DBRS Confirms UBS AG at A (high), Trend Revised to Positive

DBRS, Inc. (DBRS) has today confirmed its rating 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 the long-term rating has been revised to Positive, while the trend on the short-term rating remains Stable. The Bank’s intrinsic assessment (IA) has been confirmed at “A”. 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).

Underpinning UBS’s IA of “A” is its significant global wealth management franchises, which cater to a diverse client base of high net worth and ultra-high net worth individuals, and its dominant domestic banking franchise that provides the Bank with sizable and stable deposit funding. UBS’s refocused Investment Bank (IB) has demonstrated some success in focusing on less capital intensive, higher margin businesses that complement its important wealth management franchises, although DBRS will continue to look for a longer track record to demonstrate continued progress. Asset Management (AM) is a sizable business that adds further diversity.

Also factored into the rating level are the headwinds still faced by UBS in its earnings generation ability, notably from elevated litigation expenses and the drag from the Non-core and Legacy (NC&L) Portfolio. DBRS also continues to have some concerns regarding the Bank’s operational risk controls, as past risk management and compliance failures continue to result in costly litigation and other charges. While the Bank’s CHF 1.8 billion litigation charge in the most recent quarter contributed to an operating loss in 3Q14, DBRS notes that UBS has put much of its material legacy litigation issues behind it, eliminating another distraction and enabling management to more fully concentrate on its core businesses.

The Positive trend indicates DBRS’s view that UBS is consistently making progress with its strategic plan. Positive franchise momentum has been evident over the past two years, highlighted by continued momentum in Wealth Management (WM) and Wealth Management Americas (WMA). Also, although further progress is still possible, the Bank appears to have strengthened its risk management processes, including its controls and compliance, and reinforced its traditionally conservative culture across its organisation. Furthermore, DBRS is cognizant of improvements in UBS’s balance sheet with enhanced capital levels, ample liquidity and an improving credit profile, all of which add to the positive ratings pressure.

DBRS views UBS as having strong underlying fundamentals, and perceives that the Bank is successfully addressing its challenges, although further progress can still be made. While costs have been impacted by elevated litigation expense, core revenues have continued to hold up well, driven by positive underlying business momentum. DBRS now considers the Bank’s remaining legacy issues as generally far less material than in the past, although cautions that legacy issues are likely to remain a headwind over the medium-term. UBS has also demonstrated progress in running down its NC&L portfolio, with total assets down 59% to end-3Q14 from year-end 2012 of CHF 429 billion, materially reducing its drag on overall results. In this portfolio, UBS reported a pre-tax net loss of CHF 1.2 billion in 9M14, down from a pre-tax net loss of CHF 2.3 billion in 2013 and continuing to progress on a downward trend. At 17% of total assets at end-3Q14 though, the portfolio remains sizeable and DBRS notes that continued progress in its reduction remains an important element in improving the Bank’s position.

UBS has refocused its IB, with certain businesses and exposures moved to the NC&L portfolio, leaving the core IB to focus on businesses that complement its wealth management franchises. DBRS continues to analyze the success of these businesses in a challenging environment. ROAE in the IB has generally exceeded the Bank’s 15% target in all quarters since 1Q13, excluding the most recent quarter which included a sizable litigation charge. DBRS notes that UBS is focusing on key businesses within the IB that support WM clients, such as equity sales and trading and equity capital markets, with considerable strength in EMEA and APAC. DBRS maintains its view that an appropriately-sized IB is an important component that complements the Bank’s important wealth management franchises, adds extensive capital markets product capabilities and enhances UBS’s position in global markets.

UBS’s continuing success in executing its strategy, including meeting or exceeding targets, is likely to add positive pressure to the rating over the medium-term. DBRS will look for continued success in running down the NC&L portfolio, reducing associated costs and a diminishing drag on overall earnings from this portfolio, combined with continued positive franchise momentum, particularly in WM and WMA. Negative rating pressure, including a reversion back to a Stable trend, could arise 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.

Notes:
All figures are in CHF unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013).These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include publicly available company documents, FINMA 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 credit rating was not initiated at the request of the issuer.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. This rating is based on publicly available information.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Alan G. Reid
Initial Rating Date: May 17, 2010
Most Recent Rating Update: December 20, 2013

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