expenses, which increased largely due to litigation provisions and the investments in our controls I just mentioned. Excluding litigation, PBT is up 5% year on year, comparing favorably to our U. S. Competitors. Our advisors continue to be the most productive in our peer group, with invested assets and revenue per advisor increasing to another record level. Loans also rose to a record level. Net new money was flat as $3,000,000,000 inflows from ultrahighnetworthoffsetoutflows elsewhere. Outside the Americas, mandate penetration rose to record levels in each region and we had positive net new lending, although offset by currency effects. We had double digit increases in transaction based revenues year on year in each of the regions and decent performance versus the seasonally stronger second quarter. In the Q4, we're reducing the threshold for charging for euro deposits to $500,000 and introducing charging for Swiss franc balances above $2,000,000 But we are of course working with clients to provide alternatives. For example, by investing in mandates, offering deposits with other U. S. Group entities or moving to other products. In our Global Family office, we had strong year to date performance with revenues up 11%. In terms of net new money, we had $16,000,000,000 inflows globally, and it was positive or flat in all regions. Asia was a major contributor, helped by a large single inflow contributing to year to date annualized growth of 11% in the region. Year to date, net new money globally has been solid at a growth rate of just above 2% and particularly strong in global ultra with $32,000,000,000 of net inflows or an annualized growth rate of around 7%. Performance in P and C has been strong year to date with PBT up 3%. 3rd quarter PBT was down 10% to CHF 360,000,000, mainly driven by higher credit loss expenses and lower net interest income. The CLE this quarter was predominantly due to a provision on a single exposure. Year to date, credit losses have only been 3 basis points annualized on P&C's CHF 130,000,000,000 loan book. NII was down 2%, driven by a 4 basis point reduction in the net interest margin to 150 basis points, partly offset by higher loan balances. Recurring fees were stable, transaction revenues rose on increased credit card and foreign exchange transaction and reached a record level year to date. Business momentum remains very strong with 3.1 percent annualized net new business volume growth in Personal Banking for the quarter and a record 5.3% year to date. Costs were flat and the cost to income ratio was 59%. During the Q4, we expect to realign our client coverage between GWM and P&C. This will result in a one time shift in referral fee of around $70,000,000 paid by P&C to GWM. Asset Management had another good quarter. PBT was up 6% to $135,000,000 Operating income was up 2%, driven by a 3% increase in net management fees, reflecting higher average invested assets. Costs were broadly flat, driving 2% of operating leverage and improving the cost to income ratio to 71%. Invested assets were up 3% during the quarter to the highest dollar level for at least the last decade and a half, driven primarily by net inflows of $33,000,000,000 Year to date, net new money was broad based across asset classes and channels and has come in at higher margins in aggregate than our average book of business margins. During the quarter, UBS was ranked number 1 in Broadridge's inaugural ranking of 60 Global Asset Managers operating onshore in China, confirming UBS as a leading foreign fund manager in China. Our IB return on attributed equity was 6.6 percent as income decreased and costs rose from a lower base in the prior year quarter. Market conditions and broader macroeconomic trends did not favor our investment bank's business and geographic mix. Compared with our peers, we have heavier weighting in EMEA and APAC versus the U. S. Our capital light strategy also means we have a smaller footprint than some of our peers in rates, credit and DCM. After outperforming in the 2nd quarter, CCS revenues were down 19% year on year in Q3, with decreases across most products. Geographically, we underperformed in the Americas, where the fee pool was up slightly, while we outperformed EMEA in EMEA, where the fee pool declined. Our equities revenues were down 7%. Derivatives was the main driver, partly reflecting our strong performance in 3Q 2018, but also our weighting towards APAC and specifically in structured derivatives versus peers, where market conditions were tougher. Our cash business held up well with revenue broadly flat, and we believe we've gained market share in the U. S. And in APAC. FRC performed well, considering the low volatility in volumes in FX, where we delivered an increase on a strong 3Q 2018 performance, and eFX rose in the Bloomberg spot rankings during this year. Lower credit revenues more than offset broad based increases in our rates business. ID costs were up 6%, reflecting a net release of a litigation expense in 3Q 2018, as well as higher tech and regulatory related expenses, including the investments in controls I referenced earlier. To be clear, and as Sergio already satisfied with our year to date financial performance. The reorganization that he referenced will align our business to better serve our clients, and we expect to deliver around $90,000,000 of net cost savings. In the 3rd quarter, tangible equity rose by $3,000,000,000 while CET1 capital was relatively flat at $35,000,000,000 dollars The increase in tangible equity was primarily driven by the recognition of a $2,000,000,000 net surplus in our Swiss pension plan. The recognition had no impact on CET1 capital. Prior to this quarter and going back a few years, the surplus wasn't reflected in tangible equity due to an accounting requirement that effectively capped the recognition of the surplus. The large decreases in the discount rate we saw during the Q3 reduced the pension surplus, but also removed the effect of this cap, triggering the recognition of the $2,000,000,000 net surplus in our equity. As a consequence, the CET1 deduction items included in our tangible equity increased from 25% to 30%, compared with peers deducting only around 6% on average. Our deduction items notably include $6,500,000,000 DTAs, along with around $2,000,000,000 each in dividend accruals, compensation items and unrealized gains from cash flow hedges, as well as our pension surplus from this quarter. None of these components provide usable capital to our businesses, nor do they contribute to our regulatory capital requirements, which dictate our ability to return capital to shareholders. This all further reinforces why measuring our returns based on CET1 capital makes sense. We navigated a challenging quarter to deliver over $1,000,000,000 in net profits and 12.1% return on CET1 capital. We remain focused on executing our strategy, while optimizing costs and capital. With that, we'll take questions. We will now begin the Q and A session for analysts and investors. The first question comes from the line of Benjamin Goy, Deutsche Bank. Two questions, please. First, on your net interest income in GWM. It was better than guidance and looking at how rates moved, probably better than expected. So just wondering what helped you in Q3. And you gave the guidance for rate cuts. Should we expect any positive mitigation in Q4 as well after the September rate cut? And then secondly, on investment bank costs, so is it fair to assume the €90,000,000 you target on cost savings is mainly personal expenses and that the non personal expenses likely continue to go up due to investments? Thank you. Yes, Benjamin, thank you for your two questions. In terms of net interest income, if you look at the year on year, we saw 6 basis points overall erosion in our net interest margin and that's as a consequence, of course, of the lower interest rates, but as well as price competition that we're seeing in the market. Now we continue to see that price competition, particularly for loans in the U. S. And internationally. Nevertheless, you did see that our net interest income quarter on quarter was more stable. And really, there was a slight deterioration in product results, but our treasury related results held up a little bit better. You shouldn't read into that any indication of the future trend. As I highlighted in my comments, we still expect the persistent negative and low interest rates along with further expected reductions in the Fed will pose net interest income headwinds. And I highlighted that a 25 basis point move implies around $60,000,000 of full year reduction absent any changes to our balances or our pricing on a full year basis. In terms of the IV costs, you're correct, the $90,000,000 reduction really is 100% personnel costs. In fact, the gross reductions actually are greater than that. And we are planning to continue to invest in technology in our investment bank, particularly in our electronic platforms, just given how critical digital and electronic is in our Investment Bank's performance and in that industry going forward. In addition to that, I did highlight that there are some regulatory increased regulatory cost headwinds that we expect to see in that business in the 4th quarter. Okay. Thank you. Along, of course, with the typical U. K. Bank levy. Yes. Perfect. And then maybe small follow-up. So, given the investments, it is too early to see a leverage out of these investments, so to say, to reduce platform costs over time? Yes, I'm not sure your question around reducing platform costs. I mean, I think as we indicated, the realignment of the business is importantly to adjust our organization so we can better serve our clients. So there is certainly a revenue component of this. And we do believe it will allow us to better allocate both our capital as well as our cost resources into the market segments, the business, the product segments of where we can best perform. But then in addition to that, there's an efficiency element that we highlighted with the $90,000,000 net reductions. Okay, I understand. Thank you. Next question comes from the line of Stefan Stalmann, Autonomous Research. Please go ahead. Good morning, gentlemen. Thanks for taking my questions. I have 2, please. The first one regards the Investment Bank. We have had quite a bit of a spike in credit and counterparty risk weighted assets during the quarter about €6,000,000,000 Would you say that was a, let's say, seasonal spike that will drop back and normalize? Or is that a more permanent elevated level of activity and then capital consumption? And the second question is more, I guess, a strategic question regarding GWM. You have obviously made a high profile hire to co add the business, Mr. Khan. Could you talk a little bit about what objectives he is going to follow and what he is asked to do differently from what has been done before in GWM? That would be helpful. Thank you very much. Yes. Thank you for the two questions. In terms of the IB, first, just to clarify, quarter on quarter, RWA is up $3,000,000,000 and year on year up just $1,000,000,000 And year on year, that's despite the fact that we've actually absorbed a fair bit of regulatory related increases. Now you shouldn't read anything in terms of what we saw quarter on quarter. It's just normal business activity during the quarter. And also I would highlight that our LRD was actually flat quarter on quarter and $16,000,000,000 down year on year. So that's reflective of the fact that there was just less inventory at work just given the lower volumes and activity levels that we saw this quarter versus Q3 last year? Kurt, I was actually referring to the credit and counterparty risk component only, which was up 6,000,000,000 dollars Yes, that was just really reflective of during the quarter activity that we saw across our CCS franchise and it should be indicative of forward opportunities that we have for future deals in the pipeline. Okay, great. So Stefan, on your second question, well, first of all, is Iqbalah priorities are to help the execution of our current plans and set initiatives that we need to just execute. The second is that I asked him to basically look in the 1st 60 days to make his own assessment of our franchise and together with Tom and Aratiola to come back to me early in So I'll give him a little bit of time to really go into the organization, get to know people. And of course, like I expect every person being appointed to any new role in the organization to bring some things different, a new approach. And I'm sure Iqbal will bring his expertise to that. Great. Thank you very much. Next question comes from the line of Kian Abu Hussain, JPMorgan. Please go ahead. Yes. Thanks for taking my questions. The first one is just coming back to the issue of transaction based income in Wealth Management. You clearly state that it's up in all regions on a year on year basis also and you talk about double digit growth by the way and you also clearly see a real relative good performance quarter on quarter. I'm just trying to understand that when I look at clearly stock markets, in particular in Hong Kong and Europe and look at the data relative to what you illustrated in your revenues, which is very good, just to understand what's driving that? And in that context, should we not look at exchange volume data to get a feeling of what's going on? And if there's any other measures that you would suggest, if you could maybe highlight that in that context? And then the second question is regarding more U. S. Wealth Management Business. In terms of hiring process, where we are, how we should think about that as employee numbers are going down? And in that context, the competition in the U. S, which is clearly heating up with some of the peers becoming very aggressive in pricing as well as some of the banks entering, so to say? Yes, Keyon, thank you for the question. First, I guess to put the transaction revenue in the quarter into context, it is on a comparative basis off of quite a low 3Q 2018. And we also, you might recall, had a low 4Q 2018 where our transaction margin was only 11 basis points. So what you've seen this year is a 1 basis point uptick. But also, I think it's reflective of the fact that we have been very focused on working with our clients to find appropriate investment opportunities given the low yield environment and given the very, very challenging macroeconomic outlook. You referenced equity and brokerage and stock exchange volumes, really generally not a good proxy for us in terms of transaction revenue. When we have a good transaction revenue quarter, usually it's much more concentrated in structured products, so volatility can help, although we didn't have a lot of volatility this quarter, as well as positioning in funds and mandates. There was quite a bit of activity in positioning in funds that we felt were appropriate for clients. I referenced a couple. There's a $2,000,000,000 inflows in the real estate fund and also our systemic dynamic fund that I mentioned with a $500,000,000 inflows. In terms of wealth management hiring, as you've seen overall, we've had a reduction in our FAs and we're very focused and Tom consistently talks about our focus on productivity, not number of FAs and we still believe that there is substantial upside in terms of continued improvement in productivity. Nevertheless, we have been very focused in our hiring and very selective. We focus much more on ultra high net worth FAs, FAs with a higher concentration of ultra high net worth consistent with our strategy to increase penetration of that segment in the U. S. And you saw that result. We had $3,000,000,000 of ultra high net worth inflows during the quarter, although that was offset by some outflows with some smaller clients. We have a decent pipeline going forward and that's going to continue to be our focus. And yes, indeed, there is quite intense competition and including you see JPMorgan step up their game and the regionals are competing quite a bit, but we still feel comfortable with our franchise and our strategy going forward. Okay. Thank you. Next question comes from the line of Jeremy Sigee from Exane. Please go ahead. Good morning. Thank you. On targets and a question on capital, please. So firstly on targets, you said that you plan to give us an update with the full year results. And I just wondered what sort of shape of communication we should expect, whether you would obviously, the 2019 targets have been and gone at that point. So is this about updating 2021 or rolling over to 2022? And should we expect any sort of tweaks to business strategy? Or is it just a kind of numbers communication is my first question? And then secondly, just on capital, You're proceeding quite strongly with the buybacks. You've obviously done another €300,000,000 in 3Q like 2Q. So I wonder, do you expect to reach the €1,000,000,000 that you're targeting and well, technically up to €1,000,000,000 Do you think you'll reach the €4,000,000,000 And have you reached decisions on dividend growth policy in relation to that preference for buybacks? So thank you. Let me take the questions on what to expect in January. I think in January, you will get an update as we as I mentioned in my remarks on how we execute this current strategy and outlining where we stand the 2019, how we executed in 2019. And based on that, we will also update on that if we have new initiatives or if we believe that some of the initiatives that we have in the pipeline may need to be a slowdown or even not consider for the future considering market changes. And the second topic, we will also highlight our expectations for the profitability and the targets for 2020, but also rolling over what you saw in 2021 into 2021 2022. So I mean pretty much in line with what you saw a year ago. And in terms of our share buyback, I think that as I mentioned in my remarks, again, we are accruing for a cash dividend in line with our policy. And our intention is to continue to execute on what we mentioned in the past, so a buyback up to $1,000,000,000 for the year. And excuse me, the dividend policy is the mid single digit growth, that's the current stated policy? Exactly. Okay. Thank you. Next question comes from the line of Terni O'Mahin, Goldman Sachs. Please go ahead. Yes. Good morning from my side as well. I have two questions. The first one is on Page 12, where you highlight that you've reduced the hurdle for negative interest rates on your euro deposits with your customers. And I was wondering what type of a financial impact do you expect from this move? And I guess it's correct to say that this should already materialize the next quarter. Separately, just as an aside, it says here that this applies to deposits held in UBS, Switzerland. And I was wondering whether what that means that if you have euros in Singapore, you still get 0 or whether that's something different? And the second question I wanted to ask, so there's €100,000,000 restructuring charge that you've earmarked for the investment bank. I think the charge is low compared to the cost base in the investment bank. And I was wondering whether there is a particular area within the IV that you're targeting with this charge. Thank you. Yes. Just regarding the negative rates overall, I think, 1st year and a, you might recall back in 2017, we first introduced charging on euro cash deposits, and that was really driven mostly to address the fact that we had a large euro deposit overhang versus our lending book. And at that point, we saw quite significant outflow and actually we saw net new money outflows. So now we lowered the charging floor from $1,000,000 to $500,000 and the focus as well is also to deal with the fact that we have a large overhang. Now, we already communicated that to our clients. And as part of that communication, we offered alternatives for them to shift their deposits into other products, other investments or other legal entities where we actually needed the funding, which is why the shift out of UBS Switzerland for us is accretive to the group overall. We've actually already seen the reaction. And in general, we think that we're going to see more shifts into products rather than clients opting to pay the pricing. And the same dynamic for Swiss francs, where we introduced pricing for the first time on deposits above 2,000,000 dollars In terms of the restructuring charge, the restructuring really just aligns with the organizational changes that we made, where we talked about realigning the global bank around 5 segments and 3 product segments, including the introduction of private markets and then internationally where we've converged our equity and our fixed income business around platform, around structure and around financing. And the overall restructuring and the reductions are going to be broad based across the group at fairly senior levels. Thanks a lot. Can I just ask as a follow-up? What is the negative rate? So if I had if somebody has €10,000,000 on deposit in UBS Switzerland, what would you charge them? Well, we haven't announced specifically what we will charge them. But generally, it's in line with the current negative rates that you see for euros and for Swiss francs. Thank you very much. Next question comes from the line of John Peace, Credit Suisse. Please go ahead. Hi, good morning. So my first question is about net new money in the Americas. It's been flat or negative for about 6 quarters now. And I just wondered what is going on there. And it's quite a drag on your group net new money goal. And when do you think that might sort of normalize upwards a little bit? And then my second question is on the litigation in France. Is there any change to your expectation that we probably won't get any developments here until the end of next year? Thank you. John, yes, in terms of net new money, I think first and most importantly, and of course, we constantly remind all of you that the focus really should be on invested asset growth rather than net new money, because as you know, net new money can include a lot of different components that can be either high quality or low quality. And in general, we see more of our growth in invested assets driven by market moves and dividend retention and we do net new money. So with that, if you look at our invested asset performance in the U. S, it's completely in line with our U. S. Competitors. I think there was a chart that we showed last quarter where over the last 3 years, our net new money growth has been very much in line with our U. S. Competitors. So that would suggest the dynamic where it's relevant, net new money has been and performance has been pretty consistent across our peer group. And having said that, we did have net neutral net new money for the quarter. We had $3,000,000,000 of inflows from our Ultra clients, which is our strategic target. And our intention is to going forward to begin to show some growth in net new money in the U. S. And the second question It's on regulation. For which expectation on regulation implementation? Yes. So broadly, I think if you look at the continued regulatory and compliance investments that we're making, we're making those across the group. I highlighted the fact that we continue to spend a fair bit to up our game in AML, and that is just as the regulators continue to up that bar. And as a leading global wealth manager, it's appropriate for us to do that. In addition to that, if you look in other areas where we're spending money, we need to onboard the ECB as a consequence of the Brexit and the establishment of our SE entity in Frankfurt. We're also spending a fair bit of money to address LIBOR migration, benchmark migration, which is an industry challenge more broadly. So there's still a number of requirements that we have where we are investing to address regulatory as well as up our game on the compliance side. Thank you. And specifically with regard to the French tax case, we shouldn't expect any material updates on that until the end of next year or has your timetable evolved a little bit? The next update is going to be on November 4. There is a it's not sure, but most likely we're going to find out the date of the Apeel trial. Okay. Thank you. Next question comes from the line of Andrew Stimpson, Bank of America Merrill Lynch. Please go ahead. Good morning, everyone. First question on the IB, please. The IB has made a return on or ROA of 9.4% in the 1st 9 months of this year. And they've announced some cost cuts to try and fix that. But the €90,000,000 of annual savings, it seems quite small given the headwinds that you've got there. I think on my numbers at least, it looks like it might add 70 basis points or so to returns. So still leaves you a pretty big gap. So I'm just wondering how given that that's the level of restructuring you've announced, how that division will get back towards its target of being above 15%. And is there any heavy lifting to come from the denominator there? So I think you mentioned very quickly there something about on the balance sheet from a smaller balance sheet maybe, I don't know if I misinterpreted that, or whether the plan is just reliant upon improved revenues in the IB? And then secondly, Kurt, you spoke about discipline on costs and the adviser numbers in GWM. But the costs that we actually see in GWM haven't been dropping year on year. So even though the adviser numbers are down about 460 year on year. So what is the driver there? Are you is it that you're needing to pay up to retain the other advisers that you've got as the competition has increased? I guess, for all of us, when we look at our models, we tend to think that if adviser numbers are going up or down, then that would be the one of the main drivers on costs. So just wondering if that relationship should reestablish itself in the future? Thank you. Yes. Andy, thank you for your two questions. Just in terms of the IB, and I think you heard my previous response, the changes that we're making are not just costs, but very importantly, they are realigning our overall organizational model. It's an evolution in our organizational model and really the kind of the first change that we've made since Accelerate. It also recognizes just the general change in trend. So we do believe that with the resources that we will continue to have in the investment bank, we'll be able to better focus them on opportunities of growth. And that's both capital as well as our human capital. And with that, we would anticipate in addition to some of the efficiency improvement that that should improve our ability to achieve our target return levels. In addition to that, importantly, we continue to accelerate the IB and how it supports GWM. Sergio referenced a couple of areas, the acceleration of GFO, which for us is a major growth area, along with the combining and the integration of our platforms, which is not part of this overall savings that we mentioned both in the U. S. And internationally. And that should help to contribute cost as well as revenue for both businesses. There's no intention to shrink the footprint at all. We're still targeting the third of the group's capital. So you did hear me incorrectly there, and we believe that that's still the right minimum capital level for the investment bank for it to be relevant. In terms of discipline on personnel costs, what I would point out for Wealth Management is that actually, if you look year on year, there were about 850 reduction overall in headcount. That includes middle office, of course, as well as some FAs. And along with that, actually, there's been quite a substantial reduction overall in our personnel expenses. In fact, personnel expenses are down year on year, as we've taken those saves and we've partially reinvested them in the hires that we're making in China, the hires we're making in the U. S. For the build out of our GFO and our ultra high net worth program, but yet still delivering some net savings. Overall costs are up because on top of that, you do see the litigation costs year on year and you also, in addition to that, see the increased investments that we're making in technology as well as compliance. Okay, great. And just to follow-up on the IB, when you say to you'd be better focused, the capital and human capital will be better focused? Is that just you redirecting that capital into higher returning areas? Or is that more the velocity of the balance sheet? I think it's some of both. I mean, as you know, one the way that we've oriented our investment bank, it's capital light and it's capital efficient and very highly capital productive. And so we do think with the reorganization, a good example for we've moved our global bank, our CCS business into a focus around 5 industry segments globally. And so that will allow us to be much more efficient in how we deploy our capital globally across geographies. And we've moved away from really a geographic structure. In addition to that, converging our markets platforms so that we can better leverage the technology investment we have in execution platforms will also allow us to generate better return on that investment capital. Okay. Thank you very much. Next question comes from the line of Magdalena Stoklosa, Morgan Stanley. Please go ahead. Thank you very much. I've got 2 questions. 1 is on the pricing in the U. S. And another one is on the operating leverage. So really in the U. S, we're seeing very different kind of price moves in the market. We have seen discount brokers moving to 0 commissions. You are kind of suggesting slightly lower fees on select accounts. On the Page 5, I assume, to kind of drive the net new money and mandate sales as well. But I'm curious more kind of philosophically, when you see kind of how do you see the overall pricing evolution, particularly as you kind of target very different layers and higher layers in the private bank? But also, how do you think about the value of advice in the U. S. Market in particular going forward? And my second question is really about your operating leverage. And when you think about 2020 in particular, what are the levers to pull on the operational side that you see? Because of course, we have you've communicated the savings you're seeing from the IV restructuring and you've also been talking about the regulatory and conduct cost inflation. But do you see any of that abating into next year? Thank you. Yes. Thank you, Magdalena. In terms of pricing overall, of course, we saw the move by the electronic brokers by Schwab to eliminate their brokerage fees. And just to put that into context, brokerage income is a very small percentage of our overall operating income. And in addition to that, we already, over a year ago, waived our commission fees on our Workplace Wealth Solutions, which is our equity investment, our employee equity investment platform, which is the part of our business that most directly competes against Schwab. If we think about our pricing more broadly, if we look at in particular, of course, our advisory pricing, which is the most important pricing component of our U. S. Business. There are many other dimensions where we add value, including planning, trust advice, helping with philanthropy solutions, thinking about the next generations and that holistic advice, I think, is recognized by our clients. 1st of all, as having a cost component, but also as having a much greater value component than just execution and transaction. We still feel pretty secure in those margins and our pricing integrity overall in the U. S. On the operating leverage side, I think what we've guided before is we are looking to maintain our total direct costs excluding variable compensation flat going forward. And in maintaining that flat, we're generating substantial cost saves to fund the additional investments that we have in compliance that we highlighted, mitigating some of the regulatory issues that we need to address in addition to investing in the business. And we feel that that flat trajectory is appropriate for us given what we want to accomplish in the franchise. And so therefore, the operating leverage will come from what we generate on the Alpha side as well as any beta help we can get in this environment, which is a bit more fleeting, we would admit. So clearly, we're going to have to track and watch how the market evolves as we get into 2020. Thank you. Next question comes from the line of Andrew Lim, Societe Generale. Please go ahead. Hi, good morning. Thanks for taking my questions. First of all, can I tackle the GWM net margin? Obviously, the markets to some extent are working in your favor, S and P near record highs, credit market is doing well. But your net margin is still declining, 14 basis points now versus 16 for the Q3 last year. I know you don't have a target, but is there a lower level here where which you would say to yourselves, this is intolerable. We can't face single digit basis points on the net margin. And we had to do something about it. And what's your mind are the key strategic initiatives that you'll undertake to try and defend that in the near term? Or are you just hoping on the market beater to try and rescue the situation? And then the second question really drills down a bit more on the NII side. So you've announced, of course, some changes on the deposit charges. If we look forward to what the forward rates are pricing in, to what extent do these changes on the deposit charges offset the net interest margin compression from the rate decreases? I'm just trying to get more of an absolute sense of how this should play out in the coming quarters. Thank you. Yes. So Andrew, first of all, if you look at our net margin dynamic, as you point out, we were at 16 basis points last year during the Q3. 2nd quarter, we actually were at 14 basis points. We did have a basis point recovery in the 3rd quarter. Now what's driving that on a year on year basis? There are a couple of dynamics. I referred to the fact that we saw a drop in recurring fee margin in the Q1. Now that's really stabilized though year to date. And the drop was driven by the fact that clients moved into lower risk under contract products and also lower price under contract products. In addition to that, it's the segment mix into ultrahighnetworth. And then on top of that, it's also within the mandates, it's overall risk levels. And we do expect going forward, you can see continued stability overall in our recurring margin. Now net interest income margin is also down 1 basis point year on year, and it's partly offset by 1 basis point increase in transaction margin. Now overall, we still have good confidence that we're going to maintain stability and even show some improvement if we get some help with the market environment terms of net margin and what's going to drive that. Banking product penetration is critical. We've not had a good year today lending performance, but we're still very focused on growing our loans. Mandate penetration, where we have seen some improvement, and that's a continued area where as we increase our penetration, we'll see an uptick in margins. And then on top of that, it's continuing to manage our overall discount levels. Now in terms of net interest income, on your question, your forward question around pricing, I'm not exactly sure what you're getting at, but essentially if you look at the industry, betas are somewhere around 50%. And so what that's going to suggest is rates come down. There's 50% of that that we can pass on to clients and 50% that kind of hit us. And as we look at that $60,000,000 I referenced, that takes into account our current product and pricing structure as well as our betas. I guess, I'm trying to ask more specifically, given the changes that you've announced on the charges for client deposits, are you still expecting your net interest income or your net interest margin rather to decline on the GWM side given where forward rates are? Yes. I mean, so if we look at charging, I mean, of course, the charging applies specifically to euro deposits and Swiss franc deposits. And if you look at that and put that into context within GWM, we actually implemented charging more because of the capital burden we have with excess euro cash. We don't have a large euro loan book. And so when we implemented that charging back in 2017, what it did is we saw outflows. So clients took the cash elsewhere. Now the charging that we now the updated charging bringing down the floor to $500,000 First of all, we should do think that the industry is catching up. So we're seeing other competitors that are introducing charging. So there's going to be probably fewer places that clients can take their cash. But again, overall, it's not just a play in order to increase net interest income, it still remains a capital play and managing our LRD where we have excess and we don't have a lending volume to be able to absorb that. And it's a similar picture with the Swiss francs side. Now our P and C business is a completely different dynamic. Hi. So just one more follow-up question on question. Would you still expect deposit outflows because of this change in the charging structure? So I think you referenced some net new money outflows the last time you did this back in 2017. Could we expect the same this time around, especially seeing as you seem to be on the front foot in terms of charging for deposits? We don't really see a lot of this happening. As Kurt just mentioned before, you have to wonder if somebody is willing to pay for getting the new money right now, maybe you have one off situations, but structurally speaking, we see the industry facing the same kind of dilemma. And therefore, for the more wealthy clients, I think it's we try to find tactical solution to avoid that. But I think it's clear that over time, as the pain grows, we it's going to be inevitable that we have to do a trade off between profitability and capital consumption and net new money, as we always said. What we will not do, we will not pass negative rates to the affluent and retail segments. That's great. Thank you very much. Next question comes from the line of Andrew Combs from Citi. Please go ahead. Good morning. One question on Investment Banking revenues, just one follow-up as well on the Swiss franc deposit charge through. On the Investment Banking revenue mix by region, you cited that the impact was unfavorable for you in part due to your regional mix, and you cited the dialogic people for Asia and for Europe. But if I look at Slide 25, which gives the regional breakdown, the decline year on year in your Investment Banking revenues appears to be more due to your U. S. Business rather than Asia and Europe. So if you could just elaborate on what was driving the weakness there in your U. S. Investment Banking revenues? And then my second question, coming back to this point about the Swiss franc deposit pass through from November on customers with more than CHF2 What proportion of your deposit base do you expect to be captured by that? Thank you. Yes, Andrew. If you look at our investment bank, first to the comment that on a relative basis, so if you look at our overall concentration of revenue and activity compared to U. S. And European peers, we are much more weighted to Europe and Asia Pacific. Now having said that, of course, the U. S. Fee pool is far larger than the Europe and the Asia Pacific fee pool. And in addition to that, if you look at the performance during the Q3, you saw that Europe fee pool was down a fair bit. The Asia fee pool was down a little bit less, but still negative. Now year to date, we've actually held our share and increased our share in EMEA. So across those regions, we performed on a relative basis well. Where we have not performed well is in the U. S. In the U. S, we were down more than the feed pool. So the feed pool was up slightly 1% if you look at geologic and we were down considerably, substantially. And so we did underperform in the U. S. In the largest feed pool that had the best performance during the quarter itself, and that really explains our CCS performance overall. Now we're taking actions to address that. We've done some hiring year to date, and also some of the organizational changes that I mentioned is really looking to stabilize and improve our positioning in the U. S. Market. On your second question, in terms of relative balances, we haven't really indicated the distribution of our balance by account size. I just would mention that, as you would expect, we do have a relatively large concentration of Swiss franc deposits with clients with more than $2,000,000 in deposits. Okay. Thank you. Next question comes The first one is just coming back on the Investment Bank and your January update of the targets. So with Q3 results, the updates you announced, the EUR 90,000,000 cost savings, would that already capture the potential update on the investment bank? Or assuming everything else stays or the environment stays the same, there is no update with respect to our structural changes or more cost savings on the investment bank that we could expect in January? And then secondly, you talk about a lot about the potential for cooperation revenues and cross selling. I always had the impression that UBS was more had than its peers. And I just wonder, is there any indication you can give us and how much it contributes now or where you think you are on the potential to benefit from the cooperation within the group? Thank you very much. Yes. In terms of your first question, I think as we've said several times, the changes that we've made in our investment bank, which are meant to address both revenue opportunities as well as some efficiency are what we've done to date. And we think it does position us to be a much in a much better shape to be able to achieve our targets going forward. And there's nothing else you should anticipate that we're going to announce around the Investment Bank. On the collaboration side, indeed collaboration is a really core part critical and core part of our overall group model. And we do have substantial collaboration that takes place across all of our business division. Sergio mentioned the upshift in the referrals take place from P&C into Global Wealth Management. We talked about the GFO, which is a joint venture between GWM and also the ID, where we see a significant uptick when we transfer a client into that segment construct. We talked about what we're doing with Asset Management and GWM. So for us, it's not really recognizing the fact that we don't collaborate now. It's actually recognizing that we think we have further upside that even though we already we believe we're one of the better groups in terms of level of collaboration, we still think that there's substantial incremental opportunity for us to focus on accelerating and increasing the level of collaboration across our businesses. Thank you very much. Next question comes from the line of Amit Goel from Barclays. So two questions, one more follow-up to a previous question. Just on the GWM net interest income, I'm just curious, you mentioned that quarter on quarter, there have been slightly lower product revenues and slightly higher contribution from treasury. I'm just curious if you can quantify the change in treasury contribution quarter on quarter? And so that's the first question. And the second question just relates to the cost guidance that you gave at the half year. I'm curious if you still expect to see H2 costs greater than H1 on an underlying basis? Thank you. Yes. On your first question, as I highlighted, we did have slightly better quarter on quarter group treasury revenue. There are really no specifics that I can provide. There typically is a little bit of volatility in our group treasury revenue for the business divisions. And you kind of saw that quarter on quarter this time in our favor. In terms of cost guidance, the cost guidance we provided previously stands. We do expect overall an uptick in costs in the second half versus the first half. Okay. Thank you. Next question comes from the line of Adam Terlak, Mediobanca. Please go ahead. Yes, good morning. Sorry to frog a dead horse, but I want to come back to GWO and NII. You've given the guidance on the short end move of the curve to 25 basis points to €60,000,000 But I'm more intrigued about the kind of the mid, long end point of the curve, what the shift down in the euro swaps means for your deposit revenues on a multi quarter basis and how much headwind could come through as those hedges roll off into lower rates? And then secondly is on the positive side, if you could just quantify the benefit that's going to come through from the up tiering threshold at the SMB and where we should expect that in net interest income, GWM versus P&C? Thank you. Yes. In terms of the curve, so the curve dynamics for us, they're much more impactful for U. S. Dollars and Swiss francs, where we structurally have a much higher volume of hedges, just given the overall deposit composition that we have. There's not an awful lot of longer term exposure we have to euros just because that is in order, it's the 3rd concentration of deposits overall. But still, nevertheless, if you do see a downshift in the longer end of the curve, if you see inverted curves, it does have an impact on our replicating portfolio as we roll over our hedges and it will have downward pressure overall on our net interest income. In terms of the excuse me, no, we certainly haven't offered any guidance specifically on what happens to euro curve. So there's nothing the only guidance is what I mentioned around the shorter term rates, the 25 basis points. Otherwise, right now, there's really no additional guidance that we want to provide on sensitivity to rates except other than what you see in our quarterly report. And as always, you see sensitivity to various scenarios now, including 100 basis point parallel shift. And that's still no report. The second question around up tiering, I'm sorry, Les. The benefit of tiering of the SMB. Yes. The benefit of the up tiering of the SMB, that will be allocated to the business divisions that contribute in terms of their deposit mix to where that threshold is allocated. So it will be allocated across GWM and P&C going forward. And what we want to do is actually use that as a way to incent the businesses to get the right structure, the right type of deposits going forward. Okay. Thank you. The next question comes from the line of Nicholas Watts from Redburn. Please go ahead. Thank you. Good morning, everyone. I had a question on the U. S. Wealth Management Business. The operating margin target or the pretax margin target for that business is 25%. That's about 5% below where your 2 large peers are operating at the moment. Currently, that is sitting at about 15%, a level it's been floating at for sort of the last six quarters. And I was just wondering whether that target of 25 percent is something you're thinking about recalibrating or whether you think it is still achievable, particularly given where your 2 largest and closest peers are sitting? Thank you. Yes, Nicholas. Thank you for the question. When we announced that last October, first of all, it was a very different beta environment, including, of course, the U. S. Dollar rates and where they sit. Now, in addition to that, I think you heard the actions that we associated with the improvements still stick and they're the ones I mentioned before. It's increasing mandate penetration. It's increasing our lending and our banking products penetration overall. It's continuing to improve the productivity of our FAs and that's still the path to improving our overall efficiency. As Sergio highlighted, any changes in targets will be announced as part of our 4th quarter earnings. Thank you. Ladies and gentlemen, the webcast and Q and A session for analysts and investors is over. You may disconnect your lines. We will shortly start the immediate Q and A session.