DBRS Confirms UBS AG at A (high), Stable Trend

DBRS Inc. (DBRS) has today confirmed its ratings of UBS AG (UBS or the Bank), including its Senior Unsecured Long-Term Debt rating of A (high) and Short-Term Instruments rating of R-1 (middle). The trend on all ratings remains Stable. The Bank’s intrinsic assessment (IA) has been confirmed at “A”.

Underpinning the Bank’s IA of “A” is its significant global wealth management franchise (Wealth Management and Wealth Management Americas business divisions), which caters to a diverse client base of high net worth and ultra-high net worth individuals and its dominant domestic banking franchise, which provides the Bank with a sizable and stable deposit base. Importantly, despite the challenging global operating environment, underlying trends in UBS's wealth management businesses were mostly positive and its Swiss Retail & Corporate (R&C) business continues to demonstrate momentum with net new business volume growth and market share gains. DBRS sees these businesses as key underpinnings of UBS’s credit profile. Complementing these successful franchises, UBS has refocused its Investment Bank (IB) on less capital intensive businesses with higher risk-adjusted returns, providing products and services to its global client base including its wealth management and corporate customer base. The Bank’s Global Asset Management (AM) business division adds further diversification to UBS's revenues. Reflecting DBRS’s view that UBS is a systemically important banking organization (SIB) with an SA-2 support assessment, the Bank’s final ratings are positioned one notch above its IA at A (high).

Also supporting the rating from DBRS’s perspective, UBS remains on track to execute on its strategic priorities that it announced under its accelerated strategic plan in 4Q12. By focusing on capital strength, reducing risk-weighted assets and balance sheet while strengthening its business mix, UBS has the ability to generate more consistent earnings going forward. Growing core revenues in a difficult operating environment that features low interest rates, reduced capital markets activity, elevated competition and expense pressures remains a challenge. DBRS notes, however, that UBS’s core revenues have held up in 9M13 and compare well to 2009-2012 levels. DBRS is cognizant of improvements in UBS’s balance sheet with enhanced capital levels, deleveraging, ample liquidity and an improving credit profile.

DBRS views UBS as having many strong underlying fundamentals, but also perceives that the Bank faces some significant challenges, which it needs to continue to succeed in addressing. One important challenge is demonstrating the success of its IB strategy that has adjusted the core business to focus on its customer franchise and while also responding to the evolving global regulatory environment that has become more demanding for capital markets businesses. DBRS maintains its view that an appropriately-sized IB is an important component that complements the Bank’s important WM franchise, adds extensive capital markets product capabilities and enhances UBS’s position in global markets. DBRS views the performance of the core IB franchise as having been improved and the Bank has demonstrated some success in focusing on businesses that generate adequate risk-adjusted returns. Continued progress in running down the Bank’s Non-core and Legacy Portfolio also remains an important element in improving the Bank’s credit profile. Non-core and Legacy Portfolio assets of CHF 256 billion on 30 September 2013 remained sizable at 24% of the Group's total and continue to drag on overall results.

Also of great importance for the rating is the Bank’s continued progress in demonstrating that it has successfully strengthened its risk management processes, including its controls and compliance, and reinforced its traditionally conservative culture across its organisation to reduce the likelihood of major mis-steps occurring again on the scale and range of recent events. DBRS remains concerned about the Group’s operational risk controls, given its history, as past risk management and compliance failures continue to result in costly litigation and other charges. Most recently, UBS reported that the Swiss Financial Market Authority FINMA imposed a temporary 50% add-on to the Group’s operational risk-weighted assets effective 1 October 2013 related to known and unknown litigation, compliance and other operational risk matters. While DBRS views these issues as having some impact on the Bank’s reputation, it does not appear that the core franchise has been significantly impaired. UBS managed through the sizable total net asset outflows of prior years (CHF 388 billion from 2008-2010), reversing the trend to net asset inflows in recent periods (CHF 104 billion from 2011-9M13), inclusive of UBS’s AM and wealth management businesses. DBRS notes that these past issues came under the previous management team, but will continue to monitor the progress of the new management team and the focus on risk management and controls.

The Stable trend indicates DBRS’s expectation that UBS will to continue to make progress in the execution of its strategy despite these challenges. Negative rating pressure could stem from a reversal in progress in business positioning, if accompanied by weakness in delivering key performance goals. Substantial litigation and reputational issues could also pressure ratings, particularly if DBRS perceives that these issues are causing damage to the core franchise. Alternatively, continued success in the execution of its strategy, including meeting or exceeding targets, could positively pressure the rating. A proven track record of solid risk management over time, indicated by no new material litigation, compliance or other risk management issues could also positively impact the rating.

Notes:
All figures are in Swiss francs unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: 17 May 2010
Most Recent Rating Update: 20 September 2011

For additional information on this rating, please refer to the linking document under Related Research.