UBS Group AG (UBS) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning. Welcome to the UBS Second Quarter 2020 Presentation. The conference must not be recorded for publication or broadcast. [Operator Instructions] At this time, it’s my pleasure to hand over to Mr. Martin Osinga, UBS Investor Relations. Please go ahead, sir.

Good morning, and welcome to our second quarter 2020 earnings call. Before we start, I should draw your attention to our slide regarding forward-looking statements at the end of our presentation. For more information, please refer to the risk factors in our latest annual report, together with the additional disclosures included in our quarter reports and related SEC filings. Now, over to Sergio.

Thank you. Good morning, and thank you for joining us. The strengths, resilience and diversification of our integrated model has once again been confirmed by the strong second quarter results. As we continue to face challenging environments we are adapting and accelerating the pace of change, supporting our clients, employees and the economies in which we operate, while remaining focused on our strategic priorities. The second quarter net profit of 1.2 billion was driven by strong results across our asset gathering and institutional businesses. This led to strong returns, substantial capital generation and a CET1 capital ratio of 13.3%. These strong results and the first quarter made for an outstanding first half performance, and importantly these were achieved without the help of any exceptional items in revenues or costs. Net profit for the first half increased 12% year-on-year to $2.8 billion while PBT was up 9% or 24% ex-CLE. Operating income was up 4% with top line growth more than upsetting higher CLEs. Net new money was over $70 billion. My thanks goes to all our colleagues who made this possible by showing professionalism and dedication and who have been instrumental in delivering for our clients. I'm very proud of how we – how everybody at UBS is responding to these challenging times. The last few months have grown very volatile and fluctuating market conditions. While measures to contain the COVID-2019 pandemic has had initial success in some countries, there has been material destruction to many businesses as well as increased unemployment. The timing and path of recovery is likely to vary widely. Geopolitical tension and political uncertainties also increased. Therefore the range of possible outcomes remained very wide. All this is reflected in our updated microeconomic scenarios and let us to model increased expected credit loss expenses. Given the continued uncertainty related to the pandemic, it is reasonable to expect elevated group credit loss expenses in the second half of 2020, but below those seen in the first half of the year. In this context, our strong balance sheet, which has been a pillar of our strategy and a source of our competitive advantage for many years is of critical importance. Regarding capital returns, with a CET1 ratio of 13.3% and about 11% post stress, we are well-positioned to pay the second tranche of the 2019 dividend in November as planned. As you may remember, FINMA has expressed its support for our plans for the 2019 dividend. For 2020, regulators around the world have made it clear that they want banks to be prudent and flexible in their capital return policies. Considering the ongoing elevated uncertainties about size and depth of the crisis, we understand and share this view. As a consequence, while it is too early to be definitive about capital returns for 2020, we are taking a fresh look at our mix between cash dividend and buybacks going forward find a dividend payout ratio more in line with our most relevant U.S. peers. Our dividend accruals so far this year reflect this thinking. Depending on business development and the outlook in the second half, we don't rule out the possibility for some share buybacks in the fourth quarter. 2020 will most likely be a year in which our capital returns will be affected by the uncertainties around COVID. Beyond 2020, our intention is to continue to pay out excess capital and deliver total capital returns consistent with our previous levels, while rebalancing the mix between cash dividend and buybacks. With return on regulatory capital well in excess of 16% for the first half of the year, we compare very well to our most relevant U.S. peers. This is an impressive achievement, especially when one takes into account we added $2.6 billion to our CET1 capital during that time. As you know, we measure ourselves on return on regulatory capital. For every bank CET1 capital is the method which best reflects the equity it controls and deploys in the business and it is a binding constraint for capital returns. For us, there is a fairly big gap between tangible equity and CET1 with DTAs [ph] and dividend accruals accounting for the majority of this. Our integrated business model with diversified revenue streams and broad geographic mix continues to serve us well as do our past investment in the technology space. Our infrastructure investment in digital platforms have been tested and thoroughly validated over the last few months, placing us among the leaders in the industry and allowing us to reap benefits across all our business. This is confirmed by our client growth and their feedback, benchmarking and the awards we win. The pandemic have accelerated client shift to digital and our smart solution in this area are gaining in popularity. For example, the second quarter the CIO arranged for more than 50 live streams reaching close to 45,000 clients and prospects. We also introduced new interactive functionality through the live streams allowing clients to indicate their investment interests and preferences and providing client advisors with valuable input for more targeted dialogue with them. Last but not least, our staff remained totally dedicated in serving our clients, successfully dealing with the challenging conditions. As the [indiscernible] aspect of the pandemic developments are far from being resolved, a large number of our colleagues continue to work remotely. We plan to gradually increase staffing of our offices while keeping their safety and wellbeing remain a top priority. In my view to be a global leader, you also need to have a strong position in a strong home market. Of course, Switzerland is not the biggest country with a population of 8.7 million, but we punch well above our weight in economic terms. Being the number one bank in the country brings us stable and strong revenue streams, but also comes with responsibilities towards the economy and the wider community, both in good and bad times. Switzerland is considered a safe port during financial crisis and for good reason. The country has the physical strength and resources to deploy where needed. The response to this crisis from the authorities has been effective and the banking system has played a vital role in supporting the government's efforts. As a the country's largest lender, we have been providing funding to clients throughout the crisis well beyond the CHF3.2 billion in credit lines we committee to prove the government's backed program. We provided over 6 billion in additional menu [ph] loans and commitments to corporates and private individuals. In relation to the government backed SME loan program, less than half of our commitments have been drawn by clients so far with a fairly consistent picture across sectors. We have also seen a number of clients already repaying their loans. In addition, we are seeing no particular signs of stress in our mortgage book and credit card exposures so far. All this speaks to the strength and resilience of the Swiss economy and the quality of our credit portfolio. We are well aware that difficult times are still ahead of us. A deep recession is expected in Switzerland this year and the full impact of the economic disruption on the corporate sector as yet to be seen. However, the forecast contraction is less severe than across most of the other developed countries. On a positive note, our latest CIO survey showed robust sentiment among Swiss firms. Over 70% of them expect 2022 revenues to match or increase from last year's levels and nearly 9 out of 10 expect by then to employ at least the number of period they did in 2019. This further underpins that Switzerland is in a comparatively good position to withstand and recovery from this crisis. Now let me give you a glimpse of our most recent investor survey that will be published tomorrow. Global investor sentiment has slightly improved, lifted by the market rebound, but overall it is not surprising that investors remain cautious. Further developments of the pandemic are top of their list of most immediate concerns as is uncertainty regarding the forthcoming U.S. presidential election and as 61% plan to rebalance their portfolio regardless of the outcome. Staying close to clients and helping them to navigate the difficult market continues to be the top priority for us. Recent months have shown quality of advise is just as critical as once technology and platforms. The pandemic is also sharpening the market's understanding of the importance of climate transition and certain social issues for investment risk and opportunities, driving further acceleration in interest in sustainable finance. So it is not surprising that nowadays everyone talks about sustainable investments and their capabilities. At UBS, sustainable finance has been a critical component of our client offerings and strategic growth opportunities for many years, and that's why we are the clear market leader today. In the first half of 2020 alone we had net sales of $2 billion for Global Wealth Management a 100% at site multi-asset mandate with assets now exceeding $10 billion. At the same time, clients were also adding funds to Asset Management at site focused products, increasing assets under management by $10 billion to an all time high of $48 billion. We will continue to support the increasing client demand in this space delivering the best of UBS content and capabilities to them. That is the reason why we are creating the UBS hub for sustainable finance in order to facilitate the sharing of insights from experts across our firm and across our extensive network. The last few quarters show that UBS is one of the most front-to-back tax saving and agile financial company. Having said that, the lessons from the crisis is clear. There is no room for complacency and you cannot afford to slow down investments that are necessary to be competitive. Therefore, we are already thinking ahead and reviewing areas where we can accelerate our plans to build on our momentum. For example, we are enhancing our client's digital experience through new interfaces and functionalities. We are doing so by leveraging our resources and creativity. We are also open to cooperation with others who have interesting ideas and high quality solutions. Automation and technology enablement is also more relevant than ever. We plan to roll out more robots and accelerate our migration to cloud. Lastly, with over 95% of our workforce able to work remotely and with the majority of doing so for an extended period of time now, we are reassessing the way we will be working going forward and the impact on our real estate footprint. As we speak, we are working on plans regarding our offices and branch networks. However, any change will be gradual. We have to ensure the most appropriate working arrangement for our staff. For our branches, we have to balance both, revenue and savings aspects of any changes, and serving our clients to our high standards remains critical. With that, let me now hand over to Kirt for our Q2 results.

Thank you, Sergio. Good morning everyone. Pre-tax profit for the quarter was $1.6 billion, down 10% year-over-year. Stripping out the credit loss expenses in both quarters, PBT would have been 5% higher than in 2Q 2019. Our cost income ratio improved by 1 percentage point to just below 76% with income pre-CLE outpacing expenses. And looking at the operating expenses, excluding variable compensation and litigation, costs were down 2%. Net profits of $1.2 billion led to a 13.2% return on a higher CET1 capital base. As previously announced, we expect the Fondcenter transaction in Asset Management to close in 3Q 2020 with an associated post tax gain of around $600 million with limited tax expense. Along with other measures, this transaction will help drive a full year effective tax rate of around 20%, excluding any DTA re-measurement that might occur in the fourth quarter as part of our business planning process. Turning the Global Wealth Management. PBT Rose 1%, or 8%, excluding CLE. Operating leverage was positive, with the cost income ratio improving by 2 percentage points to 76%. Year-to-date, PBT is up 21%, or 27% excluding CLE. Performance was consistently strong throughout the quarter with operating income at around $1.3 billion in each month. Over the quarter that came to a 3% reduction from the prior year due to lower recurring fee net income on a lower invested asset base, and higher credit loss expenses, partly offset by higher transaction based net interest income. Excluding CLE income was down just 1%. Costs decreased by 4% as a result of efficiency measures taken earlier in the year, driving positive operating leverage and improvements in advisor productivity, one of Tom and Iqbal's key focus areas. We had net new money of $9 billion, with inflows in all regions. Mandate penetration rose sequentially to 34.2% on positive mandate sales, and as mandate performed better than the total invested asset base. Net new loans were $ 3.4 billion coming back strongly in the latter half of the quarter following COVID related clients de-leveraging in April. Year-to-date, net new loans were $7.4 billion, reflecting our continued focus on loan growth and despite COVID related volatility. About 80% of this growth came from GFO. Following this significant increase in margin calls that we saw in the first quarter, these returned to a more normalized level from mid April, and the average LTV of our Lombard portfolio remained around 50% Credit loss expenses were $64 million in the quarter are only three basis points of GWM's loan book. About 70% of CLE are stage one and two, driven by updates to the forward-looking macroeconomic scenarios, model changes, and expert judgment overlays. Stage three CLE impairments were $19 million, half of which came from a single structured margin lending position that was already in the call to the prior quarter. We are very pleased with our firm initiatives continue to accelerate. Year-to-date GWM-IB collaborative efforts produced $34 million in revenues from 30 cross divisional deals. Our separately managed account initiative in the U.S. is driving inflows in the Asset Management, and GFO saw extremely strong performance with income up 22% across the IB and GWM. Recurring fees were down 8% year-on-year and 13% sequentially. As a reminder, we bill in arrears [ph] based on quarter end balances in the Americas and month end balances everywhere else. As such, the 11% rise in invested assets during Q2, was mostly not captured in our recurring fee billings, driving more than two thirds of the 4.6 basis points decline in margin sequentially. Most of the remainder of margin decline in the quarter, also relevant is a driver of year-on-year margin compression, relates to non-mandate factors, including shifts into lower margin funds and lower custody fees. In the third quarter, recurring fees should benefit from the rise in invested assets, which is expected to lead to a roughly $200 million increase sequentially. Net interest income was up 6% year-on-year, mainly driven by growth in lending revenues on higher loan margins and volumes. Deposit revenues were stable as proactive balance sheet management, higher volumes, and an increase in the exemption threshold, more than offset the significant deposit margin compression from U.S. dollar rate cuts. Transaction based income was up 8% on continued high levels of client engagement and greater market volatility, alongside tailored client solutions from our Chief Investment Office. A regional view of our GWM results, demonstrate the value of our global business as very strong performance in Asia and EMEA, offset a more challenging quarter in the Americas, where COVID effects were most pronounced. Performance in the Americas, which compared to a very strong to 2Q 2019 was impacted by the billing dynamics already mentioned. Around negative $100 million headwind to deposit revenues from lower U.S. dollar, interest rates, as well as $53 million of credit loss expense from 2Q 2020. The majority of U.S. CLE related to stage one and two positions, with few stage three impairments. Normally, we would have seen higher seasonal tax related outflows in the U.S. in the second quarter of the year, but as tax payment deadline was extended from April to July this year, we expect that the majority of those will come through in the third quarter. Last year this amounted to around $5 billion of outflows. PBT was up 3% in Switzerland or 12%, excluding CLE on higher client activity levels and lower expenses driving positive operating leverage. In EMEA, PBT increased 16%. Income in the region was up on higher NII and strong transaction based income. This along with lower expenses drove strong operating leverage. Loans were up 6% sequentially and net new money flows were $8 billion in the quarter. APAC performance was particularly impressive, delivering a record 2Q with PBT increasing 71% to $233 million. This reflected excellent transaction based income performance, especially within our global family office on high client activity and continued engagement. Net interest income increased on higher deposit revenues on loan growth. Adviser productivity also improved significantly. Moving to P&C, which was most adversely impacted by COVID, PBT was down 41% as a result of credit loss expenses of CHF104 million and around 60 million lower transaction based income on lower credit card fees and FX transaction revenues. PBT would have been roughly flat excluding CLEs and the reduction in card fees and FX transactions. Income before credit provisions was down 7%, mainly reflecting 60 million lower credit card and foreign exchange transaction income on reduced travel and leisure spend. When Switzerland started its lockdown in March, our clients' domestic card spending dropped by about a third, compared with the prior year all through April, and then started slowly recovering to 2019 levels again in late May as lockdown eased significantly. But the far greater driver of revenues, card transactions abroad, which have tied to client travel dropped by around 60%. We therefore expect to see continued drag year-on-year on transaction based income in the second half of 2020. Delinquency ratios and credit losses remained extremely low. NII and recurring net fee income were stable. The majority of the $104 million credit loss expenses were Stage 1 and 2, mainly reflected expenses for selected exposures to Swiss large corporates and SMEs, as well as some real estate exposures. Operating expenses reduced by 1%, and for the first half we had the lowest cost base on record. We continue to support our personal and corporate clients with solutions in funding. Even excluding the government backed loan facilities, we had over $2 billion net new loans in the quarter. Asset Management had another great quarter, with PBT up 27% to $157 million, and 6% positive operating leverage. This is the fifth consecutive quarter of year-on-year improvement in PBT. Year-to-date PBT is up 38%. Operating income was up 10% on exceptional performance fees, primarily driven by hedge fund businesses. Net management fees were only $3 million lower, despite the spillover effect of the market impact in the first quarter, which was largely offset by continued positive momentum in net new run rate fees. Net new money was $19 billion, or $9 billion excluding money markets, contributing to record invested assets of $928 billion. Year-to-date we have seen $52 billion of inflows, reflecting positive net flows across all channels in nearly all asset classes. We continue to deliver on our strategic priorities. To list a few, our initiatives on separately managed accounts in the Americas together with GWM had $10 billion of net new money inflows during the second quarter and $28 billion today, well ahead of our expectations. Furthermore, our sustainability assets reached $48 billion, a year-on-year growth of 80% with our climate aware fund [ph], more than doubling in size, over the same period to $4.9 billion. The IB delivered another strong performance with 9% higher operating income versus a good to 2Q 2019, and only marginally higher expenses driving 43% PBT growth. Global markets revenues increased 25%. FRC more than doubled benefiting from volatility, improved rates in credit market conditions, as well as high FX volumes. Credit delivered its best quarter since accelerate. We believe, we gained market share in electronic trading in FX and U.S. cash equities, reflecting the continued investments we have made in our platforms. We also rose three ranks to second place in the FX Euro Money survey this year. Equities overall reduced 9%, reflecting lower derivatives revenue, due to the challenging market conditions for our structured [ph] derivatives business offsetting increases in cash and financing. Global banking revenues decreased by 14%, mainly on lower advisory fees. In part, this was due to an exceptionally strong 2Q 2019 for Advisory. 2Q was also a quarter where the sea port [ph] was dominated by banks that deploy balance sheets in their capital markets businesses to a greater degree than we do, which is consistent with our overall strategy for the IB. Capital Markets revenues were up 25%. Markups of $88 million, mostly on loans and LCM were partly offset by losses of $70 million on related hedges, reflecting quality of our portfolio and prudent risk management. Net credit loss expenses were $78 million, mainly from Stage1 and 2, including recoveries of provisions taken in 1Q 2020. Our cost to income ratio improved to 71% and below 70% for the first half. Throughout the first half, we maintained strategic focus on deploying capital efficiently and with discipline, helping drive best-in-class revenues per unit in bar of our India IB. This enabled us to deliver a return on actuated [ph] equity of 19% for the quarter and over 20% for the first half. Group Functions loss before tax was $305 million, compared to our guidance of around $200 million per quarter. The main driver was an incremental roughly $90 million of liquidity costs from additional buffers we are carrying related to COVID-19 stresses. As this cost is likely to remain elevated going forward, we will attribute a portion of these liquidity costs to the business divisions. We also booked $20 million in credit loss expenses in non-core and legacy portfolio. For Group Functions, our guidance remains around negative $200 million per quarter, excluding accounting asymmetries, litigation and any one offs. At the group level, we booked credit losses of $272 million in the quarter of which $202 million related to Stage 1 and 2 and $70 million related to Stage 3 positions. A large driver of these losses resulted from updates to macroeconomic assumptions in our model scenarios, which drove a $127 million within Stage 1 and 2 positions. Other Stage 1 and 2 CLE of $75 million mainly reflected expert judgment overlays, largely in P&Cs, as well as re-measurements within our loan book. The Stage 1 and 2 CLE have a limited impact on our CET1 capital as CLE related positions under the IRB approach were offset against our existing Basel III expected loss buffer, of which $262 million remained at the end of the quarter. Stage 3 CLE of $70 million related to various impairments across the divisions with no more than $22 million of aggregate defaults in any one division. At the end of the quarter, our total ECL allowances and provisions were $1.5 billion. Given that a large driver of our CLE during the quarter were related updates to macroeconomic assumptions in our model scenarios under IFRS9, we wanted to provide some additional granularity. Further details can be found in note 10 of our quarterly report. During the quarter, we updated both our baseline and our global crisis scenarios. The new baseline scenario assumes a sharp deterioration of GDP in relevant markets and increasing unemployment with the largest shocks in the U.S. Our baseline scenario forecast improvements and the various macroeconomic indicators beginning in the second half of 2020, but with a slower recovery expected in the U.S. relative to Switzerland and the Eurozone, and with the U.S. GDP remaining below pre-crisis levels until 2022. The baseline scenario also assumes U.S. unemployment will remain in double-digits until mid 2021. The global crisis scenario is the severe downside scenario, and now incorporates more extreme COVID related stresses, including significant economic contraction, with a slow recovery beginning in late 2021 and with peak unemployment reaching over 17% in the U.S., remaining at elevated levels throughout the stress horizon. The weightings remain unchanged from last quarter at 70% for the baseline and 30% for the global crisis scenario. Our risk weighted assets were flat since the end of March, credit risks RWAs reduced by $3 billion mainly on loan distributions during the quarter and lower open margin calls in the IB, with some offset from lending growth in GWM. About a third of the increase was driven by rating migration and changes to loss given default. Market risk RWA was marginally down, partly on less extreme volatility. Lastly, foreign exchange effects increased RWA by $2 billion. Our capital position remained strong, with capital ratios comfortably above regulatory requirements. That's without taking into account any of FINMA's temporary relief measures. Our CET1 capital ratio was 13.3%. This came in much higher than the guidance we gave in April, reflecting our strong 2Q profits, which led to higher CET1 capital and flat RWAs, mostly as we saw lower market risk RWA and fewer draw downs than anticipated. Excluding the temporary COVID-19 related FINMA exemption for site deposits, Central Banks, our CET1 leverage ratio increased to 3.9%. Now back to Sergio.

Thank you, Kirt. Few closing comments before we move to the Q&A. Our performance in the first half has demonstrated our resilience ability and ability to generate higher returns we remain very focused on executing on the strategic priorities we laid out in January. We are deploying our strength and abilities to seize the positive momentum that we have, capturing opportunities that are opening up before us, and accelerating and adjusting our plans to do what we do best, deliver to our clients. Let me finish by saying that with the specter of the pandemic still very much front and center around the world, we continue with our commitment to do the right thing by ensuring the safety of all the UBS colleagues around the world and playing our part to help the communities in which we operate. With this, we can now open the line for questions.

We will now begin the Q&A session for analysts and investors. [Operator Instructions] The first question comes from Alastair Ryan from Bank of America. Please go ahead.

Thank you. Thank you, good morning. Really good capital number this quarter and I guess better risk weighted assets, management than I'd expected for sure as well as a strong ending [ph], could I just ask looking into the second half, please, Is there any more sort of averaging up of market volatility or RWA drag from credit migrations still to come and or is that pretty much behind us, so that its earnings driven capital? Secondly, is just an update. You said before, pretty much all the regulatory changes are phased through now. Is that still the case or might you benefit even from some of the delays that have been talked about by regulators? Thank you.

Thank you, Ryan. Yes, we were very pleased with our overall capital results, because as you said, driven by flat RWAs, but also I would highlight of course pretty strong capital accretion with our CET1 ending up at $38 billion. I guess as we look into the second quarter, first of all, of course, what we observed during the - as we look into the third quarter, excuse me, we reserved during the second quarter is volatility did come down during the quarter. And that remains, we remain at kind of quarter end levels as we venture into the third quarter. And barring any significant change in our current outlook, we would expect market volatility levels to kind of continue to be around where they are, of course, with an important caveat that there's still a lot of uncertainty. That in turn would suggest that our debt [ph] market risk, RWA levels would stay at their current levels overall. In addition to that, we also would not anticipate any significant draw-downs in reaction to any further stress in the current environment, again with a caveat that that assumes that the outlook remains where it is, also acknowledging that there of course, is currently a very wide range of potential scenarios going forward. In regards to regulatory changes, we would only note that at the moment, there's nothing necessarily on the horizon that should lead to any increases in regulatory RWAs. We have some small remaining expected increases from an update in our U.S. mortgage risk RWA that will phase in over the next four quarters. I believe the total increase is around $2.4 billion. We'll get back and confirm that. But outside of that there's nothing else right now on the horizon to increase our overall RWAs. Of course, with the exception of finalization of Basel III, which at the moment, of course, has been pushed forward until 2022 and we believe we'll get more updates on that timing from our regulator in the third quarter.

Thank you.

The next question is from Andrew Coombs from Citi. Please go ahead.

Good morning. Two questions please. Firstly, if I could ask you to elaborate on your plans on capital return. I know you talk about potentially restarting buybacks in the fourth quarter, but you also talk about reviewing the mix. So there is also a possibility of rebasing the dividend down as you introduce buybacks? That is my first question. And second question would be on costs, particularly in Global Wealth Management, where you have shown a very disciplined result, and down 7%Q-on-Q, but also down 4% year-on-year, and can you just provide a bit more color on what is driving the cost takeout in Global Wealth Management, and from here, whether we can expect more of that or whether there is investment to come to offset? Thank you.

Yes, let me address your second question first, and then Sergio will take your question on capital returns. We were pleased overall with our cost performance in GWM. I think you recall that the business took initiatives last year to drive out some headcount, particularly in kind of the middle and the back office side. That combined with the fact that Tom and Iqbal are very focused on CA and FA productivity has helped to drive the lower costs. In addition to that, of course there was some benefit as well from less travel as well as less marketing spend. And we would believe if we think about our cost trajectory going forward, we should continue to see the benefit of actions that were taken last year as well as continued focus from Tom and Iqbal on productivity, and we wouldn't expect the spike up of T&E costs certainly in the third quarter. Having said that, we do continue to look at investment opportunities in the business, and you can expect going forward, that we will invest particularly of course in our platforms and in our growth markets.

So, no, Andrew, I don't know if I have much more to add than what I already mentioned in my remarks. But I think that it is clear that regulators around the world have made it clear that banks should be prudent and flexible in respect to their capital return policies. And so, considering the uncertainties that we have still head of us, we've fully shared those views, and therefore we are already reflecting this in our thinking around capital returns, mix definitely rebalancing the two, more towards cash and more balanced approach between cash dividends and buybacks. And this is already reflecting - is reflected in the way we are accruing for this year. So 2020 as I mentioned before, is likely to continue to be a year in which our capital returns may be impacted by COVID-19. But if the trajectory and the expectations we have for the second half are more or less materializing then we do not rule out some share buyback in Q4. But I think that as we all know, nowadays a few months are like an eternity, so I think that we are going to be in a better position to give you more details in October.

Right, thank you.

The next question is from Magdalena Stoklosa from Morgan Stanley. Please go ahead.

Thank you very much. I've got two questions; one on NII and another one on the investment banking performance. So first on NII, of course, it has been strong in the quarter, it's kind of lower rates has been offset by the loan growth and of course it is the second quarter of very strong loan growth that we are seeing particularly in GWM. So, how should we think about that balancing act between the kind of lower deposit spreads, but also the treasury income and of course the high loan growth you are delivering, and also could you give us detail of where your lending demand is coming from, both geographically and from a product perspective. So that's the question number one. And question number two really, of course, we've got the second quarter of a very strong thick performance, and how do you see the kind of second half of the year in terms of trading, but also in terms of pipelines on the advisory side as well? How do you think that normalization may look like there is of course, we have seen a kind of tremendous amount of kind of client activity, but also kind of good global [ph] situation and so forth, now do you see it normalizing? Thank you.

Yes, thank you Magdalena. Let me take you through the moving parts on net interest income and a quarter and then reflect a little bit on the third quarter. So as you highlighted, overall the year-on-year 6% increase in GWM was driven by loan growth. Loans were up, and our loan revenue overall was up 15%. Loan balances were up $9 billion year-on-year on our net new loans as I mentioned at $7.4 million. That should continue to provide some tailwinds as we go into the third quarter. Now the deposit revenues and that's where there is a lot of moving parts, and overall actually was up slightly year-on-year. And that is as we generated volume growth 9% overall, so over $30 billion increase in deposit volumes, so a lot of that is concentrated in the U.S. along with the threshold exemption that I reference, the increase helped to offset the U.S. dollar headwinds of just over $100 million. And then in addition to that, we have been proactive in how we've managed our banking book overall. As I look forward to the third quarter, I would expect that those effects on a year-on -year basis would still be present. And so overall, that would point towards increased net interest income year-on-year. However, at the same time, there is one additional headwind. I highlighted the fact that we are carrying excess balances as [indiscernible] balances in response to COVID stress, we're going continue to carry excess liquidity balances, and a portion of that cost would be pushed out to the business divisions including to GWM and that will have somewhat offsetting effects of what otherwise was positive trajectory into the third quarter.

Comment on the IB, as you highlighted, we were very pleased with our FRC performance and indeed we saw very strong growth year-on-year given the very attractive rates and credit environment, and also very significantly higher FX transaction volumes. I also referenced the fact that we did see an improvement in our euro money rankings from 5 to 2 in our FX electronic trading [indiscernible]. As we look into the third quarter and I believe here Sergio references in Bloomberg, we continue to see good activity levels, at the same time as we progress through the quarter of course, we expect to see the typical seasonality. And I would also reference some - it's unlikely that the overall market conditions will be as conducive particularly the fixed income revenue and trading activity levels as we saw in the first and the second quarter. So all that would suggest that the quarter could remain fairly attractive, but a step down from the levels that we've seen over the last couple of quarters. Now on the banking side, I would just mention that, of course, announced M&A was at extremely low levels in the second quarter, which will impact fees that we will see in the third quarter. Otherwise, we do have a good pipeline of other banking activity. And also given the fact that we are in a position to be able to deploy capital should give us a little bit of help as we go through the third quarter.

And Kirt, can I just follow-up on the NII question from the perspective of loan demand? If you could give us color of where you're seeing that demand and how it's manifesting itself, both geographically and from the perspective of the portfolio?

Yes, the demand overall came from first of all GFO that I referenced and so there is still some quite a bit of a structured lending demand and that's actually where we continue to see a very good pipeline. The more flow lumbar [ph] lending is a little bit mix, because we did see deleveraging in the quarter itself, and so that that lending activity is a bit more muted. And then in addition to that, we continue to see good mortgage activity in the U.S. In fact, in the second quarter, we saw mortgage growth, and we actually had record mortgage loan balances at the end of the quarter. And then geographically, the structured lending demand is really across all of our regions, but a bit more weighted towards Asia and EMEA.

Okay. Thank you very much.

The next question is from Kian Abouhossein from JPMorgan. Please go ahead. Mr. Abouhossein, your line is open.

Yes, apologies about that. The first question is about geopolitical issues, clearly Hong Kong and China, if you can just comment how uncertainty and other issues clearly they are affecting your business, have you seen any impact and do you anticipate any impact going forward either on net new money or client activity levels? And in that context, could you talk a little bit more about your onshore China expansion where we are, what you expect to do in the future and maybe again a little bit discussion around breakeven levels at that point? And secondly, if you could talk a little bit around transaction margins overall in private banking and wealth management, which clearly have been holding up quite well, relative to expectation, I would say, and if you can talk about how you see that developing into the second half in terms of from a very, very strong environment I assume from the first half?

Yes, you know maybe I can answer your second question and then turn to Sergio for your first question. We are pleased with our transaction levels and client activity overall. I think that's the consequence in the first quarter of course, you saw is a very strong start to the year and then you saw the continued engagement around COVID related factors. And what has been driving that is the focus that Tom and Iqbal have been placing on increasing the level of interactions that we've had with clients. And in addition to that, ensuring that at all those points of interaction, we have very strong CIO content in solutions that respond very dynamically to the evolution of the environment. And we found that our clients have been very receptive and that in turn has resulted in some of the transaction levels that you’re seeing. Sergio referenced a bit, how we're using digital through our live streams, that is a good example of how we're using technology to help aid and support our interaction with clients. As I look into the third quarter, I would expect on a year-on-year basis to continue to see good positive momentum. At the same time is – I referenced to the investment bank, we will see some seasonality come into play as we get into August of course and vacation levels, and that could have some quarter-on-quarter impact overall. But I would just close in saying on that point that I do feel really good with what Tom and Iqbal are doing. And that's particularly reflected as well in the GFO I mentioned in my speech that our GFO activity levels and revenue is up over 20% for both the IB and GWM. And I expect that really good collaboration to continue going forward as well to help both businesses.

So Kian, on the geopolitical uncertainties, I have to say that in the last few weeks, we haven't really seen any major impact on the client activity per se. I would say that we are monitoring the situation carefully as clients are doing the same, but I don't really expect any major contraction. I think that if you see this is a trend that has been going on for months and despite that, we have an exceptional quarter in APAC with PBT being up more than 70%. So I'm not overly concerned about that. If I look also in the second half of the year, you know one has to also look at those geopolitical tensions both in Asia, but also in the U.S., as I mentioned before. You should think about 61% of the investor telling you that they will change their asset allocation, regardless of the outcome of the elections, makes me comfortable that there is an element of transaction activity and business that will likely to happen in the second half of the year. So for the time being, we are monitoring the situation in Asia, like we do in Europe as well because with all the ongoing challenges, but I don't see any major developments from the client side. In respect to your question on on-shore China, I think on-shore China investment is a marathon. It's not a sprint for sure and not even a long run, it’s a marathon. And it is clear that we look at those investments for the next generation, but also very importantly short-term. Our on-shore China presence is vital to our Greater China strategy, which includes Singapore, Hong Kong, and all other regions where we are present. So the capabilities and know-how that we built on-shore are critical. Therefore, while we are definitely looking to expand and going to the positive territory in terms of profitability in our consolidated China on-shore strategy, one has to look at it as part of a broader Greater China business. And we will continue to invest like we did in the last decades in Asia and in China. Although of course we may adapt to the pace of – in which we invest to you know from a tactical standpoint of view. But the direction is clear, China on-shore has a great opportunity and although the competition is very fierce from domestic players, but also international players, UBS has long standing and leading position in on-shore China and we are convinced that we will be able to capture the benefits of that over the next few years.

And if I may just very briefly follow-up, in GWM Asia, you have some deleveraging going on in the quarter, which surprised me. Is there anything we should read into this, is it related?

Yes, maybe not necessarily. Yes, it's a good point that you raised and I have to say it’s not really necessarily driven by those concerns. Our potential concerns you raised has to do with the fact that in Asia investors were quite prompt in taking the opportunities in Q1 to build up positions and leverage up and in the second quarter, we saw a lot of profit taking and repositioning of portfolios. So it's not really an issue of risk, but it’s rather, you know some of them did pretty well in the last few months and they think it's understandable. They took off some of their leverage investments.

Yes, which is that of course, it didn't impact the performance at all. You saw the exceptionally strong quarter that APAC had with their pretax up 71% and 11 points of positive operating expense.

Thank you.

The next question is from Adam Terelak from Mediobanca. Please go ahead.

Yes good morning all. Understanding the regulator's view on capital return and why you might be adjusting the dividend accrual for this year, I was just wondering what input on conversations you've had with the incoming CEO about that one? And then moving on to NII and GWM, the guide or the indication for 3Q is very helpful. And I was just wondering what this could look like over the medium term, the next few quarters and how long hedges and replication portfolios take to roll off? And so we can size that a little bit more into 2021 and whether your approach to deposits is changing at all? Clearly, at the moment, the cash is being left out of your leverage denominator in the hopes that that could become a little bit more permanent and whether that changes how you think about gathering deposits, and whether that can be a bit of an input into your NII outlook midterm? Thank you.

So, on your first question I think that we are looking at accruing compensation based on performance and this is something that is a matter of the Board of Directors to opine. So, I guess, I don't really want to expand on that question.

Apologies, the question is on the capital return and whether the incoming CEO has been in those conversations, clearly moving the needle a little bit on plans for 2020?

The conversations, I mean, I think that it would be inappropriate to have conversation with somebody that is still under control still another bank Adam. So I think that is about to start on September 1, and we are looking forward to bringing him up to speed with everything that needs to be done. We are about to start on September 1, and we are looking forward to bringing him up to speed with everything that needs to be done.

Very good.

So maybe on the NII dynamics, so firstly, naturally as our hedges roll off and structurally we do have hedges that come over the next couple of quarters, and will reprice, that will put some further pressure on our net interest income related to U.S. dollar. But also, we continue to see, of course, with the negative rise in Swiss francs and euros that does put forward pressure as well on net interest income. Now, overall, the business remains very focused on offsetting that through continue loan growth. I expect to see good loan growth throughout the second half of the year. In addition to that, the business is also poised to take further action on managing their banking book and their deposit book to try to reduce some of that drag. Now we put that activity on pause until we saw more stability with COVID. But I would expect that once we are a bit more confident in the forward trajectory, we would reinitiate some of that activity level, which should help to take some of the pressure off as well. And then on your point regarding cash overall, I think firstly, we didn't even reference our leverage ratio excluding the cash exemptions, which was at 4.3%. We consider 3.9% comfortably above the 3.7% that we referenced. And at the moment, we're more bound by RWA as we think about our capital deployment and trajectory going forward and I think that's going to certainly continue for the next couple of quarters. And so, we're really not concerned overall about our leverage ratio. Having said that, managing our cash inflows and deposit does impact our funding levels. So that has an impact on our funding cost, which is an area we're focused on as well.

Thank you.

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

Hi, good morning. Thanks for taking my questions and well done on the results. Could we drill down on the FRC business a bit more please? Obviously, very strong FRC revenues there, but again, it's a surprise arguably because you've derisked the FRC business versus peers and it's supposed to be skewed towards FX. So I was wondering if you could give a bit of color on how well FX revenues has done year-on-year and how it stacks up versus rates and credit? And then my second question is on capital return. So you've said that you're going to review the composition of dividends and buybacks, but in aggregate, in context of what you view as excess capital, is there a potential to review also what your target CET1 ratio is? So it's around 13%, of course, but that's quite a large buffer versus 9.7% regulatory minimum. So and as a constraint in fact is there a potential there to bring it down towards like 12%, 12.5% and free up a bit more excess capital? Thank you.

So, thank you, Andrew. Let me take first quickly your first question, which is that, you know, I think that it's not just quarterly. I think it's fair to say that's what you see now where FRC business is the outcome of more of a strategic decision. It is correct that we took off lot of balance sheet and capital consumption in those areas. But as you know, FX is pretty much capital light. And second, when we talked about credit and rates, the investment we made in technology allowed us to capture high margins like a high share of execution only. So we have been very active in execution intermediation, less so by benefiting from positions or markups during the quarter. So I would say that I'm very pleased with the fact that we have been able to – although with a different size in terms of overall absolute revenues, but we are able to capture the benefits of these upswings, the FRC business through technology investments and through executions. So, in respect of your question on CET1 ratio, fair points, I think that we always say that the 13% anchoring, the 13% plus minus was something that should be seen in the transition into the full implementation of Basel III. I would say that from my standpoint of view, yes the most likely outcome is that we will have to review the right capital, the right CET1 ratio of the full implementation of Basel. It is clear when you look at our business that we have been accruing billions and billions of CET1 ratio that the fact or adjustments to the capital required and do not reflect risk taking is just pure non-revenue generating capital. And therefore, it's very natural from my standpoint of view that when once you finish that trajectory, you may want to review the CET1 ratio levels. Yes, we have been using the 13% since almost I started for different reasons. But if I look at our pro forma what it means, today it means, in the old days, probably an 18%, 19% CET1 ratio. So it is clear to me that there is room for adjusting slightly down the target, but it's very premature because, as I said before, we need to see exactly the full outcome of Basel III, and what it means.

That's great. Thank you very much for that.

The next question is from Jeremy Sigee from Exxon. Please go ahead.

Thank you. Good morning. I just wanted to come back on to the capital returns points. I get to the point about rebalancing the dividends. I think that makes a lot of sense. Specifically on the buybacks, your – I thought it was striking your comment about maybe being able to restart buybacks in the fourth quarter. And that's obviously quite a sort of politically loaded topic as well as the dividend. So I just wondered whether you have any sense or indications of what the politics look like about being able to restart the buybacks as early as the fourth quarter, whether you have any endorsements or views from regulators or politicians that encourage you to believe that might be possible? So that's my first question. And my second question really then was, you mentioned in GWM, some of the fee pressure that you experienced in the quarter, a shift from to lower margin funds and lower custody fees. And I just wondered if you could talk a little bit more about what the changes were that caused those negatives and how those play out going forward? Is there more erosion or is there any kind of recovery that we can expect in fee levels in GWM?

So let me take the first question, Jeremy, and then I'll pass it to Kirt for the second. So, as I said before, we are building up this capital, excess capital, I think that it is clear that in many cases we are not the only one flagging that potentially share buyback are something that we could consider, but or please, we are not ruling that out. And most importantly, I do think that it’s appropriate to follow the desire of regulators and in general also, as we said, we also believe that is the right way to be prudent is to look at cash payout versus buyback. We have to start to demonitor – share buybacks have been demonized way too much. I think, actually, share buybacks in an environment like this one, has an excellent – are an excellent way for banks to retain flexibility in their capital return policies. And last but not least, as we all know, with banks stocks and particularly also our trading below tangible are probably also the most natural way to create value for shareholders when thinking about the best way to return capital. But we haven't really shared concrete plans with regulators because it's premature, but of course, we – our commitment was not to do any share buyback until the third quarter at least and then we will revisit the situation where we are in a position to discuss these matters. And this will be based on our capital position then and the outlook in the future. And as I said before, the fact that we will sacrifice in that sense the cash dividend by rebalancing and there is a need for us to consider some share buyback. The headwinds that we have on CET1 ratio if we don't have that, it's quite challenging because we keep putting CET1 on our denominators and therefore it's also a question that is likely so it needs to be addressed from that standpoint of view.

Yes Jeremy, in terms of your second question indeed, over the past year and quarter-on-quarter, we did see some margin compression that was driven by some mandate factors in particular year-on-year about half of it was a mandate mix. And that included a combination of clients actually preferring to move into advisory versus managed mandates that carry a lower margin, along with segment mixes as we continue to build up our GFO and our ultra high net worth versus our high net worth business naturally they do come in with larger volumes, but lower margin overall our mandates. And then there are the non-mandate factors that I mentioned and specifically, we did see clients move out of active into passive funds, lower margin passive funds along with lower custody fees. On the custody fee side that dynamic is generated, if you bring in a client with very significant single stock position for example, you generally have far lower custody fee arrangements than you do for clients, smaller clients with diversified portfolios. And again, that's going to be the dynamic of our segment mix going forward. The business is very focused on managing that margin. I think there's a combination of actions that they're taking. Firstly, its introducing additional managed semantic funds that we think will have very good take up. Also it is emphasizing the fact that actually our managed portfolios have performed very, very well in the current environment. We think that's going to help the client, encourage clients to move into those products. And then in addition to that, we think there's a big opportunity in the private equity space and there specifically also with some of the initiatives with the investment bank in terms of emphasizing private markets, we think that will help our margins overall. But you can expect that longer term there will be continued pressure on margins that we're going to have to address through volumes and other fee activity including other areas and opportunities we have with the investment bank and asset management.

Thank you very clear. Thank you.

The next question is from Nicolas Payen from Kepler Cheuvreux. Please go ahead.

Yes, good morning, thanks for taking my question I have two please. The first one is regarding rating migration. Do you think you will see the bulk of rating migration in 2020, and if not can it actually lead to higher digital expenses in 2021 versus 2020? And the second one is that you have been protective in terms of digital initiative or insurance partnership, and you’re referring to your mortgage origination platforms Q4 or your life insurance partnership with CLE [ph]? And I wanted to know if you could give us a bit of color as to what were your expectation in terms of your accretion, market share and strategic goals behind this move? Thank you.

Thank you, Nicolas. In terms of rating migrations, we did see an impact during the second quarter and that both showed up in terms of the downgrades and about $5 billion of incremental RWA that we more than offset through mostly through loan distributions. The IB completed about $7 billion of loan distributions during the quarter. So we did overall minimize the impact on our increase in RWA. But then in addition of course, as you mentioned there was an impact on CLEs. And so, the concentration in Stage 1 and Stage 2 that $202 million, a portion of that was certainly driven by rating migrations, and overall reductions or increases in probability of default. Now given that we fully updated of course, our scenarios during the quarter and that would model through, you would expect that all future ratings migrations would have been anticipated by the current model scenarios and macroeconomic assumptions we have in the quarter. So therefore, assuming we don't have any further deterioration overall in our outlook in either the weighting of our current scenarios or any changes in those factors that are precipitated by a further deterioration and outlook, you would expect the majority of rating migrations have already taken place and we would not anticipate any further rating downgrades into the third and the fourth quarter of this year. But again, that assumes that the outlook remains as it is and we know with an important caveat, that there's still a lot of uncertainty around the future. On the – excuse me – yes there has been a focus on our P&C business, of course as you know, we are a digital leader in the Swiss marketplace, and that includes deploying digital platforms and capabilities in our core business and we've been very successful in doing that. We've seen a significant take up on those digital offerings and particularly in this environment we've seen a very substantial increase in online product sales, as well as the course online activity overall. But then in addition to that, we have looked at of course how we would expect the Swiss market plays to evolve. And it is very clear that there is some - we are going to see a proliferation of platform businesses and third-party originators. And we already started to see that. We actually were one of the leaders with our commercial real estate platform business that we launched, that's been quite successful. But we're expanding that out more broadly to launch a residential product with K4. And it's not just going to be about mortgages, but it's going to be about building out a broader ecosystem with other third-party offerings to address the full range of financial requirements of our target client bases. You've seen that successfully deployed in other markets, and we're quite optimistic that we have the opportunity to be a leader leveraging our UBS platform, but then also of course, creating in some cases, some cannibalization of part of the business we otherwise would have seen in that business. And we think that that’s right move to retain overall our retail financial services share in the Swiss marketplace.

Thank you.

The next question is from Amit Goel from Barclays. Please go ahead.

Hi thank you. Most of my questions have been answered already, but maybe one just in terms of the GWM strategy. Just to check in terms of the tweaks or changes announced earlier this year obviously, we’ll see the increase in lending in the quarter and are most of the changes basically in place now in terms of the collaboration with the IB and the setup for integrated lending against more illiquid collateral et cetera or is there still a bit more work to be done? And then maybe a second one, just in terms of now for kind of the remainder of the year, what are the kind of strategic priorities obviously with Ralph coming in, I guess there will be some change, but just to think what you're trying to work on in anticipation or during the next few months? Thank you.

Yes, let me answer your first question. Sergio will address the second. First just to clarify, we announced in 2018, when we had our Investor Update, the intention for us to accelerate our lending in our wealth management business. And that included a focus in particular on structured lending, acknowledging that we did have – not have our fair share of wallet and actually executing that through increased collaboration with the investment bank. And you've seen that focus all the way through 2019, and then with Iqbal on-board and you've seen Tom and Iqbal continue to focus on loan growth, I would say that the results to-date are quite positive. We have taken steps to build a much closer structural collaboration between GWM and the IB. That's helping to facilitate growth in loans. I think that will continue to help to drive that growth through the second half of the year. But it's not just around lending, it's also around capital markets activities, where we talked about moving our execution platform into the IB and we're seeing very good activity levels there. You saw that we indicated that the partnership with the IB and it's across a broad range of areas including private markets, which I referenced before where we seen $34 million of revenue generated off of 30 deals here today. I only see upside growth from all of those areas as we venture into the second half of the year and beyond.

So well, look in respect of our priorities, as I mentioned before, the priorities are crystal clear. We have to manage this environment in a very challenging one, staying close to clients, deploy resources focusedly and execute on our 2022 priorities. So I don't think that there is any room for being distracted by speculations about what Ralph will do when he comes in. It's going to be up to him to outline to say in Q4, when he speaks about Q4 results. For the time being, we are focused on executing our strategy.

Thank you.

The next question is from Tom Hallett, KBW. Please go ahead.

Good morning guys. Just a one on credit from me. If I look at your loan loss allowances on, I think it’s Page 80, those went up around 90 basis points from the large corporate book, which is similar to the U.S. there. But the SME client loans seemed to decrease something about 60 basis points, which was surprising. I was just wondering what is driving that please? And then whether there's a timing thing involved there, and whether you'd expect that to go higher in say 2021, when some of the support measures roll off? Thank you.

Yes, Tom, thank you for the question. Frankly, I don't have all those details in front of me. So we'll have to get back to you on that question.

Yes.

The next question is from Jon Peace from Credit Suisse. Please go ahead.

Hi. Could I just please ask three quick clarifications? Firstly, on global wealth gross margin. Did you say monthly revenues were consistent across the quarter and does that also apply to transaction margin? So do you consider that to the kind of normalized run rate then? The second question was just on the dividend. If you were to rebase it, are you’re thinking to a low level but can be progressive or would you move to a payout ratio that could be really flexible both upwards and downwards on a year-by-year basis? And does the French tax appeal timing have any bearing on your decision there? And then the final one is with the full year 2019 results, you reminded us of your 2020 to 2022 targets, you know, things like the return on the CET1, the cost income ratio of 75% to 78% and the 10% to 15% growth in global wealth PBT. Obviously, 2020 is an exceptional year. But do you still stand by all of your 2022 targets? Thanks.

Yes, in terms of your first question, indeed, we saw a fairly steady overall operating income levels for – through the three months of the quarter, including reasonably consistent overall transaction revenue levels. I wouldn't call that a current run rate view because we will be impacted by seasonality and there are seasonal factors that we would expect in August for example and on the positive side, naturally when we would get into the first quarter. But I do think that the consistency is something that Iqbal and Tom are striving for and in particular ensuring that we have consistently high contact levels with clients. So that should help to generate greater consistency going forward.

Yes Jon, on the dividend side, first of all, I guess once we decide what is the new final mix, I think that I do personally believe that there has to be an element of progressive growth in the dividend line reflecting, hopefully, what I believe is the growth prospects of UBS over the years. And therefore, I would say that there has to be an element of that. So the pace of that progressions and should be measured also not only as a function of profitability, but also as a function of where the stock trades. Personally, I do think that, as I mentioned before, one of the advantage of this rebalancing is that as long as the stock trades below book, we should have also a very good look at that element when we consider capital returns. So, but it's very premature to talk about it, but I believe that the attractiveness of the capital return story probably needs to have an element of progression in the cash dividend. Of course, your question about the French matter as you remember, we already outlined at the beginning of the year that the French matter would require us to consider carefully how to manage the 2020 capital returns and the fact that the trial was delayed by a few months is still something that needs to be considered finishing 2020 and going into 2021. But we see this as one off issue rather than a structural issue affecting our capital returns. In respect of the 2020, 2022 targets, I think if anything, I don't really believe that the fact that we are well within our targets so far is just out of the six months conditions we face. I would say that what we use so in the first six months first of all is also a more balanced market condition where market volatility and asset allocation by clients has been less static than what we saw in the last two years. We start to see also the benefits of our cost reduction programs. But of course, we are still investing in our business going forward. But the investments are paying off in terms of our ability to capture larger share of wallet market share and therefore driving our topline. And in that sense, I only would say that we got higher conviction level that those levels of returns are achievable and we need to stay very focused on executing on the strategy. So I see no reason from my standpoint of view to revise the target or reconsider any of those targets.

Great, thank you.

The next question is from Anke Reingen from Royal Bank of Canada. Please go ahead.

Hi, yes, thank you very much. I just had two follow-up questions please. I'm sorry again on the capital return. You mentioned in your press release that the focus is on maintaining the capital return at historic levels. Are you basically referring to absolute as the [indiscernible] outlined in 2018 levels? And then, secondly, just on your dividend accrual for the first half. Did I understand you correctly that you sort of like already adjusted it in line with your comment similar dividend payout ratio to U.S. peers? Thank you very much.

So let me tackle that. Yes, on the second question, you are right. We already - as I mentioned in my remarks, our thinking in respect of rebalancing the mix between - in our capital return policy is already reflected in our accruals for this year. And in respect of the second questions, I think as I mentioned in my remarks in 2020 is clearly a year in which COVID will affect our capital returns. But beyond that, we do expect total payouts to be similar to what we saw in the previous periods before 2020. So with the capital generation and we expect over the years we don't see any reason for us to retain excess capital that is not strictly necessary to manage our business outlook going forward.

Okay, thank you.

The next question is from Patrick Lee from Santander. Please go ahead.

Hi, good morning. Thanks for taking my question. I just have one on IFRS 9 and then one on the retrofit asset sensitivity. First on the IFRS 9 and thanks for the economic scenario disclosure on page 20, and I don't think it was disclosed in a similar way in the last quarter. And while there are obviously a lot of moving parts, can you give us a few in terms of sensitivity to these assumptions? So for example, whether GDP is much more important or less important than unemployment, or whether there is some sort of a simple sensitivity like if 2021 GDP is higher by X percent equals, Y percent lower impairment charge or even right mix? So, there is on IFRS 9. Secondly on risk-weighted asset, I think one general theme so far is that risk-weighted asset inflation is lower than expected. And I think on slide 31, you provide the interesting risk weighted sensitivity saying that 20 basis points of CET if corporates downgraded by one notch. I just want to check, is that like a hypothetical one notch downgrade of all corporate exposure, because you know assuming some sector more resilient than other, it seems like corporate downgrades is not going to affect your risk-weighted assets that much? So that's it from me? Thanks.

Yes Patrick. On your question regarding sensitivity that factors, you can't really generically indicate that if GDP goes up or down, then that's going to impact CLE by X, because the modeling really is quite complex. Now the most dominant factors that do affect our CLE is GDP growth, unemployment, and then housing costs of course, influencing mortgage CLEs in particular. But the mix of those factors and how they affect each of the portfolios is quite different depending again on the nature of the exposures and so therefore there's a quite a bit of complexity in the modeling overall. And then on top of that, you have not only the statistical modeling that we run, which is the pure output, and you see that it was 127 on 2019. But then you have all the SME expertise and the overlays and the other considerations like our modeling is not going to be able to reference the impact of stimulus. So how would we expect that to play out? Well that's something that where we have to use our expertise to be able to impact. So it is much more intricate and complex than that. In terms of the RWA side, you should take that $5 billion is just an order of magnitude an approximation where we do, do kind of an across the portfolio estimation of what one notch downgrade would do in terms of our RWA sensitivity.

Okay thanks.

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

Yes, good morning from my side as well. I think you've covered a lot of ground. I just have maybe three short questions left. So first of all Sergio on the last conference call on Q1 conference call, you pointed out that you were hopeful that some of the regulatory loosening which was put in place when COVID really struck would become of a permanent nature rather than of a temporary nature? And I was just wondering whether you had any additional thoughts on the topic, i.e. is do you feel that the regulatory discussion is moving in this direction that some of these changes become permanent? The second question I have is on this slide which is over here a descriptive nature on Page 9. So when you talk about how this public health crisis is changing the way you work and accelerating the pace of change. Just a question for a concrete example on real estate that you called out in particular, I mean, is it as simple to say that you expect that in the future, a larger portion of your population will be working from home and therefore you'll require less office space or is it more complicated than that? And when you think about the quantum of that impact, how important is this? Are we talking about a percent of the cost base, higher or even lower? And then the last question I have is on Page 17. Throughout your presentation, you referred to the return on core equity Tier 1 as being the right metric when benchmarking UBS versus peer group. Why when it comes to the investment bank are you using return on average equity? Thanks very much.

So look on the first question, I think that I haven't seen any concessions that have been deployed, which by the way, I want to underline that we are benefiting nothing from. So we have zero concessions that order than the leverage one which we are not using or reporting to because as Kirt mentioned before, we are more bind by risk-weighted assets at this stage. And so, I don't see any trend, which I believe most likely regulators will take the lessons learned out of the COVID and make an analysis of if and when they want to reconsider some of those changes going forward. I think it is - personally I think that the fact that some of them have already highlighted the necessity of thinking about the pro-cyclicality of certain regulations and that is already a positive also the fact that they may or may not slightly delay again the Basel III for implementation. I see it also as a positive signs of willingness to engage. But I haven't seen anything concrete emerging, and it's probably not the right thing to do postmortem analysis. I think that we should wait till probably the end of the year or the early part of next year to do that. In terms of the acceleration and we have been already looking at our real estate footprint, but one thing is clear out of this crisis, everything that was designed towards recovery site business continuity, management. So the concept of business continuity management has been dramatically changed by COVID. So and of course, we are already starting to put a lot of thoughts about how to manage that, but also then, as I mentioned before, how to think about two elements of flexibility of the workspace. One is, offices where we have our people are serving clients or helping in the infrastructure. Today, we have, call it 70%, 80% of the people who are working from home. I do expect and we do expect probably over time that we will have on a regular basis between 20% and a third, up to a third of the people regularly working from home, but not necessarily always the same people. And that means that we will have our space will be designed to allow this flexible environment allowing us to - save space. So the fact of, as it's already going on it's nothing new, but there is an acceleration that more and more you will have situations in which people don't have necessarily their own desk, but they have a space in which they need to share. And that creates a lot of flexibility in the way we manage our real estate footprint. The second one is, what we have been observing before COVID and during COVID is clear that clients are getting used to use technology and digital channels and different way to interact with us. And therefore our branch and physical presence also in the way we serve clients will be reshaped. Now, I think it's very important that we understand that being too fast in addressing that second part of the elements may create very nice headlines in terms of potential cost savings, but can cost you a fortune in respect of the revenue you lose and the client traction you lose. So, we are carefully balancing all those things towards creating and keeping economic value to shareholders and keeping the service quality that we want to achieve. In respect of the last question that I know is your – one of your favorite topic – and we measure every business with allocated capital – returns on allocated capital. So, we do the same for wealth management, the IB, P&C and asset management and there is no reason to treat the IB in a different way. So the CET1 ratio, actually if you look at their consumption is very close to – it’s a mix between CET1 component and leveraged components, which is a good mix to reflect their true capital consumption on a CET1 basis.

And maybe just to clarify, because I think your question was why is this return on average equity, it actually means return on allocated equities [indiscernible] so that's look like a proxy for the CET1 consumption?

So this is what I say, it’s basically a mix of 50% CET1 and 50% weighting towards leverage. So it's very clear hence with our total capital, and so if you look at the capital allocation it is pretty spot on.

Thanks very much. Just sorry just one short follow-on on the on the second answer, so Sergio, you think that 20% of your workforce could permanently work from home right, did I get that right or was it?

Yes, I think between, similar look, it is still subjective you know. Sabine Keller-Busse, our COO thinks that we can even go toward her, you know at this stage it is not important if it is 20% or 30%. That directionally speaking, we are moving there. But we're not going have 80% like today, because at the end of the day, we can go on for another few quarters in managing the bank in this way, but over time, as I mentioned before, in our business, particularly in the wealth management and in everything which has to do with advisory, but also in the culture of a firm, you can't have everybody working from home. You're going to have to have social interactions and staying so to clients. So, we're going to move maybe from an 80/20 to a 20/80 or 30/70, I don't know. It's not so important. But if you think about the ramification of only 20% or 30% of the people working from home is huge.

Yes.

Now some people are saying, on the other hand the future will lead into two-folds. Now maybe if you do the same business over time you will need less people, right that's natural. But also people are saying maybe the pandemic will require more space in the office to separate people. But you know that’s between one to the other, so – the mix is – the discussion is very wide. So it's difficult to make a prediction on the precise number, but the direction of travel is set and we are working with that.

Yes perfect, thank you very much.

Okay, so looks like we have no more questions. So thank you for joining us on this call today. I wish you a good summer break and I'm looking forward to see you for the last time in my current role for the Q3 results in October. Thank you.

Thank you and you can now close the call and wish you all a great day.

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