Good morning, everyone, and welcome back to our 31st Financial Conference here at Bank of America. We couldn't make a better start than this, actually. I think we're very pleased to have everyone, of course, join us and to have Sergio Ermotti, CEO of UBS. Sergio, many thanks for joining us. There's a lot of ground to cover, I think there's a lot of topics that I'd like to get through. As usual, you'll have a chance to ask your questions. At the end, we'll leave about 10 minutes after our discussion.
M aybe, let's start. You put out a press release, but I think the best way to start is if you can run us through your thoughts on the capital proposals that is being discussed in Parliament. There's a vote that is expected tomorrow. There seem to be three options left on the table. The original government proposal, and two alternatives, which are respectively the 50/50 CT1 and AT1 scenario, and the 90% CT1 backing. Now, what will the 90% scenario mean for UBS?
F irst of all, I think that this is an outcome that I have to say was a quite surprising one in respect of what it means. Because if you look at the difference between the current proposal from the Federal Council at 100% and the 90% is de facto the same. Yes, CHF 4 billion of difference, but broadly speaking, it's not really resolving the topic that we should try to address, i.e., the lessons learned from the Credit Suisse crisis. I think that Credit Suisse didn't go down because the regulatory framework was not correct. The fact is that the regulatory framework was not implemented in the way it was necessary. Therefore, going into an extreme solution that with a 90% or 100% backing of the foreign subsidiaries doesn't really resolve that matter.
I think it's quite clearly it's not internationally aligned and therefore creates, in my point of view, a distortion of the competitive position of UBS, and we don't think that this is an acceptable outcome. Also, considering the fact that our shareholders already put on, I would say around CHF 15 billion of forgone profits in order to stabilize and restructure Credit Suisse, also helping the country to avoid a fairly major reputational damage. I think that we deem this outcome. We are not in control of the outcome, but we don't see this as a compromise, but rather as a little lighter version of the current proposal.
Makes sense. If we move on to discuss the proposal from the WAK-S, the Council's Committee for Economic Affairs and Taxation in the Swiss Parliament, which includes potential changes to the structure of AT1 instruments. What is your view on those changes?
T hat proposal is a proposal that still, I would say, is a compromise that still leads into substantial increase of our Tier 1 capital, because if you add on the two elements, we have a couple of billions of CT1 plus 13 billion of AT1, which they cost. If you look at what is the difference between the two proposals, the extreme proposal of the Federal Council costs us CHF 3 billion a year.
The factor between if you look at the full impact of additional capital that we have to carry because of the current regulation process and the future regulation, the 50/50 would bring that numbers down to CHF 2 billion. I think that, as you can see, if you add up the CHF 15 billion we basically shareholders paid to restructure Credit Suisse plus an annual additional cost of CHF 2 billion, this is becoming a big topic.
Now, on the AT1, the proposal is all about clarifying the Swiss regime and bringing the Swiss regime in line with the EU and U.K. regime. This is not an experiment. It is actually pretty straightforward clarification of the existing prospectus and the way we look at AT1. W e believe it is a balanced way, which is costly for the bank, but still a balanced way to address the topic and recognizing that adding full CT1 backing. In addition to that, AT1, because the AT1 are not going to be discontinued. It is the way to go.
Now, last question on the too big to fail, I promise, and then we can move on to talk about the business. What should we look out for from here? Can you talk us through the next steps, and when do you think we could get a final decision on this?
I think that according to the current timetable, tomorrow is the upper house vote, and then after that, you go down to the lower house first with the Economic commissions of the lower house, and then the National Council will then deliberate. If they agree on the proposal coming from the upper house, then it goes to the governments for implementation. If they disagree, they need to then meet and try to reconcile their positions and come up with another solution.
I can only be hopeful that things are going to be resolved between now and the end of the year, but this is a political process that is highly influenced also by the upcoming elections in Switzerland. This is a very, I don't need to explain in the room or the people watching via video. These are very technical discussions, and now has become also political discussion, and therefore the complication is very high.
Thanks for that. Now let's move on maybe to talk a bit about the business, because I think there's been market shifting and focusing increasingly more to that. Your commitment to deliver value for stakeholders hasn't changed and has been increasingly visible in the results, and you've signaled that you could exceed your targets for this year. We've seen some of your peers recently provide a rather wide range of comments on developments when I look at the quarter ahead. How are you performing against your plans and ambitions, also relative to your peers? We also saw you complete a liability management exercise. Will that impact your Q3 results?
Okay. The third quarter, so we are making good progress in implementing our current plan, and I'm quite happy to see the developments in terms of growth. We see also really now coming fully the fact that we are almost over with the integration. Basically all the people, the front people, are really focused on clients, and they are not distracted by integration topics. W e see good momentum definitely in wealth management. We see still good momentum in transaction, although it's quite clearly we expect this number to be up year-on-year. Unlikely, and actually very unlikely to be as good as last year because the seasonality effect this year is definitely there. Last year was a quite unusual strong third quarter. S till, seeing good momentum there despite the seasonality and having an uptick year-on-year is positive in the investment bank.
Fee pools in banking are going to be down. Generally speaking, we should be in line with market trends. On the markets side of the equation, I think we see robust momentum. We see us still gaining market share and momentum. I am broadly speaking positive about the momentum in the third quarter. You mentioned the liability management. Yes, we basically retired almost CHF 10 billion of Credit Suisse issuance, which we were able to replace at a tighter spread with a longer tenure. It was a pretty successful exercise, which will be very beneficial for NII from 2027 onwards. Broadly speaking, that cost that we are going to take in Q3 will be offset by other non-core legacy asset disposals or litigation resolutions. I do not expect this topic to be actually a meaningful element of our Q3 results.
It is very clear, thank you. You have mentioned the integration, and I think you have done a tremendous job in getting that delivered to date, including client account migrations that were completed in mid-March. This allows for decommissioning of IT infrastructure by year-end. Can you talk a little bit more about the implications for your business, and how should we think about the next leg of UBS story from here, especially regarding both efficiency and growth?
Yeah, of course, this is now clearly becoming more of a focus as we prepare the next three-year plan. On the efficiency front, we are still finalizing the last mile of our integration. I think that very happy to see that more than 90%, as we speak, of the 3,000 application we inherited from Credit Suisse are now not in use any longer, and a good 3/4 is decommissioned. By the end of the year, we should be very close to our targets, so basically concluding the integration. This is going to have a meaningful impact on our exit rate and our 2027 numbers. That kind of efficiency is helping us to really come down to the 67% cost-income ratio targets. In terms of growth, we are freeing up resources also to invest for growth, across the board.
Particularly when I look at the high net worth segments, we believe that technology and capacity that we have right now in the front to back environment, is going to allow us to go deeper into serving more the high net worth segments, which is booming. If you think about in the U.S., in the last three years, 1,000 millionaire were created every day. In Asia, we had last year, 100,000 millionaires created every day. For us, it is becoming very important to keep our leadership position in Ultra, in the GFO space, in the upper end of high net worth, but also really leverage technology, to go deeper, in terms of segments coverage at a lower cost to serve. Investing in that is paramount.
We are also, as you could see, we did a pretty good job in optimizing the balance sheet, and creating capacity for growth and lending. I am very happy that, you remember when we started the journey, achieving a double digit return on risk-weighted assets was seen as a little bit of a too much of an ambitions. In the first half we had 11%. Now, one could argue that we are plateauing a little bit there because, I think that now the time starts to be focused on how can you deploy excess capital in a creative way at a marginal basis.
I am not saying that that number is good, but it tells you that now we can start to choose exactly how to deploy excess capital. I am very confident that we still have a lot of room for growth. At the same time, AI is going to help us to drive down cost and create a more efficient and effective front to back environment.
Love those stats on wealth creation for both U.S. and Asia. Maybe let us touch on your wealth management business respective to U.S. and then we will go to APAC in a second. I f I look at your U.S. market, it is your largest wealth market really, and you have been making progress in pre-tax profit margins these last few quarters. Now, what do you see as the key drivers of U.S. growth, now that you have added a banking license and we are probably through the worst part of the financial advisor departures?
Well, other than what I just mentioned, the underlying momentum in wealth creation. Also, if you look at the U.S. economy is doing pretty well. If you look at nominal growth in the U.S. in the last quarter or so was 7%. I think you have a great momentum, that creates wealth and is very constructive for our business. A s you know, our main focus in the U.S. is to basically make our business more profitable, achieving, in terms of wealth management, our high teens PBT margins targets. I am very happy to see that, when you look at the first half of the year, we already reached the 15% mark on return on pre-tax margins. 16% in Q2. T his is coming by executing on four or five levers. It is not just one lever that allows us to do that. W e see growth in lending.
We had nine consecutive quarters of growth in lending. The national charter is now helping us develop products that will create NII, more sticky NII and more predictable NII. We are working more closely with the investment bank and wealth management to really drive solutions that are seen in our transaction line. AI is a big topic and we are very happy that we have a leading position. If you look at our application in the U.S. is called Stat, has won an award by the Financial Times for the best AI tool for financial advisors. This is a tool that allows basically to create a more effective way for financial advisors to serve clients. In terms of attrition of financial advisors, I think that we have been plateauing. Our stats are now converging more to the industry.
I am very happy to see that same store is really doing great. If you look at net new assets and net new money momentum on same store, it is good. We have also a healthy recruiting pipeline. We try to really balance staying competitive in the recruiting space without doing deals that are quite value disruptive. I would say confident that we will continue the trajectory to narrow the gap with our peers.
Now, moving on to Asia, which is a key wealth market for you. It is probably your growth engine. You have $790 billion of U.S. dollar- invested assets. There has been strong wealth creation, as you mentioned, throughout APAC. You have an invaluable franchise, and I think sometimes it is overlooked. Now, you are the largest wealth manager in the region, with nearly double the size of the number two. What are your growth plans here?
T hey are the same we had for the last 50, 60 years. I think that we continue to invest in the region. I think that, clearly, the combination of UBS and Credit Suisse franchises was to some degree overlapping, but in many others, quite complementary. I think now we have a much stronger Asia business and, of course, we are going to continue to develop our Greater Bay Area business in around Hong Kong, Shenzhen. Australia is growing nicely for us. Japan is good. In India, we have a good joint venture that we will and an investment where we believe that we are going to be able to capture more of the overseas Indian money flowing back to the country.
I see the franchise developing from a very China-centric franchise to a more broad, diversified Southeast Asia, China. We keep investing. Also there, is a good example where we can do much more on high net worth and leverage more our brand, our capabilities. In Japan, for example, we are working with Sumitomo Mitsui Trust on a joint venture. We believe that there are plenty of opportunities to continue to grow there.
We've talked about the capital debate, and you've made it clear that you remain committed to delivering on shareholder distribution for the year by announcing an additional $3 billion buybacks by June 2027. Now, you've done already $1.2 billion to date. How shall we think about the further pace, and can you be done with it earlier?
Further, yes, as of last Friday, we have done already $1.2 billion, so I would say it's fair to expect that we're going to land at least $1.5 billion by the end of October, as we mentioned. At the same time, we are also executing share buybacks to hedge our compensation plans. I think there is a little bit of an overlap and also capacity. We don't want to be too much of a big percentage of daily volume, so we have to really pace what we do in the proper way. A t the end of the day, as we mentioned, the pace and size of share repurchases will be driven by the ongoing momentum on financial results and our ability to keep our capital position at 14%. I'm confident we will deliver on what we promise and what is expected.
Now, we've talked about growth, we've talked about efficiency, we've talked about the capital debate. We've discussed the wealth to the extent of the U.S. and APAC. Maybe more broadly in the context of investments, how should we think about the way you deploy capital in the age of AI, in the form of investments? How do you balance between funding business growth, IT investments, and capital distributions?
Well, that is very important. If I look at, for us, the clear priority is always to protect, and if you look at excess capital, sacrosanct protection of our dividend and growth of our underlying cash dividend, which, by the way, has doubled since we started the journey. If you look, in 2022, the dividend was $0.55. Last year, we paid $1.10. Our focus is really to continue to grow the cash dividend. Excess capital is, yes, deployed for share buyback, but we are not going to sacrifice quality and healthy growth for share buybacks. That is for sure now, we look at balancing all aspects, and also we are not starving the business in terms of resources necessary to be competitive for the next three, five, 10 years in technology for optimizing short-term returns.
I believe that AI will be very important for us to take down cost and create more efficiencies. A t the same time, we need to recognize, we are shifting a big chunk of cost from one segment to another. AI is not for free. It is quite, you need a lot of infrastructure. The more you go digital, the more you are going to have to bring up your defenses around cyber risk and it is becoming complicated.
Net net, I believe is going to be beneficial to the bottom line. L et us make no mistakes. The big winners out of these transformations are going to be the clients. The pressure you are going to start to see on top line is quite important. That is the reason why we need to use AI to grow in other areas, in other segments, potentially in other geographies. Trying to optimize returns on the same stack is not a long-term strategy we want to pursue.
That is ultimately a scale game. In Wealth Management, the vision you have with UBS as a business is one where the global platform is a point of strength and not vice versa. Now, you are the largest truly global wealth manager. You touched on some of these points already, but maybe you can remind us why that is a winning model.
F irst of all, I think that it's leveraging our strengths. I would say that fundamentally, it's because the secular trend supporting wealth creation and wealth preservation is still intact. People will need to save money for demographies, and you have either in one part of the world, people needs to save money and plan for successions, and so creates an environment that is very helpful to our business model. In other part of the world, you have wealth creation. F undamentally, these two trends are likely to continue to be strong. Innovation brings monetization opportunities, one big growth opportunity for us. You see, when we speak about new money, usually we measure in three buckets. One is GDP growth, wealth creation, share of wallet wins. Then the third one, which is very important for us, is monetization.
When we have IPOs, M&A, entrepreneurs that are edging their positions, and that kind of events create or leveraging their existing shareholding are all events that creates new money and growth. These trends are quite important and intact.
Maybe just to follow up on your investment banking business, because we've talked about the quarter, but we've talked a lot about how UBS is levered to wealth creation and IPO activity in capital markets because of the cross-selling capability that you have. That's obviously been supportive, and we've seen it, especially on the AI capex cycle. Now, what is the outlook for your investment banking business as you look ahead?
Well, as you know, that's a very competitive environment in being involved in these big transactions. I think that so far we have been able to find a sweet spot that allow us to capture some of these investment banking fees. I t's also very important for us to see how these kind of events translate into a transaction volume and people looking for exposure in the underlying stocks or hedging activity around their stakes.
I think that this momentum is there, but frankly speaking, we cannot really count on this kind of hypes to really think about the future. I don't believe this is a sustainable long-term strategy to look at that one. I think that the underlying trends that we see of innovation and across the board in technology, in health, in longevity, and in the energy sector are more sustainable in my point of view, and this is where we are really investing on.
Now, we have just over 10 minutes to go, and I am going to test if there is any questions from the audience as we promised. I f you have any questions, please raise your hand and introduce yourself, and there will be a mic coming your way. Any questions? Okay, we have a shy audience today. I have a few more, actually, that we can go through.
Maybe just touching on, because we have discussed a lot efficiencies and one area where we could arguably see more is probably your Swiss business. Switzerland, when I look at sort of the macro picture, lies on a flat curve with interest rate at zero, which is arguably the worst outcome for your P&C profitability. Not high enough to preserve deposit margins and not low enough to sustain the non-NII or new loan origination. Now, the good news is that it cannot get worse than it is, and you have been able to defend profitability despite these headwinds. What is the outlook for your P&C business?
Yeah, look, I think that the glass is half full and half empty in that sense. I think that we are making good progress in, as I mentioned before, in the Swiss business was the last one to go through the migration. W e completed 1 million clients migration at the end of the second quarter. A s we speak, people are now fully focused on clients, and I do believe that we have an opportunity to gain back some market share we lost. Broadly speaking, in Switzerland, we lost I would say 10% market share, so from around, let us call it around 30%, 31% down to 28% on average. I am overly simplifying. I would say that there is definitely one point of lost market share that we can make back.
The rest is something that either is going to be difficult because the overlapping position of clients was too important, and therefore rightly so, clients are diversifying. Others is businesses that were uneconomic. Therefore, I see some growth and momentum in terms of regaining market share and share of wallet. Also, we see good momentum in deploying technology AI. The Swiss environment is the one that we protected the most in terms of not making changes during the integration. Now we can do that because we have a stable operating platform. On the other end, Switzerland is in the middle of Europe. Europe is not really doing great economically. I would say the ongoing disputes with the U.S. on tariffs is also putting a lot of pressure on the Swiss economy, which is still performing solidly.
O f course, the headwinds we have there have to be mastered. Having said that, we believe that all things being equal, without any major change of the NII environment, we should be able to achieve our targets. The sensitivity for us is pretty much either, from now onwards on NII, it is very simple. Either we move into negative territory and it is going to be accretive and positive for NII, or if it goes to a higher rates environment, we will make back some NII. I t is quite unique for a commercial banking business to have almost no NII income.
I am going to try again if there is any questions in case. Yeah, please. There is one here. Second row, please.
I think we are on now. Thank you very much for your patience. I have got two questions, if I may. The first one is we are seeing European bank stocks hit this morning apparently by news that Meta will be able, basically, to book everything for everyone. I guess the idea is that AI agents will disintermediate financial services. H ow do you feel about being disintermediated by AI? Number one. Number two, on your characterization of Swiss AT1 reform being aligned with Europe, I mean, no. You are suggesting in Switzerland an 11% trigger or something crazy like that. We do not see anything, I think, like that in Europe, unless you are looking into your crystal ball and expecting Europe to raise the trigger to 11% as well. T hose two things on AI disintermediation and AI reform. Thank you.
Thank you. O n disintermediation by AI or any new competitor that is emerging, like in the last few years, we should never be complacent. Actually, I do think that that kind of development is really like in the last 40 years I've been in business. It's going to help us to really drive the next level of innovation and adaptation. Frankly speaking, I think that we can learn a lot out of it, and I'm much more concerned about one of my traditional peer or a group of traditional peers to be able to stay in line with that evolution and us being behind.
I think that it's fair to say that at the end of the day, banking, and particularly when you talk about wealth management, there is going to be always an element of technology and quality of products, but also trust and emotional attachment. Particularly when you see also some of the side effects that this technology can create, I do believe that trust and safety is going to, one day or the other, come back at the center of what we do. We need to be focused, not complacent, not to try to overemphasize this point, but also adapt and change. Well, on the AT1, you may know that Europe has the MDA close in its prospectus, and what's being discussed right now is just the same.
If you go through your minimum requirement in the current EU legislation, the bank or the regulators is required to take actions that includes stopping payment of dividends, stopping the coupon payment of the AT1, take actions on compensation, and take other restructuring charges. T hat topic that is currently proposed is aligned with the MDA EU standards. I would say I feel pretty good about that. Actually, you look at the reaction of our major investors in the AT1 instruments, the rating agencies are supporting that element. You look at the price movements of our AT1 as being basically neglectable, and so we believe it's a good solution.
We said it was a technical topic, so hopefully MPs will do what's right. Maybe before I wrap up, one last question from my side. Sergio, when you rejoined UBS back in April of 2023, specifically to navigate the bank through, well, a historical integration with Credit Suisse. Now, if you look back, what's your perspective of what's been achieved and looking forward at the same time, what do you see as sort of the equity story after the integration, including, if I may, the perspective on the succession plan?
Yeah. Well, I think that, of course, the journey has been quite exciting and very good one. I think that we can say that with my colleagues in the bank, and also, I have to say, the patience of shareholders and the clients allowed us to create something stronger and better than the two banks were on a standalone basis. Today we have a stronger business and a more solid business, and the one that has now also the capabilities to invest for the future. We just spoke about AI and technology. It is quite clear that when I look at that, plus cyber, plus everything you need to do to stay competitive, you need a lot of resources. You need the best people.
That kind of critical mass we created, it is very important to create the prerequisite to think about how is the bank going to look like in 5- 10 years' time. I feel pretty strong that we are exceptionally well-positioned to capture value for the future. That is the reason I keep saying that question is usually also more of a media question, but a bout succession. It is not so important about my succession when I go, but what I leave behind and what we leave behind for the next generation.
For sure, at the end of this journey, which completes at the end of this year, we are back into a position in which, if you go back into 2023, we were considered one of the few banks that could step in and stabilize Credit Suisse. Without hopefully having to go through the same exercise. We want UBS to be strong, to be seen as a safe haven, not only by clients, by regulators, and by stakeholders. This is what we are working on.
We can safely say that your legacy will stay for years to come. Thank you very much, Sergio, for joining us today, and thank you everyone for listening in.