Morningstar DBRS Confirms UBS AG's Long-Term Issuer Rating at AA (low), Negative Trend; Discontinues Credit Suisse AG's Credit Ratings

DBRS Ratings Limited (Morningstar DBRS) confirmed the Long-Term Issuer Rating of UBS AG (the Bank) at AA (low) and the Long-Term Issuer Rating of UBS Group AG (UBS or the Group), the top-level holding company, at A (high). The trend on the long-term credit ratings remains Negative. The Bank's Intrinsic Assessment (IA) is AA (low) and the Support Assessment is SA1. The Group's Support Assessment is SA3.

Credit Suisse AG has now ceased to exist as a separate entity upon the completion of the merger of UBS AG and Credit Suisse AG on 31 May 2024. Morningstar DBRS consequently discontinued and withdrew its credit ratings on Credit Suisse AG.

See the full list of credit ratings in the table at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
Since the acquisition of Credit Suisse Group AG (Credit Suisse) last year, UBS has fully restored confidence levels, achieved its Q1/Q2 2024 milestones on schedule (e.g., key legal entity mergers), and maintained business momentum with recent results reflecting a positive performance in all divisions, including a positive contribution from Credit Suisse in the Group's core franchise, Global Wealth Management (GWM).

The confirmation reflects that Morningstar DBRS expects UBS to maintain its leading position in GWM alongside solid earnings, further progress in offloading non-core and legacy assets, a conservative risk profile, strong liquidity, and robust capital levels.

The Negative trend reflects the still elevated and inherent operational execution risks associated with the sizable Credit Suisse integration. In addition, the Negative trend reflects UBS' challenge to operate in a difficult operating environment (e.g., elections, geopolitical tensions, etc.), which could affect its capacity to generate adequate revenues at a time when the Group is still digesting the integration of Credit Suisse (e.g., migration of clients, planned savings, etc.).

CREDIT RATING DRIVERS
Should the Group continue to successfully execute on the integration of Credit Suisse, as well as generate solid and recurring earnings while maintaining strong liquidity and capital levels, the long-term credit ratings would return to Stable.

The long-term credit ratings would be downgraded if significant integration issues materialise, the franchise significantly weakens, and/or profitability levels materially decline.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
UBS is one of the largest global financial institutions. The recent acquisition of Credit Suisse strengthens UBS' position as the leading Swiss-based global wealth manager with USD 5.8 trillion in invested assets at end-Q1 2024. In addition, UBS is the leading universal bank in Switzerland with a major retail and commercial banking franchise. Outside Switzerland, UBS is present in the Americas, EMEA, and Asia Pacific, and is particularly focused on the Ultra High Net Worth and High Net Worth segments. The Investment Bank (IB), which operates Global Banking (Advisory and Capital Markets) and Global Markets (Execution Services, Derivatives and Solutions, and Financing) segments accounted for 21% of Group risk-weighted assets (RWA) at end-Q1 2024, which compares to the Group's ambition of capping the IB to 25% of RWA.

Earnings Combined Building Block (BB) Assessment: Good
UBS returned to statutory profitability in Q1 2024, with a solid profit before tax (PBT) of USD 2,376 million. UBS' net profit attributable to shareholders increased to USD 1,755 million in Q1 2024 from a loss of USD 751 million in Q4 2023, and a loss of USD 184 million in Q3 2023. On an underlying basis, all operating divisions reported positive results in Q1 2024. UBS' PBT was significantly up, 67% Quarter over Quarter (QOQ), to USD 2,617 million in Q1 2024 from USD 592 million in Q4 2023, thanks to a 15% QOQ increase in revenue and a 5% QOQ decrease in operating expenses taking place in NCL but also GWM and IB. UBS' return on CET1 increased to 9.0%.

By end-2026, the Group is targeting a 15% underlying rate of return on CET1 capital (RoCET1), and approximately USD 13 billion in gross cost savings compared to the 2022 cost base. UBS has achieved USD 5 billion gross cost savings at end-Q1 2024. At the same time, the Group is guiding to a cost-to-income ratio of below 70%, which Morningstar DBRS sees as ambitious given the Group's historically above 70% cost-to-income ratio as well as the numerous moving parts that a substantial acquisition involves on both the revenue and cost sides of the income statement. On a statutory basis, the Group's cost-to-income ratio was 80.5% in Q1 2024, compared to 105.7% in Q4 2023, and 99.5% in Q3 2023. On an underlying basis, UBS' cost-to-income ratio was 77.2% in Q1 2024, compared to 93.0% in Q4 2023, and 89.3% in Q3 2023.

Risk Combined Building Block (BB) Assessment: Strong/Good
UBS has a generally conservative risk profile reflecting the credit and market risk characteristics of its primary businesses, especially in wealth and asset management, with sound asset quality. Nonetheless, Morningstar DBRS considers there are still elevated and inherent operational execution risks associated with the substantial size of the Credit Suisse integration. As such, Morningstar DBRS will continue to monitor the Group's operational execution risks, including legacy issues, IT and client transfers, and reputation.

Exposures in the Non-core and Legacy (NCL) business line, which are marked as nonstrategic, are expected to continue to decline as a result of maturities and the active unwinding of positions. During Q1 2024, the NCL division exited positions and reduced RWAs by USD 16 billion. NCL's total RWAs declined by 22% to USD 57.9 billion at end-Q1 2024 from USD 74.0 billion at end-Q4 2023, which represented about 11% of total Group's RWA compared with a target of below 5% by end-2026.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
Morningstar DBRS considers UBS' funding and liquidity as solid, supported by a large and stable deposit base, benefiting from the Global Wealth Management (GWM) business and the strength of UBS' banking franchise in Switzerland. The Group has maintained well-diversified funding sources across various markets, currencies, and products including issuances of AT1 instruments (first post-acquisition AT1 issuance being in November 2023). UBS reported strong liquidity metrics with an LCR ratio of 215.7% at end-Q4 2023 on a quarterly average basis, up from 196.5% at end-Q3 2023, and well above the prudential requirement set by the Swiss Financial Market Supervisory Authority, as well as USD 416 billion of high-quality liquid assets at end-Q4 2023, up from USD 368 billion at end-Q3 2023.

Capitalisation Combined Building Block (BB) Assessment: Strong
Morningstar DBRS expects the Group's capital position to remain strong given its solid capacity to generate earnings, as well as sound access to capital markets. The Group's CET1 ratio increased to 14.8% at end-Q1 2024, up 40 bps on lower RWA as the Group's CET1 capital represented USD 78.1 billion at end-Q1 2024, down from USD 78.5 billion at end-2023. The Group's RWAs declined to USD 526.4 billion at end-Q1 2024 from USD 546.5 billion at end-2023, compared with UBS' target to reduce its RWA down to USD 510 billion. UBS' total loss absorbing capital was USD 197 billion at end-Q1 2024, representing a loss absorbing capacity ratio of 37.50% compared to requirements of 25.49%. At the same time, Morningstar DBRS notes UBS is going to be subject to stricter capital requirements, however, more details of the proposal to strengthen the Swiss TBTF requirements regime are still to be made public.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/434790.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

ESG Considerations had a relevant effect on the credit analysis.

Morningstar DBRS views Business Ethics (G) as relevant rating factors for UBS' credit ratings.

Morningstar DBRS views Business Ethics as relevant but it does not affect the credit ratings or trend assigned to the Group. Although largely reflecting legacy issues, UBS remains subject to various disputes and legal proceedings. At end-Q1 2024, the Group reported total provisions for litigation, regulatory, and similar matters of USD 3.9 billion (up from USD 2.6 billion at end-2022), of which approximately USD 1.2 billion from GWM (broadly unchanged since end-2022) and USD 2.1 billion in NCL (up from USD 0.8 billion at end-2022, driven by the former Credit Suisse IB). In addition, contingent liabilities accounted for USD 3.8 billion at end-Q1 2024. These considerations are reflected under the Risk grids.

Morningstar DBRS no longer views Corporate Governance as relevant for UBS' credit ratings. This reflects the efficient and successful to date progress UBS has made in processing its acquisition of Credit Suisse, whilst restoring confidence.

There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024; https://dbrs.morningstar.com/research/433881/global-methodology-for-rating-banks-and-banking-organisations). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024; https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings) in its consideration of ESG factors.

The credit rating methodologies used In the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents. Other sources include UBS Group AG Annual Report 2023, UBS Group AG Full Year and First Quarter 2024 Financial Results Documents, Swiss National Bank, and FINMA. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/434792.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Vitaline Yeterian, Senior Vice President - European Financial Institution Ratings
Rating Committee Chair: William Schwartz, Senior Vice President - Global Fundamental Ratings, Credit Practices
Initial Rating Date: 17 May 2010
Last Rating Date: 21 June 2023

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