UBS Group AG (UBS) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning. Welcome to the UBS Fourth Quarter 2018 Presentation. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to UBS. Please go ahead.

Good morning. I'm Martin Osinga from the Investor Relation team. Welcome to our fourth quarter 2018 results presentation. I'd like to remind you that today's call may include forward-looking statements. These statements represents the firm's beliefs regarding future events that by their very nature may be uncertain and outside of the firm's control. Our actual results and financial condition may vary materially from this belief. Please see the important information citing cautionary statements, including today's presentation on the discussion of risk factors in our Annual Report for this fiscal [Technical Difficulty] factors that may affect our future results and financial condition. I'll now hand over to Sergio.

Thank you, Martin, and good morning, everyone. For those of you who don't know, Caroline has been promoted to CFO of the Investment Bank, so as you can hear, Martin is now in the hot seat. As we told you in October, we changed our functional currency and we are reporting in U.S. dollars for the first time to date. The change will bring material benefits to our NII and improve our risk and capital management. It required a lot of work behind the scenes, so a big thank you to our colleagues who made it happen smoothly. Now on the quarter. You are well aware on how - how tough market conditions were out there. Equity market had one of the worst Q4 performances since the Great Depression. The convergence of macroeconomic, geopolitical, and geoeconomic concerns continued to negatively affect client sentiment, which, along with negative seasonality factors had an impact on liquidity, creating a bitter cocktail. As a consequence, both private and institutional client activity dropped significantly and much earlier than usual for a fourth quarter and market condition were very tense in the last two weeks of the year. Despite this very challenging backdrop, we again showed the strength of our strategic choices and diversified franchise, delivering a resilient performance in the quarter. PBT was up slightly to $862 million, with a 4% reduction in expenses more than offsetting external revenue pressures. The various onetime income adjustments in both years largely canceled each other out. Our net profit increased by a third to around $700 million adjusted for last year's impairment related to the U.S. Corporate tax law changes. The fourth quarter closed what was a very successful year for us. Our net profit increased by 25% to $4.9 billion. We again demonstrated our models capacity to delivering under various market condition in a year when nearly all asset classes had a negative market performance. In the first year of combined operation, Global Wealth Management reached a decade-high pretax profit of $4 billion, driven by record results in the net interest and recurring fee income. The Investment Bank also had a particularly good year with pretax profit up 29%, supported by higher equities and FRC results, while maintaining cost and resource discipline. Personal & Corporate Banking delivered nearly $2 billion in earnings, helped by gains on the SIX-Worldline [ph] transaction which mitigated NII headwinds. Asset Management performance improved throughout the year helped by cost actions offsetting pressures on invested assets and the impact of previous year's disinvestment. Net new money was $32 billion, a 4% growth rate, so far comparing very well with the industry. We delivered 3% positive operating leverage and we increased revenues and reduced expenses. Costs went down by $432 million despite higher technology spend and regulatory costs. Most of the gains were driven by continued curbing of restructuring expenses and lower litigation. Reported cost income ratio improved by 3 percentage points to 79% and we remain committed to lowering it further. Our business model is geared towards high capital generation. We delivered attractive shareholder returns while maintaining a strong capital position and investing for growth. In 2018, we accrued for a higher dividend and exceeded our share buyback goal by CHF 200 million. At the same time, TLAC increased to over $84 billion, and we meet our regulatory capital requirements a year ahead of their full implementation. We intend to propose an 8% increase in our dividend to CHF 0.70 [ph] per share, consistent with our capital returns policy. Combined with the share buyback of CHF 750 million, our total payout ratio will reach 70%. In 2019, we plan to repurchase shares worth up to $1 billion. The UBS franchise is unique. We are the only truly global wealth manager. Our businesses is diversified geographically and we are well positioned in the largest and fastest growing markets. More than half of our profit comes from asset gathering businesses, and our Swiss business further contributes to the stability of our earning. The strength of our franchise has clearly been on display over the last 5 years, a period during which we generated $19 billion in net profits. As we put our legacy and restructuring issues behind us, adjusted and reported profit has been converging. Through increase operating profitability, we were able to add to our capital and offer attractive shareholder returns, all while absorbing nearly $9 billion in regulatory and litigation costs. Now a familiar chart, as a reminder of our core philosophy and how we manage UBS for the long-term. Our goal is to be both cost and capital efficient. We do not look at cost efficiency in isolation, and I believe neither should you. It's only half of the equation. It is quite striking to see so many experts, stakeholders comment on or compare our cost income ratio to banks with completely different business models and far lower capital efficiency. In addition, it's also misleading to look at our headcount developments without considering our total workforce, including the outsourced portion where we have seen substantial reduction in the last year. Our in-sourcing program has and will result in savings and better risk management. We are among the highest valued banks in Europe and already compare well to a number of U.S. peers. Actually, our 14.2% return on CET1 capital for the full year is very strong in absolute and relative terms. But our sights are set higher. For us, being best-in-class means delivering return in line with the best. At our investor update, we highlighted the alpha and beta assumption underpinning our targets and ambitions. Our goal was to bring to your attention and to be transparent about the factors that we can and cannot control. We do not control the external environment nor equity market and interest rates. Clearly, the starting point is different than it was last October, making this year's journey toward our targets steeper. However, as we all learned too well over the last few years, it's too early to make any judgments on the entire year. Of course, this doesn't mean that we are sitting here passively waiting for markets to improve. We are working on various levers to mitigate the lower beta contribution. We have a range of cost and capital related management actions to run the bank in a fuel saving mode without compromising our long-term strategy. Although we cannot and don't want to hold our investments, we can adjust the pace and relative priority, and in a slow down, we can be more selective in our hiring plans. In addition, having completed our legal entity transformation and related tech investments, we are now positioned to further optimize our capital and balance sheet. Lastly, we have natural hedges in the business. Lower revenues means lower pay, particularly in GWM, AM and IB, which are most correlated to beta factors. On the capital side, a less supportive environment with muted clients activity and lower-risk appetite mean we utilize fewer resources. All these actions will allow us to drive capital generation, maintain our shareholder returns capacity and invest for growth. I'm happy with the progress we made on various initiatives last year, and we have listed some of the highlights here. We have continued to make significant progress on a number of legacy litigation issues, including resolution of the two RMBS related matters, the Trustee Suit and the New York Attorney General investigation, along with the state AG LIBOR matter. In the two most prominent open cases, we chose to defend the bank decisively in court in the best interest of shareholders. While the cases are ongoing, we believe our stakeholders now have a better understanding of why we have taken this route. Looking forward, of course, our aim is to always do better and to strengthen our competitive position. In that respect, we compare ourselves against the best, both as a group and across the business divisions. Specifically, in areas like net new money, GWM can and should improve. While some regions showed positive developments, in the Americas where net new money was negative, we did better than our key competitors in terms of invested asset development both on quarter-on-quarter and year-on-year basis. The overall result for the year are clearly not satisfactory. To meet our goals, we need to intensify efforts to attract and retain a higher portion of our current and prospective clients assets. In the current environment, it's not only important to execute on the group's existing plan to deliver cost efficiency but also to constantly look for new opportunities. Likewise, we will continue to foster a culture of partnership across divisions to generate new revenues and even better serve our clients. To summarize, we are taking commercial and responsible actions to mitigate the shorter impact of difficult market and to execute on our long-term plans. By looking at the valuation in the banking sector, one could think market expect a meaningful economic downturn. We don't see evidence to support such a negative scenario in our discussions with clients. Rather, the secular trends driving our ambition and plans for the future such as global wealth creation and the opening of financial markets in China remain intact. With this, I'll hand over to Kirt for the Q4 results.

Thank you, Sergio. Good morning, everyone. My comments will compare year-on-year quarters in reference adjusted results in U.S. dollars unless otherwise stated. In the fourth quarter, we adjusted for restructuring expenses of $188 million and a net $190 million gain on the income side. For the full year, we incurred restructuring expenses of $561 million. That's about a $630 million reduction from the restructuring charge in 2017. We still expect around $200 million in 2019 with our reported and adjusted results further converging. For our income adjustments, the $190 million included a $460 million valuation gain relating to the sale of SIX Payment Services business to Worldline. The gain was booked mainly in Personal & Corporate Banking with some in Global Wealth Management. Partly offsetting this, we had a re-measurement loss of $270 million booked in Corporate Center services related to the consolidation of UBS securities in China, following the increase in our stake of 51%. The market environment made for a very challenging quarter for Global Wealth Management. It was a tough end to an otherwise good year with PBT for the quarter down 22% or 14% excluding litigation. Total operating income was down 2%, and I'll take you through the components in a moment. Cost increased by 5% to higher expenses for litigation provisions and legal fees, as well as increased technology and risk control spend. Compared to 3Q, we also saw higher cost related to seasonal items, for example, bank levies and marketing related costs. The cost income ratio rose to 81% and would have been 77%, excluding litigation. Loan balances were up versus the previous year, but net fee leveraging from clients in Asia drove a contraction in lending during the fourth quarter. Moving to revenues. Net interest income was broadly stable. Its 8% higher deposit revenue and a positive contribution from loans, along with some benefit from our currency change, were offset by higher funding cost and the expiry of a hedge portfolio in 4Q '17. Transaction base income fell to the lowest level in a decade with the largest reductions in the Americas and Asia Pacific. The 23% drop in transaction income in Asia had a particularly significant impact on the region's performance as this revenue line makes up a large portion of APAC income. Recurring net fee income was resilient, up versus last year, but down from the previous quarter with an increase in the Americas offsetting decline in EMEA and Switzerland. I want to give you a bit of context on this revenue line but also as we look ahead into the first quarter of this year. There is a time lag effect between invested assets and recurring fees, which is more pronounced in the Americas than elsewhere. In the Americas, we typically go based on the prior quarter end balance versus the prior month end to the rest of the world. Therefore, recurring fees will likely be down in 1Q both quarter-on-quarter and year-on-year. Moving to the regional view. We saw continued profit growth in the Americas, driven by higher recurring fees and net interest income. Our other regions were more severely impacted by the market environment as we saw greater market declines and based on how we bill, as I just explained. In APAC where markets were down in the range of 20%, PBT was down nearly 40% due to the lowest transaction revenue since 2011, as well as higher cost as we added 100 advisers and we continued to invest in China. In EMEA where markets declined 14% and geopolitical and geoeconomic instability heightened, recurring and transaction-based revenues were down. We also incurred higher litigation expenses and legal fees, as well as expenses related to bank levies and our acquisition in Luxembourg. Within EMEA, our emerging markets business was more resilient with PBT flat year-on-year. Switzerland where markets were down 10% had a decline of 5% in recurring fees, reflecting a similar drop in invested assets, while expenses were flat. Ultra high net worth performed well considering the market environment, capping off a very strong year. In terms of global net new money, we saw $7.9 billion of outflows for the quarter, impacted by around $4 billion of deleveraging, outflows from net recruiting in the Americas and client moves in reaction to the adverse environment. As Sergio highlighted, our net new money results for the quarter and the full year are below expectations. We remain confident in our ability to meet target - our target going forward. Given expected wealth creation, our market-leading franchise and actions we're taking, let me briefly review some of our plans for each region. In the Americas, importantly, our invested asset growth is above peer average year-on-year and quarter-on-quarter. Our net new money performance was impacted by outflows from net recruiting, partly offset by record inflows from our same-store FAs, consistent with our strategy. We have taken steps to improve the net recruiting side of the equation. In addition, we are particularly excited about our unified coverage model in Lat Am, the launch of our solid [ph] rated strategy to grow the Global Family Office in ultra high net worth segments, as well as capturing opportunities in the affluent and lower end of the high net worth segment through our Advice Advantage offering. In APAC, we remain confident in our ability to continue to gain an increased share of new wealth creation, as we hire additional client advisers, intensify our focus on lending and buildout China onshore. In EMEA, we established dedicated teams with specialized skills to capitalize on client’s liquidity events. In Switzerland, we expect to grow share of wallet and attract new clients with an increased focus on entrepreneurs and executives. PBT in our Personal & Corporate business was down 13% to CHF 373 million from previous year. Operating income was down 6%, driven by lower transaction base income and higher CLEs. In interest income, we continue to improve our product results, offsetting headwinds from higher funding costs, the expiry of a hedge portfolio in negative interest rates. 4Q NII was the highest quarter during 2018 and flat year-on-year. Recurring revenue continues to be very stable. Transaction-based income decreased due to lower fees from our corporate business, as well as the reclassification of certain expenses to the income line from 1Q '18. We booked $17 million in credit loss expenses, primarily related to a number of smaller corporate loan impairments. Expenses were broadly flat as higher investments in digitization were offset by the reclassification that I referenced, as well as good cost control across other expense lines. Business momentum continues to be strong, and annualized net new business volume growth was 2.2%. For the full year, growth was 4.2%, the highest level on record. Asset Management had a very good quarter with PBT up 15% to $134 million. Operating income was down slightly against a 7% decrease in expenses mostly driven by cost actions we took in the second quarter. Net management fees were resilient in a tough market environment. Performance fees increased slightly versus the prior year as higher fees from our Hedge Fund Businesses in real estate and private markets were largely offset by a decrease in equities. Invested assets decreased to $781 billion, down 2% from the prior year and 6% sequentially. We expect some headwind to net management fees in the first quarter given the lower starting point for invested assets. For full year, net new money, including money markets was $32 billion, a 4% growth rate in a tough year for the industry. Moving to the IB, we've had a very strong full year despite a difficult final quarter. PBT for the fourth quarter was $26 million. Markets were challenging especially towards the end of the quarter, with correlated volatility across equity indices, widening credit spreads and a general lack of liquidity. Given this backdrop, we saw a sharp fall in client activity levels. Unsurprisingly, many deals were postponed in CCS. Revenues were down 29%, mainly driven by a decrease in ECM. ECM public market revenues were down roughly in line with the market. However, we had a significant reduction on the private side. Advisory was down 21%, driven by lower revenue in APAC as 4Q included a large transaction and lower private transaction fees globally. Nonetheless, we gained share in equity debt and leveraged capital markets. Equities revenues declined by 10% with decreases in all products, mainly driven by lower client activity. With the increase in correlation and higher market volatility, conditions were adverse to new structure product transaction, particularly in APAC where we have a relatively larger franchise versus our peers. However, cash equities in the Americas performed well on higher volumes. FRC had a better quarter with revenues up 14%, driven by FX, which is where we're overweight, partly offset by a subdued credit performance. As we mentioned at our investor update, when credit spreads tighten, our fixed income heavy peers have the potential for larger revenue upside. But in a more adverse market conditions, like the ones we've seen in the last quarter, our capital-light FRC model should outperform, and that's pretty much what we've seen to date. Costs were down 3%, mostly in lower personnel expenses. RWAs were up related to higher volatility, while LRD decreased, reflecting lower client activity and market trends. The Corporate Center retained [ph] loss improved overall. Corporate services retained P&L was affected by higher funding costs for balance sheet assets. The group ALM loss improved, mainly as a result of increased allocations and more favorable market spreads. Non-core and Legacy Portfolio posted a loss of $93 million, a more normalized level than in the past two quarters as we no longer benefited from positive marks on our remaining asset rate securities. Given that NCL has been substantially downsized and apart from litigation represents a diminishing drag on our earnings, we will fall [ph] the remainder into the new combined Corporate Center perimeter from 1Q '18 and no longer report NCL as a separate segment. As a reminder, we will allocate about $700 million of current retained losses along with additional equity of approximately $7.5 billion to the business divisions beginning this quarter. With this equity pushout, we will be in line with best peer practice. For the full year, total Corporate Center cost before allocations were down 2% on a reported basis, while increasing our investments in technology and absorbing higher risk control cost. The overall reduction was driven by benefits from previously executed programs and continued cost discipline during the year. We also benefited from cumulative reductions in our legacy litigation portfolio, including the progress this year that Sergio referenced. While I show the $122 million benefit from changes in the Swiss pension plan as a one-off benefit, it's important to note that this was the result of deliberate management action to respond to market and other factors related to our pension plan. As we announced in October, we have implemented certain changes on the tax side, which should reduce the volatility in our tax line. There are a couple of moving parts in these changes, but the main driver is that we had eliminated the seven year DTA remeasurement period for our U.S. tax losses. Instead, we have recognized the DTAs in our U.S. intermediate holding company tax group due to their maturity in 2028, and we will start amortizing these from the first quarter 2019. This change triggered a net $275 million tax benefit for the fourth quarter, which was neutral to CET1 capital. We expect our corporate tax rate to be around 25% with a cash tax rate of around 14%. Our U.S. profits will continue to be shielded from Federal as well as most state and local cash taxes through 2028. We wanted to highlight one of the core strengths and a fundamental part of our strategy, the high-quality, low-risk profile of our balance sheet. 226 or 24% of our $958 billion balance sheet is cash and high-quality liquid assets and other liquidity buffers. Our non-cash balance is underpinned by $84 billion in TLAC or an 11% ratio. $337 billion is our loan portfolio, of which about 50% in mortgages mainly in Switzerland. Our Swiss mortgage book has a average loan-to-value ratio below 60%, and even with a 20% decrease in Swiss house prices, 99.7% of single and multifamily home would still be covered. A third of our mortgage portfolios with Global Wealth Management clients, around 40% is Lombard loans, with around 50% average LTV and where we have seen virtually no losses over the last 5 years. Less than 10% or around $30 billion is corporate and institutional client loan, of which half is collateralized and the vast majority of the remaining unsecured exposure is investment grade. Average cost to credit over the last 5 years has been less than 3 basis points across the entire lending book. Provisions on the total portfolio is only 33 basis points, including the impact of IFRS 9. $104 billion or 11% is our trading portfolio, which only generates $10 million of management VAR. The vast majority in the IB or about $85 billion is held as collateral hedges of client trades, therefore, we had limited exposure to market risk on these assets. Of the remaining $14 billion in the IB, $6 billion is developed market government bonds and $2 billion in investment-grade corporate bonds. The around $5 billion in group ALM is mostly U.K. government bonds and U.S. Treasury bills. Only 1.9% of our trading portfolio is in Level 3 assets. $126 billion is derivatives positive replacement values with a minimal amount in Level 3 assets. Under U.S. GAAP, this should be netted down to around $16 billion. Most of the uncollateralized exposure is with investment-grade counterparties and in part driven by counterparties with non-nettable [ph] agreements, which are typically with governments, pension funds and insurance companies. We remain confident that we are well positioned should an adverse change in the environment materialize. Considering all the attention recently on leverage finance, I'll provide a brief overview of our business. We operate our leverage finance business in the same way as we do the rest of the Investment Bank, strictly adhering to our return hurdles and our risk appetite, competing selectively where we can add value beyond just committing balance sheet and with an eye to how we would fare [ph] under stress. We have oriented our origination and deal acceptance criteria to maintain high balance sheet velocity. In 2018, we supported our clients through $94 billion of trades. At the same time, we managed our take-and-hold book down as we deem it sufficiently late in the cycle to want to be cautious while continuing to take appropriate risk. Our capital position remains strong with our CET1 going concern and gone concern capital ratios above the 2020 requirements. To close, considering the market conditions, we had a very resilient fourth quarter that hasn't diluted the progress we made in the first time onto the year. For the full year, we generated strong results and capital returns, reflecting our unique and diversified business model. Looking ahead, there are areas where we can improve further, and we have clear actions to execute on these opportunities. While we're managing UBS for the long term, we will take all necessary actions to mitigate short term fluctuations to deliver attractive shareholder returns while investing for growth. With that, Sergio and I are happy to take your questions.

[Operator Instructions] The first question comes from Jeremy Sigee from Exane. Please go ahead.

Morning. Thank you very much. I was going to ask two questions about Wealth Management, please. [Indiscernible] aspects were a little bit disappointing in the quarter, so the first one was about the outflows. I wonder if you could talk more about that. And specifically, the ultra high net worth outflows, were they all in Switzerland? And a bit more about what the other sources of outflows were, you mentioned Asia and deleveraging, but clearly, something else is hurting sort of in Switzerland, I wonder if you could talk more about that. And then the second question still in Wealth Management. The cost line looked a little heavy to me even taking out the litigation. It's up about 80 million year-on-year without that. And I wondered if you could talk about what the underlying cost increases are in Wealth Management and whether some of that can be taken out again in response to this weaker revenue environment?

Yes, Jeremy. Thank you for your question. I guess, as both Sergio and I highlighted, it was a very difficult quarter, of course, for net new money. I think overall, I provided some color in my comments. I would just add, if you look at the two areas where we had net outflows, the Americas, as I mentioned, really was not recruiting. That's consistent with our strategy. Also, as I highlighted, we had growth year-on-year and quarter-on-quarter on invested assets, which is critical. Switzerland, a bit more unusual, and that was clearly impacted by one large outflow. And so overall, if we look at Switzerland, the fact that we are up 1.5% for the year, we still feel very comfortable that we're going to consolidate and take share going forward. I would also highlight for the full year, Asia Pacific despite rather neutral, slightly positive for the quarter, we were still up 4.5% growth for Asia Pacific for the full year. And we're pretty comfortable that we're going to continue to consolidate and take share in that region. Global high net worth, certainly, the outflows for the quarter were impacted by Switzerland, but also there were impacts across the Americas and Asia Pacific. Moving to your second question regarding the cost line. I would just highlight for the quarter, if you look at the fourth quarter, it's really important to note that we do have seasonal effects. And in the fourth quarter for Global Wealth Management, we had bank levies. We also had increased marketing cost. I mentioned the fact that we had a cost related to our acquisition in Luxembourg. And also apart from legal provision, we also saw heightened legal expenses, legal fee expenses overall for the quarter. I think if you were to adjust for all of those, you would find actually the year-on-year expense trajectory to be quite, quite favorable. And I would also note that during the Investor Day, we indicated that we were targeting $100 million of run rate saves for this year. We've actually overachieved. We've delivered $125 million. And I would also note, we indicated that we're targeting $250 million of saves as we continue to execute on those programs next year and we feel comfortable we'll deliver on those as well.

Okay. Thank you.

The next question from the phone comes from Andrew Stimpson from Bank of America. Please go ahead.

Morning, everyone. First one is going to be on gross margins, and then second one on the buyback. And on gross margins, what's - I'm just trying to think through here on the behavior of clients when markets have dropped like this. And you've been doing very well selling the mandates, that penetration continues to increase. But I'm just wondering, most of the increase and those mandates have come in markets have been very good. We now had a quarter where markets have been bad. I know they've come back strongly so far this year. But should we be expecting any pricing pressure to come through as clients see that they've been sold these slightly more expensive products and which would have inevitably had negative returns? I'm just wondering how those conversations go with the advisers? And then secondly, on the buyback, you said up to $1 billion. I just want to clarify if that's a hard ceiling for this that you won't be going above $1 billion? Or I just want to clarify exactly what that language meant, please. Thank you.

Yes. Thank you, Andrew. I mean, when you look at gross margin, I think that's, of course, as we show the trend in terms of mandate penetration and lending penetration and NII developments were quite favorable. I don't think that we have been observing in the last few years and don't see at this point in time any indication of clients backing away from mandates for the reason you mentioned. I think what we saw or we can see is more of a prudent asset allocation within mandates. And in that sense, it depends how things develop. You raised the fourth quarter, I think that’s - I have to say that we have to really look in a more balanced way what happen in the last couple of months. This is not the end of the world. Last year, at this point in time, everybody, probably including yourself were overly enthusiastic about the outlook for the year and for the quarter only to find ourselves with a more challenging environment. So it's way too early to call for a trend for the full year. And of course, we're going to look at ways to mitigate any potential headwinds, but I don't see that the margins being under pressure for the reason you mentioned. Margins are under pressure because we have lower risk appetite by clients deleveraging. That is mainly reflected in our transaction line. That's the bottom line. On share buyback, Andrew, the language is a cut and paste of last year language. So I think that I don't need to tell you anything more. And I also - we also show very well, at Investor Day and today, the meaning of the arrows that goes inside and outside the buyback target box. More than that, I can't help you.

Perfect. All right. I understand. Its very clear. Thank you.

The next question from the phone comes from Stefan Stalmann from Autonomous Research. Please go ahead.

Good morning, gentlemen. Two questions for my side, please. The first one relates to Slide 10 where you outline potential countermeasures if markets remain weak. Could you provide any numbers around this? And maybe specifically, is this more targeted at achieving your cost income ratio target for the year of 77%? Or is it more about avoiding a further deterioration from the level that we have seen in 2018, which was around 78.5% adjusted cost-to-income ratio? And the second question relates to your market risk-weighted assets, which had another quarter where they went up quite substantially. Could you shed any further light on what exactly drove this, maybe by business line or geography or whether it affected stressed VaR or multipliers, et cetera? And do you expect this to revert back again in more normal quarters, please? Thank you very much.

Yes, thank you, Stefan. In terms, as Sergio referred to on Slide 10, naturally, when we see market disruptions and we see that the adverse impact of what we saw in the fourth quarter, we look for actions that we can take to help mitigate those. And Sergio outlined both on the efficiency side, as well as on the capital side that it's very clear that there are specific actions that are available to us and we're actually busy implementing those. I wouldn't specify any particular numbers around that. What I would indicate though clearly and also as Sergio mentioned as well, the path to our target has steepened, it's too early to call to have any change at all to the targets for the full year and we remain focused on those targets that we communicated at the Investor Day. In terms of RWA, the increase was really driven by the Investment Bank. It was higher levels of volatility, particularly in regulatory and managed VaR at the end of the quarter. It's not unlike what we saw in the first quarter last year where we saw heightened levels of volatility and increase in RWA. And also, I think it would be very consistent if you look at what U.S. peers reported, they had substantial increases most of them in their overall market risk VaR that they've reported. So this is very consistent, I think to what we're going to see in the industry.

Great. Thank you.

The next question from the phone comes from Benjamin Goy from Deutsche Bank. Please go ahead.

Yes, hi. Good morning. Two questions, please. The first one on your cash tax rate. Just wondering whether the change was to an October Investor Day is essentially just a lower profit outlook for the U.S.? Was there anything else behind it? And the second is also on your market risk. Is there any intention to bring down VaR? Because I mean this, of course, was an unfavorable quarter, but we could see the same volatility here? Thank you.

Yes, Benjamin. In terms of your first question, the slight change in the mix of between cash and non-cash in our tax rate was really just as a consequence of completing all the rather significant actions that we took in the fourth quarter around remeasurement and some other tax planning steps. And when everything settled, then we just reassessed our tax rate. There was a slight change to the estimate that we had during Investor Day. In terms of market risk, this is really market driven. You should note that despite the very significant volatility, our management VaR in the IB was still only 10, so still very, very well.

I don't know. I don't really. I think there is a little bit of - let's remember that our guidelines around capital is around 13%, and our binding constraints for the next couple of years is leverage ratio. So any over-focus on $2 billion or $3 billion, the variance of risk-weighted assets on CET1 is not aligned with what we have been telling you and also our capital planning process and efficiency processes.

Okay. Thank you very much.

The next question from the phone comes from the line of Amit Goel from Barclays. Please go ahead.

Hi. Thank you. And could you mind just giving a bit more color in terms of how the start of Q1 has been in terms of some of the change obviously from Q4 will feed into Q1?, if you highlight that you know, in terms of the better market levels and so forth how much the weakness has potentially reversed so far? And that was my first question. And just my second question was on the cash tax rate, so that's already been answered. Thank you.

Yes. I mean, if you - as you know, we don't really like to comment on quarter, particularly after three weeks considering the volatility we have been experiencing in the last few years on our intra-month and intra-quarter basis. But of course, we all can see the developments in asset classes performance since the beginning of the year, which have a positive impact to sentiment. Although the sentiment, I think investor sentiment and conviction level has been hurt. I mean, people, some people out there are still quite concerned about the developments. I would say that when you look at year-on-year performance, we should always remind that we had a spectacular January and I would say in the industry. And last year, we had a more muted developments in February and March. So to call the environment at this point in time is way too early. As I say before, that doesn't mean that we are implying things are going to normalize on their own. We are really taking proactive actions to see how we can be ahead of the curve should the situation continue to be the one that we saw in the last part of the year.

Okay. Thank you.

The next question from the phone comes from the line of Magdalena Stoklosa with Morgan Stanley. Please go ahead.

Thank you very much. Good morning. I've got two questions. One about the equity business in particular, and the second about the developments of the net interest income. So on the equity business side, could you give us the context for the quarterly performance? I'm looking at the slide, I think it was Slide 20. And I was just wondering how the fourth quarter looked in terms of the business lines and also kind of geographical mix? You commented a little bit about the Americas and EMEA, but I'm curious to hear how the quarter actually looked like in Asia and what would be the potential read across? And my second question is about net interest income. We saw a very steady development across this year. And again, how shall we think about it in to 2019 in terms of the loans, in terms of spreads, margins? And also if you could give us a sense of what should we be aware of in terms of the NSFR, which is likely to be clarified for you by the end of 2019? What would be the impact on the cost of funds, your preliminary thoughts? Thank you very much.

Yes. In terms of the equity business overall, if you look across on a product basis, we saw a much sharper drop in derivatives. And that's really reflective of what I meant. And it's the fact that we saw increased levels of correlation as we went through the quarter. And with increased level of correlation, of course, structure products become less attractive. And that was very, very pronounced in Asia Pacific where we tend to have a disproportionate share of that business versus our peers. And so as you might expect, we therefore also on a regional basis saw a sharp drop in Asia that impacted our overall equity result. Conversely, our cash business held up quite well, held up better, but still down overall. But in the Americas, we were up, so we had a good cash overall results. And our prime brokerage business was down slightly, again due to the fact that we saw a falloff in overall activity levels. On the net interest income side, clearly, we expect some of the same dynamics that we saw during the year. We, as you know, we announced a very focused plans on growing our banking book, so we’re very focused on growing our loans, as well as reenergizing our deposit growth. That should provide us with some tailwind as we go through the year. In addition to that the US rate environment is still favourable to our book overall. Although I would note that with the last Fed raise, given the fact that we saw an inverted yield curve, it didn't provide any further immediate help. And in addition to that, I would also mention that we continue to face headwinds, of course, on euro rates and Swiss rates, and we don't see any relief there. In terms of NSFR, given that the Swiss authorities are still determining what the final rules are going to be around NSFR, it's too early to call if it's going to have any kind of impact for us overall. And what we are confident though is whatever we end up with in Switzerland will be very consistent with international standards, and so from that perspective, we expect to see a level playing field.

Thank you.

Magdalena, I should say welcome back.

Thanks very much.

The next question comes from Andrew Coombs from Citigroup. Please go ahead.

Good morning, all. I'd like to just follow up on Stefan's two questions, please. So firstly, on the market risk-weighted assets. When we look at the one day average management VaR, it only moved from $9 million to $11 million Q-on-Q, and yet your market RWA has gone from a $11.5 billion to $20 billion, which would seem to suggest that actually its higher multiplier that's providing that, and yet that doesn't seem to change in assume multipliers based on back testing exceptions, so could you just elaborate and exactly how much of the increase in the market RWAs is directly attributed to VaR versus how much of that are factored? I mean it's important for us when we're thinking about movement into 1Q '19 and beyond. And the second question was more strategic question, again coming back at this point to alpha and beta factor and the ability to mitigate these factors. And at the Investor Day, you gave a great slide looking at the wall [ph] from the cost-to-income ratio. So you said 78% cost income at 3Q '18. You'd expect 9% revenue improvement, offset by 3% on performance-based compensation and then a flat fixed cost base. That 9%, 3% ratio, should we think about that has been the key link here. So if you took out 4.5% for the beta factors you've assumed, does that mean you can then assume a 1.5% offset on performance-based compensation? Or would you hope to do better than that?

Yes, Andrew. Thank you. On the market risk RWA, firstly, you can't read just from looking at management VaR in terms of what drove the increase. The increase was driven more stress VaR and regulatory VaR. Now overall, if you look at the total increase, a part from the - the impact of general market volatility factors which fed the stressed and the regulatory VaR increases, we also had some increases related to some methodology and some model changes that were agreed particularly in risk not in VaR. I think those are around $2 billion, but we'll get back to you with a specific breakout. So it's not all just driven by market factors.

Perfect. I would probably add that you know, it doesn't - if you go back at Q1 '18, you remember the kind of behaviors we had on VaR and the normalization you saw in Q2. So I think history tells you a little bit of the fact that why you know, I don't see that we have so much diversification within our business, so we have higher fluctuations, which tend to reconvert back in the following quarter as soon as market condition normalize. If you go through what happened in Q4, in terms of volatility, it's what you should expect from our business, honestly. So I think that I'm always a little bit puzzled by saying that people don't understand yet how our business is positioned and the diversification element that is missing is always translated into a late effect on reg and stressed VaR.

Yes, absolutely. We would expect to see normalization and frankly, our outlook for RWA overall for the year is unchanged.

Your look back period is 250 business days, you seem to be implying that there's a higher waiting on the last quarter. Is that fair?

Well, I mean, if you look at the way stressed VaR behaves and also regulatory VaR, particularly stressed VaR, that actually has – that actually bounces back or deteriorates much more quickly. It's much more sensitive to more recent volatility factors. From the cost to income side, I think your math mathematically actually is spot on, but naturally, of course, as Sergio outlined on the alpha side, clearly, if we see that the beta factors are less attractive, what we'll look to do more on the alpha side, and potentially in down market conditions, there's opportunity, for example, for us to consolidate wallet share for us to find other opportunities in the market that maybe our competitors would actually not have access to because of their relative size or their relative strength of their capital and their credit standing. So the way that it actually pans out is not going to be purely mathematic. You have to insert what we would do as a management team to rebalance that mix going forward.

Okay. Thank you, guys.

The next question from the phone comes from Jon Peace with Credit Suisse. Please go ahead.

Yes. Thank you. My first question is on the net new money. After you saw the outflows in the second quarter of last year, you expressed confidence in the full year, which I think was because you had some visibility of a recovery as you went into July. So I was wondering whether your confidence in the targets for this year reflects what you're seeing through January, i.e., a more normalized pace of some inflows? I appreciate it could be quite lumpy. And then second question was just on Corporate Client Solutions business. Your U.S. competitors like to talk about a pipeline of activity. How do you see your pipeline at the moment relative to last quarter and last year? Thank you.

Thanks, Jon. I think after two weeks or three weeks in January it's early to call the trend for net new money. I think that we are in any case, not overly paranoid about quarterly performance on net new money. I think that the year performance is what matter. And I think that it was quite clear that our confidence in respect to the plans we have together and the secular trend supporting our ambitions and competitive position supporting our ambitions are intact. We can and we should do better on net new money. So I think the numbers are what they are. We have not - we didn't take actions to go out and show a better net new money even if it's not economically sustainable. It is what it is, but it's not an excuse. Now as Kirt, well, explained very well in his chart, the picture is a mixed one because if you look at Asia, Switzerland and Europe, we had a okay, an okay picture. I think that’s - it's not at the top of what we could expect in a better environment. But a 5% in Asia and a 1.5% in Switzerland on a year-on-year basis are quite solid results. The disappointing result is coming from the U.S. There, I like to - this is our choice and we stick to our choice of transparency. We are the only firm reporting net new money. And so the only proxy you have to really measure ourselves is the absolute number, which, again, we have to do better and we can do better through different actions. But also, we have to look at the relative performance. And when I look invested assets as a proxy for that, it tells you a clear story. On net new money, the implied net new money means that we have been doing better than our key peers during the full year. So this is not an idiosyncratic UBS situation. There is a change in behaviors. By the way, it's quite interesting because in our survey with clients, in Q4, we observed a record high level of cash balances with U.S. clients at 24%. So you can imagine 24% cash balances with U.S. wealth investors is a quite striking high number. And this is what's going on. Some people may have a tendency to take the money outside at the wealth management system in the banking not only UBS and go for other asset classes outside. So its absolutely the developments. We have plans to increase our G4 [ph] and ultra presence in the U.S. We have plan to increase our share of wallet with U.S. persons outside the U.S. So we will take actions to really go back in to our trajectory of growth. But in the meantime, we have also to take acknowledge that the market conditions out there are very unfavorable. In addition to that, the usual tariff [ph] that comes through net new money through lending wasn't there for the full year and particularly in Q4 where we saw a degree of deleveraging. Pipeline issue, I think that we had - I don't want to go through, but we have the substantial number of deals that were pulled in Q4. I think the problem is not the pipeline. The problem is not the mandate. The problem is the market environment to execute the mandates. So I feel pretty convinced and comfortable that we have a solid approach and solid penetration of potential mandates, but of course, Q4 was totally not constructive for any kind of transaction. And hopefully, as the situation normalizes in the near future, we will be able to execute.

That’s great. Thank you.

The next question from the phone comes from Anke Reingen from Royal Bank of Canada. Your line is now open. Please go ahead.

Yeah. Thank you very much. Just two follow-up questions. Firstly, on the market RWA, given your comments is it fair to assume that they will have come back again looking at the trends in Q2, Q3 last year as well - or Q2, Q1 last year as well? And I'm sorry, coming back to the cost income ratio, so how strong is your commitment on delivering it? Because, I mean, obviously, you said it's too early to say, seeing investments opportunities, that's not the right way to look at it. But I mean, how - but then say it's too early to confirm. So how strong is your commitment? Thank you very much.

Anke, thanks for the question. I think that we really answered really three times the question on [indiscernible] market. So I mean, unless you have a more precise question, I think that I would refer to that. On cost income ratio, of course, we are very committed to execute our absolute cost savings. Cost income ratio is a function of many other factors that we will take, as I say, execution on the existing plan. We are very focused as time goes by. Always, there are changes and searching for new opportunities, both strategic and tactical to respond to market conditions. And at this time, I can only look at this one as a reference point. I know that you understand that its - you can't took in isolation cost income ratio. I try to reemphasize the issue that cost income ratio is an important metric, but it's not the one that we can be overly obsessed because fixed cost income ratio as a cost of capital return is not the way to address the issue. So we really work on absolute cost, both strategically and tactically. And also, as I mentioned, there are levers that we can put outside fixed cost and variable cost that goes into optimization of capital and consumption of capital, which as - for us, is also very important because we want to continue to sustain our capital return objectives and targets, and therefore, we have different levers to play around.

Okay. Thank you.

The next question comes from Jernej Omahen from Goldman Sachs. Please go ahead.

Yeah. Good morning from my side as well. I have two questions. One is on the follow-up on your commentary on your Equities business, and the other one is on deleveraging on the private Wealth Management operation. So can I just ask on Equities. So Kirt, I think you talked about weakness in Asia and in the derivative business within Asia, but over the past 2, 3 years, I think UBS was the only European bank that kept pace in equities with U.S. banks. This quarter, U.S. is up 6. UBS is down 10 in equities. I mean, this almost looks like bad trading, bad inventory management in one portion of your Equities business. So the first question is this, now so is the extent of underperformance versus the U.S. a function of decreased client engagement, you reckon, or a function of managing your inventory? And the second question I have is - I was looking - we were looking at the supplement on Page 4 on the point that there was deleveraging in the Private Wealth business. So as you point out, there was a $4 billion reduction in loans. Can I ask, I mean, this reduction, are these margin calls that are being triggered in your Asian operation? Or is this just essentially people extinguishing loans, the Lombard loans preemptively? And I was just wondering, so if we look at the breakdown of the outflows in Asia, I think $2.8 billion of the net new money outflow is due to redemption or contraction of Lombard loans, which basically means you still have a fair chunk of net new money outflows even without that. Can you just shed some light on that? So how these breaks down? And what is driving the Lombard loan reduction? And what is driving just essentially the plain-vanilla asset outflow? Thank you very much.

Thank you, Jeremy. I always like your very pointed question and absolute statements. I like to understand where you see the U.S. peers being up 6% year-on-year on equity on a quarter basis. Because I have in front of me a table saying down 17%, down 11%, down 16%, one is up 7% and another one is down 4%. Then I would add that in any case, as Kirt will explain, we have a business that is more skewed towards Asia. And I think that he also explained very well the performance of the each - in business activity and the increase of correlation on the structure side of the equation. So overall, I would say our strong performance for the year seems to indicate a somehow expected outcome considering our business that is skewed towards, more towards Europe and Asia than it is to our U.S. peers. But..

Sergio, can I add something? So I think that the numbers that you readout are sequential figures in equities. Yes, I'm looking at the 5 biggest U.S. banks year-on-year. Equities were up 6%, right? The numbers are plus 11%, minus 4%, plus 2%, 0 and plus 17%. But sequentially, you're right.

Okay. But in any case...

So my question is this, U.S. banks year-on-year are up 6%. UBS is down 10%, which is the first time this has happened over the past 2 years. So I'm just wondering whether this is a one-off and we can expect to add back or whether there's something else.

I think that Kirt explained very well what happened in our Equity business. It's almost like - and we are not trying to do victory laps and extrapolating numbers like saying our FRC numbers is up 14% year-on-year and compared to the industry trend. So we are not trying to extrapolate one quarter doesn't make the full year and doesn't make the future, so we have to put things in perspective. But to answer your question, no, it's a clear convergence of market factors, client activity skewed toward APAC where we have a bigger presence, putting this quarterly performance into a different light. I'm comfortable that there is nothing strategic and structural that we should look into it for the future.

So in terms of your second question, I think naturally, when you see the falls in the market and the magnitude that we saw in the fourth quarter, in the case of Asia Pacific actually, it's been more trending full year. But roughly speaking, if you take kind of a midpoint with the Asian markets predominantly driven by North Asia down around 20% that does a couple of things. Firstly, it leads clients to have less conviction and the overall return profile going forward, and therefore less willing to pay for leverage. So they pay down their loans. And the second case, it does, as they see an overall reduction, it does impact their overall margin levels, although the deleveraging was much less driven by margin calls. It was much more driven by initiative and actions that our clients took to reposition their overall investment portfolios.

That’s very helpful. Thank you.

The next question from the phone comes from Kian Abouhossein with JPMorgan. Please go ahead.

Yes, hi. I have two questions. The first question is related again to the outlook on Page 130. You indicate normalization markets early in 2019, so should we see the current environment so far and I know it's very early in the quarter, but so far, very similar to what we normally see every first quarter, i.e., very strong start to the year, et cetera, et cetera? And in that context, I'm trying to understand the first - fourth quarter. Is this just unusual environment that we saw in December, especially second half of December, which dislocated the P&L for most of the banks, including yourself to some extent? Or is this deleveraging/lower activity level really what you see more of a cyclical trend, an ongoing trend? And I'm not exactly sure how to interpret generally not just you but other banks fourth quarter. And if you can maybe show a little bit of light how the months have progressed in the fourth quarter without really giving a lot of detailed data, but if you can put a little bit of light of how this dislocation, how this lower number actually came into place both on WM and on the IB? And then on the second question that's related to your plan, your 3-year plan of $70 billion additional assets in the ultra high net worth space, and you talked a lot about the Investor Day about the U.S. expansion or U.S. client base expansion, I should say. Can you discuss a little bit what setup you have now? And if there has been any progress been done? And how that's shaping up considering a more difficult market condition?

Thank you, Kian. I mean, as I mentioned before, so first of all, I mean let me tackle a little bit the Q4 question. I think it's not any subjective or personal interpretation of what happened. I think if you look at different statistics published by even outside, out service, the deterioration of market level across all asset classes, which was meaningful when you look at 2018 with, you know, I've been seeing reports talking about 90% of asset classes in the market out there being down on a year-on-year basis is quite extraordinary. I think if you look at what happened in December, must be the worst month since the Great Depression in terms of market performance. So then what I would add before December, which December has two kind of characteristic, I would say the second half, I mean, very dramatic market condition with a lot of underlying market volatility supported by almost no volume and business activity. The second one is to say what I would call the early Christmas and early seasonality effect. I mean, usually, you see seasonality coming in the second half of December. To be honest, I think that we observed seasonality this year in the early part of November. October was a decent month, was a good month. And in November, we started really to see this convergence of concerns by investors and the market, both. And again, a quite different pattern compared to the last few quarters where you would see more volume and business coming through institutional channels than you would see from Wealth Management clients as reflected in our transaction line. We have seen and de facto holiday mood coming already into November. And when those discussions about the geopolitical, geoeconomic issues, trade tensions, Brexit, things that goes on in Europe or between France and Italy and so on have been causing even more concerns with investors. When I look at - as I mentioned before, when I look at the first quarter this year, it's really way too early, Kian, to make a call. Because one can only say that, of course, when you look at the year-on-year basis, I want - I mean, it's quite clear that the picture for January cannot be as good as we added before. Maybe if you go back in a time series '16 and '17, you will see something more close to what we are experiencing in January. But last year, remember, that February and March were not up to the level of January. Therefore, we need to wait and see how - to determine how the quarter will play. It's absolutely clear that the resolution of few of this outstanding items being trade tensions, geopolitical tensions, what's going on with Brexit, needs to be resolved in order to restore confidence in the market. What happened in Q4 has somehow impacted institutional investors and wealth management investors somehow and we need to reconstruct at their conviction level. But this is not the end of the world. So as I said before, we are not going down years and years in order to - it's probably a matter to say, January last year versus January this year, of course, is not a fair comparison. In terms of the 3-year plan, look, we are in execution mode. We are building up, we have been expanding and exporting our capabilities on the G4 [ph] and ultra side into the U.S. We are executing on our plan, and this is not a sprint. It's clearly something that we are going to see developing faster than you would see our developing in onshore China, but it's not something that you will see a transformation of the business coming on a quarter-on-quarter basis, but rather, as you observed, year-on-year development.

Thank you.

The next question from the phone comes from the line of Daniel Regli with MainFirst. Please go ahead, sir.

Hello. Good morning. Thanks for taking my question. I have particularly one question regarding the ALM development in global market. I think you've well explained the trend we've seen in net new money, but I was a bit surprised by the negative market impact in Q4 coming - yes, coming from markets, I saw [indiscernible] was down like 7.5%, you're negative impact on the AM was 7%, so can you help me frame this? Were your clients just highly exposed to equities? Or what was the reason for this negative performance on your assets?

Daniel, I think you'll see that overall and we've shown on Slide 32, you'll see a concentration of our invested assets on the concentration in equities and mutual funds. Bond as well, of course, were impacted during the quarter. So what you saw, the sharp drop in equity markets and also we got a good slide to show the magnitude of that drop overall, which is on 29, so you see emerging market 17; China, Hong Kong, 25 and 14; Europe 14; Switzerland 10; United States, 6. So that explains, of course, the equity drop was more pronounced than you saw - our drop in invested assets. Credit spreads blew out substantially during the quarter. That explains the drop in bond markets. Mutual funds are going to be down the line in that as well. So I think that the math works out very well if you just look at the overall concentration of our invested assets that's quite logical that you saw the drop that you saw for the quarter.

Thanks.

The next question comes from Andrew Lim with Societe Generale. Please go ahead.

Hi, good morning. Thanks for taking my questions. And so firstly, in the Americas, just wondering if the change in rate outlook has changed customer behavior in terms of deposit beta? I think you mentioned in the past that clients were taking out deposits and putting into credit assets and that was raising your cost of funding. I don't know if that was changed or continued. And then secondly, on net new money in the Americas as well, I appreciate we've had a tough quarter. But for the full year, the Americas has had outflows and yet you say you're better than competitors. Is this something structurally which is a concern here? And what are you going to do about it to try and make them positive?

So Andrew, just in terms of your just first question, we still expect, over time, our beta around the 40s and 50s, and that's kind of what we guided pretty consistently. I think has there been any change in client behavior. Really, we haven't observed any change. We - of course, there's still some question now as to how many more rate increases we're going to see during the year. That obviously will have some impact on flows and overall rate performance. I mean, in terms of where we view the outlook, we're still pretty comfortable with our net interest income outlook for GWM. In terms of net new money, I would just repeat what I mentioned, what Sergio has already mentioned, what's most important because we have no transparency on the flows from any of our peers is that our invested assets are higher than our peer average on a year-on-year and a quarter-on-quarter basis, and that's what structurally most important in the U.S. business.

Great. Thank you very much.

Gentlemen, there are no more questions.

Okay. Well, then we'll close the call. Thank you very much.

Ladies and gentlemen, the webcast and Q&A session for analysts and investors is over. You may now disconnect your lines.