DBRS Confirms Ratings of UBS AG – Senior at A (high), Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of UBS AG (UBS or the Group), including its Senior Unsecured Long-Term Debt & Deposits at A (high) and Short-Term Debt at R-1 (middle). All ratings have a Stable trend. These rating actions follow a detailed review of the Group’s operating results, financial fundamentals and future prospects.

The ratings confirmation reflects the resiliency of UBS’s franchise, as it continues to demonstrate momentum in its wealth management businesses and success in executing on its strategy. UBS’s franchise is supported by its substantial scale and strong market positions across its diverse, global mix of businesses. This franchise strength is backed by its consistent and improving core earnings capacity, which supports solid internal capital generation. Additionally, the Group appears to have strengthened its risk management processes, including its controls and compliance, with its traditionally conservative culture appearing to now permeate the organization. Further supporting its strengthened credit profile, UBS maintains strong capital levels and a conservative funding and liquidity profile. The current ratings level also considers the continued headwinds faced by UBS, including a still challenging operating and regulatory environment, its exposure to wide ranging capital markets activities, which have been considerably reduced but still add some level of market risk, and the potential for past operational risk issues to have a negative impact on UBS’s reputation and disrupt franchise momentum.

Underpinning UBS’s IA of A (high) are its leading 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. These businesses provide the Group with sizable and stable deposit funding. The Investment Bank (IB) has also been performing well, reporting a return on attributed equity of 15% in 2Q16 despite the challenging operating environment. Asset Management (AM) is a sizable business that adds further diversity.

DBRS considers UBS’s earnings as strong and much improved, supported by momentum across its core businesses, which continue to demonstrate improving trends. The Group has made considerable progress in achieving its strategic objectives and demonstrating a more stable earnings performance. UBS reported net income attributable to UBS shareholders of CHF 6.2 billion in 2015, up substantially from CHF 3.5 billion in 2014. While net income in 1H16 of CHF 1.7 billion is tracking lower, this is in line with peers as the operating environment remains extremely challenging. Earning headwinds could emerge from further litigation settlements, as the US RMBS investigation and further inquiries regarding cross-border wealth management business activities remain outstanding, and settlement costs continue to be extremely elevated across the sector. Other headwinds include the continued uncertain operating environment which is driving lower client activity, and the shift from active to passive investing, pressuring transactional revenues.

Given its track record of successfully adjusting to the current market environment, DBRS views UBS as having a strong ability to continue to adjust to the evolving operating environment. Critical to UBS’s success is the continued enhancement of its operational infrastructure, which supports risk management, compliance and control functions, as well as its cost-efficient execution capabilities.

Further supporting its fundamental credit profile, UBS maintains strong capital levels and a conservative funding and liquidity profile. The Group has very strong risk-weighted regulatory capital ratios, at the high end of the global peer range. While more constrained from a leverage ratio perspective, DBRS views UBS as having considerable time (until January 2020) to meet the latest requirement and the ability to adjust. The Group’s financial profile also benefits from its strong deposit franchise that funds the entire loan portfolio, combined with wholesale funding diversity across markets, products and currencies.

RATING DRIVERS
Continued success in enhancing its franchise through collaboration between key business divisions, while maintaining strong levels of profitability and capital, combined with a longer track record demonstrating the successful implementation of operational risk enhancements and permeation of cultural change, could add positive pressure to the rating.

Negative rating pressure could arise from an inability to deliver on key performance goals. Litigation and reputational issues could also pressure ratings, if damaging to the core franchise.

Notes:
All figures are in CHF unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under Methodologies.

The primary 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: William Schwartz
Initial Rating Date: August 28, 2001
Most Recent Rating Update: September 29, 2015

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.