DBRS Morningstar Confirms UBS AG’s Long-Term Ratings at AA (low), Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the Long-Term Issuer Rating of UBS AG (the Bank) at AA (low) and the Long-Term Issuer Rating of UBS Group AG (UBSG or the Group), the top-level holding company, at A (high). The Bank’s R-1 (middle) Short-Term Issuer Rating was confirmed and UBSG’s Short-Term Issuer Rating was upgraded to R-1 (middle) from R-1 (low). The trend on all the ratings is Stable. The Bank’s Intrinsic Assessment (IA) is AA (low) and the Support Assessment is SA1. The Group’s Support Assessment is SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the Long-Term ratings reflects the UBSG’s leading global franchise that is highly diversified by business and geography as well as its leading position in global wealth manager. DBRS Morningstar views the Group continues to strengthen its Global Wealth Management business by growing net new money and invested assets. UBSG’s ratings also reflect the Group’s sound risk management and conservative risk profile, as well as its strong asset quality and solid funding and liquidity position. DBRS Morningstar considers litigation remains a key risk for the Group, however it expects the outcome of any outstanding cases to be manageable from a capital and profitability perspective. This is supported by the Group having a robust capital position and strong earnings generation ability to absorb potential charges, despite some ongoing pressure in its Investment banking (IB) revenues.

UBSG’s Long-Term Issuer Rating is positioned one notch below the Bank’s IA reflecting the structural subordination of the holding company. In DBRS’s view, liquidity, or having high-quality, liquid assets readily available to meet potential short-term funding needs, underpins the Short-Term ratings of financial institutions. The upgrade of the Short-Term rating of UBSG Holdco reflects DBRS Morningstar’s decision to grant the upside Short-Term Rating mapping exception to UBS Group AG holdco. The exception reflects that DBRS considers bank holdcos to typically hold high liquidity standards, reflecting both that they are part of a of regulated entity that has demanding regulatory requirements as well as their role as liquidity provider for the broader group.

RATING DRIVERS

Positive rating action would require consistent track record of strong profitability, whilst maintaining a moderate risk profile and robust capital position.

Negative rating pressure could arise if litigation and reputational issues materially impact the capital position or if there is evidence of any material weakening of the core franchise.

RATING RATIONALE

UBSG is the market leader in retail and commercial banking in Switzerland and amongst the largest international financial institutions globally. UBSG’s wealth management business (GWM) ranks as the largest globally by invested assets and it is is the largest contributor to the Group’s revenues. In GWM, UBSG has a strong presence in EMEA, Asia Pacific and the US and is targeting further expansion in the Ultra High Net Worth (UHNW) segment. UBSG’s IB is focused on predominantly fee-based, advisory and client flow businesses. The Group’s Investment Bank operation is well positioned in key businesses including advisory, equity underwriting and equities and FX trading, with particular strength in equity derivatives in EMEA and APAC.

UBSG’s profitability has been negatively affected since 4Q18 by the challenging conditions in the financial markets, uncertainty about global economic growth and trade as well as lower client activity. Net attributable income declined to USD 3.6 billion in 9M19 from USD 4.2 billion in 9M18 and total operating revenues were down 6% YoY, largely affected by weaker performance across all segments, particularly in IB. Despite these challenges, the Group’s reported Return on Equity was 7.7% in 9M19, which DBRS Morningstar considers is in line with most similarly rated European Peers.

IB’s net revenues were down 14% in 9M19 YoY largely driven by weak equity derivatives and underwriting performance. UBSG’s Global Wealth Management business continued to benefit from good business momentum and the Group reported strong inflows of net new money in 9M19, mainly in Asia Pacific. However, the poor market performance also negatively impacted the market valuation of invested assets and this impactedGWM revenue generation in 9M19. Cost discipline remains a key strategic objective for the Group. Operating expenses were down around 3% in 9M19 YoY reflecting lower outsourcing costs and lower litigation, regulatory and similar matters expenses. However, with a cost /income ratio of circa 79% (as calculated by DBRS) in 9M19, DBRS Morningstar considers the Group’s cost efficiency is at the weaker end of its European and US peers, albeit this partly reflects the different business mix.

UBSG has a moderate risk profile and strong asset quality. The Group’s impaired loan ratio remained very low at 0.6% at end-3Q19 and broadly in line with the previous year. Litigation remains a key risk for the Group. In February 2019, a French court found the Group guilty of unlawful solicitation of clients on French territory and aggravated laundering of the proceeds of tax fraud and imposed fines of around EUR 4.5 billion on the Group. The Group has appealed the decision and the case is still pending. The Group set aside a total of USD 516 million for this case and has total provisions for litigation, regulatory and similar matters of USD 2.5 billion at end-September 2019.

The Group also has a solid funding and liquidity position that benefits from a large and stable deposit base, and well-diversified wholesale funding sources across various markets, products and currencies. At end-3Q19, customer deposits totaled USD 426.8 billion, accounting for approximately 52% of total funding and the Group’s net loan to deposit ratio was 75%. Funding sources are diversified by currency and instruments, with over 70% of funding generated outside of the domestic market.

DBRS Morningstar views UBSG as having a robust capital position supported by strong risk-weighted regulatory capital ratios and sound leverage position. The Group has strong risk-weighted regulatory capital ratios that remain at the high end of the global peer range. UBSG reported a fully-applied Basel 3 CET1 ratio of 13.1% at end-3Q19. Moreover, DBRS Morningstar considers the Group as well placed to meet upcoming capital regulatory requirement. UBSG is required to meet a 10.3% CET1 ratio and 5% minimum Tier 1 leverage ratio by 1 January 2020. Under Swiss regulation, UBSG is also required to maintain a CET1 leverage ratio 3.5% by 1 January 2020, and the Group reported a fully-loaded CET1 leverage ratio of 3.8% at the end -3Q19.

The Grid Summary Grades for UBS Group AG are as follows: Franchise Strength – Very Strong/Strong; Earnings – Strong; Risk Profile – Strong; Funding/Liquidity – Strong; Capitalisation – Strong.

Notes:
All figures are in USD unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019) This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company Documents, and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS Morningstar had no access to relevant internal documents for the rated entity or a related third party.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Maria Rivas, Senior Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director – Head of European FIG
Initial Rating Date: August 28, 2001
Last Rating Date: November 22, 2018

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

For more information on this credit or on this industry, visit www.dbrs.com.