DBRS Ratings Limited (DBRS Morningstar) confirmed the Long-Term Issuer Rating of UBS AG (the Bank) at AA (low) and the Long-Term Issuer Rating of UBS Group AG (UBSG or the Group), the top-level holding company, at A (high). All the Short-Term ratings were confirmed at R-1 (middle). The trend on all the ratings is Stable. The Bank’s Intrinsic Assessment (IA) is AA (low) and the Support Assessment is SA1. The Group’s Support Assessment is SA3. See the full list of ratings in the table at the end of this press release.
KEY RATING CONSIDERATIONS
The confirmation of UBSG’s ratings reflects the Group’s global and diversified franchise in wealth management, its strong investment bank and asset management business, and the leading banking franchise in its home country of Switzerland. DBRS Morningstar is also taking into account the Group’s solid profitability in a more challenging environment. The Group’s asset quality remains sound. Funding and liquidity is robust, while its capital position is also strong. In addition, DBRS Morningstar considers that UBSG’s capacity to generate earnings and solid capitalisation should provide a significant cushion to absorb any potential fines arising from outstanding litigation cases. At the same time, we do not expect these to materially impact the Group’s franchise.
UBSG’s Long-Term Issuer Rating is positioned one notch below the Bank’s IA reflecting the structural subordination of the holding company.
The Long-Term ratings would be upgraded if the Group demonstrates sustainable growth in profitability while maintaining its current robust risk profile and reducing its significant pending litigation.
A downgrade of the Long-Term ratings would arise if there is evidence of any material weakening of the core franchise, risk profile and/or capital.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
UBSG is the largest global Wealth Manager, and has a leading franchise in retail and commercial banking in Switzerland as well as a strong Investment Bank (IB) that provides services that include advisory, equity underwriting and equities and FX trading services, with particular strength in equity derivatives in EMEA and APAC. In Global Wealth Management (GWM), in addition to its home market, Switzerland, the Group is present in the Americas, EMEA, and Asia Pacific with a particular focus on the Ultra High Net Worth (UHNW) and High Net Worth (HNW) segments. The Group had total invested assets in GWM and Asset Management businesses of USD 3.7 trillion at end-Q3 2022.
Earnings Combined Building Block (BB) Assessment: Strong/Good
UBSG has been generating solid profitability, benefiting from the strategic initiatives that were implemented to reposition its wealth management business, whilst also taking advantage of its investment banking franchise capability over the past three years. The Global Wealth Management (GWM) businesses experienced strong growth in FY21 (revenues up 19% YOY in FY21) and demonstrated resiliency in a more adverse environment (stable revenues YoY in 9M 2022 compared to strong year in FY21). GWM is the largest contributor to Group’s revenues, and benefitted from supporting markets in FY21 with strong growth in recurring fee-based income, and growth across all geographies, particularly in the Americas in FY21. While this trend has reversed this year, the Group’s exposure to net interest income has offset some of the revenue pressure in 9M22. IB revenues, the second largest contributor, declined 19% in 9M 2022 YoY due to lower Cash Equities and lower Financing reflecting depressed equity markets. Overall, UBSG reported net profit attributable to shareholders of USD 6.0 billion in 9M 2022 (including around USD 1 billion of gains on sales), stable from USD 6.1 billion in 9M 2021. The Group’s Return on Equity was a solid 13.7% in 9M 2022, compared to 13.8% in 9M 2021, and well above 8.9% in 9M 2019.
Operating expenses excluding litigation and FX were up 1% in 9M 2022 YoY, with inflationary pressure on salaries, technology and consulting costs offset by variable compensation. The Group’s cost-to-income ratio was within targets at 71% in 9M 2022, while allowing strategic growth and digital capabilities also thanks to the ongoing execution of the USD 1 billion gross cost saving programme by 2023, announced in early 2021. Meanwhile, credit cost remained very low. In 9M 2022, credit loss was USD 22 million, up from credit reversals of USD 121 billion in 9M 2021 but well below USD 628 million taken in 9M 2020 during the pandemic.
Risk Combined Building Block (BB) Assessment: Strong
UBSG has a conservative risk profile reflecting the credit and market risk characteristics of its main businesses, especially in wealth and asset management, with sound asset quality. UBSG has low levels of gross impaired loans (stage 3). Stage 3 loans to customers and financial advisors totaled USD 2.4 billion at end-Q3 2022 down from USD 2.8 billion at end-Q3 2022, and below USD 2.6 billion at end-2019. Stage 3 loans to customers and financial advisors ratio (as calculated by DBRS Morningstar) were about 0.6% at end-Q3 2022, improved from 0.7% at end-Q3 2021, 0.9% at end-2020 and 0.8% at end-2019.
However, in terms of operational and reputational risks, the Group remains subject to investigations. UBS Group had total provisions for litigation, regulatory and similar matters of USD 2.7 billion at end-Q3 2022, up from USD 2.1 billion at end-Q3 2021, of which USD 1.2 billion was within Global Wealth Management.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong
The Group’s funding and liquidity position is strong, supported by a large and stable deposit base, benefiting from its GWM business and the strength of its banking franchise in its home country. Customer deposits totaled USD 496.2 billion at end-Q3 20222, largely supported by deposits in GWM and P&CB. The Group has well-diversified funding sources across various markets, products and currencies. At end-Q3 2022, the Group reported a sound liquidity coverage ratio (LCR) of 162.7%, and a Net Stable Funding Ratio (NSFR) of 120.4%.
Capitalisation Combined Building Block (BB) Assessment: Strong
UBSG's capital position is strong thanks to the group’s solid capacity to generate earnings. UBSG reported a fully-loaded Basel 3 CET1 ratio of 14.4% at end-Q3 2022, vs. 14.9% at end-Q3 2021, and well above the approximately 13% CET1 ratio guidance from the Group, which compares well to peers. The CET1 leverage ratio was 4.51% at end-Q3 2022 from 4.31% the year before. UBSG is required to meet a minimum Basel 3 CET1 leverage ratio of 3.5%. The group aims to repurchase approximately USD 5.5 billion worth of shares in 2022, of which USD 1 billion was purchased in Q3, bringing the buyback 9M 2022 total to USD 4.3 billion.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/405311
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Governance (G) Factors
DBRS Morningstar views Business Ethics and Corporate Governance as a relevant rating factors for the Group’s ratings, with these were reflected in the Franchise and Risk building blocks. At present, there are two major outstanding cases for the Group: (i) the French tax case and (ii) the RMBS case in the US. (i) In February 2019, a French court found the Group guilty of unlawful solicitation of clients on French territory and aggravated laundering of the proceeds of tax fraud and imposed a fine of around EUR 3.7 billion on the Group and civil damages of EUR 0.8 billion. The Group has appealed the case. In FY21, the actual penalty was EUR 1.8 billion, of which EUR 3.75 million fine, EUR 1 billion confiscation, and EUR 0.8 billion damages, representing an important step down in charges. However, UBS has filed another appeal with the French Supreme Court to preserve its rights. The notice of appeal enables the Group to thoroughly assess the verdict of the Court of Appeal and to determine next steps in the best interest of its stakeholders. The fine and confiscation imposed are suspended during the appeal, but the civil damages of EUR 0.8 billion were paid. At Q3 2022, The Group had provisioned EUR 1.1 billion (up from EUR 450 million initially) for this case. (ii) The second case is related to legacy RMBS in the US. In November 2018, the US Department of Justice filed a civil complaint relating to the issuance, underwriting and sale of 40 RMBS transactions in 2006 and 2007. Our expectation is that the final economic and reputational impact of these cases will be manageable for the Group due to the Group’s strong franchise and its financial and capital position.
There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (17 May 2022)
All figures are in USD unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022). https://www.dbrsmorningstar.com/research/398692
In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.
The sources of information used for this rating include Morningstar Inc. and Company Documents, UBS Annual Reports (2015-2021), UBS Quarterly Reports (2015 Q1-2022 Q3), UBS Earnings Presentations (2015-2022 Q3). DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/405310
This rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Vitaline Yeterian, Senior Vice President - Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Ratings – Credit Practices Group
Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: May 17, 2010
Last Rating Date: November 16, 2021
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