Earnings Call: Q2 2019

Jul 23, 2019

Welcome to the UBS Second 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 Ossinga, 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. Thank you, Martin, and good morning, everyone. Before I comment on our financial performance, allow me to draw your attention to the cover of our presentation, which highlights our Together BAND initiative. The goal of this initiative launched on Worldheart Day in April this year is to raise public awareness and inspire action for the 17 United Nations Sustainable Development Goals, or UN SDGs in short. They are critical for the long term economic growth and the future of communities around the world. One fundamental problem is how little the public is aware of these goals. Various surveys show less than 2% of the wider population actually knows what the UN SDGs are. And that's something that TogetherBend is trying to address. UBS is proud to be the founding partner of TogetherBands. At the heart of the TogetherBands campaign our friendships bands in the 17 colors of the UN SDGs that comes in packets of 2, 1 to wear, one to share. The UBS Optimus Foundation provides guidance on how all net profits of the campaign will be used for projects aligned with the SDGs. It is supported by a group of high profile ambassadors and experts with a strong commitment to sustainability. The response from our employees and many clients has been amazing. For UBS as a leader in sustainable and impact investing and smart philanthropy, this is an important initiative, but also for me personally. The bands I'm wearing represents life below water, quality education and no poverty. All of you on this call are opinion makers, and I encourage you to take part and spread the word. Together, we can achieve more than as individuals. You can find more at togetherband.org. So now on to our financials. In the 2nd quarter, we delivered the highest Q2 net profit since 2010, an improvement on an already strong Q2 2018. Our earnings reached $1,400,000,000 Return on CET1 capital increased to 16% and our cost income ratio is also in line with our full year targets. Once again, we showed the strength of our business model and its ability to generate competitive returns even in market conditions far poorer than last year's. The impact of the challenging environment is particularly evident in our global Wealth Management business. Here, we had record profits in the Americas and global invested assets reached an all time high of $2,500,000,000 but NII come under pressure just like for our U. S. Peers. Kurt will cover this later on in more detail. Our P and C business again delivered very strong performance with double digit profit growth, increases across all revenue lines and excellent new business volume. Asset Management revenues recovered nicely in the quarter, leading to strong earnings growth. The Investment Bank nearly doubled its profit from a difficult first quarter. Our CCS revenues increased 18%, driven by outperformance from our advisory and ECM franchises. We completed a number of significant transactions, including the $27,000,000,000 Novartis spin off of Alcon, the Amcor acquisition of Bemis and the Brambles unit spin off. This was our best quarter for M and A revenues since 2012 with the number one spot in Apex. The Q2 brought some normalization to business conditions following the very difficult start of the year. Equity markets recovered further, volatility in credit spreads and rates was more constructive and deal volume increased quarter on quarter. However, we are still operating in an environment with low volatility and trade volumes in equities and FX. Also, global geopolitical and macroeconomic uncertainty remain and in some case got worse weighing on both sentiment and economic prospects. The outlook for U. S. And European interest rates surprisingly quickly turned for the worse in the quarter with yields on the U. S. 5 years treasuries down 40 basis points in just 2 weeks between May June. It is no surprise our quarterly survey shows that investor sentiment remains muted with persisting concerns over national politics, geopolitical uncertainty and global trade. We see diverging the regional dynamics. Asian investors are more worried about effects of trade tensions resulting in declines in optimism in contrast to improving moods in Europe and the U. S. We saw signs of these trends in our regional performance. Overall, investors lack the conviction to step into the market right now, waiting for prices to be more attractive before increasing their exposure. Having said that, clients remains generally satisfied with their current asset allocation, but it is noteworthy to see that the share of cash in their portfolios increased further even with a general increase in asset prices. While understandable from a client standpoint of view, it is not a supportive backdrop for transactions or lending. Our approach here is to intensify even further our dialogue with clients to help them navigate the current environment. The difficult start of the year weighed on our half year results, but we have made significant progress over the last 3 months. Return on CET1 capital for the first half was 14.6%, higher than the full year of 2018. And this return was on a capital base that is nearly $1,000,000,000 higher than just 6 months ago and over 15% higher than in 2016. It is difficult to predict how external factors will develop in the second half of the year. And of course, we face the usual seasonality affecting both revenues and costs. But the results so far reinforce our conviction that we can achieve a return on CET1 capital in line with last year's. We remain committed to our strategic and tactical cost reductions. Against the 7% reduction in operating income, our operating expenses were also down 7%, driven by natural hedges built into our model, some of our structural and tactical cost actions as well as lower litigation. As I say, we are aware that the second half of the year will present further cost challenges, including seasonality, but we remain committed to actively minimizing the effects by continuing to implement our strategic and tactical plans. Year to date, we have year to date, we already generated $2,500,000,000 of capital. As you can see, we accrued for future dividends, bought back $300,000,000 of shares and built up $800,000,000 of CET1 capital, improving our high capital ratios. For the rest of the year, we intend to continue to execute on our capital returns plans as previously communicated. Growth in tangible book value is of natural interest to shareholders and often comes up in discussions. Here is my take. In order to assess absolute and relative developments in tangible book value per share, we need to take cash dividends into consideration. Since 2011, we paid around €15,000,000,000 in dividends or a third of the tangible book value, ranking us among the top cash dividend payer across large global peers. With a 6% CAGR on cumulative book value and dividends per share over the last 8 years, we compare very favorably to European peers and most importantly, we are in line with our U. S. Competitors. On this basis, our tangible book value per share increased 9% year on year. As I mentioned in the past, there is no such things as being a leading global wealth manager without a significant presence in the U. S, which remains by far the world's largest wealth pool. It is also a very attractive market for our Investment Bank and Asset Management businesses. We already have strong position in the region. GWM quarterly profits reached a record high, our advisor productivity remains market leading and invested assets increased to a record $1,300,000,000,000 That's more than half of GWM's total. In addition to being a big growth driver for our business, the U. S. Will continue to provide unique value to UBS shareholders due to the $6,000,000,000 in tax loss DTAs. These can only be used by us and should benefit our CET1 capital over the next decade. Our strategy and growth ambitions here are very clear. We want to increase Wealth Management profit margins to 25% in the U. S. And become the market leader in LatAm. We also aim to strengthen the IB's position in our key capital light businesses, our asset management and generate additional value by increasing revenues through collaboration. We have been in Asia for over 50 years in good and bad times. This unwavering commitment to the long term prospects growth of the region has helped us earn the leadership position in key business areas. In Wealth Management, we are the clear market leader in the region with over €400,000,000,000 invested assets, 70% more than the next competitor. We are also the top ranked foreign asset manager in China and have leading equities research and M and A businesses through our investment bank. Our goal is to grow further both organically and through strategic partnerships. Few weeks ago, we signed an agreement with Japan's leading private trust bank, Sumitomo Mitsui Trust Bank to offer services to one of the largest pools of high net worth and ultra net worth clients in the country. No other wealth management firm in Japan can offer a comparable range of services at the moment, and we are confident this joint venture will be beneficial for both UBS and Sumitrust. We believe such partnerships are an effective model allowing us to efficiently scale our business. We are currently exploring other such opportunities globally. Our global growth prospects are underpinned by the stability, efficiency and effectiveness of our home markets. Despite severe interest rates headwinds, the 4 business divisions operating in Switzerland have collaborated to generate a third of the group profits and consistently deliver around 20% return on attributed equity. We stayed disciplined on pricing and made significant investments into technology over the past few years, which are now paying off. We are seeing higher client satisfaction levels leading to increased client and business inflows and improved efficiency. To summarize, we have made good progress in the second quarter, but we have more work ahead of us to deliver on our plans. We are very focused on efficiency, including our strategic initiatives and incremental tactical savings to mitigate regulatory cost pressures and NII headwinds in the second half. We will continue to execute on our alpha initiatives and pursue other strategic optimization opportunities. For example, while the Q2 performance of our IB demonstrated the strength of the franchise, we recognize the revenue pressures across the industry are likely to persist. Therefore, we are looking at ways to further evolve its business model, leveraging our tech capabilities, building on our strengths and focusing resources on the highest growth opportunities. We are also exploring new ways to enhance collaboration in the GFO and Ultra space between Global Wealth Management and EIB. Across the group, we will continue to drive our front to back technology initiatives to innovate our platforms. Some of these changes will also bring us tax and regulatory benefits. Overall, our goal remains unchanged to deliver sustainable and profitable long term growth while investing in our businesses and providing attractive shareholder returns. With this, I'll hand over to Kurt. 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 gains on sales of $10,000,000 and restructuring expenses of 39,000,000 as our reported and adjusted results have largely converged. Year to date, restructuring expenses were $70,000,000 and we still expect to incur around $200,000,000 for legacy programs for the full year 2019. Our group effective tax rate was 21% in 2Q, reflecting $65,000,000 of net DT and A benefits, primarily resulting from certain real estate assets transfers from UBS AG to UBS Americas Inc. In addition, we shifted parts of the business, which achieved further tax efficiency. The cash tax relevant portion was just 12%, with the rest related to DTAs, leading to a sizable direct benefit to CET1 Capital. We expect our tax rate for the second half of twenty nineteen to be lower than the 23.4% in the first half of the year, reflecting the benefit of real estate asset transfers I mentioned, subject to any potential DTA related adjustments made as part of our annual business planning process. From 2020 onwards, we expect a tax rate of around 25%, including a roughly 1.5 percentage point benefit from the business shifts I previously mentioned, and excluding the effects of any remeasurement of DTAs. Our tangible book value per share is up 6% to 12.72 percent with a third of the increase coming from share count reduction. Moving to our businesses. This has been a challenging first half for Global Wealth Management and interest rate headwinds intensified in 2Q. For the quarter, operating income was down 3% on lower net interest income and recurring fees, partly offset by higher transaction income. I'll cover revenues in more detail in a moment. Cost increased by 1%, driven by strategic investments in the business, partly offset by our savings initiatives, which we highlighted at our investor update and lower litigation. During the quarter, we continued investing in APAC, including our Sumitrust partnership, building out our ultra high net worth business in the Americas, U. S. Branch expansion and investing in our strategic platforms, while contributing to the Group's tactical cost savings. We reached a record 34.4 percent mandate penetration. Net new lending was slightly positive despite muted client appetite for leverage. Back to revenues. Transaction based income increased by 3% despite continuing client concern is evidenced in both the heightened geopolitical uncertainty index and investor feedback from our survey that Sergio referenced. Recurring fees were up 4% sequentially and down 2% year on year. The Q on Q increase is partly driven by sales and some margin uptick, but also due to the pickup in invested assets from the Q1, per the usual time lag effect that's most pronounced in the U. S. Year over year, there were some headwinds from client preferences for cheaper mandates, which we already noted last quarter, along with a mix shift toward ultrahighnetworth, although our recurring fee margin has stabilized sequentially. Net interest income was down 7% overall versus a decade high in 2Q 2018, driven by lower revenues from both deposits and loans, along with accelerated mortgage backed security amortization. As you saw from the U. S. Banks, net interest income pressure accelerated during 2Q from accumulated shifts in client deposits, lower rates and heightened price competition. We saw similar trends in our NII and faced added headwinds from euro and Swiss franc rates going further negative. NII declined 4% sequentially. On the deposit side, we continue to see a mix shift towards clients moving into money market funds in term deposits. We also saw a $5,000,000,000 increase in Swiss franc deposits from net inflows, along with clients increasing their cash holdings. And on lending, margins were under pressure, mainly in the U. S. As competitors sought to protect market share with very aggressive pricing as clients refinanced. If the Fed were to cut rates by 25 basis points, we would expect to see NII to be slightly down sequentially in the Q3. Moving to the regional view. In the Americas, we posted record PBT of $367,000,000 Recurring fees and transaction based income increased with some offset from lower NII. We delivered top line growth with fewer advisors, consistent with our strategy, and average annualized revenue per advisor increased to a record $1,300,000 ahead of U. S. Peers. And we improved our efficiency to the lowest cost income ratio we've ever had. Outside the Americas, income decreased largely due to lower NII and recurring fees, particularly in Asia. $7,000,000,000 lower average loan balances in Asia following deleveraging in 2018 and a decrease in loan margins from heightened pricing competition weighed on revenues. Costs were also up due to our ongoing investments in the region to drive long term growth, such as expenses related to our China onshore build out, as well as lower litigation as well as higher litigation. Furthermore, clients shifted 4 percentage points of invested assets out of equities into cash and fixed income. This more conservative asset allocation by clients also weighed on revenues and profits. Net mandate sales globally were positive and mandate penetration increased across all regions. In terms of net new money, we had $1,700,000,000 outflows globally. This was driven by the Americas, where we had the typical seasonal outflows for U. S. Tax payments, which were around $5,000,000,000 All other regions had net inflows. Overall, year to date, net new money has been solid at a growth rate of around 2%. We'd like to provide a peer comparison of invested asset developments in the U. S, which is the only way for us to benchmark our net new money performance, as U. S. Peers do not disclose this metric. While we've seen outflows, our invested assets have grown in line with the peer average since 2016. That's when we completed the implementation of our operating model change in the U. S, focusing on retention and away from recruitment, which has had an adverse impact on net new money. This change in the model has contributed to the 1 percentage point reduction in our cost to income ratio over the same period. We recognize the quality net new money is an important driver of sustainable growth in the business over the cycle, and we are focused on improving this metric. Personal and Corporate had a very strong quarter with PBT up 11% to CHF391 1,000,000. Operating income was up 4%, driven in part by transaction revenues, which were the highest on record with increased credit card and foreign exchange transactions. Credit loss expenses were also substantially lower. In net interest income, we further improved our product results in both deposits and loans, offsetting pressure from higher funding costs and negative interest rates. This is evidenced by the resilient net interest margin, which at 152 basis points was in the upper half of our target range. Recurring net fee income also rose slightly on higher account fees. Business momentum remains very strong with 4.4 percent net new business volume growth in personal banking. We saw loan growth and strong net new client acquisition in both Personal Banking and Corporate and Institutional clients. Costs were down marginally and the cost to income ratio improved to 59%, in line with our target for the year. Asset Management had a strong quarter with PBT up 10% to $135,000,000 Net management fees increased by 2%, reflecting higher average invested assets. Costs were flat as higher personnel expenses were offset by lower G and A expenses. The cost to income ratio improved to 72%, in line with our target for the year. Excluding money markets, net new money outflows of $14,000,000,000 in the quarter mainly reflected client derisking, asset allocation changes and delayed investment decisions in reaction to continued market uncertainties. Outflows were largely in lower margin index funds with minimal impact on operating income. Invested assets were up 1% or $7,000,000,000 sequentially, driven primarily by market performance. DIB generated 14.2 percent return on attributed equity in a very challenging market environment. PBT excluding around $1,000,000 day 1 P and L in 2Q 2018 and Tradeweb related gains in FRC was down 10% and revenues were virtually flat versus a very strong 2Q. CCS revenues were very strong, up 18% against a 21% decline in the global fee pool. Advisory stood out with M and A revenues up 67% against a 26% fee pool decline, partly aided by closing deals that slipped from 1Q 2019. We gained share in all regions and were ranked number 1 in M and A in APAC. ECM also performed well with revenues up 23% versus a 5% decline in fee pools. Our equities revenues were down 9%, in line with U. S. Peers, reflecting persistently low volatility that weighed on client activity, along with deleveraging by hedge fund clients at the end of last year. We were, however, pleased with our performance in electronic cash trading, where we believe we've once again gained market share. FRC held up well, considering extremely low volatility in volumes and FX. Revenues were down 7%, excluding previously deferred day 1 profits in Tradeweb, as credit rates performed well, partly offset by declines in FX. IB costs were up 3%, reflecting higher tax spend. In Corporate Center, accounting asymmetries and hedge counting ineffectiveness in litigation jointly contributed $114,000,000 gain compared with negative $127,000,000 in 2Q 2018. Absent any effects from accounting asymmetries, hedge accounting ineffectiveness and litigation, we still expect Corporate Center to average around a $250,000,000 loss per quarter in the second half of this year. Driving continued improvement in our efficiency remains a core focus, as evidenced by the 7% reduction in first half twenty nineteen reported operating expenses that you saw earlier. Our cost performance is underpinned by structural improvements as well as disciplined management of third party costs that contributed to an 11% reduction in our reported G and A costs, excluding litigation and IFRS 16 impacts. Insourcing technology headcount is a key initiative driving improvements in efficiency and contributing to the group's overall 3% reduction in workforce. IT and other service outsourcing costs are down nearly $200,000,000 or 25 percent, partly offset by higher personnel expenses. And we are reducing risk and improving effectiveness. As you can see from the slide, we constantly drive efficiency gains, while funding new requirements and investments in the business, along with mitigating market headwinds. So while we remain diligently focused on expenses, we are seeing incremental costs as we gain further clarity on regulatory requirements. This includes, for example, investments in our KYC AML and data capabilities, transitioning to new benchmark rates and implementing ECB requirements. We have also identified new attractive investment opportunities, including the announced Sumitrust Partnership, consolidation of our capital market business in the U. S. And various actions to drive immediate bottom line efficiencies. All of these factors and typical seasonality given all of these factors and typical seasonality, we currently expect our second half adjusted operating expenses, excluding litigation, to be up slightly versus the first half of the year. RCT1, going concern and going concern capital ratios are all above the 2020 requirements. LRD has increased year to date, mostly due to higher equity markets, but somewhat offsetting this, we've achieved $9,000,000,000 in reduction in LRD as a result of our optimization efforts. For example, merging our UK entity UBS Limited into UBS Europe SE reduced our liquidity requirements. We have also realized initial benefits from improved intraday liquidity modeling. For the full year, we still expect to deliver about $20,000,000,000 LRD reduction versus our plan, as we said in March. Sum up the quarter, we delivered a strong $1,400,000,000 net profit, our best since 2010, and a 16% return on CET1 capital, while making progress towards our capital return objectives. But we know we have work to do, and we are very focused on executing our strategy and delivering our alpha plans to drive long term growth. With that, we'll take questions. The first question from the phone comes from Amit Goel with Barclays. Please go ahead, sir. Hi, thank you. Thank you for the presentation. So two questions for me. Firstly, just on the net interest income guidance for GWM. I heard you mentioned the sequential impact if we get a 25 bps cut. But just thinking more into 2020, if we were to see the current forward curves, is there a bit more color you can give us on the potential impact? And the second question just relates to the kind of the strategy and the plan and obviously versus what the environment was like as of October last year, we've seen quite a lot of change. So just curious how you think about that, how you go into kind of Q3 when you're thinking about the strategy, etcetera, and how you evaluate the changes in the environment? Thank you. So I'll take the first and Sergio will address your second question on it. In terms of net interest income, the reduction in longer term rates had an impact immediately on the amortization of our MBS portfolio, just with model assumptions that prepayment levels increase. In year on year, that was about a $14,000,000 impact. Naturally, if rates stay low or further reduce, we'll continue to see a further accelerated amortization as we go forward into the following quarters. Beyond that, the lower longer term rates, as you suggest, have an impact on the structural positions that we use to hedge both our deposits as well as our equity. And that impact will materialize over time, given the duration that we have on our investment of equity as well as our deposit portfolio. So we would expect to see that reduction to accrete in over the next couple of years, depending, of course, on further movements in interest rates. That's something naturally that we'll update as we go through our 3 year planning process. Yes. On the second point, of course, as you mentioned, at the end of during the summer, at the end of Q3, we always go through our 3 year rolling plan and we take in consideration the so called beta factors based on consensus. So basically no subjective input by management or anybody in respect of how we see rates developments, how we see economic developments in the various regions that are usually the driver of our business from a beta standpoint of view. And we together with our growth and alpha initiatives, we will assess the impact on our forward looking targets. I think that as we demonstrated this so far this year, we are not giving up on trying always to maximize and get to our absolute returns. But of course, we always need to see exactly how those factors play to each other. We will also have to consider the new environment and decide if and how we need to take strategic measures to offset or mitigate some of those developments. But I guess considering the volatility and the lack of visibility we see in the current macro and geopolitical environment is quite difficult to answer right now what it means for 2020. You saw last year that within few months, we had a total turnaround in expectations on rates. And so we will need to see how things develop in the last part of the year. The next question comes from John Peace with Credit Suisse. Please go ahead, sir. Yes. Thank you. So my first question follows on a little bit from the previous one. Beyond the sort of beta factors of the market, when you think of the sort of competitive pressures you highlighted on Slide 15 on loan margins and also shifting client preferences within the mandates on deposit mix, How persistent do you think this sort of decline in gross margins, excluding transaction revenues, is likely to be? And then my second question is just on the buyback of up to EUR 1,000,000,000. Now we're halfway through the year. How close to that figure do you think you might get? Thank you. Yes. Thank you, John. And in terms of the beta factors that we've highlighted, first, if I look at our recurring margin, as I mentioned, our recurring margin is largely stabilized quarter to quarter. At this point, we don't believe that we're going to see any further pronounced shift into lower risk. We expect the mix overall of client preference around mandates going forward to relatively stabilize. And so we don't see any factors apart from the continued segment mix change with a bias towards ultrahighnetworth that would have a significant further downward pressure on recurring margins. Now on net interest income, the competitive intensity remains and it gets a little exacerbated because with the lower rates, you see higher levels of refinancing. So what we're seeing is very, very high volumes actually of clients paying down loans and then building back up their positions. And when they're in play, it opens you up to some competitive and vulnerability. So there we do expect to continue to see some competitive intensity and pricing. However, apart from the potential rate move from the Fed, we don't see any other factors that would naturally result in a significant quarter on quarter decline in our net interest income or margin? Yes. In respect to the share buyback, of course, we have been on a blackout period during the last few years. And so our aim is to restart the buyback program in the next couple of days as soon as we are out of the blackouts and continue to execute on our targets to buy back up to $1,000,000,000 in between now year end. Okay. Thank you. The next question from the phone comes from the line of Magdalena Stoklosa with Morgan Stanley. Please go ahead. Thank you very much. I've got 2 questions and both quite structural ones. When we look at the Asian business, and we've gone through quite a lot of details on the kind of changes in the investment allocation, changes in risk appetite impacting part of revenues. When you look at Asia overall and that's across your business, how should we think about the cost trajectory? Because you've got kind of 2 key buckets there. Of course, 1, your business as usual, but 2, also your kind of your big strategic projects like the China onshore build out that you have called out, how shall we think about the that cost trajectory and how potentially elevated is it because of those more strategic projects there? And 2, U. S, because we've talked about the margin levels of 25%, but we've also talked about at least kind of near term pressure on revenues. How do you see the flexibility of costs or maybe even kind of mitigants on the other parts of the revenues rather than NII to effectively end up around that targeted margin rate? Thank you. Yes. In terms of Magdalena, first of all, thank you for your questions. Looking at Asia overall, you're right. What we saw is actually quite a pronounced impact on our revenue line overall with clients shifting. And the magnitude of shifting, just to put that into perspective, is we saw clients shift 4% out of equities into cash, 2% over 2% into cash and into fixed income. And that of course impacts overall our recurring revenue, as well as putting a little bit of pressure on our net interest income. In addition to that, we saw the deleveraging with about a $7,000,000,000 reduction overall in loans on a year on year basis. Now what we do know about Asia is Asia can turn very, very quickly. And we can see wild swings quarter on quarter if clients get more confident in the environment. Now, while we don't see a catalyst in the near term, we are very confident that over the medium term, we are going to continue to see very, very good growth in Asia Pacific. Therefore, it's important for us to maintain our investment overall in that region. Naturally though, we'll pace those investments. So with these current headwinds, you would expect us to be able to delay some of our investments, delay our hiring plans and then pick up that momentum as we see the market improve overall. But it's really been our 50 year commitment to that region that has allowed us to have the position that we have. Now if you look at the U. S. Margins overall, what we articulated in terms of the 25 basis point improvement overall and our margin are actually moving our margin not 25 basis points, but down to 75 basis points is an increase in mandate penetration. We continue to see that that's actually performing as we would expect, an increase in banking product penetration. Now there, we haven't seen the level of growth in banking products and that's really because of the environment plus the headwinds in net interest income, along with the continued increase in productivity, which we do see just given our overall strategy. But clearly, if we don't have, along with the actions that we're taking, the beta environment that we planned for, that is going to have an impact and it's going to delay the pace at which we can actually achieve the target 75% efficiency ratio in the U. S. Business. Thank you. The next question from the phone comes from Andrew Stimpson with Bank of America. Please go ahead. Good morning, everyone. First question from me is on the client appetite, which you've been talking about a bit. You're saying that, Kurt, that you don't expect much more client rotation into the lower risk mandates, but I wanted to get maybe some more numbers around that. I know you said there's that 4 percentage point shift from APAC clients from equities and fixed income and cash. I just wondered how far off that is, say, from the lowest level that we've had over the past 5 years or so, maybe more broadly for GWM, not just for APAC? And then secondly, you spent a lot of time at the Investor Day, as we often do, talking about the connection between the Investment Bank and Wealth Management. And in particular, one of the things that we often talk about is how better ECM can drive better flows within Wealth Management. But this quarter, we've seen actually really strong ECM, but the inflows weren't as strong. So is that should I be reading anything into that there? Is that just is it just a regional say, it just didn't work out this quarter? Or any reason to doubt that those two things shouldn't eventually go together, please? Thank you. Yes, Andrew. Thank you. Thank you for your question. So if you look at our current and the trend that we've seen over the last year, there are a couple of dynamics on the mandate side. It's 1, clients have shown a preference for lower margin mandates in terms of the sales that we've seen versus managed product. In addition to that, we've seen the mix shift and also the segment shift. Now the indication is quarter to quarter that the debt trend has stabilized. And also if you look at the client sentiment survey, what you see there is a high percentage of clients have indicated that they're happy with their current asset allocation. So that would suggest to us that we're unlikely to see further derisking going forward. But on the other hand, at the same time, since we also have a high percentage of clients that are really waiting for markets to drop before they're likely to move further, there could be a muted impact over on client activity. So I think those are the 2 dynamics that our client survey is suggesting going forward. Now in terms of your question overall on ECM, if you look at our the ECM business and what drove the good performance within the IB, it was really much more focused in our institutional client business and not necessarily focused as much in our overall GWM business. And so therefore, you didn't see the linkage and the correlation between outperformance versus the market on the ECM side and in our IB and it necessarily flows on the GWM side. Okay. Thank you. And then just to follow-up on the first question, you don't have any is there any I don't know if you're comfortable giving a time series on how that client asset allocation has changed. I know you've given us the cash allocation number a few times. I just wondered if you think we're near the lows or if your comment is just purely if you're more talking about what the survey has said or whether it's based on what you've seen previously? Yes. I think, Andrew, we got 2 points. 1 is in terms of the survey, cash levels were already at highs. And with the 1% increase quarter on quarter, we actually have cash levels that are even well above what has been historic highs. And I think if you look across the regions and I'll speak to the survey, in Asia, we're seeing 32% of overall holdings in cash, and that's the highest amongst the region, up 1%. Switzerland at 30% is next. The U. S. At 22%, and you saw 3% cash increase in the U. S. The U. S. Typically has been the lowest amongst all the regions. Now we've seen a same pattern in our own business. Our cash levels are pretty much at highs versus where we've been historically. As I said, at this point, it doesn't seem that there's any indication that we're going to see further moves into cash, but of course, that's going to be dependent on the environment going forward. Okay. Thank you very much. The next question from the phone comes from Kianabu Hossain with JPMorgan. Your line is now open. Please go ahead. Yes. Thank you for taking my question. Maybe to be a little bit more focused on some of the numbers you gave at the Investor Day. On Slide 4, Kirk, you gave some of the beta factors to drive your assumptions in terms of investment and growth. Out of the four assumptions, 2 of them don't hold anymore. The forward curve has clearly shifted from up to down. The real GDP growth number is lower than originally expected. So I'm just wondering at one point, Sergio and Kirk, do you make a decision that what would be the trigger that we actually need to slightly change our plan in terms of investment and that outlook, so to say? That's the first question. The second question is related to the ultrahighnetworthbusiness U. S. You mentioned the EUR 70,000,000,000 in the past. And I just want to see where you are at this point and when should we expect some statistics on that? And what are going to be the key drivers for us to see the SEK 70,000,000,000 to come in? As I answered before, the moment in which we create additional transparency and clarity about how we look at our forward looking targets is going to be year end as we plan for the 3 year cycle based on these assumptions, which I like to reiterate are consensus based and not subjective to our own assumptions, so that we can isolate the impact of alpha versus beta when we analyze our performance. So I guess the right moment is to assess towards year end. And so we're going to do it as every year guide. Long term, we the trajectory has to be the one that we mentioned before because the underlying trend sustaining our business model, wealth creation, Asia, the fact that we believe that the U. S, we have opportunity to gain share of wallet are still intact. Of course, the pace and the contribution of the beta factor may not be the one that we were planning for based on those assumptions. But the timing is going to be that one. In the meantime, we will think about any strategic or tactical measures that we need to do to adapt to any changing environment. I'm sure like many of our competitors will do. Kiyan, to your second question, as we highlighted the overall Americas program focused on ultrahighnetworthandgfo is more of a medium term, of course, objective in terms of the $70,000,000,000 And we indicated that that was over a 3 year period. So where we are is that we've laid all the groundwork. We've built out our Ultra teams and we've ring fenced them. We've built out our GFO teams. We've identified the target client set. And as we highlighted, the majority of those clients already have relationships with us. So we have an ongoing dialogue. And we put in place some of the other ultra high net worth offering capabilities. And we're now starting to build a pipeline. So the process is starting. We would expect to see some actual momentum, some real inflow momentum in the second half of the year. That should grow as we go through the year. And then of course, as we get into 2020, that momentum will continue to grow. Thank you. The next question comes from Jeremy Sigee with Exane. Please go ahead, sir. Good morning. Thank you. Two questions. The first one is on the investment bank costs, which I was a little surprised. As you point out, they're up 3% year on year, while revenues were down 4%. And I just wondered to what extent that new cost level, the 1631 adjusted costs that you printed for 2Q, is that a run rate going into 3Q and 4Q? Or is the scope to get it back down below $1600,000,000 as it was in previous quarters? So that's my first question. My second question, which I hope you won't find too annoying, but it's going back a little bit onto the strategic review that you're talking about, which is underway, and you're going to tell us about it at 3Q. Obviously, that will then be very late in the year and probably too late to do very much about this year's numbers, which don't seem to be on track for the targets. What range of options do you think you might consider as you look at the 2020 numbers? Is it again going to be about delaying investment spend? Or could it be more structural efficiencies? What's the range of options that you might look at? Yes. Jeremy, so if you look at what drove the year on year increase in the IB costs overall, it was really tech related. And it's reflective of the fact that we do continue to build out our digital platforms and we also have an increased costs year on year overall just related to our tech infrastructure for the IB. And we would expect to continue to maintain that level of investment away from that though. We would also expect that the IB will manage their costs prudently as they have in the past. And of course, variable compensation will be directly linked to revenue and mix. On the second part, I think that's, first of all, I looked at our performance in the Q2. Again, and by the way, I don't find the question annoying at all. And we are more than happy to continue to explain how we look at our business and how we adapt to the changing environment. The 2nd quarter was a demonstration that we were able to compete at similar performance across our equity business, across the businesses, even when you neutralize it for year on year effects. And when I look at our CCS performance, it indicates again that we have a very strong franchise that's particularly when you look at the performance of our APAC numbers and the M and A numbers. Now from this position of strength, we will continue to look at ways to evolve and adapt our business model. We are not thinking about making a revolution. It's a constant evolution of the business, trying to look at way to redeploy resources in areas where we see more growth and also creating opportunities not necessarily just on optimizing financial resource utilization, balance sheet utilization, but also cost, but also most importantly to drive growth and drive collaboration between our units, particularly with Wealth Management, but also with our corporate business in Switzerland. So what you have to expect is a series of steps that we take. Some of them will be more public by its nature. Some of them are may not be public at all, because again, this is the way we manage the business and therefore expect an evolution and not a revolution. Thank you. The next question comes from the line of Jernejo Macham with Goldman Sachs. Please go ahead, sir. Yes, good morning from my side as well. I have three questions, please. The first one is just a clarification question for Kurt, because I didn't understand it well when you talked about it prior. So you were talking about clients taking advantage of lower rates by trying to refinance the existing positions. I think you mentioned that they would be winding down their current positions and then putting them on at a lower funding cost. And I didn't understand what you mean, but I'd like to understand that, please. Then the second question is on the Swiss Bank. Just looking at Page 19 and the net interest income trajectory. In the eventuality that the Swiss Central Bank cuts again even further into negative territory, what is the ability that you have to pass this further cut on to your clients? And would you consider increasing the perimeter of clients to which you charge negative rates to? And then my final question, and I'm going to try to ask this in a way that would allow you to say something. You talk about geopolitical situation a lot. And I guess we've been following some of the media reporting about UBS's operations in China and some of the backlash that you've received in the media there. And I wanted to ask you 2 things. 1, in your assessment, has the ease of doing business in Asia and in China changed significantly over the recent period, so call it the last 3 months? And the second question I wanted to ask you is UBS is still working on integrating the global wealth management capabilities into a more singular unit. And I was just wondering given the new geopolitical realities whether that changes the pace of that project to the way you think about that project? Thank you very much. Thank you, Gharoni. I think I counted 4 questions there. But to first address the first one. So what's the dynamic? We'll take the U. S. First. And if you think about mortgages, as rates go down, naturally the inclination is for mortgage holders to look to refinance, to lock into lower rates. And once that happens and refinancing picks up, then those clients shop, they shop their mortgage, particularly in the U. S. Where you have the highest degree of fungibility just across different distributors and mortgages. And we've seen U. S. Players price very aggressively and price well below their cost of capital. And that's put pressure overall on our mortgage rates. We've seen the same dynamic. In Asia Pacific, there's been deleveraging, but also there's been just an increased volume. I'll just give you an example overall. If you look at the total amount of pay downs that we saw in Asia Pacific during the first half of the year, we saw $15,200,000,000 of overall paydowns. Now we offset that with about $14,700,000,000 of rebooking of loans for a slight reduction in our lending. And that's the same volume we saw for the full year last year. And that also is the impact of lower rates. And again, once those clients are in play, they'll work to finance at lower rates and you introduce competitive pressures. And Kurt, this pay down that you referred to in Asia, what type of loans are these? These are all our Lombard loans. So they're all security loans. So the logic is I have a client, he sells the underlying asset, he repays the loan for no prepayment penalty and then he take he could literally take out a new loan with you at a lower rate. Or generally he doesn't actually sell down the collateral. What he does is he pays down the loan and he looks to refinance at a lower rate because he's uncomfortable with the current margin that he's receiving given the fact that interest rates have come down and expectations on equity values have come down. Yes, yes. Thank you very much. So on the question of the potential SMB or any other central bank further moving to a negative territory, I think that, of course, we are contemplating like we did in the past before such potential outcomes would materialize, a series of actions we will take across the board. I think, of course, I'm sure you understand that it would be totally premature and not appropriate to outline what they are before things move. So we also need to see if this is happening, what is going to be, if any, the other actions or points that a central bank would put in place in order to mitigate the effects on going deeper into negative rates with a low inflation environment. I think that's we will see need to understand how effective that policy would be. And so but nothing is ruled out. We think about every possible option at this stage. Of course, the only thing we know is that we're not going to get just our shareholders to pay for negative rates. And of course, as things get wider, like we did in the last couple of years, we will implement measures to offset and protect our margins. In respect of China and the geopolitical, which has nothing to do with geopolitical, what happened? I think that we took you saw a little some reactions. We have I have to say that other than the first few days in which we had both internally and externally because it's not just an external event, some issues to be addressed. The situation, I can say, has normalized and there is no impact whatsoever on our commitment to the region. We have been in Asia for 50 years and more. We have been in China for many, many years. I think that this was an unfortunate situation, but I think we took all the actions necessary to remediate. And as we go forward, we are confident about our position. Now, Of course, you saw in the quarter that we reached a number one M and A position in league tables in Asia. So I think that's there is little evidence that there is an impact on that. In respect of the geopolitical tensions has nothing to do with the way we manage our global business lines. If anything, this is something that is more related to the legal entity activities. And one of the strongest offering we give to our wealth management clients is to an opportunity to book assets globally. So our wealth management clients, the wealthy, the ultra, the GFOs can book in the U. S, can have relationship with us in Asia, in Switzerland, in London and so on. And getting the same level of service. And this is one of the unique features that we can offer that makes us the only truly global wealth management franchise. Thank you very much. The next question from the phone comes from Andrew Coombs with Citi. Please go ahead, sir. Good morning. Two questions, please. 1, a clarification on costs and one on equities. On the OpEx guidance you provided for the second half to be slightly up versus the first half ex litigation, Would that still hold true if you stripped out the UK bank levy in the Q4? I think that was €85,000,000 last year. And then my second question on the equities business. The year on year revenue performance down 9% looks to be consistent with the U. S. Banks that have reported. But looking at the detail you provide, the mix is a bit different. I think your cash and derivative revenues have held up relatively well. And actually, the bigger decline has come in the finance service revenues. If I look at those financing revenues, you talk about lower prime brokerage balances. Can you just explain what's driving that? Is that a share loss issue? Thank you, Andrew. In terms of your first question regarding total cost, as we highlighted, we expect to be slightly up year on year in the second half. Now that includes the combined impact of all the actions that we've taken, including the tactical initiatives where we expect to see the majority of those in the second half of the year, along with some of the headwinds that we highlighted around the further clarification regarding regulatory matters in addition to some of the investments that we're making in the business. That also reflects the fact that we do see seasonality in the Q4 and that includes the UK banking levy. So the UK banking level will contribute to that slightly up year on year. I won't comment as to whether or not if you exclude that, does that mean we're going to be flat or down? I would just mention that it's all aggregate and that's the kind of the aggregate picture that I commented on. Now looking at our equities businesses, as you indicated, our cash derivatives held up fairly well. And that is in actually, of course, a very low vol environment, which does impact our business. I would mention as well, we do believe we increased our share of electronic trading in equities, particularly in Asia as well as the Americas. Now in terms on the prime brokerage and the financing side, I can't comment on a relative basis. I haven't seen any indication at all that we've lost share. It's just the level of activity that we've seen with our own clients and our activity levels are down quite a bit, which aren't surprising just given the environment. Thank you. The next question from the phone comes from the line of Benjamin Goy with Deutsche Bank. Please go ahead, sir. Yes. Hi, good morning. Two questions, please. The first one on loan growth in GWM. So the 10% to 15% you highlighted last year, do you think that's still feasible in an environment where you highlight more competitive pressure in loan pricing? And then secondly, in the Investment Bank, the RWAs fell quite significantly and were now below the or you basically more than compensated the increase we have seen in Q4 last year. Is that now the new run rate? Or you expect a bit of recovery after maybe a subdued Q2 in terms of volatility going forward? Thank you. Yes. In terms of loan growth, naturally, the environment is, of course, is going to impact overall our loan growth performance versus our plan, just given the changes in assumptions around the beta factors. And specifically, as an example, we saw accelerated deleveraging in Asia Pacific that was completely due to our clients' outlook that resulted in a $7,000,000,000 overall reduction in loans in Asia Pacific. On top of that, with the increased level of refinancing, the very aggressive pricing in the U. S. Even though our U. S. Mortgage book is actually up quarter on quarter, it still is going to impact the pace of growth versus what we had anticipated. So certainly, and as we reformulate our plans and Sergio commented on that several times, we'll come back and we'll give an indication of what we feel that trajectory is. In terms of RWA and I think very clearly when we received quite a significant reaction to the increase in in market risk in the Q4. And we highlighted that that was really due to the volatility and we would expect it to come back down. That's exactly what you've seen. In fact, market risk continue to come down in the second quarter. We also saw a reduction overall in credit risk. Right now, our RWAs are at around a third of the total group and we maintain our guidance that we expect RWA and LRD usage to be around a third of the group with some volatility from quarter to quarter. Okay. Thank you. The next question from the phone comes from Stefan Stahlmann with Autonomous Research. Please go ahead, sir. Yes. Good morning, gentlemen. Two questions from my side, please. For the first time, I think you have now disclosed your interest rate risk in the banking book. And you spell out a stressed loss in the 200 basis point upside scenario of $4,500,000,000 Could you give a rough guidance of how much of this 4,500,000,000 stress test loss would be CET1 capital relevant? I assume some of that would be filtered out through cash flow hedges, etcetera. And the second question, last year when you switched to U. S. Dollar reporting, you mentioned a roughly EUR 300,000,000 revenue benefit as a result of this. Could you provide some color as to whether this is already in the current run rate of revenue in the first half? Or is there still some of that to come because the positions have not been put on yet? Thank you very much. Stefan, yes, according to the updated Pillar 3 requirements, we now are reporting on the interest rate in our banking book. The stress loss that we quote, the $4,500,000,000 which is an economic measure loss, would not have a material effect, would have an insignificant effect on our CET1. In terms of the U. S. Dollar, our reporting, we've actually seen a little bit more than the $300,000,000 and it's already in our current results. I would mention that the run rate of that benefit from the change in currency will be impacted by the lower rates going forward. So you will see as we roll over our hedges on our investment in equity, there'll be some erosion of that over time. But that $300,000,000 holds for the full year and it's already in our run rate. Great. Thank you. The next question from the phone comes from Andrew Lim with Societe Generale. Please go ahead. Hi, thanks for taking my questions. So the first one is on the competitive intensity for deposits that you referred to on Page 16. I was wondering if going forward with interest rates set to go lower, you would expect that competitive intensity to alleviate going forward based on your historical experience? And then following on from that, just another question on NII in general, but factoring in forward rates, can you give an equivalent impact on your gross margin over the next 12 months or so, everything else being equal? And then my second question is on the outflows, the net new money outflows in the Americas. Obviously, I mean, you've attributed that mainly to seasonal tax effects. But I also know that you've got adviser numbers dropping by about 100 or so over the quarter. Is that a contributory factor to the outflows? Or is it the case that you retain most of the AUM from those advisers leaving the franchise and that goes to your more experienced advisers that you retain? Yes, the competitive intensity on deposits. And so if we it really that's been building up over the last year and there are a couple of drivers. Firstly, it was actually more in response to interest rates as they were going up. As interest rates were increasing, we saw our U. S. Clients in particular, but also other clients in U. S. Dollars move into money markets. We saw about $11,000,000,000 increases in money market, a large portion of that coming out of demand deposits. And the second is actually clients moving into term deposits. Now we, in addition to clients shifting on their own rate preference, we also have been active in putting clients into term deposits. And that's really just to continue to help with the funding structure of our U. S. Business. And all of that contributed to the reduction in deposit margins. Now that interest rates have reversed and they're coming down, we don't really expect it to see much more shifts into money markets and into time deposits going forward. So we think that effect has largely stabilized. On the net interest income guidance, we'll just really stick to the fact that sequentially, we would expect to be down slightly if we see the 25 basis point drop. Now clearly, the longer term rates will have an impact over time as we roll over our hedges on our U. S. Dollar book, but as well as on our Swiss franc book. You've seen in our Swiss business, we've been able to offset that through some pricing actions. In our U. S. Business, in terms of the net new money outflows, you are correct. The largest portion of the U. S. Outflows were driven by tax payments. But in addition to that, we had some net recruiting outflows. Now I would say we have a really strong pipeline of high quality new recruits. A number of those recruits actually come from the private banks, which means that they have a cooling down period. So there is a little bit of delay between when we recruit the FAs and when we actually onboard them, and that's causing a little bit of a delay of the inflows. So we would expect with our current pipeline in the confirmed recruits to see some improvement in our net recruiting numbers in the second half of the year. That's great. Many thanks. The next question from the phone comes from Adam Terrillak with Mediobanca. Please go ahead, sir. Good morning. Sorry to return to NII again, but you've given an indication on NII pressure coming both from the short end and the long end of the curve. But which would you actually say is the greatest threat to GW NII? We should be focusing on multiple cuts from the Fed or the inverted yield curve and lower midterm rates? And how confident are you in protecting NII at the €950,000,000 to €1,000,000,000 sort of run rate a quarter level we're at today? And then the other side of that is how much flex do you have in your cost base? So year over year revenues in GWM are down, but FA compensation in the U. S. Is up. Is this driven by the revenue mix? And does it imply that much of the NII pressures actually end up dropping straight to the bottom line? Yes, Adam. Thank you for another question on NII. In terms of the dynamics, the interplay between long term and short term, it is somewhat complex. I would just highlight short term rates, we immediately see the flow through to our NII because it depends of course on the beta factors. When we gave our guidance on the 5 basis point impact having a sequential reduction overall in our NII that was purely from the 20 an assumed 25 basis point along with an assumed level of beta and how much we would of that we would pass on to our clients. And away from that, we don't see much outside of that in terms of headwinds on a quarter on quarter basis. Now the longer term rates, they actually drive client preferences. And so you see a lot of the shifts that have taken place. It's a combination of short and long term rates. It also drives the prepayment impact that you saw in mortgages, which is very pronounced in U. S. Banks, but also it was evident in our results on a year on year basis. And so there are a number of complexity in terms of how short versus longer term rates impacts overall the business. Now on the overall, you talked about the U. S. Business and the fact that RFA comp is up. I would just highlight that actually, as we mentioned, our pre tax profit was at record levels in the U. S. And so year on year, our PBT was up 4% year on year and 10% quarter on quarter. So really our FA comp moves is directly in line with that. Having said that, as we've indicated before, of course, banking product revenue has very little payout on the grids. And so you're right, banking product revenues, including deposits and loans, is much more accretive or dilutive to our pre tax profit on the way up and down, particularly in the U. S. Perfect. Thank you. The next question from the phone comes from Patrick Lee with Santander. Please go ahead. Hi, good morning. It's Patrick from Santander. Thanks for taking my questions. I have two questions on the Global Wealth Management division. 1 more general on the inflow dynamics and second one on the revenue mechanics. And firstly, on the inflow question, outside the U. S. Seasonality, you recorded very good inflows in Q2 in Switzerland and EMEA, but APAC was particularly weak after a record Q1. And I know you have talked about general economic and political environment. But I just want to ask you how much of that weak Q2 in APAC was due to all these conditions, problems? And how much of that is your decision to stay out of competition, for example? And secondly, on the revenue dynamics, and I think in the past, you have alluded to some sort of a lag or timing difference between getting the assets through the door and getting clients to deploy the assets so as to generate revenues. But if I look at, for example, your APAC as an example, you had a record influence in the Q1, but that has not translated to better revenue sequentially. So I just want to know how much of that is because of all the issues you mentioned like client deleveraging, lower margin products? Or can we be more positive and expect some sort of a stronger pickup in the second half of the year as people put money to work, so to speak? Thanks. Yes. So in terms of your first question, I guess if you look at the net new money, you're right, APAC was down to $1,100,000,000 after very strong Q1. And as we indicated during the Q1, where we also had a challenging overall market and geopolitical environment, that's often driven to effects outside of market And it often is driven by large idiosyncratic inflows. It could be driven by an entrepreneur either having gone through an IPO or actually wanting to look to monetize large positions that they have. So it's So you don't always have direct correlation. So I wouldn't read much into the fact that we're lower this quarter than we were Q1. And you would expect to continue to see volatility, but overall, we're pretty confident that we'll see good flows in Asia during the second half of the year. You mentioned EMEA. Actually, EMEA had a very strong quarter with $4,500,000,000 and that's off of a good Q1, so there's $7,400,000,000 year to date. So EMEA, in many ways, is probably our better performance certainly outside of Asia Pacific in terms of net new money. Now on the revenue side, in a typical environment, when we get invested assets in, it takes up to a full year before we fully put those new assets to work. Now if the inflows are in the form of cash, it's usually going to take longer. And in this environment where clients are inclined to hold a higher proportion of their assets in cash, And in Asia, that's even more pronounced as we highlighted, we saw an allocation out of equities into cash and cash holdings increased by over 2%. You would expect that it's going to take even longer for us to see that money be put into investments. And a lot of it's going to depend on our clients and their conviction. As you saw from the survey right now, there's not high conviction and clients are more or less in a wait and see mode. Great. Thanks. Ladies and gentlemen, the webcast and Q and A session for analysts and investors is over. You may now disconnect your lines. We will shortly start the media Q and A session.