© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good morning. Welcome to the UBS fourth quarter 2018 presentation.[Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to UBS. Please go ahead.
Good morning. Martin Osinga from the investor relations team. Welcome to our fourth quarter 2018 results presentation.I'd like to remind you that today's call may include forward-looking statements. These statements represents the firm's beliefs regarding future events that by their very nature may be uncertain and outside of the firm's control. Our actual results and financial condition may vary materially from these beliefs. Please see the important information slide and cautionary statements, including in today's presentation, on the discussion of risk factors in our annual reports for a description of some of the factors that may affect our future results and financial condition.I'll now hand over to Sergio.
Thank you, Martin. And good morning, everyone.For those of you who don't know, Caroline has been promoted to CFO of the Investment Bank, so as you can hear, Martin is now in the hot seat.As we told you in October, we changed our functional currency, and we are reporting in U.S. dollars for the first time today. The change will bring material benefits to our NII and improve our risk and capital management. It required a lot of work behind the scenes, so a big thank you to our colleagues who made it happen smoothly.Now on the quarter. You are well aware on how tough market conditions were out there. Equity markets had one of the worst Q4 performances since Great Depression. The convergence of macroeconomic, geopolitical and geoeconomic concerns continued to negatively affect client sentiment, which along with negative seasonality factors had an impact on liquidity, creating a bitter cocktail. As a consequence, both private and institutional client activity dropped significantly and much earlier than usual for a fourth quarter, and market conditions were very tense in the last 2 weeks of the year. Despite this very challenging backdrop, we again showed the strength of our strategic choices and diversified franchise, delivering a resilient performance in the quarter.PBT was up slightly to $862 million, with a 4% reduction in expenses, more than offsetting external revenue pressures. The various onetime income adjustments in both years largely canceled each other out. Our net profit increased by 1/3 to around $700 million, adjusted for last year's impairment related to the U.S. corporate tax law changes.The fourth quarter closed what was a very successful year for us. Our net profit increased by 25% to $4.9 billion. We again demonstrated our model's capacity to delivering under various market conditions in a year when nearly all asset classes had negative market performance.In the first year of combined operation, Global Wealth Management reached a decade-high pretax profit of $4 billion driven by record results in the net interest and recurring fee income. The Investment Bank also had a particularly good year, with pretax profit up 29%, supported by higher Equities and FRC results while maintaining cost and resource discipline. Personal & Corporate Banking delivered nearly $2 billion in earnings, helped by gains on the SIX worldwide (sic) [ SIX-Worldline ] transaction, which mitigated NII headwinds. Asset Management performance improved throughout the year, helped by cost actions offsetting pressures on invested assets and the impact of previous year's disinvestments.Net new money was $32 billion, a 4% growth rate, so far comparing very well with the industry.We delivered 3% positive operating leverage, and we increased revenues and reduced expenses. Costs went down by $432 million despite higher technology spend and regulatory costs. Most of the gains were driven by continued curbing of restructuring expenses and lower litigation. Reported cost-income ratio improved by 3 percentage points to 79%, and we remain committed to lowering it further.Our business model is geared towards high capital generation. We deliver attractive shareholder returns while maintaining a strong capital position and investing for growth. In 2018, we accrued for a higher dividend and exceeded our share buyback goal by CHF 200 million. At the same time, TLAC increased to over $84 billion, and we meet our regulatory capital requirements a year ahead of their full implementation. We intend to propose an 8% increase in our dividend to CHF 0.70 per share, consistent with our capital returns policy. Combined with the share buyback of CHF 750 million, our total payout ratio will reach 70%. In 2019, we plan to repurchase shares worth up to $1 billion.The UBS franchise is unique. We are the only truly global wealth manager. Our businesses is diversified geographically, and we are well positioned in the largest and fastest-growing markets. More than half of our profits comes from asset-gathering businesses, and our Swiss business further contributes to the stability of our earnings. The strength of our franchise has clearly been on display over the last 5 years, a period during which we generated $19 billion in net profits. As we put our legacy and restructuring issues behind us, adjusted and reported profits have been converging. Through increased operating profitability, we were able to add to our capital and offer attractive shareholder returns, all while absorbing nearly $9 billion in regulatory and litigation costs.Now a familiar chart as a reminder of our core philosophy and how we manage UBS for the long term. Our goal is to be both cost and capital efficient. We do not look at cost efficiency in isolation, and I believe neither should you. It's only half of the equation. It is quite striking to see so many expert stakeholders comment on or compare our cost-income ratio to bench with completely different business models and far lower capital efficiency. In addition, it's also misleading to look at our headcount developments without considering our total workforce, including the outsourced portion where we have seen substantial reduction in the last year. Our insourcing program has and will result in savings and better risk management.We are among the highest-valued banks in Europe and already compare well to a number of U.S. peers. Actually, our 14.2% return on CET1 capital for the full year is very strong in absolute and relative terms, but our sights are set higher. For us, being best in class means delivering returns in line with the best.At our investor update, we highlighted the alpha and beta assumptions underpinning our targets and ambitions. Our goal was to bring to your attention and to be transparent about the factors that we can and cannot control. We do not control the external environment nor equity markets and interest rates. Clearly, the starting point is different than it was last October, making this year's journey toward our targets steeper. However, as we all learned too well over the last few years, it's too early to make any judgments on the entire year. Of course, this doesn't mean that we are sitting here passively waiting for markets to improve. We are working on various levers to mitigate the lower beta contributions. We have a range of cost- and capital-related management actions to run the bank in a fuel-saving mode without compromising our long-term strategy. Although we cannot and don't want to halt our investments, we can adjust the pace and relative priority. And in a slowdown, we can be more selective in our hiring plans.In addition, having completed our legal entity transformation and related tech investments, we are now positioned to further optimize our capital and balance sheet. Lastly, we have natural hedges in the business. Lower revenues mean lower pay, particularly in GWM, AM and the IB, which are most correlated to beta factors. On the capital side, a less-supportive environment with muted client activity and lower risk appetite mean we utilize fewer resources. All these actions will allow us to drive capital generation, maintain our shareholder returns capacity and invest for growth.I'm happy with the progress we made on various initiatives last year, and we have listed some of the highlights here.We have continued to make significant progress on a number of legacy litigation issues, including resolution of the 2 RMBS-related matters; the trustee suit; and the New York attorney general investigation, along with the state AG LIBOR matter. In the 2 most prominent open cases, we chose to defend the bank decisively in courts in the best interest of shareholders. While the cases are ongoing, we believe our stakeholders now have a better understanding of why we have taken this route.Looking forward, of course, our aim is to always do better and to strengthen our competitive position. In that respect, we compare ourselves against the best both as a group and across the business divisions. Specifically, in areas like net new money GWM can and should improve. While some regions showed positive developments, in the Americas where net new money was negative we did better than our key competitors in terms of invested asset development both on quarter-on-quarter and year-on-year basis.The overall results for the year are clearly not satisfactory. To meet our goals, we need to intensify efforts to attract and retain a higher portion of our current and prospective clients' assets. In the current environment, it's not only important to execute on the group's existing plans to deliver cost efficiency but also to constantly look for new opportunities. Likewise, we will continue to foster a culture of partnership across divisions to generate new revenues and even better serve our clients.To summarize. We are taking commercial and responsible actions to mitigate the short-term impact of difficult markets and to execute on our long-term plans. By looking at valuation in the banking sector, one could think markets expect a meaningful economic downturn. We don't see evidence to support such a negative scenario in our discussions with clients. Rather, the secular trends driving our ambitions and plans for the future such as global wealth creation and the opening of financial markets in China remain intact.With this, I'll hand over to Kirt for the Q4 results.
Thank you, Sergio. Good morning, everyone.My comments will compare year-on-year quarters in reference adjusted results in U.S. dollars unless otherwise stated.In the fourth quarter, we adjusted for restructuring expenses of $188 million and a net $190 million gain on the income side. For the full year, we incurred restructuring expenses of $561 million. That's about a $630 million reduction from the restructuring charge in 2017. We still expect around $200 million in 2019 with our reported and adjusted results further converging. For our income adjustments, the $190 million included a $460 million valuation gain relating to the sale of SIX' payment services business to Worldline. The gain was booked mainly in Personal & Corporate Banking, with some in Global Wealth Management. Partly offsetting this, we had a remeasurement loss of $270 million booked in Corporate Center - Services related to the consolidation of UBS Securities in China following the increase in our stake to 51%.The market environment made for a very challenging quarter for Global Wealth Management. It was a tough end to an otherwise good year, with PBT for the quarter down 22%, or 14% excluding litigation. Total operating income was down 2%, and I'll take you through the components in a moment. Costs increased by 5% to higher expenses for litigation provisions and legal fees as well as increased technology and risk control spend. Compared to 3Q, we also saw higher costs related to seasonal items, for example bank levies and marketing-related costs. The cost-income ratio rose to 81% and would have been 77% excluding litigation. Loan balances were up versus the previous year, but net fee leveraging from clients in Asia drove a contraction in lending during the fourth quarter.Moving to revenues. Net interest income was broadly stable. Its 8% higher deposit revenue and a positive contribution from loans, along with some benefit from our currency change, were offset by higher funding costs and the expiry of a hedge portfolio in 4Q '17. Transaction-based income fell to the lowest level in a decade, with the largest reductions in the Americas and Asia Pacific. The 23% drop in transaction income in Asia had a particularly significant impact on the region's performance, as this revenue line makes up a large portion of APAC income. Recurring net fee income was resilient, up versus last year but down from the previous quarter, with an increase in the Americas offsetting declines in EMEA and Switzerland.I want to give you a bit of context on this revenue line but also as we look ahead into the first quarter of this year, there is a time lag effect between invested assets and recurring fees which is more pronounced in the Americas than elsewhere. In the Americas, we typically bill based on the prior quarter-end balance versus the prior month end for the rest of the world. Therefore, recurring fees will likely be down in 1Q both quarter-on-quarter and year-on-year.Moving to the regional view. We saw continued profit growth in the Americas driven by higher recurring fees and net interest income. Our other regions were more severely impacted by the market environment as we saw greater market declines; and based on how we bill, as I just explained. In APAC, where markets were down in the range of 20%, PBT was down nearly 40% due to the lowest transaction revenues since 2011 as well as higher costs as we added 100 advisers and we continued to invest in China. In EMEA where markets declined 14% and geopolitical and geoeconomic instability heightened, recurring and transaction-based revenues were down. We also incurred higher litigation expenses and legal fees as well as expenses related to bank levies and our acquisition in Luxembourg. Within EMEA, our emerging markets business was more resilient, with PBT flat year-on-year. Switzerland, where markets were down 10%, had a decline of 5% in recurring fees, reflecting a similar drop in invested assets, while expenses were flat. Ultra high net worth performed well, considering the market environment, capping off a very strong year.In terms of global net new money, we saw $7.9 billion of outflows for the quarter, impacted by around $4 billion of deleveraging, outflows from net recruiting in the Americas and client moves in reaction to the adverse environment. As Sergio highlighted, our net new money results for the quarter and the full year are below expectations. We remain confident in our ability to meet target -- our target going forward given expected wealth creation, our market-leading franchise and actions we're taking. Let me briefly review some of our plans for each region.In the Americas, importantly, our invested asset growth is above peer average year-on-year and quarter-on-quarter. Our net new money performance was impacted by outflows from net recruiting, partly offset by record inflows from our same-store FAs, consistent with our strategy. We have taken steps to improve the net recruiting side of the equation. In addition, we are particularly excited about our unified coverage model in LatAm, the launch of our accelerated strategy to grow the Global Family Office in ultra high net worth segments as well as capturing opportunities in the affluent and lower end of the high net worth segment through our advice advantage offering.In APAC, we remain confident in our ability to continue to gain an increased share of new wealth creation as we hire additional client advisers, intensify our focus on lending and build out China onshore. In EMEA, we are establishing dedicated teams with specialized skills to capitalize on clients' liquidity events. In Switzerland, we expect to grow share of wallet and attract new clients, with an increased focus on entrepreneurs and executives.PBT in our personal and corporate business was down 13% to CHF 373 million from previous year. Operating income was down 6%, driven by lower transaction-based income and higher CLEs. In interest income, we continued to improve our product results, offsetting headwinds from higher funding costs, the expiry of a hedge portfolio and negative interest rates. 4Q NII was the highest quarter during 2018 and flat year-on-year. Recurring revenue continues to be very stable. Transaction-based income decreased due to lower fees from our corporate business as well as the reclassification of certain expenses to the income line from 1Q '18.We booked $17 million in credit loss expenses, primarily related to a number of smaller corporate loan impairments. Expenses were broadly flat, as higher investments in digitization were offset by the reclassification that I referenced as well as good cost control across other expense lines. Business momentum continues to be strong. And annualized net new business volume growth was 2.2%. For the full year, growth was 4.2%, the highest level on record.Asset Management had a very good quarter, with PBT up 15% to $134 million. Operating income was down slightly against a 7% decrease in expenses, mostly driven by cost actions we took in the second quarter. Net management fees were resilient in a tough market environment. Performance fees increased slightly versus the prior year, as higher fees from our Hedge Fund Businesses and Real Estate & Private Markets were largely offset by a decrease in Equities. Invested assets decreased to $781 billion, down 2% from the prior year and 6% sequentially. We'd expect some headwind to net management fees in the first quarter given the lower starting point for invested assets.For full year, net new money, including money markets, was $32 billion, a 4% growth rate in a tough year for the industry.Moving to the IB. We've had a very strong full year despite a difficult final quarter. PBT for the fourth quarter was $26 million. Markets were challenging, especially towards the end of the quarter, with correlated volatility across equity indices, widening credit spreads and a general lack of liquidity. Given this backdrop, we saw a sharp fall in client activity levels. Unsurprisingly, many deals were postponed in CCS. Revenues were down 29%, mainly driven by a decrease in ECM. ECM public market revenues were down roughly in line with the market. However, we had a significant reduction on the private side. Advisory was down 21%, driven by lower revenue in APAC, as 4Q included a large transaction, and lower private transaction fees globally. Nonetheless, we gained share in equity, debt and leveraged capital markets.Equities revenues declined by 10%, with decreases in all products mainly driven by lower client activity. With the increase in correlation and higher market volatility, conditions were adverse to new structure product transaction, particularly in APAC where we have a relatively larger franchise versus our peers. However, cash equities in the Americas performed well on higher volumes. FRC had a better quarter, with revenues up 14% driven by FX, which is where we're overweight, partly offset by a subdued credit performance. As we mentioned at our investor update, when credit spreads tighten, our fixed income-heavy peers have the potential for larger revenue upside, but in a more adverse market conditions like the ones we've seen in the last quarter, our capital-light FRC model should outperform, and that's pretty much what we've seen to date.Costs were down 3%, mostly on lower personnel expenses. RWAs were up related to higher volatility, while LRD decreased, reflecting lower client activity and market trends.The Corporate Center retained whilst improved overall. Corporate services' retained P&L was affected by higher funding costs for balance sheet assets. The group ALM loss improved mainly as a result of increased allocations and more favorable market spreads. Non-core and Legacy Portfolio posted a loss of $93 million, a more normalized level than in the past 2 quarters as we no longer benefited from positive marks on our remaining asset rate securities. Given that NCL has been substantially downsized and, apart from litigation, represents a diminishing drag on our earnings, we will fold the remainder into the new combined Corporate Center perimeter from 1Q '18 and no longer report NCL as a separate segment. As a reminder, we will allocate about $700 million of current retained losses, along with additional equity of approximately $7.5 billion, to the business divisions beginning this quarter. With this equity pushout, we will be in line with best peer practice.For the full year, total Corporate Center costs before allocations were down 2% on a reported basis while increasing our investments in technology and absorbing higher risk control costs. The overall reduction was driven by benefits from previously executed programs and continued cost discipline during the year. We also benefited from cumulative reductions in our legacy litigation portfolio, including the progress this year that Sergio referenced. While I show the $122 million benefit from changes in the Swiss pension plan as a one-off benefit, it's important to note that this was a result of deliberate management action to respond to market and other factors related to our pension plan.As we announced in October, we have implemented certain changes on the tax side which should reduce the volatility in our tax line. There are a couple moving parts in these changes, but the main driver is that we have eliminated the 7-year DTA remeasurement period for our U.S. tax losses. Instead, we have recognized the DTAs in our U.S. intermediate holding company tax group through to their maturity in 2028, and we will start amortizing these from the first quarter 2019. This change triggered a net $275 million tax benefit for the fourth quarter, which was neutral to CET1 capital. We expect our corporate tax rate to be around 25%, with a cash tax rate of around 14%. Our U.S. profits will continue to be shielded from federal as well as most state and local cash taxes through 2028.We wanted to highlight one of the core strengths and a fundamental part of our strategy, the high-quality, low-risk profile of our balance sheet.$226 billion or 24% of our $958 billion balance sheet of cash and high-quality liquid assets and other liquidity buffers. Our noncash balance is underpinned by $84 billion in TLAC or an 11% ratio. $337 billion is our loan portfolio, of which about 50% in mortgage is mainly in Switzerland. Our Swiss mortgage book has an average loan-to-value ratio below 60%. And even with a 20% decrease in Swiss house prices, 99.7% of single and multifamily homes would still be covered. 1/3 of our mortgage portfolio is with Global Wealth Management clients. Around 40% is Lombard loans, with around 50% average LTV and where we have seen virtually no losses over the last 5 years. Less than 10% or around $30 billion is corporate and institutional client loans, of which half is collateralized and the vast majority of the remaining unsecured exposure is investment grade. Average cost of credit over the last 5 years has been less than 3 basis points across the entire lending book. Provisions on the total portfolio is only 33 basis points, including the impact of IFRS 9.$104 billion or 11% is our trading portfolio, which only generates $10 million of management VaR. The vast majority in the IB or about $85 billion is held as collateral or hedges a client trades. Therefore, we have limited exposure to market risk on these assets. Of the remaining $14 billion in the IB, $6 billion is developed market government bonds and $2 billion in investment-grade corporate bonds. The around $5 billion in group ALM is mostly U.K. government bonds and U.S. treasury bills. Only 1.9% of our trading portfolio is in level 3 assets. $126 billion is derivatives positive replacement values, with a minimal amount in level 3 assets. Under U.S. GAAP, this would be netted down to around $16 billion. Most of the uncollateralized exposure is with investment-grade counterparties and in part driven by counterparties with non-nettable agreements, which are typically with governments, pension funds and insurance companies. We remain confident that we are well positioned should an adverse change in the environment materialize.Considering all the attention recently on leveraged finance, I'll provide a brief overview of our business. We operate our leveraged finance business with the -- in the same way as we do the rest of the Investment Bank: strictly adhering to our return hurdles and our risk appetite, competing selectively where we can add value beyond just committing balance sheet and with an eye to how we would fare under stress. We have oriented our origination and deal acceptance criteria to maintain high balance sheet velocity. In 2018, we supported our clients through $94 billion of trades. At the same time, we managed our take-and-hold book down, as we deem it sufficiently late in the cycle to want to be cautious while continuing to take appropriate risk.Our capital position remains strong, with our CET1 going-concern and gone-concern capital ratios above the 2020 requirements.To close. Considering the market conditions, we had a very resilient fourth quarter that hasn't diluted the progress we made in the first 9 months of the year. For the full year, we generated strong results and capital returns, reflecting our unique and diversified business model. Looking ahead, there are areas where we can improve further, and we have clear actions to execute on these opportunities. While we're managing UBS for the long term, we will take all necessary actions to mitigate short-term fluctuations to deliver attractive shareholder returns while investing for growth.With that, Sergio and I are happy to take your questions.
[Operator Instructions] The first question comes from Jeremy Sigee from Exane.
I was going to ask 2 questions about Wealth Management, please, both on aspects that were a little bit disappointing in the quarter. So the first one was about the outflows. I wonder if you could talk more about that. And specifically, the ultra high net worth outflows, were they all in Switzerland? And a bit more about what the other sources of outflows were. You mentioned Asia and deleveraging, but clearly something else is hurting sort of in Switzerland, and I wonder if you could talk more about that. And then the second question, still in Wealth Management. The cost line looked a little heavy to me, even taking out the litigation. It's up about 18 million year-on-year without that, and I wondered if you could talk about what the underlying cost increases are in Wealth Management and whether some of that can be taken out again in response to this weaker revenue environment?
Yes, Jeremy. Thank you for your question. I guess, as both Sergio and I highlighted, it was a very difficult quarter, of course, for net new money. I think I -- overall, I provided some color in my comments. I will just add, if you look at the 2 areas where we had net outflows, the Americas, as I mentioned, really was net recruiting. That's consistent with our strategy. Also, as I highlighted, we had growth year-on-year and quarter-on-quarter in invested assets, which is critical. Switzerland, a bit more unusual, and that was clearly impacted by one large outflow. And so overall if we look at Switzerland, the fact that we are up 1.5% for the year, we still feel very comfortable that we're going to consolidate and take share going forward. I would also highlight for the full year Asia Pacific. Despite rather neutral, slightly positive for the quarter, we were still up, 4.5% growth for Asia Pacific for the full year. And we're pretty comfortable that we're going to continue to consolidate and take share in that region. Global high net worth, certainly the outflows for the quarter were impacted by Switzerland, but also there were impacts across the Americas and Asia Pacific. Moving to your second question, regarding the cost line, I will just highlight for the quarter. And if you look at the fourth quarter, it's really important to note that we do have seasonal effects. And in the fourth quarter for Global Wealth Management, we had bank levies. We also had increased marketing costs. I mentioned the fact that we had a cost related to our acquisition in Luxembourg. And also, apart from legal provision, we also saw heightened legal expenses -- legal fee expenses, overall for the quarter. I think, if you were to adjust for all of those, you would find actually the year-on-year expense trajectory to be quite favorable. And I would also note that, during the Investor Day, we indicated that we were targeting CHF 100 million of run rate saves for this year. We've actually overachieved. We delivered CHF 125 million. And I would also note we indicated that we're targeting CHF 250 million of saves as we continue to execute on those programs next year, and we're feel -- we feel comfortable we'll deliver on those as well.
The next question from the phone comes from Andrew Stimpson from Bank of America.
First one is going to be on gross margins; and then second one, on the buyback. And on gross margins, what's -- I'm just trying to think through here on the behavior of clients and when markets have dropped like this. You've been doing very well selling the mandates. That penetration continues to increase. But I'm just wondering, most of the increase in those mandates have come when markets have been very good. We've now had a quarter where markets have been bad. I know they've come back strongly so far this year, but should we be expecting any pricing pressure to come through as clients see that they've been sold these slightly more expensive products and -- but which would have been inevitably had negative returns? I'm just wondering how those conversations go with the advisers. And then secondly, on the buyback, you said up to $1 billion. I just want to clarify if that's a hard ceiling so there's -- you won't be going above $1 billion. Or just -- I just want to clarify exactly what that language meant, please.
Yes. Thank you, Andrew. I mean, when you look at gross margin, I think that's, of course as we show the trend in terms of mandate penetration and lending penetration and NII developments were quite favorable, I don't think that we have been observing in the last few years and don't see at this point in time any indication of clients backing away from mandates for the reason you mentioned. I think what we saw or we can see is more of a prudent asset allocation within mandates. And in that sense, it depends how things develop. You raised the fourth quarter. I think that's I have to say that I, we have to really look in a more balanced way what happened in the last couple of months. This is not the end of the world. Last year, at this point in time, everybody, probably including yourself, were overly enthusiastic about the outlook for the year and for the quarter only to find ourselves with a more challenging environment. So it's way too early to call for a trend for the full year. And of course, we're going to look at ways to mitigate any potential headwinds, but I don't see that the margins being under pressure for the reason you mentioned. Margins are under pressure because we have lower risk appetite by clients deleveraging. That is mainly reflected in our transaction line. That's the bottom line.On share buyback, Andrew, the language is a cut and paste of last year language, so I think that I don't need to tell you anything more. And I also -- we also show very well at Investor Day and today the meaning of the arrows that goes inside and outside the buyback target box. More than that, I can't help you.
The next question from the phone comes from Stefan Stalmann from Autonomous Research.
Two questions from my side, please. The first one relates to Slide 10, where you outline potential countermeasures if markets remain weak. Could you provide any numbers around this? And maybe specifically, is this more targeted at achieving your cost-income ratio target for the year of 77%? Or is it more about avoiding a further deterioration from the level that we have seen in 2018, which was around 78.5% adjusted cost-income ratio? And the second question relates to your market risk-weighted assets, which had another quarter where they went up quite substantially. Could you shed any further light on what exactly drove this maybe by business line or geography; or whether it affected stressed VaR or multipliers, et cetera? And do you expect this to revert back again in more normal quarters, please?
Yes. Thank you, Stefan. In terms, as Sergio referred to, on Slide 10, naturally when we see market disruptions and we see the adverse impact of what we saw in the fourth quarter, we look for actions that we can take to help mitigate those. And Sergio outlined both on the efficiency side as well as on the capital side that it's very clear that there are specific actions that are available to us, and we're actually busy implementing those. I wouldn't specify any particular numbers around that. What I would indicate, though, clearly, and also as Sergio mentioned as while the path to our targets has steepened, it's too early to call to have any change at all to the targets for the full year, and we remain focused on those targets that we communicated at the Investor Day. In terms of RWA, the increase was really driven by the Investment Bank. It was higher levels of volatility, particularly in regulatory and managed VaR at the end of the quarter. It's not unlike what we saw in the first quarter last year, where we saw heightened levels of volatility and increase in RWA. And also, I think it'd be very consistent. If you look at what U.S. peers reported, they had substantial increases, most of them, in their overall market risk VaR that they reported, so this is very consistent, I think, to what we're going to see in the industry.
The next question from the phone comes from Benjamin Goy from Deutsche Bank.
Two questions, please. The first one, on your cash tax rate, just wondering whether the change versus the October Investor Day is essentially just a lower profit outlook for the U.S. Was there anything else behind it? And the second is also on your market risk. Is there any intention to bring down VaR? Because, I mean, this of course was an unfavorable quarter, but we could see the same volatility here.
Yes, Benjamin. In terms of your first question, the slight change in the mix of -- between cash and noncash in our tax rate was really just as a consequence of completing all the rather significant actions that we took in the fourth quarter around remeasurement and some other tax-planning steps. And when everything settled, then we just reassessed our tax rate. There was a slight change to the estimate that we had during Investor Day. In terms of market risk, this is really market driven. I -- you should note that, despite the very significant volatility, our management VaR in the IB was still only $10 million, so still very, very low.
I don't know. I don't know really. I think that there is a little bit of -- let's remember that our guidelines around capital is around 13% and our binding constraints for the next couple of years is leverage ratio. So any overfocus on $2 billion or $3 billion variance of risk-weighted assets on CET1 is not aligned with what we have been telling you and also our capital planning process and efficiency processes.
The next question from the phone comes from the line of Amit Goel with Barclays.
Do you mind sort of just giving a bit more color in terms of how the start of Q1 has been in terms of some of the trends obviously from Q4 will feed into Q1 as you highlight, but in terms of the better market levels and so forth, how much of the weakness has potentially reversed so far? That was my first question. And just my second question was on the cash tax rate, so that's already been answered.
Yes. I mean, if you -- as you know, we don't really like to comment on quarter, particularly after 3 weeks, considering the volatility we have been experiencing in the last few years on an intra-month and an intra-quarter basis, but of course, we all can see the developments in asset classes performance since the beginning of the year, which have a positive impact to sentiment. Although, the sentiment, I think, investor sentiment and conviction levels have been hurt. I mean people -- some people out there are still quite concerned about the developments. I would say that, when you look at year-on-year performance, we should always remind that we had a spectacular January in -- I would say, in the industry. And last year, we had a more muted developments in February and March. So to call the environment at this point in time is way too early. As I say before, that doesn't mean that we are implying things are going to normalize on their own. We are really taking proactive actions to see how we can be ahead of the curve should the situation continue to be the one that we saw in the last part of the year.
The next question from the phone comes from the line of Magdalena Stoklosa with Morgan Stanley.
I've got 2 questions, one about the equity business in particular and the second about the developments of the net interest income. So on the equity business side, could you give us the context for the quarterly performance? I'm looking at the slide -- I think it was Slide 20. And I was just kind of wondering how the fourth quarter looked in terms of the business lines and also kind of geographical mix. You commented a little bit about the Americas and EMEA, but I'm curious to hear how the quarter actually looked like in Asia and what will be the potential read across. And my second question is about net interest income. We saw a very steady development across this year. And again, how shall we think about it into 2019 in terms of the loans, in terms of spreads, margins? And also, if you could give us a sense of what should we be aware of in terms of the NSFR, which is likely to be clarified for you by the end of 2019. What will be the impact on the cost of funds? Your preliminary thoughts.
Yes. In terms of the equity business overall, if you look across on a product basis, we saw a much sharper drop in derivatives. And that's really reflective of what I meant, and it's the fact that we saw increased levels of correlation as we went through the quarter. And with increased level of correlations, of course, structured products become less attractive. And that was very, very pronounced in Asia Pacific, where we tend to have a disproportionate share of that business versus our peers. And so as you might expect, we therefore also on a regional basis saw a sharp drop in Asia that impacted our overall equity results. Conversely, our cash business held up quite well, held up better. We're still down overall, but in the Americas we were up. So we had a good cash overall results. And our prime brokerage business was down slightly, again due to the fact that we saw a falloff in overall activity levels. On the net interest income side, clearly we expect some of the same dynamics that we saw during the year. We -- as you know, we announced very focused plans on growing our banking book. So we're very focused on growing our loans as well as reenergizing our deposit growth. That should provide us with some tailwind as we go through the year. In addition to that, the U.S. rate environment is still favorable to our book overall. Although, I would not that, with the last fed raise, given the fact that we saw an inverted yield curve, it didn't provide any further immediate help. And in addition to that, I would also mention that we continue to face headwinds, of course, on euro rates and Swiss rates, and we don't really see any relief there. In terms of NSFR, given that the Swiss authorities are still determining what the final rules are going to be around NSFR, it's too early to call if it's going to have any kind of impact for us overall. And what we are confident, though, is that whatever we end up with in Switzerland will be very consistent with international standards. And so from that perspective, we expect to see a level playing field.
The next question comes from Andrew Coombs from Citigroup.
I'd like to follow up on Stefan's 2 questions, please. So firstly, on the market risk-weighted assets, when we look at the 1-day average management VaR, it only moved from $9 million to $11 million Q-on-Q, and yet your market RWA has gone from $11.5 billion to $20 billion, which would seem to suggest that actually it's a higher multiplier that's providing that. And yet that doesn't seem to be a change in the same multipliers based on backtesting exceptions. So could you just elaborate on exactly how much of the increase in the market RWAs is directly attributed to VaR versus how much is other factors? I mean, it's important for us when we're thinking about movement into 1Q '19 and beyond. And the second question was more of a strategic question, again coming back to this point of alpha and beta factors and the ability to mitigate beta factors. At the Investor Day, you gave a great slide looking at the walk from the cost-to-income ratio. So you said 78% cost-to-income at 3Q '18. You'd expect 9% revenue improvement, offset by 3% on performance-based compensation, and then a flat fixed-cost base. That 9%, 3% ratio, should we think about that as being the key link here? So if you took out 4.5% for the beta factors you've assumed, does that mean you can then assume a 1.5% offset on the performance-based compensation? Or would you hope to do better than that?
Yes, Andrew. Just thank you. On the market risk RWA, firstly, you can't read the -- just from looking at management VaR in terms of what drove the increase. The increase was driven more by stressed VaR and regulatory VAR. Now overall, if you look at the total increase, a part of that impact of general market volatility factors which fed the stressed and the regulatory VaR increases, we also had some increases related to some methodology and some model changes that were agreed particularly in risk not in VaR. I think those are around 2 billion, but we'll get back to you with a specific breakout. So it's not all just driven by market factors.
Yes, but Kirt, I would probably add that it doesn't -- if you go back at Q1 '18, you remember the kind of behaviors we had on VaR and the normalization you saw in Q2. So I think history tells you a little bit of the fact that, whilst -- I don't think that we have so much diversification within our business. So we have higher fluctuations which tend to re-converge back in the following quarter as soon as market condition normalized. If you go through what happened in Q4, it -- in terms of volatility, it's what you should expect from our business, honestly. So I think that I'm always a little bit puzzled by seeing that people don't understand yet how our business is positioned. And the diversification element that is missing is always translating into a late effect on the reg and stressed VaR.
Yes, absolutely. We would expect to see normalization. And frankly, our outlook for RWA overall for the year is not changed...
Your look-back period is 250 business days, but you seem to be implying that there's a higher weighting on the last quarter. Is that fair?
Well, I mean, if you look at the way stressed VAR behaves and also regulatory VAR, particularly stressed VAR, that actually has -- that actually bounces back or deteriorates much more quickly. It's much more sensitive to more recent volatility factors. From the cost-to-income side, I think your math mathematically actually is spot on, but naturally, of course, as Sergio outlined on the alpha side, clearly if we see that the beta factors are less attractive, we'll look to do more on the alpha side. And potentially in down market conditions there's opportunity, for example, for us to consolidate wallet share, for us to find other opportunities in the market that maybe our competitors would actually not have access to because of their relative size or the relative strength of their capital and their credit standing. So it's the way that it actually pans out is not going to be purely mathematic. You have to insert what we would do as a management team to rebalance that mix going forward.
The next question from the phone comes from Jon Peace with Crédit Suisse.
My first question is on the net new money. After you saw the outflows in the second quarter of last year, you expressed confidence in the full year, which I think was because you had some visibility of a recovery as you went into July. So I was wondering whether your confidence in the targets this year reflects what you're seeing through January, i.e. a more normalized pace of inflows. I appreciate it can be quite lumpy. And then second question was just on the Corporate Client Solutions business. Your U.S. competitors like to talk about a pipeline of activity. How do you see your pipeline at the moment relative to last quarter and last year?
Thanks, Jon. I think, after 2 weeks or 3 weeks in January, it's early to call the trend for net new money. I think that we are, in any case, not overly paranoid about quarterly performance on net new money. I think that the year performance is what matter. And I think I was quite clear that our confidence in respect to the plans we have together and the secular trends supporting our ambitions and competitive position supporting our ambitions are intact. We can and we should do better on net new money. So I think that the numbers are what they are. We have not -- we didn't take actions to go out and [ shore up ] better net new money even if it's not economically sustainable. It is what it is, but it's not an excuse. Now as Kirt well -- explained very well in his chart, the picture is a mixed one because, if you look at Asia, Switzerland and Europe, we have a -- okay, an okay picture. I think that's -- it's not at the top of what we could expect in a better environment, but a 5% in Asia and a 1.5% in Switzerland on a year-on-year basis are quite solid results. The disappointing result is coming from the U.S. There I'd like to -- this is our choice, and we stick to our choice of transparency. We are the only firm reporting net new money. And so the only proxy you have to really measure ourselves is the absolute numbers, which again we have to do better and we can do better through different actions, but also we have to look at the relative performance. And when I look invested assets as a proxy for that, it tells you a clear story on net new money. The implied net new money means that we have been doing better than our key peers during the full year. So this is not an idiosyncratic UBS situation. There is a change in behaviors. By the way, it's quite interesting because in our survey with clients, in Q4, we observed a record-high level of cash balances with U.S. clients at 24%. So you can imagine, 24% cash balances with U.S. wealth investors is a quite striking high number. And this is what's going on. So people may have a tendency to take the money outside the wealth management system in the banking, not only UBS, and go for other asset classes outside. So that's a little bit development. We have plans to increase our [ GF pool ] and ultra presence in the U.S. We have plan to increase our share of wallet with the U.S. persons outside U.S. So we will take actions to really go back into our trajectory of growth, but in the meantime we have also to take -- acknowledge that the market conditions out there are very unfavorable. In addition to that, that's -- the usual [ 1/3 ] that comes through net new money through lending wasn't there for the full year and particularly in Q4 where we saw a degree of deleveraging.Pipeline issue. I think that's -- I think that we had -- I'm not -- don't want to go too -- but we had a substantial number of deals that were pulled in Q4. I think that the problem is not the pipeline. The problem is not the mandates. The problem is the market environment to execute the mandates. So I feel pretty convinced and comfortable that we have a solid approach and solid penetration of potential mandates, but of course, Q4 was totally not constructive for any kind of transaction. And hopefully, as the situation normalizes in the near future, we will be able to execute.
The next question from the phone comes from Anke Reingen from Royal Bank of Canada.
Just 2 follow-up questions. Firstly, on the market RWA, given your comments, does that assume that they will have -- come back again, looking at the trends seen Q2, Q3 last year as well -- or Q2, Q1 last year as well? And I'm sorry, coming back on the cost-income ratio. So how strong is your commitment on delivering it? Because I mean obviously you said it's too early to say. Seeing investment opportunities is not the right way to look at it. But I mean, how -- but then you say it's too early to confirm. So how strong is your commitment?
Anke, thanks for the question. I think that we answered really 3 times the question on risk-weighted asset market. So I mean, unless you have a more precise question, I think that I would refer to that. On cost-income ratio, of course, we are very committed to execute our absolute cost savings. Cost-income ratio is a function of many other factors that we will take. As I say, execution on the existing plan. We are very focused as time goes by. Always there are changes; and searching for new opportunities, both strategic and tactical, to respond to market conditions. And at this time, I can only look at this one as a reference point. I know that you understand that it's -- you can't took in isolation cost-income ratio. I try to reemphasize the issue that cost-income ratio is an important metric, but it's not the one that we can be overly obsessed because fixing cost-income ratio as a cost of capital return is not the way to address the issue. So we really work on absolute costs, both strategically and tactically. And also as I mentioned, there are levers that we can pull outside fixed cost and variable cost that goes into optimization of capital and consumption of capital, which is, for us, is also very important because we want to continue to sustain our capital return objectives and targets. And therefore, we have different levers to play around.
The next question comes from Jernej Omahen from Goldman Sachs.
I have 2 questions. One is on the follow-up on your commentary on your Equities business, and the other one is on the deleveraging on the private Wealth Management operation. So can I just ask on Equities? So Kirt, I think you talked about weakness in Asia and the derivatives business within Asia, but over the past 2, 3 years, I think UBS was the only European bank that kept pace in equities with the U.S. banks. This quarter, U.S. is up 6%. UBS is down 10% in equities. I mean, is -- this almost looks like bad trading, bad inventory management in one portion of your Equities business, so the first question is this. Is the extent of underperformance versus the U.S. a function of decreased client engagement, you reckon, or a function of managing your inventory? And the second question I have is, I was looking at -- or we were looking at the supplement on Page 4, on the point that there was deleveraging in the private wealth business. So as you point out, there was a $4 billion reduction in loans. Can I ask? I mean, this reduction, are these margin calls that are being triggered in your Asian operation? Or is this just essentially people extinguishing loans -- Lombard loans preemptively? And I was just wondering. So if we look at the breakdown of the outflows in Asia, I think $2.8 billion of the net new money outflow is due to redemption of -- or contraction of Lombard loans, which basically means you still had a fair chunk of net new money outflows even without that. Can you just shed some light on that? So how this breaks down and what is driving the Lombard loan reduction? And what is driving just essentially the plain vanilla asset outflow?
Thank you, Jernej. I always like your very pointed question and absolute statements. I like to understand where you see the U.S. peers being up 6% year-on-year on equity on a quarter basis because I have in front of me a table saying down 17%, down 11%, down 16%. One is up 7%, and another one is down 4%. Then again, I would add that in any case, as Kirt well explained, we are -- we have a business that is more skewed towards the -- Asia. And I think that he also explained very well the performance of the -- in business activity and the increase of correlation on the structured side of the equation. So overall I would say our strong performance for the year seems to indicate a somehow expected outcome considering our business that is skewed towards -- more towards Europe and Asia than it is to our U.S. peers. But maybe I missed something.
Sergio, can I add something? So I think that the numbers that you read out are sequential figures in equities, yes. I'm looking at the 5 biggest U.S. banks. Year-on-year equities, yes, were up 6%, right. And numbers are plus 11%, minus 4%, plus 2%, 0 and plus 17%. But sequentially you're right, yes.
Okay, so -- but in any case...
So my question is this. U.S. banks year-on-year are up 6%. UBS is down 10%, which is the first time this has happened over the past 2 years, so I'm just wondering whether this is a one-off and we can expect [ add-back ] or whether there's something else.
Yes, I think that -- I think Kirt explained very well what happened in our equity business. It's almost like -- and we are not trying to do victory laps and extrapolating numbers like saying our FRC numbers is up 14% year-on-year and compared to the industry trend. So we are not trying to extrapolate. One quarter doesn't make the full year and doesn't make the future. So we have to put things in perspective. But to answer your question, no. It's a clear convergence of market factors, client activity skewed toward APAC where we have a bigger presence, putting this quarterly performance into a different light. I'm comfortable that there is nothing strategic and structural that we should look into it for the future.
So Jernej, in terms of your second question, I think, naturally when you see the falls in the markets of the magnitude that we saw in the fourth quarter -- in the case of Asia Pacific actually it's been more trending full year, but sort of roughly speaking, if you take kind of a midpoint, well, the Asian markets, predominantly driven by North Asia, down around 20%. That does a couple of things. Firstly, it leads clients to have less conviction in the overall return profile going forward and therefore less willing to pay for leverage. And so they pay down their loans. And the second case, it does -- as they see an overall reduction, it does impact their overall margin levels, although the deleveraging was much less driven by margin calls. It was much more driven by initiatives and actions that our clients took to reposition their overall investment portfolios.
The next question from the phone comes from Kian Abouhossein with JPMorgan.
I have 2 questions. The first question is related again to the outlook on Page 1. Sergio, you indicate normalization in markets early in 2019, so should we see the current environment so far, and I know it's very early in the quarter, but so far very similar to what we normally see every first quarter, i.e. a very strong start to the year, et cetera, et cetera? And in that context, I'm trying to understand the first -- fourth quarter. Is this just unusual environment that we saw in December, especially second half of December, which dislocated the P&L for most of the banks, including yourself to some extent? Or is this deleveraging/lower activity level really what you see more of a cyclical trend, an ongoing trend? And I'm not exactly sure how to interpret generally not just you but other banks, fourth quarter. And if you can maybe show a little bit of light how the months have progressed in the fourth quarter without really giving a lot of detailed data but if you can put a little bit of light of how this dislocation, how this lower number actually came into place both on WM and on the IB. And then the second question is related to your plan, your 3-year plan, of CHF 70 billion additional assets in the ultra high net worth space. And you talked a lot at the Investor Day about the U.S. expansion -- or U.S. client base expansion, I should say. Can you discuss a little bit what setup you have now; and if there has, any progress been done? And how that's shaping up considering a more difficult market condition?
Thank you, Kian. I mean, as I mentioned before -- first of all, let me tackle a little bit the Q4 question. I think that it's not any -- a subjective or a personal interpretation of what happened. I think, if you look at different statistics published by even outside servers, the deterioration of market levels across all asset classes, which was meaningful when you look at 2018 with -- I've been seeing reports talking about 90% of asset classes in the market out there being down on a year-on-year basis. It's quite extraordinary. I think, if you look at what happened in December -- must be the worst month since the Great Depression in terms of market performance. So then what I would add, before December, which December had 2 kind of characteristic -- I would say, the second half, I mean, very dramatic market condition with a lot of underlying market volatility supported by almost no volumes and business activity. The second one is to say what I would call the early Christmas and early seasonality effect. I mean usually you see seasonality coming in, in the second half of December. To be honest, I think that we observed seasonality this year in the early part of November. October was a decent month, was a good month. And in November, we started really to see this convergence of concerns by investors and the market both and again a quite different pattern compared to the last few quarters where you would see more volume and business coming through institutional channels than you would see from Wealth Management clients as reflected in our transaction line. We have seen a de facto holiday mood coming already into November. And when those discussions about the geopolitical, geoeconomic issues, trade tensions, Brexit, things that goes on in Europe between France and Italy and so on have been causing even more concerns with investors. When I look at -- as I mentioned before, when I look at the first quarter this year, it's really way too early, Kian, to make a call because one can only say that, of course, when you look at a year-on-year basis, I want -- I mean it's quite clear that the picture for January cannot be as good as we had it before. Maybe, if you go back in the time series '16 and '17, you will see something more close to what we are experiencing in January, but last year, remember that February and March were not up to the level of January. Therefore, we need to wait and see how the -- to determine how the quarter will play. It's absolutely clear that the resolution of few of these outstanding items, being trade tensions, geopolitical tensions, what's going on with Brexit, needs to be resolved in order to restore confidence in the market. What happened in Q4 has somehow impacted institutional investors and wealth management investors somehow, and we need to reconstruct their conviction level. But this is not the end of the world. So as I said before, we are not going down years and years in order to -- it's probably a matter to say January last year versus January this year, of course, is not a fair comparison.In terms of the 3-year plan, look, we are in execution mode. We are building up. We have been expanding and exporting our capabilities on the [ GF 4 ] and ultra side into the U.S. We are executing on our plan, and this is not a sprint. It's clearly something that we're going to see developing faster than you would see our developing in onshore China, but it's not something that you will see a transformation of the business coming on a quarter-on-quarter basis but rather, as you observed, year-on-year developments.
The next question from the phone comes from the line of Daniel Regli with MainFirst.
I have particularly one question regarding the ALM development in global markets. And you -- I think you've well explained the trend we have seen in net new money, but I was a bit surprised by the negative market impact in Q4 coming -- yes, coming from markets. I saw [indiscernible] down like 7.5%. Your negative impact on the ALM was 7%, so can you help me frame this? Were your clients just highly exposed to equities? Or what was the reason for this negative performance on your assets?
Daniel, I think you'll see that overall -- and we show on Slide 32 -- you'll see a concentration of our invested assets; and the concentration in Equities, mutual funds. Bonds as well, of course, were impacted during the quarter. So what you saw, sharp drop in equity markets. And also we've got a good slide that showed the magnitude of that drop overall, which is on 29. So you see emerging markets, 17%; China, Hong Kong 25% and 14%; Europe, 14%; Switzerland, 10%; United States, 6%. So that explains, of course, the equity drop was more pronounced than you saw our drop in invested assets. Credit spreads blew out substantially during the quarter. That explains the drop in bond markets. Mutual funds are going to be down the line with that as well. So I think the math works out very well if you just look at the overall concentration of our invested assets. It's quite logical that you saw the drop that you saw for the quarter.
The next question comes from Andrew Lim with Societe Generale.
So firstly, in the Americas, just wondering if the change in rate outlook has changed customer behavior in terms of deposit beta. I think you mentioned in the past that clients were taking out deposits and putting them into credit assets, and that was raising your cost of funding. I don't know if that's changed or continued. And then secondly, on net new money in the Americas as well: I appreciate we've had a tough quarter, but for the full year, the Americas has had outflows, and yet you say you're better than competitors. Is there something structurally which is a concern here? And what are you going to do about it to try and make them positive?
So Andrew, just in terms of your first question, we still expect over time our beta around the 40s to 50s. I mean that's kind of what we've guided pretty consistently. I think, has there been any change yet in client behavior? Really, we haven't observed any change. We -- of course, there's still some question now as to how many more rate increases we're going to see during the year. That obviously will have some impact on flows and overall rate performance. In terms of where we view, though, the outlook, we're still pretty comfortable with our net interest income outlook for GWM. In terms of net new money, I will just repeat what I mentioned and what Sergio has already mentioned. What's most important because we have no transparency on the flows from any of our peers is that our invested assets are higher than our peer average on a year-on-year and a quarter-on-quarter basis, and that's what's structurally most important in the U.S. business.
Gentlemen, there are no more questions.
We'll then close the call. Thank you very much.
Ladies and gentlemen, the webcast and Q&A session for analysts and investors is over. You may now disconnect your lines.