UBS Group AG
Q2 2022 Earnings Call Transcript

Published: 26 Jul 2022

[Operator:]

Ladies and gentlemen, good morning. Welcome to the UBS Second Quarter 2022 Results Presentation. The conference must not be recorded for publication or broadcast. . At this time, it's my pleasure to hand over to Sarah Mackey, UBS Investor Relations. Please go ahead, madam.

[Sarah Mackey:]

Good morning, and welcome, everyone. Before we start, I would like to draw your attention to our cautionary statement slide at the back of today's results presentation. Please also refer to the risk factors in our 2021 annual report, together with disclosures in our SEC filings. So on Slide 2, you can see our agenda for today. And it's now my pleasure to hand over to Ralph Hamers, Group CEO.

[Ralph Hamers:]

Thank you, Sarah. Good morning, everyone. I think going through, you will see that the second quarter has been one of the most challenging periods for investors in the last 10 years. It has not been an asset class that has been immune to the effects of the challenging global macroeconomic environment. In these uncertain times, our clients rely on our powerful ecosystem to navigate markets and invest for the long term. And our headline numbers for the quarter were strong and a return on CET1 capital was 19%. And those numbers included a gain from the sale of our stake in the joint venture in Japan. This gain aside, our underlying performance reflected good result in a more challenging environment with lower asset levels, higher volatility and increasing rates. And we're navigating this environment staying close to our clients, keeping strong risk and credit discipline and our continued focus on cost. Going to the next slide, basically, you see that the market sell-off accelerated in the second quarter, and that was the case in both equities as well as fixed income. Inflation continues to be high. The war in Ukraine is ongoing, strict COVID policies are still part of the life in Asia, and all of these have led to further declines in economic growth outlook. And with significant drop in markets, our client portfolios lost value resulting in lower client assets across our franchise. Just to put a couple of numbers to that, the MSCI world index was down 70%. And Investment-grade bonds were down 5% on average. High-yield bonds were down 12%. So it's no wonder that our private clients stayed on the sidelines this quarter. Net new fee-generating assets were flat for the group, but positive for Asia Pacific and also positive for Switzerland. Transaction-based revenues with these clients declined by 17%. We also saw €12 billion of net outflows in asset management, mostly out of equities. In times of turmoil, liquidity is important. We continue to support our clients through lending with growth, particularly in the Americas. We also focus on deposit offering and optimize our net interest income, where we saw 15% growth across our deposit-taking businesses and deposits were flat against last year. Client activity was robust on the institutional side. So that's a completely different picture. They remain very active on the back of high volatility. Global Markets revenues for that reason were up 10% year-on-year. Our markets business had another good quarter, traded well on increased activity. We benefited from prudent risk management here from resilience of our technology platform to basically handle the very high equity volumes coming through the system. And it's clear that it was a challenging quarter for our clients and for our businesses. But in times like this, it's where our clients need us most and need our advice modes as well, and that's what we're focused on. Then looking at some of the particular performances that we showed, our investment ecosystem continue to allow our clients with unique insights, opportunities to get through this volatility. This slide, Slide 5, I am right now. highlight some areas of growth in our ecosystem for the last quarter. We're working with our partners to offer our unique, our clients' unique investment opportunities. For example, private markets where we saw new commitments at €3.9 billion for the quarter or €5 billion on a gross basis. And we see also more potential for this category, private markets category. Our CIO recommends that clients with a balanced risk portfolio, risk profile allocated to 10% of their portfolios to private markets. At this moment, the average allocation is 3%. So a real upside there. Our offering for separately managed accounts in the U.S. continues to attract inflows as well. €4 billion this quarter with overall asset under management and SMAs currently at $115 billion. So that's quite remarkable in terms of performance since we started that in 2020. Sustainable investing is embedded in our purpose and our strategy, as you know, and that's why we report on this as well. We already managed €239 billion of sustainable investments on behalf of our clients. So more than half way to our €400 billion of aspiration for 2025, but we need common standards here to maximize the impact. And that's why we're partnering to create these in many different platforms, subscriber to many different methodologies but also by contributing to the newly developed Swiss climate scores. My Way, as you know, it's a module where we actually deliver digital mandates. We saw inflows of €0.5 billion here. We expanded our product offering in line with our CIO views, including and actively managed commodities module here as well now. So that offering to really have your mandate digitally is increasing every quarter as well. And lastly, momentum stayed positive for investment product inflows in Switzerland. These contributed to 8% year-on-year growth in recurring fees. Last quarter, we saw €0.5 billion of positive inflows in the investment products and that's also representing 8% annualized growth. So as you can see, we're delivering on our promise to offer the clients the right opportunities at the right time. Clearly, when times change, the opportunity has to be changed as well. And we are literally think very close to our clients to get a sense for what works for them in their investment portfolios and also on the way we deliver to them in a more digital way. And on that note, let me turn to the next slide where we basically give you an update as to how we are leveraging technology as a differentiator while improving our efficiency. So technology we use in order to improve our user experience, but we also use it for efficiency. And I think this slide shows you that we are accelerating the use of technology to our clients so that they can on track with us through their preferred channels in a seamless way. We launched in Switzerland, Q4 banking, which is a digital-only banking offering. It's fast, intuitive. It's competitively priced. We target the mobile-only retail segment here, which grows at 30% year-on-year. So it's a very fast-growing segment that we want to be player in. Of course, Q4 clients also have access to the classic UBS offering for more specific services and the platform will be a feeder to those. In Asia Pacific, our Circle One ecosystem is now live. The app connects clients to experts, thought leaders, actual trade ideas through engaging content and video. So basically an app with very snackable content, and people can watch videos, get educated on specific trends, investment opportunities and as the next step also executing those. So far, also in Circle One, the user base is growing fast. And with time, we will add new features. Thanks to the agile development that we actually apply here and we will have continuous feedback from our clients to ensure that we stay ahead in our developments, both in terms of the offering as well as the user experience. As an example, in the next phase, clients will be able to connect with each other and to experts in interest groups that focus on very specific topics. And that could be investing, could be wealth planning, family advisory sustainability or flange and much more. Our strategy to transform how we manage change and develop technology is also on track. And you can see that also in this slide where we are executing our cloud strategy, to gain further flexibility to gain further efficiency as well. And we now have around 60% of our computing power fully delivered on cloud, half on the public cloud, half on the private cloud. We're transforming our agile workforce -- our workforce to agile way of working. We're currently having 13,000 employees working that way. It's the second wave we're in. Within these teams now, we see that technology teams are consisting of 65% of engineers. So basically, we're changing the composition in terms of non-engineers to engineers, and that has changed by 10 percentage points. So a real productivity increase coming through if you compare it to the pre-agile composition of our technology teams. We developed AI technology to help identify and remediate service interruptions in over 500 applications as well. And we've commissioned around 300 applications this year to simplify our tech estate. These are just a couple of proof points how we're making technology differentiator, both in user experience as well as in how we manage technology flexibly and efficiently. Turning to Slide 7. I like to give you a couple of examples of how we are executing our strategy and capabilities in the regions because that's where our strategy comes together. And we're organizing divisions but where the rubber hits the road is truly with the clients, and the clients are in the regions. So let's talk about the Americas here. The recent dollar interest rate hikes are a primary focus of how we manage our deposit offering. We expanded our deposit offering for that reason. We saw also a continued demand for loans. And as a result of the combination, our net interest income was up 37% versus last year. In Switzerland, we're building a strong foundation on the technology side, which contributes to being named Best Bank in Switzerland for the eighth time since 2012. In EMEA, as you know, our strategy is very much to improve profitability with a very selective investments in our areas of focus, more towards the entrepreneurial wealth creation, families with large companies and the build-out of our banking proposition to that segment. This strategy we see is delivering results already. Specifically on the cost side, where costs were down 9% against last year. Lastly, Asia Pacific, and that's also as a result of our continued focus and discussion with clients to show them our mandate offerings. We saw €3.3 billion of net new fee-generating assets in the quarter alone. And overall, you see basically, given the fact that we're talking about 4 regions with selective with a selective update here you see that region diversification is really a competitive advantage for us. It's a source for stability, it's a source for resilience. And I think this quarter proved once began. Now then to a summary on the numbers, and then Sarah will take you through a more specific numbers as well, and thereafter, we'll have the Q&A. But just ending on the diversification, both regionally and by business. You see the resilience in our financials here on this slide. Our revenues have started to benefit from higher interest rates and that helped offset the lower recurring fees and the lower client activity levels on the private side. Again, on the institutional side, we saw quite the opposite with good results in global markets. Meanwhile, we remain very disciplined in cost as we execute our efficiency plan. Operating expenses were down 1% compared to last year. And together with the gain on the sale of the joint venture in Japan, which we already updated you on. This resulted in €2.1 billion in net profit, 18.9% return on CET1 and 70.6% of cost-income ratio, all within target levels. In the second quarter, we bought back another 1.6 billion of shares while maintaining capital ratios well above the requirements. So we are well on track to buy back around $5 billion of shares by the end of the year. Now heading into the second half of the year, we're well positioned for an operating environment, which remains uncertain, certainly in the next couple of months. I see that so but we're very well positioned to work through that, that's thanks to our strategy, thanks to our business model at values global diversification, operation and financial resilience strict risk management, capital efficiency and a strong capital base. So strong reported results. And I think this is also the moment for me to hand over to Sarah Youngwood, our CFO, and she will take you through the underlying performance. Sarah, the floor is yours.

[Sarah Youngwood:]

Thank you, Ralph. Good morning, everyone. It is a great pleasure to be here today. As you heard from Ralph, we reported a strong set of results during this period of uncertainty. We partnered with our clients when they needed us most and delivered a good underlying performance. On Slide 10, our net profit in the quarter was $2.1 billion, up 5% year-on-year with a return on CET1 capital of 19%, a return on tangible equity of 16% and a cost income ratio of 71%. We have a balance sheet for all season and are on track to meet our return on CET1 capital and cost/income ratio targets for the full year 2022. The year-on-year comparison on the slide highlights a number of items that are not representative of our underlying performance. First of all, in revenues in the first part, $810 million from net gain on sales. This included the $848 million sale of our real estate JV in Japan and the sale of our minority stake in farm center a year ago. This was partially offset by $147 million real estate related revenue impacts, including a loss of $46 million this quarter. And moving to expense. We had $158 million higher litigation including $221 million this quarter, net FX movements were over $200 million each for revenue and expense and netted to a headwind of around $50 million. Now let me go through the underlying performance. The revenue story reflected the impact of market levels on recurring and transaction fees as well as lower global banking revenues, mostly offset by higher combined net interest income in GWM and P&C and continued strength in global markets. The net credit loss was $7 million compared to an $80 million release last year. This is a reflection of our existing level of reserves and the quality of our balance sheet. For example, 94% of our loans are collateralized. And for those, the average LTV is less than 55%. Operating expense was down 1% as variable compensation was down around $130 million offset by increases in T&E and IT. We remain focused on our cost discipline while absorbing increasing inflationary pressures and investing for the long term. Now let's turn to our regions on Page 11. Ralph walked you through the strength of our regions, and I will show you the diversification in our numbers. On the revenue side, Americas represented 40% of our business, followed by Switzerland at 23%; EMEA, at 20% and APAC at 17%. On the right, given the strong efficiencies of Switzerland and APAC and the level of investments in the U.S. On a pretax basis, ex-litigation, Switzerland represented 1/3 of our business, followed by Americas at 23%; APAC at 22%; and EMEA at 21%. Let's move to our businesses on Page 12, starting with GWM. GWM profit before tax in the quarter was $1.2 billion, down 2% year-on-year excluding litigation. Revenues were 2% lower with top line increases in Americas and Switzerland driven by NII and decreases in APAC and EMEA due to lower market levels and muted client activity. NII overall was up 24% year-on-year and 11% sequentially, with deposit volumes up 1% year-on-year, including 19% up in Americas and down 6% Q-on-Q. I would also note that the firm's deposits were flat year-on-year and down 5% Q-on-Q. We were able to increase our deposit margins in GWM by over 60% versus a year ago, while providing our funds with very competitive and stable pricing in savings rates, which they appreciated. While we've stayed close to our clients, macro and geopolitical uncertainties and lower asset pricing have kept them on the sidelines. As we enter the third quarter, the sentiment remains subdued. The operating expense ex litigation and FX was flat versus last year. Net new fee-generating assets were $0.4 billion in the quarter, with positive flows into SMAs, alternatives, self-directed mandates and UBS My Way, which more than offset pressure in discretionary mandates and investment funds. We also continue to see high demand in the private market space where, as was already mentioned, we saw $3.9 billion of net new commitments. Despite the environment, we also continue to see strong flows in APAC. while net new fee-generating assets were over $3 billion in the second quarter. These inflows together with