DBRS Ratings Limited (DBRS Morningstar) confirmed the Long-Term Issuer Rating of UBS AG (the Bank) of AA (low) and the Long-Term Issuer Rating of UBS Group AG (UBS or the Group), the top-level holding company, of A (high). The trend on the long-term ratings is Negative. The Bank’s Intrinsic Assessment (IA) is AA (low) and the Support Assessment is SA1. The Group’s Support Assessment is SA3.
Credit Suisse Group AG, the former holdco of Credit Suisse AG (Credit Suisse or CS), has now ceased to exist upon the completion of its acquisition by UBS. DBRS Morningstar is consequently withdrawing its ratings on Credit Suisse Group AG. However, the operating bank, Credit Suisse AG, continues to operate under UBS Group AG. DBRS Morningstar applies a SA1 support designation to all Credit Suisse’ entities to reflect the expectation of strong and predictable support from UBS. As a result, DBRS Morningstar also confirmed the Long-Term Issuer Rating of Credit Suisse of AA (low), with a Negative trend.
See the full list of ratings in the table at the end of this press release.
KEY RATING CONSIDERATIONS
On June 12 2023, UBS Group AG completed the acquisition of Credit Suisse Group AG, with the holdco of Credit Suisse being merged into the holdco of UBS. UBS Group AG will manage two separate operating companies: UBS AG and Credit Suisse AG, with each entity continuing to have its own subsidiaries, branches, and clients.
Considering UBS’ long history in operating in different geographies that has allowed the Group to build up relationships and expertise over time, DBRS Morningstar expects UBS to maintain its leading position in Global Wealth Management (GWM), with the acquired businesses clearly strengthening UBS’s franchise in this segment. The confirmation of UBS’ ratings takes into account DBRS Morningstar’s expectation that UBS can maintain business momentum in a complex environment.
The Negative trend reflects the high degree of execution risks associated with the significant size of the acquisition at a time of elevated market uncertainty. UBS has demonstrated its ability to generate strong earnings, however, DBRS Morningstar sees UBS’ main challenge as restoring the underlying profitability of the CS businesses.
The long term ratings would return to Stable if the combined entities’ credit strength is maintained in spite of a likely lower capacity to generate earnings during the integration, and if execution risks are well managed.
Negative pressure on the long term ratings would occur if the combined franchise materially weakens, profitability levels significantly decrease, and/or if significant integration issues materialise.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
Following the acquisition of Credit Suisse, UBS is the surviving entity and Credit Suisse’s shares have been delisted. The acquisition confirms UBS as one of the largest international financial institutions globally. In particular, the acquisition strengthens UBS’ position as the leading Swiss-based global wealth manager with more than USD 5 trillion in combined invested assets on a pro forma basis as of year-end 2022.
The transaction also reinforces UBS’s position as the leading universal bank in Switzerland with a major retail and commercial banking franchise in Switzerland. Outside Switzerland, the combined Group is present in the Americas, EMEA, and Asia Pacific, and is particularly focused on the Ultra High Net Worth (UHNW) and High Net Worth (HNW) segments.
UBS has an Investment Bank (IB) that provides services that includes advisory, equity underwriting and equities and FX trading services, with particular strength in equity derivatives in EMEA and APAC. IB is not expected to grow significantly, with the majority of Credit Suisse’s market positions expected to be moved to a non-core division. The combined IB businesses will account for approximately 25% of Group risk weighted assets (RWA) over time.
Earnings Combined Building Block (BB) Assessment: Strong/Good
The performance of the enlarged UBS is likely to be negatively impacted by the Credit Suisse integration and the restructuring in the near- to medium-term. For example, in Q1 2023, all the CS business divisions were loss making in terms of income before taxes (IBT), except for the Swiss Bank’s operations. At the same time, UBS was generating solid profitability, benefiting from the strategic initiatives that were implemented to reposition its wealth management business.
In Q1 2023, UBS reported net profit attributable to shareholders of USD 1.0 billion, down from USD 2.1 billion in Q1 2022, representing a Return on Tangible Equity of 8.1% in Q1 2023, or 14.7% on an underlying basis (mainly excluding the additional provisions for the US RMBS case), which compared to 16.0% in Q1 2022, 13.3% in 2022, 12.6% in 2021, and 11.3% in 2020.
UBS will benefit from downside protection. This includes the Swiss Confederation providing guarantees up to CHF 9 billion for potential losses on a portfolio of certain Credit Suisse assets that represent around CHF 44 billion of Credit Suisse’s leverage exposure, that UBS acquired as part of the transaction, if these losses exceed a threshold of CHF 5 billion.
Risk Combined Building Block (BB) Assessment: Strong/Good
UBS’ focus is to execute on the integration of Credit Suisse and implementing the Group’s long-term strategy. The combined Group has a dominant footprint in Switzerland and extensive Wealth Management activities with a strong asset quality profile. Nonetheless, DBRS Morningstar is taking into account the elevated operational integration risks UBS will be facing in turning around the newly acquired Credit Suisse.
UBS has a generally conservative risk profile reflecting the credit and market risk characteristics of its main businesses, especially in wealth and asset management, with sound asset quality, and DBRS Morningstar does not expect Credit Suisse’s credit risk profile to be a concern given similarly solid asset quality metrics.
We will continue to monitor the Group’s reputational risks, including legacy issues. UBS remains subject to certain investigations, although these are largely provisioned for. UBS Group had total provisions for litigation, regulatory and similar matters of approximately USD 2.6 billion at end-2022, of which approximately USD 1.3 billion were within Global Wealth Management. Credit Suisse has a number of outstanding litigation cases and operational risks, and we note UBS has indicated in its disclosures additional USD 4 billion in litigation provisions based on IFRS 3 recognition of possible outflows, although realised amounts are highly uncertain.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong
Morningstar considers UBS’s funding and liquidity are robust, supported by a large and stable deposit base, benefiting from the Global Wealth Management (GWM) business and the strength of UBS’s banking franchise in Switzerland. Q1 2023 results demonstrated a still solid level of confidence, while the pro forma loan-to-deposit ratio at end-2022 was 87% for the combined entity. Deposits could nonetheless be less sticky in the future. At the same time, UBS has substantial liquidity available to carry out the integration of Credit Suisse as the Swiss National Bank is granting the Group very significant access to liquidity lines.
Capitalisation Combined Building Block (BB) Assessment: Strong
Despite the Group likely seeing reduced underlying earnings further to the acquisition of Credit Suisse, we expect UBS's capital position to remain strong. UBS reported a fully-loaded Basel 3 CET1 ratio of 13.9% at end-Q1 2023 down from 14.2% at end-2022, and 15.0% at end-2021, and well above the approximately 13% CET1 ratio guidance from the Group, which compares well to peers. UBS expects its CET1 capital ratio to be around 14% at end-Q2 2023 and throughout 2023.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/416193
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Governance (G) Factors
DBRS Morningstar views Business Ethics and Corporate Governance as relevant rating factors for UBS’ ratings.
DBRS Morningstar notes UBS is taking on Credit Suisse’s liabilities/outstanding litigations but that they have been reportedly adequately reserved for. There are two major outstanding cases for UBS: (i) the French tax case and (ii) the RMBS case in the US. Our expectation is that the final economic and reputational impact of these cases will be manageable for the Group.
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 (17 May 2022) at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
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/global-methodology-for-rating-banks-and-banking. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies
The sources of information used for this rating include Morningstar Inc. and Company Documents, UBS/CS Pro Forma Accounts Presentation published on 12 June 2023, UBS 2022 F4 Registration Statement, UBS Group AG Annual Report 2022, UBS Group AG Full Year and First Quarter 2023 Financial Results Documents, Swiss National Bank, FINMA. 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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/416192
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: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: 17 May 2010
Last Rating Date: 31 March 2023
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