UBS Group AG
Q1 2013 Earnings Call Transcript

Published: 30 Apr 2013

[Caroline Stewart:]

Good morning, and welcome to our first quarter results. My name is Caroline Stewart, and I'm the Head of Investor Relations at UBS. This morning, Sergio Ermotti, our CEO, will present the highlights for the first quarter; and Tom Naratil, our CFO, will talk through the details. After our presentation, we'll take questions from analysts and investors and we'll address questions from journalists in a separate call this morning right after this call finishes. Before I hand over to Sergio, I'd like to draw your attention to the slide containing our cautionary statements with regards to forward-looking statements. Please read the slide carefully. Now I'd like to hand over to Sergio.

[Sergio P. Ermotti:]

Thank you, Caroline. Good morning, everybody. For the first quarter, UBS delivered a strong results with adjusted profit before tax of CHF 1.9 billion and a net profit of almost CHF 1 billion, and this despite the ongoing transformation of the bank. While it is too early to declare victory, last quarter, we have demonstrated that our business model works both in theory, as well as in practice. But what's more important is the way in which we achieved our results. In a good but still volatile and challenging environment, we deployed our risk resources prudently and focused on our energies on delivering for our clients. The results underline our employees' relentless focus in the midst of significant change, as well as the continued loyalty of our clients. Therefore, I like to extend my thanks to our employees and our clients for their ongoing commitment to UBS. On a fully applied basis, our common equity Tier 1 ratio was 10.1% at the end of the first quarter despite stable risk-weighted assets. This means we have achieved our regulators' 2019 minimum common equity capital requirement 6 years early. Capital strengths remains a decisive factor for wealthy individuals and financial institutions worldwide and events in Cyprus underlying why. Our industry-leading capital position continue to be an important factor in our success and remains a unique competitive advantage for the bank. Of the best capitalized bank in our peer group, we attracted very strong net new money inflows as clients looked for safety, service and sound advice. We saw strong inflows across our asset-gathering businesses with CHF 24 billion of net new money in our Wealth Management businesses, robust net new money -- net new business inflows in Retail & Corporate and notable inflows, excluding money markets, in Global Asset Management. But this is not just a reflection of our capital strength. It underscores our status as a trusted advisor and the capabilities we bring to our clients. That's why continued investment in our capabilities is key to our success. For example, in Wealth Management, we are launching state-of-the-art analytical tools which enhance our client advisors' ability to provide immediate and comprehensive advice across individual client portfolios. Our pretax profit of CHF 690 million in Wealth Management is the highest since quarter 2 2009. Our gross margin recovered by 6 basis points to 91 basis points in the quarter. We saw a surge in client activity in the first 6 weeks of the quarter, as well as market appreciation and increased FX volatility. This particularly benefited our Asia Pacific business and while it prompted some clients to increase their risk tolerance temporarily, we have yet to see sustain recurring in risk appetite. But this confirms that in a more normalized market conditions like those we saw in the earlier part of the quarter, our business is capable of delivering margins of 95 to 105 basis points. However, given the headwinds faced by the industry and the need for lasting solutions to global macroeconomic issues, we continue to view our target on a multi-year rather than a multi-quarter basis. Our ultimate financial goal, however, is sustainable growth in profits. We do this -- to do this, we must balance gross margins and net new money growth while keeping a close eye on costs. Managing all 3 elements and doing what's best for our clients are the critical success factors for this business. Once again, our Wealth Management Americas business achieved new highs. The business delivered another record pretax profits of $262 million, attracted very strong net new money and the team also carefully managed costs. Attrition rates remain low and our advisory productivity matrix remained industry-leading. Our commitment and client focus meant we were ranked as the #1 U.S. brokerage by an independent survey. Retail & Corporate continued to deliver resilient results as profits remain stable despite ongoing interest margin pressure. The business is also growing with net new business volume of almost 4%, well in excess of Swiss GDP growth. This underlines the market share gains we are making with both retail and institutional clients in Switzerland. Global Asset Management also delivered for its clients while generating a solid pretax profit of CHF 160 million and good cost control. Net new money, excluding money markets, totaled over CHF 5 billion and we were pleased to see our Wealth Management clients contributing to flows into long-term assets. While we saw net outflows in money market funds, this was in line with industry trends. Overall, however, our net flows this quarter will be accretive to future earnings. This is the first time we are reporting results for our new Investment Bank. I'm pleased to say that we have very strong results in what is typically the best quarter of the year. The business delivered a pretax profit of CHF 928 million, with profit 68% higher than 1 year ago, despite a 15% reduction in front office staff and a 10% reduction in balance sheet. While the transformation of the business was in its first full quarter, this result is a clear demonstration that our focus business model works. But the good results goes beyond financial achievements as it builds on the market share gains we have made in a number of our core IB businesses in 2012. For example, industry surveys have highlighted our success in both our leading equities and FX businesses. At the same time, our fixed income businesses have undergone a profound change as we have reduced resource allocation and exited businesses. Despite this, rates and credit delivered an excellent performance, complemented by a very good results in FX. Our equity capital markets business also had a particularly strong quarter. All of this is a testament to the ongoing efforts of our staff despite facing the many challenges of a major transformation, at the same time, as we are addressing legacy issues. In our non-core and Legacy Portfolio, we have also made steady progress reducing risk-weighted assets by CHF 6 billion and balance sheet assets by CHF 45 billion at minimal cost. We are committed to our risk and balance sheet reduction and capital targets. Our philosophy here remains unchanged. While speed is important, we will exit positions where it makes economic sense for our shareholders. On costs, overall, we continue to make progress as underlined by the reductions we see in our headcount figures. In addition, we are taking further strides in our efforts to reduce the long-term structural costs of the bank. Before closing, let me highlight our success in reducing capital needs of the group and improving performance, both of which are critical steps in delivering long term, sustainable returns to our shareholders. The results for the first quarter underline the transformation of UBS. Compared to a year ago, we have reduced capital allocated to our Investment Bank by about CHF 16 billion. This reflects our decision to run a smaller, less capital-intensive investment bank and successful in areas where we choose to compete. In the first quarter last year, the IB used over 60% of the equity attributed to the business divisions and it contributed less than 40% of our earnings. As you can see on the chart today, in terms of equity attribution, we see the mirror image. Profits, overall, are higher and the IB is making a contribution to earnings in line with its proportion of allocated equity. Before I turn over to Tom, let me say a little about our outlook. At the beginning of the year, I told about the factors influencing client confidence, issues in the Eurozone, fiscal issues in the U.S. and the uncertain geopolitical and economic outlook. While the first quarter showed, once again, what slightly improved confidence can do for markets, unfortunately, none of these issues have been resolved, and therefore, the recovery in clients confidence remains fragile. This means we must remain realistic. While we are confident in our ability to execute our strategy and in the long-term prospects of our business, there is no room for complacency. We must continue to build capital and reduce costs and address legacy issues. At the same time, we must remain very close to our clients, advising them in the best possible way to achieve their financial objectives. Now let me hand over to Tom to take you through some of the details for the quarter. Tom?

[Thomas Naratil:]

Thank you, Sergio. Good morning, everyone. As usual, my commentary will reference adjusted results. This quarter's adjusted results exclude the noncredit loss of CHF 181 million, proceeds from business disposals of CHF 65 million, costs related to our debt buyback of CHF 92 million and net restructuring charges of CHF 246 million. As Sergio mentioned, all our business divisions performed well this quarter and we delivered a pretax profit of CHF 1.9 billion. We reported a tax expense of CHF 458 million, comprised of deferred tax expense of CHF 319 million to offset profits in Switzerland and the U.S. and CHF 139 million of other tax expenses, mostly related to profits in other regions. The effective tax rate was 32%, higher than our guidance of 25% to 30% for the first half of this year. We expect it to be around 30% in the second quarter. We also expect to attribute CHF 150 million to CHF 200 million in profits to preferred noteholders in Q2. With regard to restructuring charges, we could see costs about CHF 250 million lower than we previously guided, as we've seen a lower cost per redundancies than we had assumed as a result of lower compensation in 2012 and certain credits related to IAS 19R. Wealth Management CHF 690 million pretax profit was its best results in almost 4 years and net new money of CHF 15 billion represents its best quarter since 2007. Revenues improved on higher client activity due to improve client sentiment and successful client engagement. Interest income benefited from loan and deposit growth, as well as higher treasury revenues. Both personnel and nonpersonnel expenses decreased. In G&A, expenses fell due to seasonally lower cost for marketing and communications, as well as lower litigation charges. Net new money was positive in all regions with exceptional progress in our targeted growth areas of APAC, emerging markets and ultra-high net worth. In Europe, robust growth in domestic businesses more than offset continued outflows in offshore, while we showed strong net new money growth in Switzerland. Gross margins also improved in all regions as we saw material increases in sales of advisory products. Most notably, APAC increased from 74 to 89 basis points, driven by higher client activity in investment funds, FX-related transactions, cash equities and fixed income products. Some of the strength was seasonal, particularly before the Chinese New Year. Our overall gross margin improved by 6 basis points to 91 basis points, mostly due to increased transaction-based and trading revenue. Gross margin was volatile month-to-month with January as the strongest month when the margin was at the lower end of our target range. February was significantly lower as a result of the holiday in APAC, and March rebounded to roughly match the average for the quarter. As we told you last quarter, our management team is not overly focused on quarter-to-quarter fluctuations in gross margin. What is more important is that we are growing our assets and our revenue base in targeted growth areas and improving our pretax performance. Wealth Management Americas reported record pretax profit of $262 million and its cost income ratio decreased to 85%. In the U.S., higher-transaction-based revenues, particularly early in the quarter were driven by improved client sentiment. The findings in our recent client survey confirmed this trend. The majority of those surveys feel significantly better about their financial situation than 6 months ago. On the other hand, the fragility of client confidence is reflected in their comfort with their current levels of cash. With regard to the national debt issue, which will likely resurface as a concern later in the year, most clients feel the long-term solution must include spending cuts. Combined with spending restraint, a number of investors, particularly those over 60, would be willing to pay additional taxes to reduce the excessive burden on future generations. Net new money increased to over $9 billion or $14 billion, including dividends and interest. Invested assets per advisor reached a new record level of 126 million, and our FAs remained the most productive in the U.S. based on revenue per advisor. Advisor numbers remained stable around 7,000 and attrition remained at very low levels. The performance in this business has been consistently strong for a number of quarters and its success is a highlight for UBS. The Investment Bank had a strong quarter with pretax profits of CHF 928 million. Revenues increased 70% from the prior quarter across both business units on higher client activity and improved trading results. Expenses increased by 8%, with higher performance-driven personnel expenses and lower G&A. With a cost-to-income ratio of 66% and an annualized pretax return on attributed equity of 47%, we've had a very good start to the year. This result was supported by the market share gains we made in key areas such as equities and FX. We deployed more resources in the quarter in response to higher client activity. We operated with average funded assets of around CHF 200 billion and RWAs below CHF 70 billion, and we ended the quarter with CHF 193 billion in funded assets and CHF 69 billion in RWA. In addition, average VaR remained at very low levels at only CHF 15 million. Adjusted return on Basel III RWAs stood at an impressive 16%. Corporate Client Solutions reported revenues of CHF 997 million, an improvement of 31% from the prior quarter as our hedging advice and distribution allowed us to leverage our client relationships across the business. The increase was driven by equity capital markets where revenues grew substantially, supported by improved market activity and our successful completion of a large private transaction. We continue to see good performance in Wealth Management Americas-driven products, including closed-end funds and Master Limited Partnerships. The overall fee pool for debt capital markets revenues declined sequentially as leveraged finance fees fell. However, revenues in our investment-grade business increased on higher primary and derivative solutions activity. We maintained strong position in leveraged finance and DCM-targeted markets and products, such as European FIG and high-yield in the Americas. On a sector basis, we saw market share gains in global industrial, healthcare, real estate and utilities. Financing solutions improved sequentially, mainly in EMEA, which was partly offset by lower revenues in the Americas. Advisory results declined broadly in line with the fee pool across all regions. In the Americas, we now have a business that is aligned with our strategy. It is a more focused business than in the past and a profitable one. We're pleased with the foundation we've built and are committed to sustainable growth, keeping profitability as a key priority. Investor Client Services reported almost CHF 1.8 billion in revenues, a significant improvement as revenues more than doubled in both business areas. We were particularly pleased with our performance in equities, which built on the gains we made in 2012. We regained the #1 position in cash equities globally for the first time since 2008 based on a leading industry survey. This is an outstanding result and underscores the positive view our clients have of our equities franchise. We saw very strong performance in derivatives, particularly in EMEA and APAC as a result of both higher client activity and improved trading. Revenues in cash and prime services also improved across all regions. FX rates and credit had a strong quarter. Continued investments in our FX platform have helped us to regain substantial market share and our leadership and execution and services are recognized by our clients in a recent industry survey. This quarter, FX benefited from higher volatility in currency markets and we saw strong performances in FX options and electronic trading. Rates and credits revenues increased substantially as we rapidly adjusted execution in line with our new strategy. Credit flow revenues increased across regions on higher client risk appetite and activity. Rates benefited from a series of restructuring trades in its solutions businesses and strong client flow trade. Global Asset Management had a solid performance with CHF 160 million of pretax profits and a cost income ratio of 67%. Investment performance for the quarter and our traditional strategies was good, and our longer-term track records versus both benchmarks and peers remained competitive. Our alternative strategies performed well in the quarter, most notably multi-manager funds within A&Q, a number of which surpassed high watermarks, and thus, contributed to the increase in performance fees recorded in the quarter. We saw net new money outflows of CHF 3.1 billion. However, excluding money market flows, we saw net inflows of CHF 5.1 billion primarily from third parties, and we were pleased to see net inflows from our Wealth Management businesses. In the aggregate, our flows this quarter are accretive to our future earnings. Retail & Corporate delivered resilient results with a stable pretax profit, a lower credit losses and operating expenses and despite continued pressure from low interest rates. The cost-to-income ratio increased slightly to just above 60%. Net new business volume was very strong and above target for the third quarter in a row, driven by both Retail & Corporate clients, reflecting our continuing positive momentum in this division and in Switzerland overall. Corporate Center - Core Functions reported a pretax loss of CHF 398 million. We reported negative revenues of CHF 155 million, of which CHF 112 million were related to Treasury activities and included hedge ineffectiveness losses of CHF 60 million, as well as other losses from valuation adjustments and hedging activity. Operating expenses not attributed to our business division decreased significantly to CHF 242 million, largely driven by lower litigation provisions. This slide details Corporate Center headcount and costs that are allocated to the business divisions. In the first quarter, approximately CHF 2.2 billion were allocated, half of which was personnel-related. The vast majority of our future cost reductions will be driven by the Corporate Center. As we've said before, this process will take about 3 years to fully implement. While some savings will materialize as we progress, most savings will only be visible once the process is complete in 2015. As we execute these programs, risk control and effectiveness will remain of utmost importance. On this slide, we compare our cost base in the first quarter with the 2012 quarterly average. While variable and financial advisor compensation increased in line with better revenue performance, our underlying cost base is being reduced successfully. This was broadly in line with the average headcount reduction and represents approximately CHF 700 million in savings on an annualized basis. As some of the nonpersonnel expenses tend to be seasonally lower in the first quarter of the year, we'll need to remain vigilant and disciplined in order to maintain the savings. As a headwind, litigation and regulatory provisions total CHF 378 million, and we expect these charges to remain at elevated levels at least through 2013. In non-core and legacy, we reported a pretax loss of CHF 84 million. Revenues of CHF 477 million included a gain of CHF 240 million from the revaluation of our option to acquire the SNB StabFund's equity. The non-core book also made a positive contribution to revenues, as we recorded realized and unrealized gains, reflecting the buoyant credit market. We also saw a positive debit valuation adjustments on our derivatives portfolio. Expenses decreased from the prior quarter CHF 561 million, primarily on lower litigation provisions, which nonetheless remained significant at CHF 346 million, mostly in relation to RMBS matters. During the quarter, we continued with solid execution on RWA and balance sheet reduction despite FX headwinds. Non-core consists of a large number of diversified and mostly liquid or well-collateralized positions, predominantly originated within rates and credit businesses. The majority are OTC derivatives reported as replacement values in our balance sheet and at quarter end were 95% collateralized. Non-core RWAs were CHF 59 billion at the end of the quarter, a reduction of CHF 6 billion. Balance sheet decreased by CHF 45 billion, with reductions of CHF 15 billion in funded assets and CHF 30 billion in PRVs. We made good progress in reducing operational complexity in this portfolio by reducing the number of OTC derivative transactions through negotiations with counterparties. We provided you with a breakdown of the reigning positions by major categories on this slide, and you'll find further details in the risk section of our quarterly report. This slide shows a similar breakdown for our Legacy Portfolio where we had CHF 36 billion of RWAs and CHF 38 billion in assets at the end of March. Over the past 6 quarters, we've reduced RWAs associated with this portfolio by CHF 44 billion. Having sold the majority of the sizable pieces, managing down the remaining large number of smaller positions is more time and labor-intensive. As a result, we view our RWA reduction target for the non-core and Legacy Portfolio as both realistic and appropriate. While RWAs for the group were roughly flat, they included a number of movements. As we transition from pro forma to actual Basel III reporting, we saw a small variance resulting in an increase of CHF 2 billion. This was more than offset by a net decrease of CHF 3 billion due to model changes. In addition, we saw increases due to currency effects and external rating downgrades. At divisional level, non-core and legacy declined. This was offset by increases in the Investment Banking and Corporate Center - Core, which included a transfer of diversification benefits from the Investment Bank to Corporate Center - Core. Since the third quarter of 2011, we've reduced RWAs by 35%. Consistent with the acceleration of our strategy announced last October, we continue to target future RWAs for the group of less than CHF 200 billion. We are the first major global bank to surpass a 10% CET1 ratio on a Basel III fully applied basis, and we still expect to reach 11.5% by the end of 2013 and 13% by the end of 2014. Our funding and liquidity positions remain strong with both LCR and NSFR ratios above 100% at quarter end. Our strong performance this quarter demonstrates the value of our unrivaled franchise. It also highlights the performance we can deliver when we collaborate successfully across the group. Our transformation remains on-track, and we remain confident in our future success. Thank you. Sergio and I will now take your questions.

[Operator:]

[Operator Instructions] The first question is from Mr. Jon Peace from Nomura.

[Jon Peace:]

I had 2 questions, please. The first one is on Wealth Management. You've given some very clear guidance around gross margins, but how should we be thinking about net new money, which was also well ahead of consensus? In particular, I think you referenced some larger inflows in the quarter, so I just wondered whether that had an effect? The second question was related to the Investment Bank, the ROE printed this quarter was well above the targets that you'd outlined with the restructuring. How should we think about that going forward? Were you highly conservative, or was there exceptional elements to seasonality? I just wonder if you could give us some help with the sort of pro forma mix or run rate of revenues going forward?

[Sergio P. Ermotti:]

Thank you, Jon. On gross margin, I think, that it's clearly, as you saw, the most important issue is that we had some volatility during the quarter. January was good, but we saw February coming down, and then March back at very good levels. In terms of net new money, your questions on net new money, we haven't seen big chunk of those assets. It's well spread across-the-board, well-diversified by clients. I have to say that when you look at Wealth Management outside the Americas, 2/3 of those assets, a big chunk of those assets was coming from new clients, so it's not just a gain in share of wallet, but it's also a substantial gain in market share. So nothing exceptional there. Of course, we continue to confirm our target for growth of net new money for the future. This was a very strong quarter, but clearly it would be not realistic to continue to expect this kind of growth going forward. In respect to return on allocated equities for the Investment Bank, I think, clearly, there is a seasonality effect, and clearly, we had also good business environment, particularly we had a couple of large transactions that affected positively the quarter. Having said that, even excluding those factors, I think that's the real point was the demonstration that the business model works, that we can, over time, aim at creating that sustainable return on allocated equities at least at 15% returns, which is our targets, i.e., moving the Investment Bank from a detractor, a dilutive factor to our earnings in terms of return on allocated equities to neutral or positive going forward.

[Operator:]

The next question is from Huw Van Steenis from Morgan Stanley.

[Huw Van Steenis:]

Just 2 things to dwell on. So congratulations in your best net new money for 5 years, I was just wondering if you could point to any particular things which would stand out? I was particularly struck by your inflows in emerging markets. Any comment also on any further potential outflows in Europe? And then secondly, I'm struck also that your return on allocated equities in the Investment Bank suggest you're the single most profitable Investment Bank on the planet this quarter. Any comments about your views on sustainability and any other sort of investments you might make as you tweak the investment plan?

[Sergio P. Ermotti:]

Well, I think that -- Thank you, Huw. I think I'll take the question on the Investment Bank. Again, I think that there is a seasonality effect. There is a demonstration that basically -- when measured on a fully applied Basel III, and this is the factor that you have to take into consideration, many of those businesses wouldn't really make sense in the new paradigm. So that's the reason why we reposition our business. There is a seasonality effect. There is one-offs. But clearly, I would say I still think that even excluding those factors having the returns that we are showing on a fully applied basis are -- our aim is to demonstrate that we can be a best-in-class where size and scope is not necessarily the driving factor. We are focusing to be very competitive in the areas we choose to compete, and that's where we want to be measured. We don't want to be measured across-the-board doing everything to everybody. On net new money, I'll let -- maybe complement my comments before, Tom, if you want to add any?

[Thomas Naratil:]

Sure, Sergio. The one thing, Huw, I'd also add on return on attributed equity, including that seasonality that Sergio was talking about, we still believe that our guidance and our target of an RoaE, of greater than 15% is appropriate on a sustainable basis. When we look at net new money, what we're very pleased with is the fact that we've got double-digit growth rates exactly where we want them in APAC, emerging markets and ultra-high net worth segment. We're well diversified across multiple client relationships, but 75% of the net new money this quarter did come from our ultra-high net worth client base. Some of the other things that, I think, are notable, very strong growth in Switzerland, 8.3% growth, which is certainly a sign that we're picking up share in Switzerland. And in Europe, we had positive flows this quarter with onshore inflows outpacing the offshore outflows. So I think it's very well-balanced. In terms of all the things that we talked about regarding gross margin and some of the outlook for that, that outlook also applies in net new money going forward. And so I would certainly say that the first quarter has been an exceptional one.

[Sergio P. Ermotti:]

Yes. Maybe I'll just add on Europe, very important to underline that while we had outflows from European clients booked in Switzerland as they converged into the new paradigm, we had inflows in our domestic European businesses. So that's very important to understand that booking in terms of Switzerland was positive, as Tom just said, based on a variety of clients booking in Switzerland. But when you look at European clients' behavior, it's very important to see that we have been able to more than offset outflows out of Switzerland into the net new market.

[Operator:]

The next question is from Mr. Kian Abouhossein from JPMorgan.

[Kian Abouhossein:]

I have a few questions. The first one is regarding the legacy assets. You're very close to your CHF 85 billion target, and you're roughly CHF 10 billion off. And I was wondering if we should assume that the CHF 85 billion is really an extremely conservative target? And if you could give us any update on why you wouldn't reduce this number by -- for year end in terms of target? And related to that, you clearly, at the time of the restructuring announced, a mid-single-digit ROE, and hence, the analyst assumed some kind of markdown on your legacy assets. I don't see any note of legacy asset write-down. I assume CHF 1.7 billion pretax for this year in terms of legacy asset write-down, and you only have CHF 10 billion to go. I wonder if you could revise that ROE target, considering the legacy asset write-downs are very, very small, and how we should think about that? The second question is regarding offshore. You have given a number in the past of CHF 12 billion to CHF 30 billion of tax-related assets to flow out, and I wonder if you could give us an update of how much of the CHF 12 billion to CHF 30 billion have actually left so far? And the last question just coming back to margins, and apologies, I missed part of the -- beginning of the call, could you give us an update on how we should think about the margins? Because we clearly had a quite cautious message with the fourth quarter results. You clearly saw quite a big positive surprise here in Asia. Is the environment was better than what you expected, or is this purely seasonal and what you indicated in the past in terms of replication portfolio, et cetera, should still have a material negative impact and we should take that into account? If you could just run us a little bit through your thinking of transaction versus replication?

[Thomas Naratil:]

Again, I'm going to take it. It's Tom. I'll take the first 3, and Sergio is going to take the last one. On the legacy, your question on whether or not CHF 85 billion, this is for the non-core and legacy, whether or not that target is conservative. No, we think it's appropriate. I think the outperformance that we had since the introduction of the strategy in third quarter 2011, we had -- it's been clear, we had very, very strong performance in our reductions in the fourth quarter. I think we're getting to a more normalized rate. The other thing that I'd highlight for you, we've moved out a lot of these big chunks and we're down to many, many line items. And these line items are -- take more time, as there is much time to negotiate the transaction small or large, and you don't have quite as much impact when you move those positions out. One of the things that I think is really quite interesting is, when we started out with the non-core, we had 1.3 million different line items of inventory related for the derivatives book. Now we've moved that down to approximately 1 million. But as you can imagine, that's a very time-consuming and labor-intensive process. So we'll continue to focus. Here's that highlight as we've done in the past is, sometimes, it's not that we weren't working this quarter with all the energy that we could to reduce positions. Some of these things are also more heavily negotiated transaction where it might take us a quarter or 2 of discussion and negotiation for us to complete the transaction itself. Your second question was on the guidance that we had previously given on a mid-single-digit ROE for this year and next year. I would say that even with this result, we do think that, that still is the appropriate guidance for the year. Your comment sort of led into what about the potential losses that you could see in the non-core and Legacy Portfolio. I'd highlight we did have gains in the portfolio during the course of the first quarter. It was certainly a friendly quarter for us where we saw both realized and unrealized gains. But at the same time, we've got to make it through the entire year. Your third question had to do with the offshore outlook guidance that we've given previously, at CHF 12 billion to CHF 30 billion. We still think that that's the appropriate range of guidance.

[Sergio P. Ermotti:]

Yes, on the margins, again, the analysis is very simple. If we look back into 2012 and even during the first quarter, the volatility of return on assets, basically, means that we need to stay very realistic about those outcome, also because we are growing very fast in net new money. Assets are also growing as a function of financial markets increasing, while credit -- while client's risk appetite is still basically very, very cautious. So it's very -- and last but not least, I have to say that our penetration and our growth in the ultra-high net worth space is higher than the size, the average size of the portfolio, therefore, you have a dilutive effect on return on assets, while on a pretax, you have a neutral effect. Our goal is clearly to focus on return on assets, but the ultimate real growth for us is to improve our pretax profit margins. And so we have to balance this elements of net new money growth and balance also -- working on costs and making sure that our bottom line improves in a sustainable way. Taking in account also that clients' risk appetite is very low and we are taking a medium to long-term view on our business. So we are building up scope for future developments.

[Kian Abouhossein:]

And just to follow up, assuming that you can get to 13% Tier 1 because, let's say, the environment is much better than expected by the end of this year. Should we assume that as soon as you hit the 13%, the payout ratio will go to 50%? Let's assume just you will get to 13%, would that be kind of just a theoretical calculation we hit 13%, we pay 50% right away? Or would it still be less likely that you would do that even if you're just over 13%?

[Sergio P. Ermotti:]

Well, look, it's difficult to make comments on wonderland, and clearly, such a rosy outcome. But I think that to stay realistic, we stay on our targets. We told clearly that if -- when we achieve a 13%, our core equity Tier 1 Basel III fully applied, we will have at least a 50% payout. So if it's coming this year and you are so positive about the developments, whatever, but our goal is to achieve this target by the end of 2014. That's our target. I think it's a credible and realistic way to look at the entire dynamics affecting our business.

[Thomas Naratil:]

And Kian, the other thing that I'd add to Sergio's comment, we've also talked about wanting to maintain post stress on Basel III fully applied ratio of 10%. So that's another point that we keep in mind in terms of looking at what's the buffer amount over 13% that we need.

[Kian Abouhossein:]

I appreciate conservatism. You have done very well. If I may ask one more very quick one, Page 17, I struggle to forecast clearly this division. And I was wondering -- and I guess, this big deltas in non-core revenues here and even exit [ph] debt valuation, can you give us an idea of how we should think about the run rate of this division, assuming no gains or no losses? So we just have an idea what the revenue line is underlying?

[Thomas Naratil:]

So the one thing I'd say is there is no run rate in this business, is the best way to think about it. The rundown portfolio, we were benefited in the quarter certainly by both realized and unrealized gains. We did take -- we took a bunch of balance sheet here down CHF 15 billion, we sold what I consider to be our big cash positions that we had in credit-related positions. So certainly, it was a friendly quarter for us to do that. Those were big balance sheet movers, but not big RWA movers. They were low risk-weighted items. So we benefited from that. I think looking forward, the best guidance on this is to take the mid-single-digit target on ROE and then factor in your other estimates on the divisions and then you'll back into what we expect here.

[Operator:]

The next question is from Mr. Kinner Lakhani from Citigroup.

[Kinner R. Lakhani:]

So a few questions. Firstly, starting off with the StabFund, just observing the trends on the SNB website of the StabFund loan. It looks like in the Q1, the loan has come down by 25%. And at this run rate, it would appear that by the end of the year, residual assets would be de minimis. And therefore, wondering whether we should start thinking about exercise of the option? And whether in any of your guidance on the 11.5% and 13% Basel III ratio, you have the SNB stuff on exercise as part of your assumptions? And secondly, just a couple of questions around the equities and the ECM business. Just on equities, just to understand if there was any meaningful benefit in this quarter from the reversal of the losses in Japan in Q4? And on the ECM side, the large private transaction that you highlight, if it had any benefit in revenue terms at the Wealth Management level from the 1 bank strategy?

[Thomas Naratil:]

So, Kinner, on your first question on the StabFund, we continue to evaluate the option on the StabFund. It is an option. We don't feel pressed on that as we've said in the past. Exercising it early does not have an advantage for us because the RWAs that would come on the balance sheet. And based on our current view at this point in time, we don't believe that, that's a 2013 event for us. In terms of ECM, I don't know if I botched my understanding of your question, in terms of the performance in ECM, we did have, and I think you'll remember the comments that we made in the last quarter's results, where we had a loss in Japan through this trading. In the fourth quarter, we said, in response to a question we didn't think that, that was problematic issue at all for us, and we see that, certainly in this quarter, we had a very strong performance, and we believe that the fourth quarter effect was a onetime item for us. And then last, if you could repeat your third question, I'm sorry.

[Kinner R. Lakhani:]

Yes, it was just whether the large private transaction would have also benefited the Wealth Management line? Occasionally, if it's Wealth Management-related revenues, I guess, they are booked in Wealth Management as well. Or was it just a very unique ECM transaction?

[Thomas Naratil:]

That's very unique ECM transaction. I think our comments that we've made on collaboration between all of our divisions for the quarter, I think, show what can happen when you've got a focused IB. I think that's a very important thing to emphasize. Now the IB, as we have it today, is the IB that we want. That IB doesn't shrink. That IB is one that we want to grow. It's going to grow as a result of its interactions with its own clients, but also primarily through its interactions with the clients for the rest of the group, and we saw some very encouraging signs on this first quarter of the year on that. We saw encouraging signs in Wealth Management flows. We saw encouraging signs certainly Wealth Management Americas. And it's a continuation of what we've seen in the universal bank model in Switzerland. We continue to see great results from that.

[Operator:]

The next question is from Fiona Swaffield from RBC Capital Markets.

[Fiona Swaffield:]

Three questions, please. One is, you mentioned again the stressed core Tier 1 target of 10%. I mean, can you give us any help on how significant your stress scenario could be? Is this like a 300, 500, 600 basis points number, and what the scenario is? And second issue is on the cost side, where are we versus the kind of a CHF 20 billion number? I'm not quite sure what progress we've made, or is it too early to say? So I think you have given a number of CHF 20 billion end '15 potentially cost base. And the third issue is just on the -- this issue was on non-core and the slide where you go through what's left, Slide 18. On the OTC, still there's quite a bit less of the funded assets, is that a plan because I know you gave some numbers in Q3, and it does seem to be on plan. Wondered if you could talk about any decisions to accelerate that or not?

[Thomas Naratil:]

So, Fiona, on your first question on the 10% -- on the 10% post stress. What I would say is the stress scenario that we currently run is a Eurozone stress scenario. Obviously, it's been a scenario, I think, that almost everyone has been running probably for the last 18 months to 2 years. The composition of what that scenario looks like has changed certainly over the course of that time period. Now there are 2 ways that we deal with that 10% post-stress number. One is, how do we reduce stress? Overall in our portfolio, one of the best ways that we can do that is by continuing the pace of performance that we've had in reducing the non-core and Legacy Portfolios over the course of the past couple of years. So I think that's one, and the second thing is obviously building the fully applied ratio up to the 13% target that we have. So the combination of those two, the combination of those 2 are what take us closer to achieving the cross over of those 2 points, approximately at the time that we reach the 13% CET1 ratio at the end of 2014. In terms of the cost performance that we had, as you know, there a number of different effects to look at in this over the course of a number of years and looking at the comparisons. The thing we've shown on Slide 16 to you, I think, is very important to see. Number one, the headcount reduction that we've made, certainly, are coming through in the personnel lines, or the salary lines and also the nonpersonnel costs, so we've had good cost control in the rest of our G&A lines. Certainly, what's going to fluctuate quarter-to-quarter in a lot of these comparisons in year-over-year is going to be the variable comp. That variable comp is aligned to performance. I think you'll see that we are making a real effort to reduce the percentage of compensations that reduce the compensation rate on our revenues. You see the headwind that we have, overall, in terms of litigation is something that if you go back to the original 2011 target that we set for the 2011 program, the litigation rate has certainly picked up since then and, as we've noted, we expect that to be elevated at least through the end of this year. Despite those factors, we made very good progress on the cost-to-income ratio overall. I think if you look, I believe, it's Page 12 in the report, you'll see our adjusted reporting by business divisions. I think if you go business division by business division, you'll see that we really are making very good progress in terms of showing some gearing.I think you see that, in particular, in Wealth Management where we''ve definitely shown the benefits. Its probably about CHF 120 million of the CHF 150 million year-over-year revenue increase on an adjusted basis drop down to the bottom line, which I think is quite impressive. Overall, we said we expect this CHF 5.4 billion gross, CHF 4 billion net in savings by the end 2015. That's in line with our greater than 15% ROE target, and that's the visibility we still have over the course of the next few years. Finally, your question on the OTC Basel III RWAs and the runoff schedules, I think it was, are we on-track? I think I would say on the derivatives book, the OTC positions are on-track cash, though, we are past our 2015 target. I think that's the one thing that I highlight as you think back to the third quarter presentation. The sales that we made, that CHF 15 billion I described in an earlier question in sales that we made, put us ahead of 2015 position that we thought we had earlier.

[Operator:]

The next question is from Mr. Christopher Wheeler from Mediobanca.

[Christopher Wheeler:]

A couple of questions. First, on the Investment Bank and a couple on Wealth Management, if I may. First of all, on the Investment Bank, obviously, [indiscernible] being very active in the market, but I think you were talking about a CHF 1.5 billion investment program in the new Investment Bank, if we can call it that. Perhaps if you could give us a clue as to what progress you've made in the sort of the 6 months or so since you started this project? Second thing really is going to what Jon asked at the beginning about the Investment Bank's ROE and really looking at it the other way, your cost-to-income ratio was just under 65%. You have a target of 65% to 85%. It's something you can control rather more than your revenues. Where should we be looking at that going forward, are you -- do you feel like you can sit towards the bottom end of that, or is it genuinely dependent on just how volatile revenues are? And then a couple on Wealth Management. Can you just perhaps tell us where you are on the retrocession situation in the Swiss wealth manager, and perhaps what your expectations are for -- at least some you may have to make and perhaps what you might have provided to date for that, if anything? And then finally, just on Wealth Management Americas, obviously, continued progress there, which is great. But I suppose what probably we're looking at is obviously Morgan Stanley sort of emerged from its investment phase to be posting a 17% pretax margin. Are there some accounting anomalies there or what is it that you need, I think, to move up to that kind of level, other than just better markets?

[Thomas Naratil:]

Okay, Chris, thanks for those questions. First -- on your first question on the IB, on the CHF 1.5 billion investment program that we've described, that was total for the group, and not just for the IB [ph]. We did say that because we wanted to grow the Investment Bank, we certainly would be making investments there. I think where you'll see us making investments is, in fact, same places that we've been emphasizing before, FX, in our FX technology platform, that certainly has paid very strong, very strong dividends for us over the course of the past 1.5 years. So that would be a continued place where we'd expect to invest. The equities business, certainly investing our platform, there it's critical to us. And then finally, third, talent acquisition is also a key part of what we'll certainly be doing on a targeted basis, and Andrea, as you note, has been very active in that process. Your questions on ROE and the cost-to-income ratio for the Investment Bank and where we think that will be, certainly, the first quarter, as Sergio has mentioned, is one that has been seasonally strong, and we also performed well. We had a few one-offs in there also. We think the range that we gave of the 65% to 85% range over the course of the cycle is the right range for us. We're going to be very disciplined on costs, but we'll be very focused on our clients, and we think the range is appropriate. In the better part of the marketplace cycle, we've indicated we'll be at the lower end of the range and then the tougher parts of the market cycle we'll be at the higher end of the range. On the retrocessions, I think that as we -- as you'd expect me to say, we've adequately provided for the exposures that we believe that we have. But I think more important, other than that, is the change in business activity that we've engaged in, as a result, which is a product innovation with our UBS advisory product. We described that in the annual report. What we're moving to in the course of the next quarter is a product that is retrocession free to our clients and that will have a new pricing structure associated with that. And we believe that, that's something and we'll see how that develops during the course of the product rollout, but we're optimistic regarding that product. Then finally, on Wealth Management Americas, business has had a fantastic performance over the course of the past few years. We've had quarter after quarter of record profits, and it's been accomplished on, not only through revenue growth but also through strong cost control. One of the key things that's driving future margin improvement in this business is continued growth in banking products. Banking products have a lower compensation ratio than asset management products. And if you look, it's actually Slide 25 in the pack in the appendix, you can see the great growth the business has had in this area over the course of the past 2 years. And we still think there's good potential there as well. I would say, I think our cost-to-income ratio, we had always said in our focus strategy for this business that we would expect -- we would not expect to have the best-in-class cost-to-income ratio because we don't have the scale of the others, but we'd have a very competitive cost-to-income ratio. And I think that 200 basis point or so difference this quarter, I think, highlights how well we're performing.

[Christopher Wheeler:]

I mean just follow up on that, Tom, looking at the financial advisors, which is obviously one way you can look to continue to crank up the business, you're starting to sort of push those up a little bit. Is that something, I mean, which Bob is looking at in terms of building on the successful business by perhaps beefing up the sales force, or does he want to keep it pretty tight?

[Thomas Naratil:]

Bob is very disciplined in his strategy execution. He likes the focus that we have with the 6,500 to 7,000 range that we have. It allows us to focus on a productivity-led strategy, a productivity-led strategy is one that will drive better bottom line.

[Operator:]

The last question from analysts and investors will be from Mrs. Teresa Nielsen from Bank Vontobel.

[Teresa Nielsen:]

I have a question regarding your repricing strategy in Wealth Management. Did we already see some impact from that here in the first quarter 2013, or is it really something that we should expect to see over the next quarters? And then with regards to the withholding tax agreement with U.K. and Austria, do you expect us to see some outsource in the second quarter there from this impact? And is that something, which has already impacted your first quarter results?

[Thomas Naratil:]

Teresa, it's Tom. So on the repricing for the Wealth Management strategy, no impact in 1Q. But in terms of thinking about the movement of the product, we start the retrocession free portion of that, in the next quarter. So as a result, we'll be foregoing revenue. And then the price increases come in following that, so there will be a little bit of a valley in the revenue run rate. On your questions on withholding tax, the guidance that we've given on CHF 12 billion to CHF 30 billion really takes into account all the different geographies that we're considering in Europe, including the U.K. and Austria. I think the one thing that we highlight, behavior of clients is, in a lot of time, anticipatory, so there is some activity that's occurred in advance of it. And then there's also the behavior that occurs along the way. So I don't think there's anything unique in terms of a spike that you should think of because of the 2 agreements that you mentioned. However, as we've indicated, based on the behavior of our clients, we think that CHF 12 billion to CHF 30 billion, after all, is more likely to be front loaded than it is to be something that occurs over an extended period of time.

[Sergio P. Ermotti:]

Okay. This was the last question. I think, let's say, in summary, those were good set of results, very pleased with the fact that the strategy works. And we continue to be the best capitalized banks amongst our peers. And now, we look with confidence about -- but also with a realistic outlook about the future, and we will continue to execute on our strategy. Many thanks for joining us today, and we'll see you at the end of July. Thanks.