UBS : Transcript

Morgan Stanley European Financials Conference

15 March 2023

Fireside chat with Ralph Hamers, Group Chief Executive Officer; Moderator: Magdalena Stoklosa, Morgan Stanley

Transcript. Replay is available at www.ubs.com/investors

Magdalena Stoklosa

Okay. Good morning, everyone. And of course, I'm delighted to have Ralph Hamers with us at the financials conference, of course, the CEO of UBS. And we're going to start our fireside chat with a polling question just to kind of see what the audience kind of think would be the most important driver for share price over the next 12 to 24 months. I'm not going to kind of read the answers, but we've got 10 seconds to vote, please.

Okay. I think we're going to cover pretty much all of this in our conversation, but thank you very much.

Magdalena Stoklosa

So Ralph, let's start kind of top down. What are kind of your thoughts on the current global backdrop, but of course, also on the events in the U.S. from -- kind of from last week and maybe let's address what you see as the impact on the industry and impact from UBS?

Ralph Hamers

Yes. Well, I think the developments are very unfortunate, right, let's start with that. In times like this, I think you have to pay a lot of attention as to what is truly happening, what is the root cause of what's happening and what effect does it have for us.

Basically, the first thing is, how do our clients kind of react to this, right? So for us, it is really important, such a client-focused institution, to be very close to your clients, make sure that they have the latest information, that they know what to do and advise them going through. And since we are a very large wealth manager in the U.S., where basically a lot of this is happening, it's been really important for us to stay very close to our clients, which we have done.

Now what we see there is that what we saw already in the fourth quarter and coming through in the first 2 months here as well is that you see a continuation of what we would call the mix shift from deposits into money markets, T-bills all within our own kind of platform. So -- but that's basically -- and it shows the sophisticatedness of our clientele, right, so that's a clear indicator as to the sophisticatedness.

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We don't see that changing now either. I mean, that continues. The last couple of days, as you may expect, there is -- we've seen inflows, right? So -- but I mean, this -- you can't really draw conclusions from that in my view. It's a reaction at first is clearly a flight to safety from that perspective. But I think 3 days don't make a trend.

But yes, I mean, that's a normal reaction, I think, of the market to come to places like ourselves. But again, the underlying clientele stays the same clientele, so you can expect a very rational behavior as to how they kind of deal with that to go work further.

And then clearly, from our own particular bank situation, yes, I mean, our LCR is 164%. Our net stable funding ratio is 119% [Edit: 119.8%]. So yes, we have a highly liquid HQLA portfolio where cash is an asset, so highly invested in cash, $170 billion of cash in our HQLA, so very prudent.

Magdalena Stoklosa

Perfect. We you've touched upon it a little bit, but let's talk about the client sentiment kind of in general. I know, the last couple of days kind of from providing a little bit more volatility. But of course, 2022 has been an incredibly uncertain year.

Of course, we had the war in Ukraine. We've got the rising energy prices. Of course, we had the inflation going up very significantly. How do you see kind of clients navigating 2023 or kind of the end of '22 because...

Ralph Hamers

No. So I think it's a very good question. I think what you saw in the -- in '22 started all fairly positively, right? We all remember that the year back just before the war, everything was very positive, whatsoever. And then a lot of uncertainty came.

The markets reacted heavily on it. The market moved from what we call micro, which is equities to fixed income in the second half and all that. Our clients were more in a wait-and-see patterns towards the second half. But nevertheless, if you stay close to your clients and you show that -- you have to advise them and guide them through also more difficult times really, that you saw that our flows were very strong, and that new fee generating asset of $60 billion on the wealth management side.

Also on the asset management side, $25 billion of net new money coming through for the year, so strong flows for being very well connected with your clients. We had a record year in markets last year as well. We outperformed on the banking side, although that was not kind of the best banking year, but we outperformed there as well, but very much on the advisory side as well.

So '22 was a very good year, although, clearly towards the end very much a wait-and-see pattern with our clients. And maybe towards the last part of it, you've got some more positive news coming from Asia, China opening up. And that basically showed them the markets to kind of return a bit going up again.

Equity markets, that we have seen not really continuing.

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In the beginning of January, we saw a continuing rally. But if you look at where we are right now, markets are up a bit from the beginning of the year. And what expect going forward, the U.S. will have a difficult year, economically a difficult year, inflation coming through higher rates, industries, sectors getting used to higher rates in leverage businesses.

On the Asia Pacific side, we actually do continue more positive momentum and sentiment. We will hear more, I expect, within the China Development Forum that is happening in 2 weeks' time there as well as to what kind of inputs that can give on the Asian side as well.

And then an important business for us is, of course, Switzerland as well, where Switzerland is kind of the one that seems to always be able to manage things in a more stable way. So rates still low, although we expect rate hikes, but still low.

Now if I then kind of projected to this -- to kind of translate this to business activity, markets where we play, like Asia Pacific and EMEA, the [Edit: exchange] trading flows in the markets are 25% to 30% down from last year. In the U.S. 10%, but we're overweight EMEA and APAC, and that's where you see markets having lower activity coming through.

Then on Asia Pacific, we think this will kind of give more race to -- more rise to more activity, transaction activity more in the second half of the year also from a wealth management perspective.

If you look at NII, also because of the rates movements and also the mix shift, we stand by our guidance for the first quarter, but on the lower end of single-digit growth versus the fourth quarter on NII. Clearly, Switzerland, underlying, still profiting from raising rates. But in the U.S., the mix shift and -- is having its impact, but in line with our guidance, but on the lower end of that guidance.

We still see flows coming in, so that -- also in terms of net new fee-generating assets, we see that coming through. So the 5% over the cycle, we also feel that, for this year, that is achievable. We don't see that necessarily hampering. But it's -- it doesn't look easy, let me put it that way, right? So I think that industries are challenged. Things are unclear. Clients are in a wait-and-see still.

Magdalena Stoklosa

Yes. Absolutely. Let's maybe take it a little bit more with the kind of regional lens. You've talked about kind of APAC, the transactional activity potentially returning in the second half of the year. But if we look at it, it is a little bit more kind of structural. You are the largest wealth manager in APAC, of course.

How do you think about building on that scale? How much of an advantage can that scale give you, particularly in wealth? And of course, also, let's augment the conversation with the investment banking franchise because it is very strong. And also on top of that, it provides that kind of extra layer from a perspective of potential growth of the business overall.

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Ralph Hamers

Yes. So in Asia, clearly, I think we have double the investment there in invested assets in comparison to the next player, right? So we are a very large player. We are a top-quality brand. We have a very good client franchise, high net worth, but even more ultra-high net worth. And we have a strong investment bank, as you said, #1 in Equity Capital Markets last year. Best investment bank in Asia and Australia last year as well. #1 in cash equities -- or strong cash equities franchise as well.

And the reason why I'm mentioning that is that the interplay between wealth management and investment banking is probably even more important than in Asia than anywhere in the world. And that is by virtue of the sort of clients, the sort of wealth that is being created there, where, if you look across the different regions, you see, specifically also in Southeast Asia, a lot of family offices on the back of companies growing very fast because of demographic development, therefore, wealth being created very quickly over time.

However, those families are not necessarily having the right family infrastructure, looking for liquidity in the stakes they have. That's where the interplay with the investment bank comes either on the financing side, but also, just as an example, families that are looking for selling a minority stake where, basically, we get to manage for through on the banking side and actually bring another family in, that families like to support families, and that's the interplay that is important there.

Now if you then take a step back and so more strategic, China is, of course, very important to us, having been there for 40 years, the go-to investment bank in China as we are with now owning 67% of our securities business there. That will -- with a -- with the market coming back, that will be in a very good position to have.

The continuation of the buildup of a middle class in China through the common prosperity policy will be good in general for asset managers because all of that money will be have to be invested for not only the rich because, basically, the wealth buildup in Asia, we expect to move from a pyramid -- or in China, I should say, from a pyramid to more true as an oval. And with that, it is more widely spread. And therefore, professional asset management services are important for China as well.

On the wealth side, active already on the offshore side, also on the onshore, but the offshore is more active for us than in the onshore. We just launched a more digital play in WE.UBS. So that is more longer term.

Then on Southeast Asia, where we were, as I just alluded to, there's a lot of wealth creation on the back of entrepreneurial wealth, where there is many liquidity moments, either partial liquidity moments in order to reinvest in new initiatives, that's where we are basically focusing on growth through close relationships with these families, our, what we call, global family and institutional wealth approaches.

Family office competence centers that we basically develop and helping families setting up those family offices, how does it work. We have platforms where we connect different players. So that's the way we go about Asia. We're very confident about the potential of Asia.

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Magdalena Stoklosa

Yes. Perfect. Now let's move on to Switzerland. We talked a little bit about it. There's this kind of very, very kind of stable high-return generator for you. But of course, kind of looking forward, where is growth there?

Ralph Hamers

Yes. So that's a good question because if you just look at who we are in Switzerland, right, so we bank about 1/3 of the households and 90% of the multinationals. Clearly, we are not the only bank with them, right, so there's more banks as well. That is good.

So we have a very stable base, a very strong market share there as well. We've been called the best bank in Switzerland by Euromoney for 8 years since 2012 or something like that. So a very good base and -- but I do think it can further be improved. And that's not only because of the rate movements, right, so that our revenues can improve. But literally, I mean -- so our team there is doing a really good job focusing on pockets of growth.

For example, in the more consumer area, where we see we can grow more in pension business, in mortgages, in sustainable finance, we expect to be able to also improve our digital offering. We are already kind of the digital leader. And one may expect for me that I think this is very important to build out that leadership where we have seen that with some small changes over the last couple of years, we have now 61% active mobile users and 30% mobile users that have -- that only use mobile, right, mobile-only users through the launch of key4, which is very successful. Just last year gaining 37,000 new consumer clients as well, not only through key4, in general, because of our positioning. So there is growth there.

But on the other side, digital also helps you keeping costs in the control. And I think that's what the team is doing effectively as well. We were the first area where we introduced agile 2 years ago already. So they have gone through the adjustment. So changes coming, smoother, faster, cheaper, et cetera, et cetera, et cetera.

So I think the Swiss franchise is a very important franchise for us. It is the foundation of what we have built also globally. It is a very healthy franchise. We do see prospects for growth literally growth, not only revenue growth on the back of NII, but also being able to keep costs under control by continuous digitization of our services.

Magdalena Stoklosa

Perfect. And then, of course, none of those conversations would have been complete without, of course, the Americas because you've got, I mean, a huge business for you, $1.5 trillion in invested assets. Of course, also a biggest revenue contributor to the group. How do you capture the opportunity from here? And maybe also, how do you assess your competitive positioning in the U.S.?

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