DBRS: UBS Results Demonstrate Strength in Core Businesses, Progress with Strategic Objectives

• 4Q13 net profit of CHF 917 million, up 59% quarter-on-quarter (QoQ), driven by stability of net revenues, lower litigation expenses, and benefit from revaluation of deferred tax assets (DTA)
• Legacy issues continue to constrain overall profitability, with the Non-core & Legacy (NC&L) Portfolio generating a pre-tax net operating loss of CHF 446 million
• DBRS rates UBS AG Senior Unsecured Long-Term Debt at A (high) with a Stable trend

From DBRS, Inc.’s (DBRS) perspective, the 4Q13 results of UBS AG (UBS or the Bank) demonstrate the strength in its core businesses and its progress towards achieving its strategic objectives. While legacy issues remain, DBRS views this hindrance as receding given the Group’s success in reducing its NC&L Portfolio and as it continues to address litigation, regulatory and similar matters. UBS continues to make progress with its strategic objectives, contributing to a strengthened balance sheet and lower risk profile, while strengthening its business mix which enhances the Bank’s ability to generate more consistent earnings.

In the Bank’s operating businesses, highlights of the results include continued strength in Wealth Management (WM), with its focus on catering to clients in Asia Pacific (APAC) and ultra-high net worth individuals, contributing significantly to net new money inflows in the quarter. In Wealth Management America (WMA), UBS showed improvement with pre-tax profits continuing upward driven by higher transaction-based revenues and improved client activity. In the Retail & Corporate (R&C) segment, UBS saw strong net new business volume growth, particularly with corporates. R&C remains an important source of new business for WM, as well as the Investment Bank (IB) and Global Asset Management (GAM). With its reoriented IB, UBS demonstrated strength in focus areas, such as equity sales and trading and equity capital markets. Higher equity issuance volume in APAC drove a 48% sequential increase in equity capital markets revenues, further demonstrating UBS’s strength in this region. In GAM, pre-tax profits improved with higher performance fees driven by strong investment performance in alternatives.

Progress towards strategic objectives was evident in the continued reduction in risk-weighted assets (RWAs), now down to CHF 225 billion. These RWAs include CHF 22.5 billion for the incremental RWA calculation based upon UBS’s supplemental analysis (mutually agreed with FINMA) which was approximately CHF 5 billion less than the incremental RWA add-on imposed by FINMA. This level already meets the 2015 target level and contributed to the Bank’s strong regulatory capital ratios with a Basel 3 CET1 ratio of 12.8%, fully applied, at 2013 yearend. Capital ratios were helped by exercising the StabFund option. The Bank’s changing business mix, including the running down of its capital intensive businesses that are now included in the NC&L Portfolio, is also helping UBS improve its leverage ratio. UBS’s leverage ratio increased to 3.4% in 4Q13, fully applied, from approximately 2.4% at the end of 2012. That being said, the NC&L Portfolio remains sizable with assets of CHF 210 billion or 28% of funded assets. This portfolio continues to be reduced and has been approximately halved from 2012 levels. In 2012, the NC&L Portfolio generated a pre-tax loss of CHF 3.8 billion, which was reduced to a pre-tax loss of CHF 2.3 billion in 2013.

DBRS expects that UBS will continue to make progress in the execution of its strategy, including meeting or exceeding stated targets, despite potential regulatory and global market headwinds. Further demonstration that the Bank has successfully strengthened its risk management processes, as indicated by no new material litigation, compliance or other risk management issues, would be viewed positively from a ratings perspective.

DBRS rates UBS AG Senior Unsecured Long-Term Debt at A (high) with a Stable trend.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations. 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 is an unsolicited rating. This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

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