Earnings Call: Q2 2018

Jul 24, 2018

Welcome to the UBS Second Quarter 2018 Results Presentation. All participants will be in listen only mode and the conference call is being recorded. 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 the media. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to UBS. Please go ahead. Good morning. It's Carla Stewart here, Head of Investor Relations. Welcome to our Q2 results presentation. This morning, Sergio will provide an overview of our results and Kurt will take you through the details. After that, we'll be happy to take your questions. Before I hand over to Sergio, I'd like to remind you that today's call may include forward looking statements. These statements represent the firm's belief regarding future events that by their very nature are underarmacked outside of the firm's control, and our actual results and financial condition may vary materially from our belief. Please see the cautionary statements included in today's presentation on the discussion of risk factors in our annual report for a description of some of the factors that may affect our future results and financial condition. Thank you. And with that, I'd like to hand over to Sergio. Thank you, Caroline. And let me first touch briefly on our strong performance this quarter, and then I'll cover some highlights of the first half of the year and our plans for the future. Q2 net profit increased 9% to nearly CHF 1,300,000,000 with strong growth in Global Wealth Management and the Investment Bank. In personal and corporate, momentum was good as profit increased. Reported profits in Asset Management were impacted by a business disposal in Q4 'seventeen. Kurt will cover the quarterly results in detail later. Strong performance in Q2 contributed to a very good first half with net profit up 15% to EUR 2,800,000,000 Global Wealth Management's reported profit reached EUR 2,200,000,000, the highest in 10 years. The Investment Bank was strong across the board with 24% adjusted return on attributed equity. Personal and Corporate maintained its good business momentum despite interest rate headwinds. In Asset Management, we saw a rebound in normalized profit and invested assets reached a decade high. To conclude, we had 2 consecutive quarters of returns well above the 15% return on tangible, and we broke down our cost income ratio by 2 40 basis points. We have generated around CHF 3,000,000,000 of CET1 capital in the 1st 6 months, the most in any first half since we began the implementation of Basel III. We added $1,100,000,000 to our capital base while accruing for the 2018 dividend in line with our dividend policy. In Q2, we also bought back 550,000,000 worth of our shares, achieving the target we set for 2018. Any additional share repurchases this year will depend on business and capital development. So now on our strengths and plans for the future. As you know, UBS is the largest and the only truly global wealth manager with a strong footprint and excellent growth dynamics in the world's most attractive markets. This is what makes UBS unique. We can also rely on very strong and stable earnings from our personal and corporate business as part of our leading universal bank in Switzerland. In Asset Management, we are focused both on areas with high growth potential and attractive margins. Similarly, our investment bank excels in the areas where it has chosen to compete and is a leader when it comes to resource efficiency and returns. All our businesses are critical to the success of our strategy, and each of them is a source of competitive advantage for the others. We have seen UBS delivering good profit in a variety of conditions in recent years. This speaks to the reliance and diversification of our earnings in difficult times and is also a result of our investment over the years. We continue to see significant potential in the world's largest and fastest growing markets. The geographic and business diversity comes at a cost, which is structurally higher than many of our peers. Having said that, these costs are more than offset by the superior prospects and returns of our models. Looking at revenues. We have added EUR 2,200,000,000 to recurring income over the past 6 years or 5% compounded. And today, almost 60% of revenues are recurring in nature. At the same time, we have refocused all our businesses on risk adjusted return and efficient use of resources. Transaction income also grew despite margin pressure, risk aversion and low volatility environment. Because our business is capital light and also because of our risk discipline, credit losses have been minimal, which speaks to the quality of our credit book. And finally, I'd like to highlight that UBS is one of the best rated large global banks. Here are some examples of the cost associated with our global and diversified business model. The $52,000,000,000 we have built in TLAC since 2012 has led to an increase in funding costs of around EUR 700,000,000 per annum. In addition, implementation of new regulations has also been costly. We are now spending over $1,500,000,000 on regulatory matters every year. The inflow of new regulation has been well above anything we could have anticipated, and some of the associated costs is more permanent in nature. The latest example that will cost us over EUR 100,000,000 is Brexit. Naturally, we continue to actively work to bring more efficiency to overall regulatory spend. Our philosophy in managing the trade off between cost income and capital efficiency on an absolute and relative basis is best reflected on this chart. Our model is very capital efficient, comes with a structurally higher cost income ratio, however, generates superior overall returns. Of course, we are working to improve on both fronts in order to move to the next efficient frontier. So how do we get there? 1st and foremost, we need to keep growing the top line. And here, we have a range of strategic plans to add to the growth inherent to our business. On costs, we have to focus on continuous improvement as well as structural changes, including investing in technology, which will enable us to create sustainable efficiency. We are taking some initial cost actions in the newly combined global wealth management as well as in asset management, which form part of our plans to improve efficiency and effectiveness. We continue to reduce corporate center spend outside of tech and risk. Having said that, even within tech, we are doing some heavy lifting to in source staff to gain greater control and better efficiency. As I mentioned in Q1, the creation of Global Wealth Management was a natural evolution of our business model, and it's a story about growth. Having said that, of course, we are taking measures to optimize resource utilization in the new organization. We already have an excellent position in terms of loans and mandate penetration, but we still have more scope to grow in both areas without compromising on risk or suitability standards. Post full implementation of FATCA and automatic exchange of information, we have a unique opportunity to expand our global offering to ultra wealthy and global family office clients regardless of their domicile. For example, we are working on new avenues to link international clients into the Americas and better serving U. S. Persons anywhere in the world. We are also working to fuel more growth in our GFO business by extending and scaling this highly successful joint venture between Global Wealth Management and the Investment Bank. The key regional drivers of growth, Americas and APAC, remain intact and progress here continues to be excellent. We see Onshore China as a critical long term driver of growth, and we are investing to capitalize on our strong position in the region. And of course, technology remains an important part of the strategy. We are piloting and perfecting different client approaches. Technology will also help us to drive costs lower. Many of you will be all too familiar with the pressures facing the asset management industry today. Our asset management business has undergone a fundamental transformation over the past few years. We have refocused on areas of strength and worked to build our investment capabilities and target future growth areas. As you can see on the slide, the business has 6 strategic priorities, of which 5 are focused both on high growth and attractive margin areas of the industry. In complementing these initiatives, we are improving efficiency and operational excellence. We are regularly asked to provide examples and quantify the benefit of technology investments. Here are some examples. In Switzerland, we are running a multiyear program to digitize the bank covering front to back processes and improving the client experience. So far, we are very happy with our progress and client response. Our digital clients are more satisfied at a more attractive revenue profile and lower attrition rates. Digital penetration and service usage are also growing rapidly across both the personal bank and our Swiss wealth management client base, which is key for cost efficient growth. All this will help us to sustain our leadership position in Switzerland. The Investment Bank broke new ground with its transformation to a client focused and capital efficient model, and the results over the last few years speak for themselves. Today, UBS is once again leading the charge with our transformation into a digital investment bank. Over the last 2 years, we have invested in our electronic FX platform to enable faster and more competitive pricing. Since we launched the new technology in Q3 'seventeen, we have seen a steady increase in volumes. Year to date revenues were up 27% above previous years, and we have gained market share. Our Equities electronic platform is also growing dynamically, with revenues up nearly 40% in the 1st 6 months. UBS's position in this area is well recognized by clients and by industry surveys. We have also invested in technology to support our research franchise. EvidenceLab is a key differentiator and allows our analysts to produce smarter and high opening research for our clients. We are using big data to bring a different and complementary take on traditional ways of valuing company a company. Last year, we had over 6,000,000 downloads of research and sales notes from our NEO platform. So all in all, we have had a strong good first half of the year, which is a continuation of the trend we saw over the last few years. We are well positioned to capture growth across all our businesses and regions where we operate. We will continue to invest in a focused way in technology to drive an even better client experience and to help us achieve sustainable efficiencies. All this will allow us to continue to grow our profitability and deliver our capital return targets. I realize that 15 minutes half an hour is not enough to tell you about all the progress at UBS and our future plans. That's why we are planning to hold an investor update in London on October 25. So I look forward to seeing you there. And with that, I hand over to Kurt, who will take you through the quarterly results. Thank you, Sergio. Good morning, everyone. As usual, my comments will compare year on year quarters and reference adjusted results unless otherwise stated. This quarter, we have adjusted for restructuring expenses of $114,000,000 dollars $15,000,000 of foreign currency translation losses. Taxes for the quarter include a reversal of the provision of $13,000,000 we took last quarter for BEAT. As following a continuing assessment of the new laws application, we no longer expect a material impact this year or for the foreseeable future. I would also note that we are currently reviewing our DTA remeasurement process and expect to make any adjustments in the Q4 this year. Global Wealth Management had another very good quarter with 10 year record performances in net interest income, recurring net fee income, strong invested asset growth and record lending volume and mandate penetration. We delivered 18% PBT growth on a reported basis or 7% on an adjusted basis despite lower client activity. On the efficiency side, our reported cost to income ratio improved by 280 basis points or 50 basis points on an adjusted basis. At the same time, we've absorbed material increases in incremental investments and regulatory related spend. This year, we have been investing in technology, building out our product suite in the U. S. And hiring advisors in APAC, resulting in over $175,000,000 in incremental expenses compared with the first half '17. In addition to this, we spent an incremental $90,000,000 for regulatory developments. As Sergio mentioned, we have implemented a number of initial efficiency measures in the quarter, which we expect to result in a reduction of over $100,000,000 by year end compared with the first half annualized. Operating income increased by 5% with 83% of our revenue recurring in Q2. Net interest income and recurring net fee income were up 9% combined, benefiting from growth in invested assets, mandate penetration, deposit margins and loans. Conversely, transaction based income declined on muted client activity in both the Americas and Asia as uncertainty weighs on client sentiment compared with a more buoyant move in the prior year. Looking at net interest income in more detail, we saw 10% growth overall, driven by both deposits and loans. Higher deposit net interest margin drove the larger share of the increase as we have benefited from U. S. Dollar rate rises outside of the U. S. As well as having maintained our deposit beta at relatively low levels through the re carrying exercise we undertook in the U. S. Towards the end of last year. It's likely that our deposit beta will increase with future rate rises, reducing the benefit we'd expect to realize in the U. S. We've grown loans in all regions over the past year and most notably in APAC, which was the largest contributor to the 11% increase in total lending balances. We're also expanding our product suite in the Americas in jumbo mortgages and more tailored and specialized lending. Partly offsetting these positive product results were we were impacted by the roll off of interest rate hedges at the end of last year and higher funding costs. We see the 9% increase in recurring net fee income, primarily as we have grown mandate products by almost $100,000,000,000 in the last 12 months, partly offset by the diminishing impact on recurring income from cross border outflows in prior periods. Moving to the regional view. Americas PBT increased by 16% on double digit recurring fee income growth and strong net interest income. Invested assets, loans and managed accounts all increased. The cost income ratio decreased 1 percentage point from the prior year. Costs increased only 3%, mainly on investments that we've made to further expand the product shelf and to deploy technology for our FAs and clients. Total F8 compensation was flat year on year. Its higher grid based compensation was mostly offset by the reduction in compensation commitments to FAs, as our focus on retention and productivity over recruitment is paying off. Our FA productivity remains unrivaled. In APAC, our revenues rose by 10% on strong net interest income and recurring net fee income growth, which offset weak transaction activity as mentioned earlier. Costs were up 13%, reflecting an uptick in investments, including a 9% increase in advisers and our investment in China, both of which will take some time to bear fruit. We also had an increase in expense for litigation and regulatory matters. Our ultrahighnetworthbusinessdemonstratedstrong PBT growth of 30% and double digit growth across all regions, higher invested assets and increases in all revenue lines. After a very strong quarter, this quarter's net new money was atypical. Outside the Americas, net new money was around 6,000,000,000 dollars as we had lower net inflows from ultrahighnetworthclients and very little net new lending. In the Americas, there were $4,600,000,000 of tax related outflows, but we also had a 4,400,000,000 dollars low margin outflow from a corporate employee share program. That said, the underlying story is encouraging as excluding these items, U. S. Same store net new money was more than 3x last year's amount. We continue to target 2% to 4% growth in Global Wealth Management. PBT in our personal and corporate business was CHF378 1,000,000, almost unchanged from the previous year despite the material ongoing net interest income drag as well as increased investment in technology. Recurring net fees rose on higher volumes of bundled products and investment funds. Transaction based income increased on FX and referral fees. Net interest income decreased by $16,000,000 from the prior year as the increased deposit revenue was more than offset by lower banking book revenues and higher funding costs. As mentioned before, we initiated a multiyear investment program to digitize our Swift Universal Bank, where we spent about $70,000,000 year to date. We expect both revenue and cost benefits to begin to improve in 2019. Net new business volume growth was strong at 3.9% with increases in both client assets and loans. PBT for asset management was $126,000,000 down $7,000,000 Normalized for the sale of our fund administration business in Q4, profits were up 1%. Invested assets reached a decade high on strong net new money over the last 12 months, favorable markets and improved investment performance. Furthermore, net new run rate fees were the highest since 2Q 'fifteen, led by a strong contribution from our wholesale business, which is one of our 6 strategic priorities. Performance fees were lower in both alternatives and equities. This was partly driven by the implementation of IFRS 15, which delays crystallization of a large portion of our performance fees in active equities until the Q4 as our investment performance held up well. We have taken cost actions in the business in the Q2 to generate personal cost savings of around $25,000,000 by year end. We booked restructuring charges of $13,000,000 in Q2 as a result, which we adjusted for. Our IB delivered another excellent quarter with 44 percent PBT growth, a 23% return on attributed equity and very strong operating leverage. On a regional basis, we had particularly strong performances in the Americas and Asia Pacific. Within ICS, equities increased 17% on higher revenues across all regions and products with stronger client flows in financing services and derivatives. If we include corporate equity derivatives to be more comparable than peers, equities rose 11%. FRC had a strong quarter with revenues up 72% to over $500,000,000 partly due to the recognition of around $100,000,000 mainly related to previously deferred day 1 profits. Excluding this, FRC revenues were up by more than a third with increases in all regions and all products. Over client solutions had a more subdued quarter, mainly as Equity Capital Markets revenues were lower. Costs were up just 4%, mostly on higher IT investments and regulatory expenses. We reduced our cost to income ratio by 6 percentage points, demonstrating ongoing cost control. We achieved these strong results while reducing our RWA sequentially, mainly due to a 9,000,000,000 dollars reduction in market risk RWA on risk management actions taken during the quarter. We've made progress in our corporate center this quarter. Consistent with our objectives, services total costs were down 2%, excluding both technology where we committed to invest and risk control where higher expenses were related to regulatory requirements. As a reminder, over 95% of the $2,000,000,000 from services was allocated to the divisions this quarter. The factors we highlighted last quarter continued to impact group ALM. While there was an improvement in structural risk management quarter on quarter, LIBOR OIS and FX basing spreads remain adverse. We are progressing actions to improve our group ALM results going forward. Noncore and legacy posted a small loss of $17,000,000 including an additional litigation provision of $76,000,000 and valuation gains on our option rate securities portfolio. As part of our overall focus on efficiency and effectiveness, we have been in sourcing jobs from 3rd party vendors to our business solution centers in recent quarters, primarily in technology. Overall, we've reduced our total workforce by nearly 1,000 since September last year. Our capital position remains strong with our CET1 ratios comfortably above the 2020 requirements and TLAC of over 81,000,000,000 dollars To wrap up, we had a very good second quarter contributing to a strong first half of twenty eighteen, and we are on track to deliver our financial targets. With that, Sergio and I will open up for questions. The first question from the phone comes from Andrew Stinson from Bank of America. Please go ahead, sir. Good morning, guys. Two questions from me, please. One on the Wealth Management division and one on buybacks. It's been a few quarters since you announced the GWM merger. So I'm just wondering when you think we'll have some tangible numbers to give the market on synergies. Presumably, there are some and I think those may well be reinvested, but I was expecting at some stage to hear a number put on those because it is a discrete project. I know there's ongoing permanent cost cutting, but it's a discrete project. I think the market would appreciate an actual number put on that. And then secondly, on the buyback, obviously, very impressive and quick execution, so well done on that. But as you know, all the analysts were all an impatient bunch. So I'm just wondering what happens now? Can you increase the 2018 buyback Now that's presumably gone better than you had initially expected. Do we have to wait until 2019? Or what does the decision process look like there? To do you need to speak to the regulator? Or does it just is it just up to you guys? Okay. Thank you, Andrew. So first of all, I think that, Andrew, the integration of the 2 businesses, as I mentioned in the past, is a really natural evolution of our business model, and it's all about creating growth outlined, we have already executed and we are executing plans that will deliver around $100,000,000 of cost savings on a full year annualized basis into 2019. So there are things that we can do better, but the emphasis of the integration is not to create massive customers, but it's to create a different momentum, a different offering to our clients. And therefore, we need to balance those issues. Of course, as I just mentioned, in October, we will be able to go maybe deeper into some dynamics. So Tom and Marcin will outline some more concrete plans. But essentially, Andrew, this is not a cost exercise. It's about creating better growth trajectory and dynamics. So regarding the buyback, I think I fully appreciate I also joined the team of inpatient people, but we have to really look at where we stand. I'm very pleased that we took the opportunity to fully execute our target for the year. And so having as a base today a 13.4 CET1 ratio, 3.75 leverage ratio, We have a base where we can look into the next 6 months based on the potential of doing further buybacks is going to be based on clients' requirements and dynamics in terms of capital deployment. Can we deploy capital at a better return and then and create and serving our clients? We need to look at the economic outlook because we need to look at the environment. But as I said in the past, we will not retain surplus capital if it's not strictly necessary from tactical standpoint of view or a macroeconomic standpoint of view. In respect of regulatory approvals, our capital plan has been approved by our regulators. And therefore, if we stay within the approved targets, there is no limitation in that sense. Okay. Great. And there's no like CET1 hurdle that you look for? No. The hurdles are what we showed on Slide, remind me guys, 4. On the bottom right, you can see around 13% and around 2.7% is what we expect our ratios to be at year end or fluctuating during the years. I mean, it's very important to understand that those are not firm numbers. We may have like we have right now a 13.4 percent last quarter, we have 13.1 percent or 13.2 percent so that we basically fluctuate around those numbers. It can go to 12.8%. And this is not going to change our philosophy. We speak to those numbers as a base. And as you can see, we have sufficient 81 outstanding instruments. We have plenty of TLAC instruments. We have a very solid capital base. And this is what we believe is very important going forward. We want to keep our solid capital position, and we want to have also financial resources to serve clients and deploy capital where necessary. But it is not the case. We will adjust our capital returns policy and or I would say, implement our capital returns policy in a more faster and way. Perfect. Thank you. The next question from the phone comes from Kian Abu Hussain from JPMorgan. Please go ahead. Yes, hi. Thanks for taking my questions. Two questions. The first one is, can we talk a little bit about adviser hires or reduction going forward? And in what segments, I. E, what geographic areas do you expect adviser numbers to change? And the second question is relating to Page 26 27. How should I think about the corporate center service reduction staffing? I mean how far can you actually go over the long term? I don't mean next quarter or even next year. And how does that square with the €2,000,000,000 on Page 26 that you roughly spent? I know there's some offsets, but how should we think about the €2,000,000,000 service cost before allocation on a longer term basis? Thank you. Yes. Perhaps, Kiyan, I can answer your second question first. In terms of what you saw on the headcount slides that we showed on Slide 27 that you referenced, we do expect to continue our overall workforce strategy of in sourcing previously outsourced headcount, particularly in technology. And so we would expect as a consequence to continue to see the growth in internal staff, along with reductions in external staff over the next couple of years while we complete that program. Now beyond that, if we look at the trajectory of our headcount, it's also very clear that part of our strategic focus in investing in technology is to automate and to deploy robotics. And we do think over time, that should continue to benefit our overall headcount in personnel expense numbers. Now regarding the overall Corporate Center expense number that you referenced, the around $2,000,000,000 First, again, I would just rehighlight the fact that if we exclude technology and we are committed to continuing to invest in technology, That, along with the increase in amortization, should result in a continued increase in technology expense over the next several years. In addition, we had higher risk management expenses, and that relates to our regulatory requirements. So the trajectory there will depend on what we actually have to address from a regulatory perspective. But beyond that, our anticipation is all other costs should continue to come down over the next couple of years, both through continuous improvement, tactical actions as well as strategic actions. And I would remind again that 95% of these costs are allocated to the business divisions. And if I may just follow-up. So the way just to for me to think about my kind of how this number progresses. On the one hand, consultants are, let's say, 20%, 30% more expensive, plus you're actually reducing net staffing. So there's a cost savings and then you're spending on the other side. So should we think about the $2,000,000,000 more like an ongoing run rate, I. E, whatever you say you have to invest and you want to invest? No. I mean, I would just refer to the dynamics that I highlighted. You're right. If we think about our total workforce, we are managing the total cost of workforce. Force. So where appropriate, we're replacing consultants with internal staff. But I wouldn't believe any conclusion about the specific trajectory of a number. I would just reflect on the comments on May about our commitment to continuous improvement and strategic investment. And that continuous improvement is we would expect to see excluding technology and risk, the remainder of costs in Corporate Center come down 2% to 3% a year? So, Kian, on headcount and so on. First of all, I think that if I look at the overall financial and client advisor dynamics, I would say that the NAND numbers is quite flat. But if you look at the underlying trend, of course, we have a slight reduction in the U. S. Whereas as you know, we are not focused on quantity but quality. Our client advisor or financial advisor in the U. S. Are the one who has the highest level of asset level of financial advisor, the highest productivity. And what we tend to do is to really focus on this high end client base. When we look at the dynamics outside the U. S, we clearly see almost a double digit increase in advisers in Asia. We are also seeing an increase in Europe, in EMEA, as we invest more, particularly in the ultra space and which is also a big driver of growth movements in the ultra space between the Americas and APAC. So overall, if you look at the net numbers, they are not really changing by a lot. If you look at the underlying growth movements between hires and terminations and transfers, I think that we have a very healthy dynamic where we focus more and more on quality of people, and we keep investing where necessary. But also, it's very important for us that deploying technology, our focus over time is to make our advisor more productive as well, giving them the tools that allows them to be more productive. So number of headcount is important. We want to grow, but it's not the only levers we need to have to grow because productivity through technology has to be part of the solution going forward. And if I may ask, is there some kind of net adviser target for Asia in particular percentage point? No, I don't think it's as I said, we hope we can grow adviser at a lower pace than we're going to grow our profitability as a function of enhanced productivity. The next question comes from Andrew Coombs from Citi. Please go ahead, sir. Good morning. If I'd ask one on FRC and then one on net new money in GWM. Starting with the FRC business, you've seen some real positive momentum there for the first time in a couple of years. So I think if you adjust for the accounting change, you're up about 37% year on year, materially outperforming your competitors. You said that's broad based across products and regions, but would love if you could provide a bit more detail about what is driving that strength and whether that improvement is sustainable from here? And the second question would just be on the TWN net new money. I appreciate there's a couple of large items in the U. S. Even if you were to exclude those, I think you did about €8,000,000,000 net new money, so about 1.3% annualized. So it is slightly below your target. Within that, it's APAC and EMEA. It looks slightly weaker than you might have anticipated. So I'd love if you could elaborate a bit more on the drivers there as well, please. Thank you. So thank you, Andrew. I'll let me I mean, on VIB and FRC, first of all, we have to go back. You spoke rightly about momentum. And you remember that Q2 last year was not necessarily a good market environment. But for a franchise like ours, it was heavily skewed in that area towards FX. Last year, we had very low, extremely low volatility in the FX market, very low turnovers by clients. And that's also a reflection the momentum is also a function of the underlying market dynamics and our business mix. We are every few towards the fact. Now the investments we made over the last couple of years and particularly in the last 12 months to improve our engine in FX, algorithm execution has helped us to create to gain market share and to capture this more normalized market environment. And so that's the reason why we believe it's quite sustainable going forward. So year to date, revenues are up 27%. And as I said, we hope to gain market share, and it's clear that we are gaining we have a reasonable impact. So I'm quite optimistic about the fact that despite the market conditions, we should be able to stay to keep that share of wallet intact for the rest of the year. In terms of net new money, I think let's make Dominic say that we it's clearly not a quarter where I categorize as being happy. And having said that, we are coming out of a very strong Q4. Remember, Q4 last year was extremely strong. Q1 was fantastic. And this year, we had almost a perfect this quarter, we had almost a perfect story in terms of what happened. We expected seasonal outflows in the U. S. It's nothing new. We knew it. These outflows from corporate clients on the employee stock option plan was not expected. We had as Kurt mentioned, we had de facto 0 net impact or net contribution of lending to our net mnemonic this quarter. So the but if I look at the underlying dynamics, just look at the U. S, we had basically a big improvement of a same store client advisor almost 3x more than last year. If I look at the outside U. S, we had almost EUR 6,000,000,000 of net new money. So overall, the numbers are now still in a trajectory that indicates we should be able to achieve and we will achieve our target of 2% to 4%. And if I look at the momentum into the Q3, I'm convinced that we're going to deliver that. But as I said so we have to we don't look at menu money on a quarter on quarter basis. We haven't made a big fuss in the Q1 when we had fantastic results. We're not going to get too focused on that one. But still, I understand that we need to deliver on our targets, and that's an imperative for the organization to deliver. That's very clear. If I could just one follow-up on deleveraging. It's been a concern, particularly around Asia Pacific. If you could just comment on whether that's been a driver within the net new money. If you look at your APAC loans, they actually look very stable Q on Q, but it would be interesting in your comments. Yes. I think, as always, with those kinds of numbers, the real dynamics is on the growth movement. And of course, we had, in the U. S, deleveraging in APAC and EMEA more than in the rest of the world. So I think the dynamics where we could see a deleveraging, it was driven by APAC and EMEA rather than the rest of the world. The next question comes from Jeremy Sigee from Exane. Please go ahead. William, thank you. Two questions, please. Firstly, just on the capital and scope for further buybacks. Are there any adverse impacts on capital ratios that we need to be expecting in the second half of the year that could affect that decision? That's my first question. And then second question on the IB side, the less good part of IB, obviously smaller but less good was advisory, ECM, DCM, which are relatively weak. But I wonder if you could talk about how you see the pipeline on the primary side looking to the back end of the year and into next year. Yes, Jeremy. So on your first question, as we had guided during the Q4, we expected about 20,000,000,000 dollars of regulatory and methodology increases to RWA during the year. During the first two quarters, we saw almost 10,000,000,000 dollars During the Q3, we expect about $3,300,000,000 and then that will taper off a little bit to $2,300,000,000 So a little bit higher than we anticipated, but roughly in line. Beyond that, it's really what Sergio mentioned. It's more based on business demand and deployment opportunities in addition, of course, to volatility from foreign currency movements. And there's nothing on the capital. You mentioned the RWAs. There's nothing we should expect happening or deducting from capital in terms of measures changes from Apart from that, there's no other major changes. Again, as we said, the next major change, while it comes the Q1 was the adoption of IFRS 16, which is going to be about $1,000,000,000 increase. And then the next major event for us, of course, is the implementation in the phase in of Basel III finalization. Okay. Yes. Jeremy, on CCS, of course, again, there is a underlying activity levels in Q2 that was clearly not skewed towards our strength in areas of expertise. But also, if you look at the Q2 last year, we had a very strong performance in particularly in the financial institution activities, a lot of capital increases. And there, if you look at the 2nd quarter dynamics in the market, it was much more Nordic and corporate than financial institutions. So it's an outcome. I think that if I look at the Q1 performance, it was a very strong one. Again, I need to look at the overall environment. We are not really commenting on pipeline. But I have to tell you that in the last couple of years, the problem was never the pipeline. Was always market conditions. Can you execute? Can you close on these numbers? And we are now trying to also bring a little bit more stability and less volatility on those business lines. As Andrea mentioned few times in public and internally, We are trying also to focus on our hiring in the U. S. On the fixed U. S. Side of the equation to balance more our portfolio. Because without saying that we are an APAC Europe skewed investment bank. But a little bit of diversification will help. And we are not talking about hundreds of people. We are talking about few thousand of people that can really rebalance the portfolio. The next question comes from Julia Miyamoto from Morgan Stanley. Please go ahead, madam. Hi, good morning. Thank you very much for the presentation. A couple of questions from me. 1 more strategic and one more short term oriented. So on the strategic side, on Slide 11, if I understand it right, the merger and the idea of Global Wealth Management is more driven by a push for growth than cost efficiencies in the short term. So and here you mentioned a U. S. Opportunity, in particular, the U. S. Persons outside the U. S. I was wondering if you can quantify this opportunity and how big do you think this market is? What portion do you think UBS can get here? So that's my first question. My second question, more short term. So if I look at your outlook for Q3, it's quite cautious around market activity and client sentiment. So I was wondering if you could please give us more color there. So do you expect clients, especially in Asia, to be more risk averse, perhaps trade less or loan back lending to be down as there is less leverage appetite? Thank you, Giulia. I'm afraid you're going to have to be patient until Investor Day to get the full answer to your question. But maybe in a nutshell, I can tell you that from a regulatory standpoint of view, our self restriction post the 2008, 2009 developments, we have de facto been restricting ourselves to do business with U. S. Persons outside the U. S. So you can imagine that it's de facto, a business that we didn't really touch and cover in the last few years. And so the community of people having either a U. S. Passport or having the FAFSA U. S. Person status living in Asia and Europe, it's substantial. And I believe that we have opportunities to capture a fair share of wallet of this business that was mainly driven by U. S. Institutions. So more details for the Investor Day. Well, Giulio, so also on the outlook, I think it's always fascinating for me to see the comments about our outlook statements because it looks like I'm reading different newspaper or I'm seeing different news or even which I'm not using Twitter. If you would use Twitter, you would probably understand that the outlook for the environment is not the most constructive. And so having said that, what we are trying to point out is 2 factors. The environment out there, macroeconomic, geopolitical protectionism, you name it, is quite intense. Just look at what's going on with Brexit. Who knows what is the outcome? If I read the comments this morning of official language being used in a negotiation that is threatening, it's almost like quite disturbing. Having said that, we have to consider seasonality factor, which I'm not saying anything new. Everybody knows that the Q3 during the summer is clearly not as dynamic in terms of our client activity. And overall, the last sentence is the one that I really hope people can reconcile. Despite all that, we are still sticking to the fact that we can create value in any kind of market condition. So I describe our outlook statement as a realistic assessment of the environment out there and our ability to operate profitably and still serving clients in the right way. The next question comes from Kim Ilkani from Deutsche Bank. Yes, good morning. So two questions. Firstly, on deposit beta and secondly on Level 3. So on deposit beta, just wanted to get some more color as to the shape of deposit beta you're seeing both outside the Americas as well as in the Americas? And I know you mentioned a forward looking statement, which was that you expect U. S. Deposit beta to increase. So wonder if you could elaborate on that. And secondly, on Level 3 assets, these things have increased 70% year on year, 20% Q on Q. So just trying to understand what's driving the increase in Level 3 assets. Thank you. Yes. Ken, on deposit beta, as I highlighted in my speech, first of all, if you look internationally, actually, our beta tends to be quite a bit lower than the U. S. Just in general. And that is in part because of how our international clients use us. We're not a transaction bank. And so therefore, most of the rate increases that we've seen actually we've retained. Now in the U. S, I highlighted the fact that we engaged in a retiring exercise in the 4th quarter, And that retiring exercise helped us to keep our beta down for the last rate rise. And so our beta through the last rate rise has been around 35%. What I mentioned is, I don't believe that, that's sustainable. I do believe that, that will increase, and we would expect to see that come up with the next rise in rates. Now exactly where, I'm not sure, but I think over time, if we're able to maintain that within the 50s, that actually would be a good result for us through the course of the ongoing rises in rates. Now your point on Level 3 assets, and there is some ebb and flow naturally in Level 3. I think if you look at our schedule overall, some of the increases you'll see were on the lending side, and that's just naturally as a consequence of some of our leverage lending activity. But again, we would expect that to fluctuate up and down, but I would re highlight the fact that we're still around 1% of total assets, which is at the lower end of our peers. Great. Thank you. The next question from the phone comes from Jernej Omahen from Goldman Sachs. Please go ahead, sir. Good morning from my side as well. I just have 3 reasonably brief questions left. The first one is on Page 22, so on the net new money figure. And there was lots of talk of this lower contribution from loanbuyers lending. Have a question. So this lower contribution from loanbuyers lending, is this a function of reduced demand for these products? Or is it a function of actually a higher level of redemptions of these loans? And in particular, in Asia, I was wondering whether you had situations where you had to trigger outstanding loan backed loans or redemptions of outstanding loan barred loans. Then the second question is on Page 25 on the Investment Bank. And here, UBS shows a 23% return on allocated equity. I think the target is 15%, if I'm not mistaken, for the medium term. So I was just wondering, when we look at the composition of the operating income here between equities, FIC and Corporate Client Solutions, what component of the investment bank is over earning today compared to the medium term target? And the third question is very short on the equities results still on Slide 25. It's a strong result, but you gave a very generic comment, which is strength across all products, all regions. Can I just ask you to provide us with a bit more clarity as to where, in particular, which products you saw strength in? Thank you very much. Yes, Tiena. Thank you for your question. Just in terms of Love Bard Lending, what we highlighted is it was one of the features that impacted net new money during the quarter. And the more important point was we actually did not see growth in lending. We saw slight deleveraging, relatively small in the Asia Pacific region. But I think as you see on Slide 22, Asia, of course, has been contributing most to our growth in loans, up 28%. And what I would characterize, it was not as a consequence of margin calls. It was more as our clients become more uncertain about the future because of the geopolitical issues, the concerns about the trade war, they're less likely to leverage their investments because they're less uncertain about their ability to generate returns. And that's simply what drives their appetite for lumbar loans in particular. In terms of your second question on our returns, first of all, we would highlight that we target greater than 15% overall return on attributed equity for our investment bank. We would highlight as well that there naturally is a fair bit of volatility around that return level, which is an inherent characteristic, of course, of that business. We would also highlight the fact that actually, we've been fairly consistently above that level over the last number of years. Now in terms of which business contributes to those returns, it really is across the board, all of our businesses. And there might be one part of the business that's more contributing during a particular quarter than another. So you would have expected, for example, CCS to have been a larger contributor to returns in the Q1 than it was in the Q2. Now in terms of your equities question, we would just highlight that we actually did see quite good growth across all of our products, so across cash, derivatives, across financing. We saw particularly good growth in derivatives, and that was really just characteristics of the volatility that we saw in the industry. And I think also we saw good growth in Asia Pacific, and that was as a consequence of the MSCI A shares inclusion. I would also highlight the fact that Sergio mentioned we've been investing in building out our Americas platform. Americas had a particularly good quarter where we saw good growth in flow and structured products in that region. That's very helpful. Thank you very much. The next question from the phone comes from Stefan Stalmann from Autonomous Research. Please go ahead. Good morning, gentlemen. I was wondering if I could get a little bit more color on 2 of your charts, please. The first one is Chart 8, where you helpfully break out the increase in regulatory costs and you clearly suggest, and this has been a topic of debate before, that there's a permanent and that there's a temporary component here. Is there any further comment or guidance that you can give about the size of the temporary part of this stack and maybe the timing over which this could normalize or come down? And the second question relates to Slide 27, where you discuss your headcount shift towards more internal staff. Could you maybe give us a little bit of a sense about the economics of this shift? How much does it cost you extra during the time that you implement this, if anything? And what kind of cost savings or maybe efficiency gains do you expect to read at the end of this process? Those would be my questions. Thank you very much. Thank you, Stefan. I'll take the first question. So I have to say that I'm afraid I'm not going to go any longer into predicting regulatory costs because I go back to the office and I will find a new requirement and request on my desk. So what I can tell you is that it's unlikely that we're going to see a major tapering of this cost base until the early part of 2020. If I think about all the upcoming requirements in front of us, it's very, very difficult to say that. I do think that over time, we should be able to master and optimize the cost base, but it's still going to be very high. I just mentioned just go back into a couple of years ago and then also the upcoming discussions about Brexit makes it very clear that we have to accelerate the readiness of being able to be compliant at the end of Q1 of this year. And this is going to cost us only this year almost $100,000,000 the Brexit case is only costing $100,000,000 this year, and it's something that was not even on the radar screen a couple of years ago or was seen as a remote lift. So as I say, we don't expect a lot of paper in there because there are always new inflows. But what's really, if you look also again here, it's quite interesting because the stickiness of the cost is there. But if you look at the underlying inflows and outflows, it's quite interesting because we are able to basically take out the temporary parts of the equation. I have some permanent ones, but the incoming flows are constant. So Stefan, on your second question, as we actually go through the in sourcing process, there is an increased level of cost related to the recruiting as well as typically we have some overlap between when we fully in source and we eliminate the outsource resources, possibly some onboarding costs. But ultimately, as we complete the in sourcing process, we tend to get a little bit of a cost benefit as we eliminate the margin that we've been paying to the outsourced partner. But what's more important for this program is it's much more about control, quality and productivity, whereas we in source more, we look to reduce our overall risk, and we look to increase productivity over time. So it is really an effectiveness play overall. Thank you very much. The next question comes from Andrew Lim from Societe Generale. Please go ahead. Hi, good morning. Thanks for taking my questions. The first question is coming back to the Corporate Center. Could you tell us how that should pan out in terms of pretax sauces after allocation? So really focusing on, say, funding costs, how you expect that to pan out, regulatory costs also over the next few years, not just the next few quarters? And then secondly, coming back to buybacks, do you need preapproval again if you want to do more buybacks in addition to your plan that you've already committed to from FINMA? And when FINMA look at your capacity to do buybacks, did they look at your stressed CET1 ratio and how that looks like compared to, say, a 10% amendment? Many thanks. Thank you, Andriy. I'll take the second question first. As I answered already before, we don't need any form of preapproval. We have a program open that's where we can buy back up to $2,000,000,000 And then from a regulatory standpoint point of view, we have an approval of our capital plan. And to the extent and that capital plan has different stress behind it, not only ratios but also stress test. And therefore, to the extent that we are able to deliver on our capital plan for the year and deliver the equity that we outlined in our capital plan. We have the flexibility to share buyback or capital returns as we deem appropriate. But as I mentioned before, we have to take into consideration if we need capital to serve clients to deploy for business or we need to look at the macroeconomic conditions. And if we don't, we're going to definitely take the opportunity, particularly considering market conditions in using that tool for the rest of the year. So Andrew, on your first question, just to give you a little bit of a flavor of what we retain within the corporate center, I think historically, we have had costs related to regulatory projects predominantly around our legal entity structure build out. The other regulatory matters are allocated out to the business divisions. And as we complete the build out of our legal entity structure, that should bring down a portion of the cost that we retain. We also have some litigation expenses, and that creates some volatility. But I think actually, if you look at the last 5 quarters, of litigation expense, you've seen that the net cost that we retain come down, and they should stabilize at around the levels where they are now. I would mention as well on NCL, the noncore and legacy there, you've seen the negative drag on that part of our corporate center actually become quite de minimis. We would expect that going forward, absent any large litigation movements. So it sounds like excluding litigation, your corporate center costs should be at a rough quarterly run rate equivalent to how it is right now? Yes. That's right. I think if you look at there were no litigation expenses in services this quarter. So that's a pretty good indication of the run rate for the services part. In NPL, we actually had some litigation, but it was offset by mark to market. And so not a bad indication of where we would expect to be going forward, absent litigation expense. That's great. Thank you very much. The next question comes from Amit Goel from Barclays. Please go ahead. Hi, thank you. Most of my questions have been answered, but there's 2. One is just in terms of client behavior within the Wealth Management business. And obviously, you've mentioned that you've only seen slight deleveraging so far, but obviously, there's no contribution to net new money from lending this quarter. Just in terms of what are you seeing in terms of trades that clients have had on? Are you seeing any impact from the flattening of the U. S. Yield curve? Are you then expecting a bit more deleveraging given how the outlook is in the coming periods? And then secondly, in terms of behavior, are you seeing changes in terms of turning out to the U. S. Deposits and so forth at the kind of present time? Yes. Amit, so if I look at clients at the year, I think if you look at the dynamics of the transaction lines, it's quite indicative of what you mentioned on yield curve. And you see activity levels on Wealth Management on the Wealth Management side of the equation on fixed income being definitely down on a year on year basis and somehow compensated by structural business on the OTT side. But net net, you can see the impact of client dealers in bonds and fixed income by closing, and it's that you outlined on the curve. Now when I look at the sentiment, I mean, the latest survey we did with clients in the last few days in the U. S. Is quite, in my point, is indicative of a sentiment that I believe is also more broader and global. In a nutshell, clients still feel somehow constructive about the medium- to long term outlook for the economies and growth. Having said that, if you look at their behaviors in terms of how they look at their equity portfolio, for example, it's very sticky. They don't really make a lot of trading. They don't really move the positions. So they see what they we believe is a good portfolio. And most importantly, if you compare their cash holdings or declared cash holdings to the second half of 'seventeen to today, it went up 5%, so to almost 24%, 25%, which from a U. S. Standpoint of view is a very high level of cash. So you can see very well reflected from my some kind of divergence between outlook in the long term being okayish, but on the other hand, when it breaks down to investments, we are very cautious. Thank you. The next question from the phone comes from Aralavitakos from HSBC. Please go ahead, sir. Hi, good morning. Thank you for taking my questions. So question number 1 is on Slide 26. Again, going back to the costs before allocations. I can see EUR 955,000,000 that relates to technology and risk control. What is the chunk exactly that goes into technology? And how does that take us to the guidance in the annual report that overall technology expenses will go up to EUR 4,000,000,000 in the next few years? That's question number 1. And question number 2, even though Sergio know that you're probably going to tell me to wait for the Investor Day, I was wondering about the Wealth Management, the robot advisers, if there is any update in terms of any success that you had either in the U. S. Or the UK? And actually, since you're spending a lot of money, when do you expect to break even in those investments? Will it take 5 years, 10 years? What is the main assumption? Thank you. I'll go to the second one because you already dropped half of the answer. So we will give you more details for sure on October 25. But in a nutshell, I think we see 2 divergent stores, to be honest. I think if I look at the U. S, we have a pretty good momentum. And actually, I'm very happy and the team is very happy about how this is working. If I look at the UK, it's not such a good dynamic. And which is part of the equation because when we look into these new initiatives, we have to take the courage and accept that risks and failures can is part of the equation. So two stories, I will give you more details. And when I look at in the U. S, considering also our critical mass and the ongoing business, payback can be quite rapid. But again, more details in October. Yes. And to answer your first question, actually, what we said is we would expect our total technology spend to be over 10% of revenue. So if you take that as a benchmark around $3,000,000,000 you can see that the numbers are trending pretty close to over $3,000,000,000 that we've indicated on Slide 26. One of the growth drivers is also amortization year on year in addition to just keeping our spend at an elevated level. Great. Thank you. The next question comes from Jon Peace from Credit Suisse. Please go ahead. Yes. Thank you. So my first question was on the Fixed Income business. I just wonder what the catalyst was to this €100,000,000 revenue recognition on the day 1 P and L. And is there any possibility that, that could recur? And my second question was on your litigation notes. You mentioned an €850,000,000, U. S. RmbS settlement where a lot of the cost will be borne by 3rd parties. Do you have an indication of how much you might expect to recognize in your own P and L, next to any existing provisions that you've got? Yes. John, in terms of your first question, the $100,000,000 pertains to our lightly structured notes business that the vast majority of our competitors are active in. And that $100,000,000 pertains to actual trades and revenue that was deferred from mostly from prior years. But it's a business we remain in, so we would expect to continue to see some revenue going forward. And we really haven't disclosed anything around capital, but the fact that it's slightly structured note should indicate that it's not a capital intensive business. In terms of your second question, the trustee suit that we announced, as we announced, we actually have an agreement with the trustee. And you can expect that based on what we announced, the $850,000,000 against that, we're fully provisioned based on what we expect. Ladies and gentlemen, the webcast and Q and A session for analysts and investors is over. Analysts and investors may now disconnect the lines.