Ladies and gentlemen, good morning. Welcome to the UBS Second Quarter 2019 presentation. After the presentation, there will be two separate Q&A sessions. Question from analyst and investors will be taken first followed by questions from media. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Martin Osinga, UBS Investor Relations. Please go ahead, sir.

[Technical Difficulty] second quarter 2019 results presentation. I would like to draw your attention to our slide regarding forward-looking statements at the end of this presentation. It refers to cautionary statements, including in our discussion of risk factors in our latest annual reports. Some of these factors may affect our future results and financial condition. Now over to Sergio.

Thank you, Martin, and good morning, everyone. Before I comment on our financial performance, allow me to draw your attention to the cover of our presentation, which highlights our together band initiative. The goal of this initiative is launched on World Heart Day in April this year. It's to raise public awareness and inspire action for the 17 United Nations sustainable development goals or UN SDGs in short. They are critical for the long-term economic growth and the future of communities around the world. One fundamental problem is how little the public is aware of these goals. Various surveys show less than 2% of the wider population actually knows what the UN SDGs are. And that's something that Together Band is trying to address. UBS is proud to be the founding founder of Together Band at the heart of the Together Band campaign are friendships bands in the 17 colors of the UN SDGs that comes in packets of two, one to wear, one to share. The UBS optimal foundation provides guidance on how all net profits of the campaign will be used for projects aligned with the SDGs. It is supported by a group of high-profile ambassadors and experts with a strong commitment to sustainability. The response from our employees and many clients has been amazing. For UBS as a leader in sustainable and impacting investing and smart philanthropy, this is an important initiatives but also for me personally. The bands I'm wearing represents life below water, quality education and no poverty. All of you on this call are opinion makers and I encourage you to take part and spread the word. Together, we can achieve more than as individuals. You can find more at togetherband.org. So now on to our financials. In the second quarter, we delivered the…

Thank you, Sergio. Good morning, everyone. As usual, my comments will compare year-on-year quarter's reference adjusted results in U.S. dollars unless otherwise stated. We adjusted for foreign currency translation gains on sales of $10 million, and restructuring expenses of $39 million as our reported and adjusted results have largely converged. Year-to-date, restructuring expenses were $70 million and we still expect to incur around $200 million for legacy programs for the full year 2019. Our group effective tax rate was 21% in 2Q, reflecting $65 million of net DTA benefits, primarily resulting from certain real estate assets transfers from UBS AG to UBS Americas Inc. In addition, we shifted parts of the business, which achieved further tax efficiency. The cash tax relevant portion was just 12% with the rest related to DTAs, leading to a sizable direct benefit to CET1 capital. We expect our tax rate for the second half of 2019 to be lower than the 23.4% in the first half of the year, reflecting the benefit of real estate asset transfers I mentioned, subject to any potential DTA-related adjustments made as part of our annual business planning process. From 2020 onwards, we expect the tax rate of around 25%, including a roughly 1.5 percentage point benefit from the business shifts I've previously mentioned, and excluding the effects of any re-measurement of DTA. Our tangible book value per share is up 6% to 12.72, with a third of the increase coming from share count reduction. Moving to our businesses. This has been a challenging first half for Global Wealth Management, and interest rate headwinds intensified in 2Q. For the quarter, operating income was down 3% on lower net interest income and recurring fees partly offset by higher transaction income. I'll cover revenues in more detail in a moment. Costs increased…

[Operator Instructions] The first question from the phone comes from Amit Goel with Barclays. Please go ahead, sir.

Hi. Thank you. And thanks for the presentation. So, two questions from me. Firstly, just on the net interest income guidance for GWM, I assume – I heard you mentioned the sequential impact if we get a 25 bps cut. But just thinking more into 2020, if you were to see the current forward curve, is there a bit more color you can give us on the potential impact? And the second question just relates to the kind of the strategy and the plan and obviously versus what the environment was like as of October last year. We've seen quite a lot of change. So just curious how you think about that? And how you go into kind of Q3 when you're thinking about the strategy, et cetera, and how you evaluate the changes in the environment? Thank you.

So, I'll take the first and Sergio will address your second question, Amit. In terms of net interest income, the reduction in longer term rates had an impact immediately on the amortization of our MDS portfolio just with model assumptions that our prepayment levels increased. And year-on-year, that was about a $14 million impact. Naturally if rates stay low or further reduce, we'll continue to see a further accelerated amortization as we go forward into the following quarters. Beyond that, the lower longer term rates, as you suggest, have an impact on the structural positions that we use to hedge both our deposits as well as our equity and that impact will materialize over time, given the duration that we have on our investment of equity as well as on our deposit portfolio. So, we would expect to see that reduction to accrete in over the next couple of years, depending, of course, on further movements in interest rates. That's something actually that we'll update as we go through our three-year planning process.

Yes, on the second point, of course, as you mentioned, at the end of - during the summer, the end of the third quarter, we always go through our three-year rolling plan. And we take in consideration the so-called beta factors based on consensus, so there should be no subjective input by management or everybody in respect of how we see rates development, how we see economic developments in the various region that are usually the driver of our business from a beta standpoint of view. And we, together with our growth and alpha initiatives, we will assess the impact on our forward-looking targets. I think that's - as we demonstrated so far this year, we have not giving up on the triangle, which to maximize and get to our absolute returns, but of course, we always need to see exactly how those factors play to each other. We will also have to consider a new environment and decide if and how we need to take strategic measures to offset or mitigate some of those developments. But I guess considering the volatility and the lack of visibility we see in the current macro and geopolitical environment, it's quite difficult to answer right now what it means for 2020. You saw last year that we did - few months, we had a total turnaround in expectations on rates, and so we will need to see how things develop in the last part of the year.

Okay. Thank you.

The next question comes from Jon Peace with Credit Suisse. Please go ahead, sir.

Yes. Thank you. And so, my first question follows on a little bit from the previous one. Beyond the sort of beta factors at the market, when you think is sort of competitive pressures you highlighted on Slide 15 on loan margins and also shifting client preferences within the mandates on deposit mix, how persistent do you think this sort of decline in gross margins, excluding transaction revenues is likely to be? And then my second question is just on the buyback of up to $1 billion. Now we're halfway through the year, how close that figure do you think you might get? Thank you.

Yes, thank you, John. And in terms of the beta factors we've highlighted, first, if I look at our recurring margin, as I mentioned, our recurring margin is largely stabilized quarter-to-quarter. At this point, we don't believe that we're going to see any further pronounced shift into lower risk. We expect the mix overall of client preference around mandates going forward to relatively stabilize. And so, we don't see any factors apart from the continued segment mix change with a bias towards ultra-high net worth that would have a significant further downward pressure on recurring margins. Now on net interest income, the competitive intensity remains and it gets a little exacerbated because with the lower rates, you see higher levels of refinancing. So, what we're seeing is very, very high volumes actually of clients paying down loans and then building back up their position. And when they're in play, it opens you up to some competitive and vulnerability. So there, we do expect to continue to see some competitive intensity in pricing. However, apart from the potential rate move from the Fed, we don't see any other factors that would naturally result in a significant quarter-on-quarter decline in our net interest income or margin.

Yes. In respect of the share buyback, of course, we have been on a breakout [ph] period during the last few weeks. And so, our aim is to restart the buyback program in the next couple of days, as soon as we are out of the breakout and continue to execute on our targets to buy back up to $1 billion in - between now and year-end.

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. I've got two questions and both and quite structural one. When we look at the Asian business and we've gone through quite a lot of details on the kind of changes in the investment allocation, changes in risk appetite impacting part of revenues, when you look at Asia overall and across your business, how should we think about the cost trajectory? Because you've got kind of two key buckets there, of course, one, your business as usual, but two, also kind of your big strategic projects like the China onshore buildout that you have called out. How shall we think about the - that cost trajectory and how potentially elevate it? Is it because of those more strategic projects there? And two, U.S., because we've talked about the margin levels of 25%, but we've also talked about at least kind of near-term pressure on revenues. How do you see the flexibility of costs or may be even kind of mitigants on the other parts of the revenues rather than NII to effectively end up around that targeted margin rate? Thank you.

Yes. In terms of - Magdalena, first of all, thank you for your questions. Looking at Asia overall, you're right. What we saw is actually quite a pronounced impact on our revenue line overall with clients shifting and the magnitude are shifting. Just to put that into perspective as we saw our client shift 4% out of equities into cash, 2% - over 2% into cash and into fixed income. And that, of course, impacts overall our recurring revenue, as well as putting a little bit of pressure on our net interest income. In addition to that, we saw the deleveraging with about a $7 billion reduction overall in loans on a year-on-year basis. Now what we do know about Asia is Asia can turn very, very quickly. And we can see wild swings quarter-on-quarter if clients get more confident in the environment. Now what we don't see a catalyst in the near term, we are very confident that over the medium term, we are going to continue to see very, very good growth in Asia Pacific. Therefore, it's important for us to maintain our investment overall in that region. Naturally, though, we'll pace those investments. So, with these current headwinds, you would expect us to be able to delay some of our investments, delay our hiring plans and then pick up that momentum as we see the market improve overall. But it's really been our 50-year commitment to that region that has allowed us to have the position that we have. Now if you look at the U.S. margins overall, what we articulated in terms of the 25-basis point improvement overall in our margin. Actually, moving our margin up 25 basis points to down 75 basis points is an increase in mandate penetration. We continue to see that, that's actually performing as we would expect. On increasing banking product penetration, now there we haven't seen the level of growth in banking products, and that's really because of the environment plus the headwinds in net interest income, along with the continued increase in productivity, which we do see just given our overall strategy. But clearly if we don't have, along with the actions that we are taking, the beta environment that we planned for, that is going to have an impact and it's going to delay the pace, at which we can actually achieve the target 75% efficiency ratio in the U.S. business.

Thank you.

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

Morning, everyone. First question from me is on the client appetite, which you’ve been talking a bit lately. You’re saying – you don’t expect much more client rotation into the lower risks mandates, but I wanted to get may be some more numbers around that, I know you said that’s about 4 percentage point shift from APAC plan from equities into fixed income and cash. I just wondered how far off that is safe from the lowest level that we've had over the past five years or so maybe more broadly for GWM, not just for APAC? And then secondly, I've spent a lot of time at the Investor Day, as we often do, talking about the connection between the Investment Bank and Wealth Management. And in particular, one of the things you often talk about is how better ECM can drive better flows within Wealth Management. But this quarter, we've seen that's a really strong ECM but the inflows weren't as strong. So, is that - should I be reading anything into that there? Is that just a regional say, just more account this quarter or any reason to doubt that, that - that those two things shouldn't eventually go together, please? Thank you.

Yes, Andrew. Thank you. Thank you for your question. So, if you look at our current – the trend that we've seen over the last year there are a couple of dynamics on the mandate side. It's, one, clients have shown a preference for lower margin mandates in terms of the sales that we see versus manage product. In addition to that, we've seen the mix shift and also the segment shift. Now the indication is quarter-to-quarter that the trend has stabilized. And also, if you look at the client sentiment survey, what you see that there is a high percentage of clients have indicated that they're happy with their current asset allocation. So that would suggest to us that we’re unlikely to see further derisking going forward. But on the other hand, at the same time since we also have a high percentage of clients that are really waiting for markets to drop before they are likely to move further, there could be a muted impact overall in client activity. So, I think those are the two dynamics that our client surveys suggesting going forward. Now in terms of your question overall on ECM, if you look at our - the ECM business and what drove the good performance within the IB, it was really much more focused in our institutional client business, and not necessarily focused as much in our overall GWM business. And so therefore, you didn't see the linkage and the correlation between our performance versus the market on the ECM side in our IB and it necessarily flows on the GWM side.

Okay. Thank you. And then just a follow-up on the first question. You don't have any - is there any - I don't know if you're comfortable giving a time series on how the client asset allocation exchange. I know you've given us the cash allocation number a few times. Just wondered if you think we're near the lows or if your comment just purely - if you're more talking about what the survey has said or whether it's been from what you’ve seen from previously?

Yes. I think Andrew, we've got two points, one, is in terms of the survey, cash levels were already at highs. And with the 1% increase quarter-on-quarter, we actually have cash levels that are either well above what has been historic highs. And I think if you look across the regions, and I'll speak to the survey, in Asia, we're seeing 32% of overall holdings in cash, and that's the highest amongst the regions, up 1%. Switzerland at 30% is next. The U.S. at 22%, and you saw 3% cash increase in the U.S. The U.S. typically has been the lowest amongst all the regions. Now we've seen the same pattern in our own business. Our cash levels are pretty much at highs versus where we've been historically. As I said at this point, it doesn't seem that there's any indication that we're going to see further moves into cash, but of course, that's going to be dependent on the environment going forward.

Okay. Thank you very much.

Our next question from the phone comes from Kian Abouhossein from JPMorgan. Your line is now open. Please go ahead.

Thank you for taking my question. Maybe to be a little bit more focused on some of the numbers you gave at the Investor Day, on Slide four, Kirt, you gave some of the beta factors to drive your assumptions in terms of investment in growth. Out of the four assumptions, two of them don't hold anymore. The forward curve has clearly shifted from up to down, the real GDP growth numbers is lower than originally expected. So, I'm just wondering at one-point Sergio and Kirt, do you make a decision that - what would be the trigger that you actually need to slightly change our plan in terms of investment and outlook so to say. That's the first question. The second question is related to the ultra-high net worth with the U.S. You mentioned for $70 billion in the past, and I just want to see where you are at this point, and when should we expect some statistics on that and what are going to be the key drivers for us to see the $70 billion to come in?

As I answered before, the moment in which we create additional transparency and clarity about how we look at our forward-looking targets is going to be year-end, as we planned for the three year cycle based on these assumptions, which I'd like to reiterate our consensus-based and not subjective to our us own assumption so that we can isolate the impact of alpha versus beta when we analyze our performance. So, I guess the right moment is to assist towards year-end. And so we're going to do it as every year, guide long-term with the trajectory has to be the one that we mentioned, before because the underlying trend sustaining our business model, wealth creation, Asia [ph] and the fact that we believe that the U.S., we have opportunity to gain share of wallet, are still intact. Of course, the pace and the contribution of the beta factor may not be the one that we were planning for based on those assumptions. But the timing is going to be that one. In the meantime, we will think about any strategic or tactical measures that we need to do to adapt to any changing environment, I'm sure like many of our competitors will do.

Kian, to your second question, as we highlighted the overall Americas program focused on ultra-high net worth in GFO is more of a medium-term, of course, objective in terms of the $70 billion and we indicated that, that was over a three-year period. So, where we are is that we've laid all the groundwork. We've built at our ultra-teams, and we've ring fenced them, we built out our GFO teams. We've identified the target clients at and as we highlighted, the majority of those clients already have relationships with us so we have an ongoing dialogue. And we put in place some of the other ultra-high net worth offering capabilities. And we're now starting to build a pipeline, so the process is starting. We would expect to see some actual momentum, some real inflow momentum in the second half of the year. That should grow as we go through the year and then, of course, as we get into 2020, that momentum will continue to grow.

Thank you.

The next question comes from Jeremy Sigee with Exane. Please go ahead, sir.

Good morning. Thank you. Two questions. The first one is on the Investment Bank costs, which I was a little surprised as you pointed out, they are up 3% year-on-year while revenues were down 4%. And I just wondered to what extent that the new cost level, the 1631 [ph] adjusted cost that you printed for 2Q, is that a run rate going into 3Q and 4Q? Or it's a scope to get it back down below 1,600 as it was in previous quarters? So that's my first question. My second question, which I hope you find too annoying, but it's going back onto the strategic review that you're talking about, which is underway, and you're going to tell us about it, is it 3Q. Obviously, that will be then been very late in the year and probably too late to do very much about this year’s numbers, which don't seem to be on track for these targets. What range of options do you think you might consider as you look at the 2020 numbers? Is it again going to about delaying investment spend or could it be more structural efficiencies? What's the range of options that you might look at?

Yes, Jeremy, so if you look at what drove that year-on-year increase in the IB cost overall, it was really tech related. And its reflective of the fact that we do continue to build out our digital platforms, and we also have an increased cost year-on-year overall just related to our tech infrastructure from the IB. And we would expect to continue to maintain that level of investment. Away from that, though, we would also expect that the IB will manage their costs prudently as they have in the past. And of course, variable compensation will be directly linked to revenue and mix.

On the second part, I think that's - first of all, I looked at our performance in the second quarter again. And by the way, I don't find the question annoying at all. We are more than happy to continue to explain how we look at our business and how we adapt to the changing environment. The second quarter was a demonstration that we were able to compete at similar performance across our equity business, across [Technical Difficulty] even when you neutralize it for year-on-year effects. And when I look at our CCS performance, it indicates again that we have a very strong franchise that's particularly when you look at the performance of our APAC numbers and the M&A numbers. Now from this position of strength, we will continue to look at ways to evolve and adapt our business model. We are now thinking about making a revolution. It's a constant evolution of the business, trying to look at ways to redeploy resources in areas where we see more growth and also creating opportunities, not necessarily just on optimizing financial resource utilization, balance sheet utilization, but also cost, but also more importantly to drive growth and drive collaboration between our units, particularly with Wealth Management, but also with our corporate business in Switzerland. So, what you have to expect is a series of steps that we take. Some of them will be more public by its measure. Some of them are - may not be public at all because again, this is the way we manage the business. And therefore, expect an evolution and not a revolution.

Thank you.

The next question comes from the line of Jernej Omahen with Goldman Sachs. Please go ahead, sir.

Yeah. Good morning from my side as well. I have three questions, please. The first one just a clarification question for Kirt because I don't understand it well when you talked about it prior. So, you were talking about clients taking advantage of lower rates by trying to refinance the existing positions. I think you mentioned that there would be winding down the current positions and then putting them on at the lower funding cost. And I didn't understand what you mean, but I'd like to understand it, please. Then the second question is on the Swiss bank. Just looking at Page 19 and the net interest income trajectory, in the eventuality that the Swiss Central Bank cuts again even further into negative territory, what is the ability that you have to pass this further cut on to your clients? And would you consider increasing the perimeter of clients to which you charge negative rates, too? And then my final question, and I'm going to try to ask this in a way that would allow you to say something. You talk about the geopolitical situation a lot, and I guess we've been following some of the media reporting about UBS's operations in China and some of the backlash that you received in the media there. And I wanted to ask you two things: one, in your assessment, has the ease of doing business in Asia and in China changed significantly over the recent period? So, call it the last three months. And the second question I wanted to ask you is UBS is still working on integrating the global wealth management capabilities into a more singular unit. And I was just wondering given the new geopolitical realities whether that changes the pace of that project or the way you think about that project? Thank you very much.

Thank you, Jernej. I think I counted four questions there, but to first address the first one. So, what's the dynamic? We'll take the U.S. first and if you think about mortgages and as rates go down, naturally, the inclination is for mortgage holders to look for refinance to lock into lower rates. And once that happens and refinancing picks up, then those client’s shop, they shop their mortgage, particularly in the U.S., where you have the highest degree of fungibility just across different distributors or mortgages. And we've seen U.S. players price very aggressively and price well below their cost of capital, and that's put pressure overall in our mortgage rates. We see the same dynamic in Asia Pacific. There's been deleveraging but also there's been just an increased volume. I'll just - I'll give you an example overall. If you look at the total amount of paydowns that we saw in Asia Pacific during the first half of the year, we saw $15.2 billion of overall paydowns. Now we all set that with about $14.7 billion of rebooking of loans for a slight reduction in our lending, and that's the same volume we saw for the full year last year. And that also is the impact of lower rates. And again, once those clients are in play, they look at financing lower rates and introduced competitive pressures.

And Kirt, this paydown that you referred to in Asia, what type of loans are these?

These are all our Lombard loans, so there all security loans.

So, the logic is as I've got a client, he sells the underlying asset, he repays the loan for no prepayment penalty and then he takes - he could literally take out a new loan with you at a lower rate.

Or generally he doesn't actually sell it on the collateral, what he does he pays down the loan and he looks to refinance at the lower rate because he is uncomfortable with the current margin that he's receiving given the fact that interest rates have come down and expectations on equity values have come down.

So, on the question of the potential SMB or any other Central Bank further moving to a negative territory, I think that, of course, we are contemplating like we did in the past, that before such potential outcomes would materialize, a series of actions we will take across the board. I think, of course, I'm sure you understand that it would be totally premature and not appropriate to outline what they are before things move. We also need to see if this is happening, what it's going to be, if any, the other actions or points that Central Bank would put in place in order to mitigate the effects on - of going deeper into negative rates with a low inflation environment. I think that's - we will see - need to understand how effective that policy will be. And so, but nothing is ruled out. We think about every possible option at the stage. Of course, the only thing that we know is that we are now going to get adjust our shareholders to pay for negative rates. And of course, as things get wider, like we did in the last couple of years, we will implement measures to offset and protect our margins. In respect of China and the geopolitical, which is nothing to do with geopolitical what happened, I think that we took - you saw a little - some reactions. We have - I have to say that other than the first few days in which we had both internally and externally because it's not just an external event, some issues to be addressed, the situation I can say has normalized and there is no impact whatsoever on our commitment to the region. We have been in Asia for 50 years and more. We have been in China for many, many years. I think that's - this was an unfortunate situation, but I think we took all the actions necessary to remediate. And as we go forward, we are confident about our position. Now of course, you saw in the quarter that we reached number one M&A position in the tables in Asia, so I think that's – there is little evidence that there is an impact on that. In respect to the geopolitical tensions, it has nothing to do with the way we manage our global business lines. If anything, this is something that is more related to the legal entity activities and one of the strongest offering we give to our Wealth Management clients is to - an opportunity to book assets globally. So, our Wealth Management clients they are wealthy, the ultra, the GFO's can book in the US and have relationship with us Asia, in Switzerland, in London and so on. And getting the same level of service and this is one of the unique features that we can offer that makes us the only truly Global Wealth Management franchise.

Thank you very much.

The next question from the phone comes from Andrew Coombs with Citi. Please go ahead, sir.

Good morning. Two questions, please. One clarification on cost and one on equities. On the OpEx guidance you provided for the second half to be slightly up versus the first half expectation. Does that still hold true if you strip out the U.K. bank levy in the fourth quarter, I think that was $85 million last year? And then my second question on the Equities business, the year-on-year revenue performance down 9% looks to be consistent with the U.S. banks reported. But looking at the detail you provide, the mix is a bit different. I think your cash and derivatives revenues have tied up relatively well and actually the bigger decline is coming from finance service revenues. If I look at those financing revenues, you talk about lower prime brokerage balances. Can you just explain what's driving that? Is that a share loss issue? Thank you.

Thank you, Andrew. In terms of your first question regarding our total cost, as we highlighted, we expect to be slightly up year-on-year in the second half. Now that includes the combined impact of all the actions that we've taken, including the tactical initiatives where we expect to see the majority of those in the second half of the year, along with some of the headwinds that we highlighted around the further clarification regarding regulatory matters in addition to some of the investments that we're making in the business. That also reflects the fact that we do see seasonality in the fourth quarter and that includes the U.K. banking levy. So, the U.K. banking levy level will contribute to that slightly up year-on-year. I won't comment to whether or not to exclude that because that's going to be flat or down. We just mentioned that it's all aggregate, and that's the - kind of the aggregate picture that I commented on. Now looking at our Equities business, as you indicated, our cash derivatives held up fairly well and that is in actually, of course, a very lowballed environment, which does impact our business. I would mention as well, we do believe we increased our share of electronic trading in Equities particularly in Asia, as well as the Americas. Now in terms on the prime brokerage and the financing side, I can't comment on a relative basis. I haven't seen any indication at all that we lost share. It's just the level of activity that we've seen with our own clients and our activity levels are down quite a bit, which aren't surprising, just given the environment.

Thank you.

The next question from the phone comes from the line of Benjamin Goy from Deutsche Bank. Please go ahead, sir.

Yes, hi. Good morning. Two questions, please. The first one on loan growth in GWM. So, the 10% to 15% you highlighted last year, do you think that's still feasible in an environment where you highlight more competitive pressure in loan pricing? And then secondly, in the Investment Bank, out of your [indiscernible] quite significantly and were now below the basically more than compensated the increase we have seen in Q4 last year. Is that now the new run rate or you expect a bit of recovery after may be a subdued Q2 in terms of volatility going forward? Thank you.

Yes. In terms of loan growth, naturally the environment is - of course, is going to impact overall our loan growth performance versus our plan, just given the changes and assumptions around the beta factors and specifically as an example, we saw accelerated deleveraging in Asia Pacific was completely do to our clients outlook and resulted in a $7 billion overall reduction in loans in Asia Pacific. On top of that, with the increased level of refinancing the very aggressive pricing of the U.S., even though our U.S. mortgage book is actually up quarter-on-quarter. It still is going to impact the pace of growth versus what we had anticipated. So certainly, as we reformulate our plans and Sergio commented on that several times, we'll come back, and we'll give an indication of what we feel the that trajectory is. In terms of RWA, and I think very clearly when we received quite a significant reaction to the increase in market risk in the fourth quarter, and we highlighted that, that was really due to the volatility, and we would expect it to come back down, that's exactly what you've seen. In fact, market risk continued to come down in the second quarter. We also saw a reduction overall in credit risk. Right now, our RWAs are at around a third of the total group, and we maintained our guidance that we expect RWAs and LRD should be around a third of the group with some volatility from quarter-to-quarter.

Okay. Thank you.

Your next question from the phone comes from Stefan Stalmann with Autonomous Research. Please go ahead, sir.

Yes. Good morning, gentlemen. Two questions from my side, please. For the first time, I think you have now disclosed your interest rate risk in the banking book. And you spell out a stressed loss in the 200-basis point upside scenario of $4.5 billion. Could you give a rough guidance of how much of this $4.5 billion stress test loss would be CET1 capital-relevant? I assume some of that will be filtered out through cash flow hedges, et cetera. And the second question. Last year, when you switch to U.S. dollar reporting, you mentioned a roughly $300 million revenue benefit as a result of this, could you provide some color as to whether this is already in the current run rate of revenue in the first half? Or is this some of it to come because the positions have not been put on yet? Thank you very much.

Stefan, yes, according to the updated pillar three requirements, we are now reporting on the interest rate in our banking book. The stress loos that we called the $4.5 billion, which is an economic measure loss, would not have a material effect, would have an insignificant effect on our CET1. In terms of the U.S. dollar reporting, we've actually seen a little bit more than the $300 million and it's already in our current results, and I would mention that the run rate of that benefit from the change in currency will be impacted by the lower rates going forward. So, you will see, as we roll over our hedges on our investment in equity, there will be some erosion of that over time but that $300 million holds for the full year. And it's already in our run rate.

Great. Thank you.

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

Hi. Thanks for taking my questions. So, the first one is on the competitive intensity for deposits that you referred to in Page 16. I was wondering if going forward with interest rate set to go lower, you would expect that competitive intensity to alleviate going forward based on your historical experience. And then following on from that, just another question on NII in general but factoring in forward rates. Can you give an equivalent impact on your gross margin over the next 12 months or so everything else being equal? And then my second question is on the outflows, the net new money outflows in the Americas. Also, I mean, attributed that mainly to seasonal tax effects, but I also know that you've got adviser numbers dropping by about 100 or so over the quarter. Is that a contributory factor to the outflows? Or is that the case that you retain lesser AUM from those advisors leaving the franchise and that goes to your more experienced adviser that you retain? Thanks.

Yes. The competitive intensity on deposits really - that's been building up over the last year. And there are a couple of drivers. Firstly, it was actually more in response to interest rates as they were going up. As interest rates were increasing, we saw our U.S. clients, in particular, but also other clients in U.S. dollars, move into money markets. We saw about $11 billion increases in money market, a large portion of that coming out of demand deposits. And the second is actually clients moving into term deposits. Now we, in addition to clients shifting on their own rate preference, we also had been active in putting clients into term deposits. And that's really just to continue to help with the funding structure of our U.S. business. And all of that contributed to the reduction in deposit margins. Now that interest rates have reversed and they're coming down, we don't really expect it to see a much more shifts into money markets and in the time, deposits going forward. So, we think that effect has largely stabilized. On the net interest income guidance, we just really stick to the fact that sequentially, we would expect to be down slightly if we see the 25-basis point drop. Now clearly the longer-term rates will have an impact over time as we roll over our hedges on our U.S. dollar book but as well as on our Swiss Franc book. You've seen in our Swiss business; we've been able to offset that through some pricing actions. In our U.S. business, in terms of the net new money outflows, you are correct. The largest portion of the U.S. outflows were driven by tax payments. But in addition to that, we have some net recruiting outflows. Now I would say we have a really strong pipeline of high-quality new recruits. A number of those recruits actually come from the private banks, which means that they have had a cooling down period. So, there's a little bit of delay between when we recruited the FAs and when we actually onboarded them, and that's causing a little bit of a delay of the inflows. So, we would expect with the - our current pipeline and the confirmed recruits to see some improvement in our net recruiting numbers in the second half of the year.

That’s great. Thanks.

The next question from the phone comes from Adam Terelak with Mediobanca. Please go ahead, sir.

Good morning. Sorry to return to NII again. But you've given an indication on NII pressure coming from the both on the short end and the long end of the curve. But which would you actually say is the great - the threat GW NII? Would – should we be focusing on multiple cuts from the Fed or the inverted yield curve and lower midterm rates? And how confident are you in projecting NII at the $950 million to $1 billion sort of run rate a quarter level we're at today. And then the other side of that is how much flex do you have in your cost base? So, year-over-year, revenues in GWM are down but FA compensation in the U.S. is up. Is this driven by the revenue mix? And does that imply that much of the NII pressures will actually end up dropping straight to the bottom line?

Yes. Adam, thank you for another question on NII. In terms of the dynamics, the interplay between long-term and short-term, it is somewhat complex. I would just highlight short-term rates, we immediately see that flow through to our NII because it - and it depends, of course, on the beta factors. When we gave our guidance on the 25-basis point impact having a sequential reduction overall in our NII, that was purely from the 20 - assume 25 basis point, along with an assumed level of beta and how much of that we would pass on to our clients. And away from that, we don't see much outside of that in terms of headwinds on a quarter-on-quarter basis. On the longer-term rates, they actually drive client preferences, and so you see a lot of the shifts that have taken place. It's a combination of short and long-term rates. It also drives the prepayment impact that you saw in mortgages, which is very pronounced in U.S. banks but also it was evident in our results on a year-on-year basis. And so, there's - there are a number of complexities in terms of how short versus longer-term rates impacts overall the business. Now on a - on the overall - you talked about the U.S. business and the fact that our FA comp is up. I would just highlight that actually, as we mentioned, our pretax profit was at record levels in the U.S. And so, year-on-year, our PBT was up 4% year-on-year and 10% quarter-on-quarter. So really our FA comp moves is directly in line with that. Having said that, as we indicated before, of course, banking product revenue has very little pay out on the grits [ph]. And so, you're right, banking product revenues, including deposits and loans is much more accretive or dilutive to our pretax profit on the way up and down, particularly in the U.S.

Perfect. Thank you.

The next question from the phone comes from Patrick Lee with Santander. Please go ahead.

Hi. Good morning. It's Patrick from Santander. Thanks for taking my questions. I have two questions from the Global Wealth Management division and one more general on the inflow dynamics and second one on the revenue mechanics. And firstly on the inflow question, outside the U.S. seasonality, you recruited very good inflows in Q2 in Switzerland and EMEA, but APAC particularly weak after a record first quarter and I know you have talked about general economic and political environment, but I just want to ask you how much of the weak Q2 in APAC was due to all these conditions problems and how much of that is your decision to stay out of competition, for example. And secondly, on the revenue dynamics, and I think in the past you have alluded to somewhat of a lag or timing difference between getting the assets through the door and getting clients deploy their assets to generate revenues. So, if I look at, for example, your APAC as an example, you had record inflows since first quarter but that has not translated to better revenue sequentially. So I just want to know how much of that is because of all the issues you mentioned like plan deleveraging, lower-margin products or can we be more positive and expect some sort of a stronger pickup in the second half of the year as people put money to work, so to speak? Thanks.

Yes, so in terms of your first question, I guess, if you look at the net new money, you're right, APAC was down to $1.1 billion after a very strong first quarter. And as we indicated during the first quarter where we also had a challenging overall market and geopolitical environment, that's often driven to FX outside of market factors. And it often is driven by large idiosyncratic inflows. It could be driven by entrepreneurial, either have a gone through an IPO or actually wanting to look to monetize large positions that they have. So, it's - you don't always have a direct correlation. So, I wouldn't read much into the fact that we're lower this quarter than we were first quarter. And you would expect to continue to see volatility, but overall, we're pretty confident that we'll see good flows in Asia during the second half of the year. You mentioned EMEA. Actually, EMEA had a very strong quarter with $4.5 billion, and that's off of a good first quarter so $7.4 billion year-to-date. So EMEA in many ways is probably our better performance certainly outside of Asia Pacific in terms of net new money. Now on the revenue side, in a typical environment when we get invested assets in, it takes up to a full year before we fully put those new assets to work. Now the inflows are in the form of cash, it's usually going to take longer. And then this environment where clients are inclined to hold the higher proportion of their assets in cash and in Asia that's even more pronounced as we highlighted, where you saw an allocation out of Equities into cash and cash holdings increased by over 2%, you would expect that it's going to take even longer for us to see that money be put into investments. And a lot of it's going to depend on our clients and their conviction. As you saw from the survey right now, there's not high conviction and clients are more or less in a wait-and-see mode.

Great. Thanks.

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