My name is Caroline Stewart, and I am the Global Head of Investor Relations, if you do not know who I am already. This morning, I would like to welcome you to our third quarter results presentation and also to our investor update. First of all, we would like to run through the Q3 results. This morning, Sergio will provide you with an overview of our results, and Kirt will take you through the details. After that, we would be happy to take questions from analysts and investors. Before I hand over to Sergio, I would like to draw your attention to our statement regarding forward-looking statements. It refers to cautionary statements included in our discussion of risk factors in our annual report 2017, and some of those factors may affect our future results and financial condition. You will see the same cautionary statement in each of our presentations today.
With that, I would like to hand over to Sergio.
Thank you, Caroline. Good morning, everyone. We will keep our remarks on the quarter fairly short, but we will get a chance to go through the details on Q3 and the way forward, of course, during the day. Overall, Q3 was strong, with net profit up 32% and reported PBT up 37%. We improved our efficiency, maintained our strong capital position, and delivered an adjusted return on tangible equity ex-VTA of 15.7%, up two percentage points year on year. Global Wealth Management improved its reported PBT by 3% year on year, despite facing tough market conditions, which led to the decline in transaction fees that I flagged back in September. We had record mandate penetration, higher recurring fee income, and continued growth in loans. New money was CHF 13.5 billion, despite a net deleveraging from our Asian clients.
The Investment Bank had a very strong quarter, up 75%, with notable outperformance in the Americas. Personal and Corporate performance was good, with resilient revenues and cost discipline. Asset Management was down against a very strong Q3 2017, which included profits from businesses we sold last year. Nevertheless, efficiency improved, and invested assets reached a 10-year high. Year-to-date, group net profit was up 19% to CHF 4 billion, the highest in a decade, driven mainly by the IB and GWM. In line with our strategy, we saw particularly strong growth in the Americas and APAC across businesses. Global Wealth Management profits were up 14% year on year, also the highest in a decade. Year-to-date adjusted return on tangible equity ex-VTA was 16.7%, highlighting the benefits and strengths of our diversification combined with a capital-efficient business model.
In the first nine months of the year, we have also delivered the strongest capital generation since Basel III was implemented. On top of CHF 1.5 billion of CET1 capital buildup, we accrued almost CHF 2 billion for dividends and repurchased CHF 650 million worth of shares, which is CHF 100 million above our target for the year. Our capital position remains strong with a CET1 ratio of 13.5%, a leverage ratio CET1 of 3.8, and a Tier 1 ratio of 5%. Summing up, another strong quarter with excellent capital generation despite a very challenging market condition. With that, I'll pass it over to Kirt, which walk you through the details on Q3.
Thank you, Sergio. Good morning, everyone. Beginning the 1st of October, the US dollar has become our functional currency. It will also be our presentation currency for the fourth quarter. From 2019, net interest income should increase by around $250 million compared with full year 2018. For the fourth quarter, we expect a limited net benefit as we incurred costs to reposition our balance sheet that offset any net interest income benefit. Our historic financials will be restated with no material changes expected. Today, we publish the time series in both Swiss francs and US dollars. Moving to the third quarter results. We have adjusted for restructuring expenses of CHF 120 million and CHF 55 million gains on sale. I will refer to adjusted results in Swiss francs unless otherwise noted.
As we all observed, the quarter was characterized by escalating geopolitical tensions with deteriorating trade talks, heightened concerns over Italy, and building tensions in the U.S. related to the upcoming elections. As you can see on the slide, these events weighed on markets, particularly in China, in emerging markets more broadly. Not surprisingly, our clients froze in reaction to this particularly challenging environment. Transaction volumes were down across all asset classes in all regions, pushing our transaction-based income to its lowest level since the crisis. Year-to-date Global Wealth Management PBT was the highest in a decade. For the quarter, profits were lower despite a 10-year high in recurring net fee income. As I just outlined, transaction-based revenues were down materially. The cost-to-income ratio rose slightly, reflecting 4% higher expenses as we made further investments in technology and addressed regulatory requirements.
Personnel expenses were lower, partly reflected actions taken in the prior quarter. Invested assets rose 6%, and all regions contributed to increased mandate penetration, which reached a new high at 33.9%. Loans were up 8% with higher balances in all regions, despite the de-leveraging that we saw in Asia Pacific. Total operating income increased by 2%. Recurring net fee income increased 6% to a new high. Net interest income was up 3% year-on-year, with deposit revenue up 14% in positive contribution from loans, partly offset by the expiry of a hedge portfolio on higher funding costs. Third quarter net interest income declined from 2Q18. As we saw reductions mainly related to currency translation, deposit net interest income, and funding costs. Deposit income reduced mostly as clients shifted into higher-yielding money market funds and other products, partly initiated by us in our fiduciary role and reflecting industry best practices.
As we issued certificates of deposits during the quarter to shore up our structural funding for current and anticipated growth in our loan book. Moving to the regional view, we saw good growth in the Americas and in Global Ultra. Americas operating income was at 6% as strong recurring revenue offset lower transaction revenue. In Ultra High Net Worth, profits rose 15% on good revenue growth as invested assets increased on continued strong net inflows from our wealthiest clients. APAC PBT was down 7%, reflecting the importance of transaction revenues in this region. In addition, we added 82 new advisors, an 8% increase year-over-year. EMEA and Switzerland were down on broadly flat revenues and higher expenses related to tech and regulatory costs. Despite the challenging environment, net new money for the quarter was a respectable CHF 13.5 billion.
Asia and EMEA included a number of big-ticket inflows from ultra high net worth clients. In the Americas, invested asset growth was in line with U.S. peers. PBT in our Personal & Corporate Banking business was $422 million, down 3% from the previous year despite the continued net interest income headwinds, as well as higher technology costs related to our digital transformation program. Revenues were broadly unchanged from the prior year. Recurring fees on custody and mandate assets rose and bundle product volumes were higher. Transaction-based income decreased despite higher FX and referral fees as we reclassified some costs to contra revenues earlier this year. Net interest income was down only slightly as increased deposit revenue offset by lower banking book revenues and higher funding costs. Expenses were up only 2% due to an increase in technology investments in higher regulatory-related costs, while G&A and personnel expenses were lower.
Annualized net new business volume growth reached the highest third quarter in a decade at 4.5%. PBT for Asset Management was $129 million, down year-over-year, but up from the second quarter as we started to benefit from the cost actions we took during the second quarter. Costs were down 3% quarter-over-quarter and 6% from 3Q18. Normalized for the sale of our fund administration business in Q4 last year, net management fees were broadly stable. Performance fees this quarter were below 3Q17 levels in both hedge fund businesses and equities due to weaker investment performance, reflecting a less constructive backdrop for active asset managers. In the fourth quarter, performance fees are expected to be broadly in line with 3Q18 levels. Invested assets reached a decade high on strong net new money over the last 12 months in favorable markets.
Our IB delivered another very good quarter with 44% PBT growth, driven by strong operating leverage. Return on attributed equity was 21%, up six percentage points from 3Q17. Overall, our IB results compare well with the peers that have reported to date. On a regional basis, we had particularly strong performance across the board in the Americas, where PBT more than doubled. The strong quarter was driven by our ICS businesses, as the same environment that drove our wealth management clients to the sidelines generated volatility that stimulated institutional client activity. Equities increased 15% on higher revenues across all regions and products, with stronger client flows and financing services. Including corporate equity derivatives to be more comparable with peers, equities rose 4%. FRC had a strong quarter, with revenues up 29%, with increases in all products. We continue to see benefits from our FX e-trading platform investments, with volumes up 25%.
Corporate Client Solutions was down from a very good third quarter last year. Advisory had a strong quarter as we increased fees for mergers and acquisitions against a decline in the fee pool. Equity Capital Markets rose. Revenues were significantly lower compared with an exceptional quarter last year. Costs were down 2%, mostly on lower personnel expenses. We reduced our cost-to-income by seven percentage points. We achieved these strong results, continuing to manage our resources prudently. Corporate Center retained loss was down, reflecting lower expenses for litigation in Corporate Center services. The factors we highlighted last quarter continue to impact Group ALM, and structural risk management net income after allocations was a negative CHF 120 million. We are taking actions to improve Group ALM results going forward, which I'll come back to later today.
Non-core and Legacy portfolio posted a small loss of CHF 25 million, including valuation gains on our auction-rate securities portfolio. During the fourth quarter, we will extend the recognition period of our U.S. tax loss DTAs in our IHC tax group to reflect the full life of the underlying tax losses. As a result, we expect to remeasure these DTAs less frequently, thereby reducing tax volatility in our earnings. UBS profits should be shielded from most cash taxes over the next decade. In 1Q19, we will start to amortize these U.S. tax loss DTAs, reducing their overall contribution to shareholders' equity. We are expecting to make other DTA adjustments relating to our U.S. operations in the fourth quarter. All of these adjustments should have a limited net effect on net profit, IFRS equity, and CET1 capital.
From 2019, we anticipate the effective tax rate will be around 25%, of which less than half will be cash tax relevant, contributing to 88% of our PBT accreting to CET1 capital or being available for returns to shareholders. Our capital position remains strong, with our CET1 ratio comfortably above the 2020 requirements, and we have TLAC of over CHF 80 billion. To wrap up, we had a good third quarter that highlighted the benefits of our diversified business model, contributing to a strong 2018 year-to-date. With that, Sergio and I will open it up for questions.
Some I'd like to make beforehand. First of all of you have got microphones in your seats. They're on one side or the other of your armrest. You need to hold the button down on the microphone when you're speaking, otherwise we can't hear you. Second thing I'd like to remind you is this is a Q&A for investors and analysts. There are some journalists in the room, and they will have plenty of time to speak to management in meetings later on. The third thing, I'd like you to keep your questions to two questions max, please. Finally, questions on the results, because we've got plenty of time for the investor update later on. Thank you very much. Andy.
Let me see if I can work this. This is part of your tech demo I see, this microphone contraption. The APAC inflows, I think, certainly positively surprised me. Can you talk us through how lumpy the inflows were there? Maybe the follow-up to that would be how client attitudes have changed in APAC, and have clients become more risk averse there and that's actually helped your inflow numbers there? Is there a flight to quality benefit that you've seen there, please? Thank you.
In terms of Asia Pacific, as you noted, Andy, we had quite a good quarter for inflows at CHF 8.4 billion, despite the very challenging quarter and despite the fact that China markets are down 21%, Hong Kong is down 16%. As we've said before, there actually is often a complete separation from how we see clients behave and what their risk attitudes are versus the actual flows in the quarter. This is an example of one of those quarters. It's not always the case. As we said before, in order for us to have very good net new money flows, generally we see large ticket items. That was certainly the case. In the third quarter, we saw a couple of large-ticket inflows from our very wealthy clients, our entrepreneurs in the Asia-Pacific region.
This is despite the fact that we actually had CHF 1.7 billion in deleveraging in the quarter. Absent that, we actually would've had a much better net new money quarter overall for Asia-Pacific. I think as you said, it certainly is reflective of the fact that we are the leading franchise in Asia-Pacific. UBS, of course, is a meaningful name, one that's highly valued by our clients, and I think our flows during the quarter were reflective of that. You mentioned client attitudes. As I said, I don't see a connection between necessarily the fact that they were risk-averse and we saw good flows.
Hello? Yeah. Two questions, please. First, on the cost control and the Investment Bank. The cost-income ratio improved materially. The costs are flat in spite of the revenue growth. Should we expect like a true-up, so to call, in Q4, or is it just generally you think that's the right cost-income ratio? On the tax rate. Does this basically mean, I'm not quite sure how I should understand the 25% and the 12%? Are we now having a 12% tax rate? Thank you.
In terms of the IB, as you saw, we had very nice revenue growth, and we also had very good expense discipline. I would note that personnel expenses contributed to the year-on-year cost overall. I would also note that we manage our compensation on a full-year basis. At the same time, the Investment Bank has been managing its costs very tightly this year as they have in the past. To comment just on our tax rate, what we highlighted is our tax rate overall, we expect to be around 25%. Within that 25% as a consequence now of us amortizing our DTAs going forward with the remeasurement on a full life basis, we expect that about 13% of that 25% will actually be DTA amortization, which will not have an impact on our accretion of capital. Therefore, our cash tax rate will be 12%.
As I said, that means that about 88% of our profits are available either to accrete or to return to our shareholders. I would also mention, as always, you should expect that in the fourth quarter, we will have U.K. levy expenses as we do not amortize for that throughout the year, and that will have an impact overall. We estimate that that should be around $70 million, with a large portion of that accruing to the investment bank.
Morning. A couple of questions from me on the U.S. side of wealth management. First of all, on the new money, it was essentially zero. If you can give us an update on why do you think that was the case, and how do you see this evolving in Q4? The other question, always on the Wealth Management Americas, regards NII. We have seen NII coming down, and you mentioned due to the fiduciary duty, some movement to money market funds. Shall we expect this trend to continue, or is this a good run rate from here? Thank you.
In terms of net new money in the U.S., as I noted, what's important to us, most important, is that our invested assets were up 6% in the Americas year-on-year, and that compares favorably to our peers. In the U.S., our competitors actually do not report net new money, so it's hard to get a read on what the trends are in the market. All we can do is to conclude that given our invested asset growth is in line, that there's probably not a big divergence in what's happening with flows in our peers. The second point overall is the net new money certainly reflected the fact that we still had outflows from that recruiting.
However, going forward, we feel very good about our business model, and we feel very confident in the fact that we're going to generate net new money growth in the Americas in our 2%-4% range. You'll hear more from Tom and Martin later today on how we expect to accomplish that. In terms of our net interest income, as you noted, and this is not surprising, it's actually occurring across the industry, that as interest rates continue to rise, there's pressure on deposits, and deposits are moving into money market funds, and we saw that during the quarter. In addition, as I mentioned, we did actually launch a CD program, and we increased our overall CDs, and that contributed to an increase in our cost of funding.
On the movement of clients to money markets, part of that was initiated by us because we think it's good industry practice for our clients that where it's appropriate for them to move in money markets. I think going forward, we'll see a balancing act between our margins and also our deposit flows. While in the short term, we're probably going to see a similar trend to what we saw in the third quarter, we still expect to see tailwinds in our net interest income line as we go through next year.
On the same kind of issue, do the CHF 0.9 billion outflows in the U.S. include any kind of impact from moving deposits into AUM, into money markets, or is it a clean figure?
What we've had about $4 billion in deposit outflows, mostly concentrated in our affluent clients, and that did actually contribute to the year-to-date net new money results.
As a second question, given that you recently sold SmartWealth, do you include any kind of benefit on your accounts this quarter?
For the sale of SmartWealth, we actually had an impairment, so the restructuring number that we adjusted for included a small impairment for SmartWealth, but it was very small, so there's really not much impact at all overall on our financials for the quarter.
Question at the back.
Hi, Amit from Barclays. Just following up actually, still on the net interest income discussion. I'm just curious whether these trends that you're seeing were or are reflected within your interest rate sensitivity guidance and also just again, more geographically. Is the NII impact primarily in the Americas part of the business, or is that something you're seeing across other geographies as well? Thank you.
The net interest income guidance that we provide is always based on a point in time. It's based on a static balance sheet composition, and it's based on forward rates. Therefore, it doesn't reflect any potential change in balance sheet, either positive or negative, new inflows or outflows going forward. That would impact the guidance that we provide. In terms of the second question. Sorry, what was your second question?
Sorry. The second part was about the geographic split-
NII
in terms of NII.
Yeah. Thank you. Overall, if you look at the NII trend in general, the fact that we have tailwinds, it's not just one region. It's the U.S., it's the Americas. It's also our Asia Pacific region. It's some of our clients that have U.S. deposits in the offshore business in Europe. We've seen broadly positive deposit trends, particularly across the U.S. and Asia Pacific. That's been partly offset actually by negative NII trends, particularly in Europe and Switzerland, with a negative rate environment.
Thank you.
Sir, I just have a detailed question, technical, if you want, on page 15. Why is UBS doing this now? What are the amounts involved? Also, can you explain the dynamics? What happens here? You take all the off-balance-sheet DTAs, you put them on-balance sheet, and you offset that with the write-off of the existing DTAs. How does the mechanics work?
The reason why we're looking to do this in the fourth quarter, we expect to do this, I should emphasize, as we are still finalizing the planning at the legal entity level, which triggers this, is first of all, we're taking advantage of the tax reform that we saw late last year. Secondly is that we are approaching actually a much shorter duration in terms of the remaining life of the DTAs, with roughly about 10 years left. In terms of the dynamics, there are a lot of technical moving pieces. What we highlighted here is that the IHC tax group is where we see the write-up, because that's where we have the majority of the earnings. That will be partly offset actually by a potential write-down in the U.S. ABG, the branch group, as we effectively see limited value in those DTAs going forward.
There's some other changes as well, which is why we indicate that the combined impact we expect to be limited overall for the fourth quarter on our tax line, as well as on our equity. We'll provide an opportunity to actually ask more technical questions at some other point, of course, related to DTA movements.
Hi, Nick.
Morning. Nick Watts from Redburn. Just a question on client transactional activity. You obviously saw a slowdown in the quarter. Could you perhaps just talk about the mix of that slowdown? Was it more pronounced in Asia? How did the U.S. do on a relative basis? Should we think about, if it was more pronounced in Asia Pac, given the slowdown, is it a harbinger of things to come for the fourth quarter? Thank you.
Yes. As we highlighted, actually the reduction in transaction revenue was really pronounced. It was down 12% year-on-year, the lowest transaction revenue that we've seen in the crisis. We saw reductions across all regions. All regions were impacted. However, in Asia Pacific, we rely more on transaction revenue as a percentage of our total income versus all the other regions. That's just the nature of how clients engage with their wealth and their investments. Therefore, the overall impact on a year-on-year basis was a bit more pronounced in Asia Pacific than it was in the other regions. Going forward, of course, we can never predict what's going to happen in markets and how clients will react. Certainly, we have not seen an improvement in the environment. Look at what happened yesterday with the Dow.
That would certainly be indicative of the likelihood that clients are still concerned and still remaining on the sidelines as we get into the fourth quarter.
David.
Is that when you talk to clients, the reality is that for the time being, they are still very happy about their asset allocation. Seeing those movements doesn't lead into reshuffling of their portfolios. It remains to be seen how long this is going to be the case. If they start to move down their allocation on equities, you may see volumes popping up, and maybe going into more mandates or so. At this time, particularly in the U.S., people are pretty happy about You saw in September, October markets going up. They wouldn't touch their portfolio for the time being. As the market goes down, they are not touching their portfolio. That's really, in a nutshell, what's going on.
It's also was interesting to see in Asia, the shift away from maybe the tech sector in China, a rotation into the same teams in the U.S., but with less cash. Net de-leveraging or net-net de-leveraging, as Kirt mentioned, but also a slight decrease of asset allocation on tech and stocks in favor of a geographic diversification.
Oh, the microphone's in your seat.
Yep. You got your own personal microphone.
He already asked two questions, that's why.
Yeah.
I was not paying attention. Sorry, could you give a bit more color on this deposit outflow in the U.S. to money market products? Could you say how much deposits are actually flowing out in that particular quarter out of the total? You talked about raising the CDs. What kind of impacts on your, say, cost of liabilities are you incurring there in Wealth Management Americas as you see that trend coming through? My second question is on those strong APAC, net new money flows that you're seeing. Do you benefit there from a flight to quality? As we see risk aversion in the emerging markets, is it the case that actually countercyclically these clients see you as an opportunity to invest their money and diversify globally?
In terms of the trends that we've seen in our deposits, first of all, for overall Global Wealth Management deposits are roughly flat year-over-year. We have seen a reduction in our deposits in the U.S. We saw that in part because we actually initiated some movement in the money markets, this was done for capital reasons, where we wanted to reduce part of the capital burden. In addition to it, as I mentioned, we also did it for fiduciary reasons, as we think the responsible thing to do for certain clients is to ensure that they're properly invested. During the quarter, what was the actual impact of movements we saw in the quarter? We haven't indicated that number. We'll get back to you on what that number is.
At the same time, what we've been doing in the U.S. to shore up our overall funding base, as I mentioned, is that we did launch a CD program. Our total CD volumes currently are about CHF 3.7 billion. We increased our CD volumes by about CHF 2 billion in the quarter. We also saw an overall cost increase of our CD program by about 1.5 percentage points. That contributed to the funding cost. Overall, our deposit costs were up by about six basis points in the quarter. That made a contribution. Going forward, we're going to use all the mechanisms available in order to shore up our structural funding as we manage this, as we do anticipate to continue to grow our loans well into next year. As I said, you'll hear more from Tom and Martin on this.
I addressed the point before on the flight to quality. As I said, we are a leading franchise in Asia by far. UBS, particularly as a Swiss name, which is highly valued by Asian clients. You would naturally expect that in times of stress, we would see some benefit from that. How much benefit we saw in the third quarter, it's really hard to estimate.
Further questions? Okay. If we have no further questions, thank you very much. Our investor update is going to start at 9:15 A.M. this morning. We've got a long break before then. The journalists that are in the room will be escorted upstairs to see the tech demo. The rest of you will have to wait till 11:00 A.M., I'm afraid. I think it's probably worth waiting for. Thank you very much, and we'll see you later on for our investor update.