Q2 2024 Earnings Summary
- UBS is performing ahead of its profitability targets, achieving an underlying return on CET1 capital of 9.2% in the first half of 2024, which is comfortably above the mid-single-digit target for the year. This demonstrates strong underlying profitability and effective execution of their strategy.
- UBS is ahead of schedule on cost savings, realizing 55% of the $13 billion gross cost-saving target by the end of the first half of 2024, earlier than expected. This progress, driven significantly by the Non-core and Legacy division, positions the bank well to meet or exceed its efficiency targets.
- UBS is making significant progress in integrating Credit Suisse, reducing risk-weighted assets, and simplifying its legal entity structure, which will unlock capital, funding, and tax efficiencies. This strategic focus on optimization is expected to enhance shareholder value.
- UBS faces potential headwinds in net interest income (NII) due to loan and deposit growth assumptions in its Swiss business and Global Wealth Management, along with anticipated rate cuts that could negatively impact earnings. Analysts questioned "what do you assume in terms of loan and deposit growth in the Swiss business NII guide and your GWM guide in the second half of the year?" UBS acknowledged downward pressure in terms of loans due to balance sheet optimization and potentially flat to growing deposits, with deposit mix shifts potentially affecting NII.
- UBS's high cost/income ratio in Americas Wealth Management remains a concern, with the ratio remaining above 90%. There is skepticism about the bank's ability to achieve its cost/income ratio improvement targets by 2026, especially with mix shift from NII potentially impacting revenues. UBS management indicated that significant cost reductions in Wealth Management would only start to materialize in the latter half of the integration, implying that cost pressures may persist in the near term.
- UBS may face increased capital requirements due to Switzerland's early implementation of Basel III final rules and the Fundamental Review of the Trading Book (FRTB), which could put the bank at a competitive disadvantage. Analysts expressed concern that Switzerland is "essentially only geography, introducing FRTB and not delaying it", questioning whether this is "the final piece of the puzzle in terms of higher capital requirements for you?" Management acknowledged that FRTB implementation could be a short-term competitive disadvantage and that lack of convergence with other jurisdictions may be problematic.
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NII Bottoming in GWM
Q: When will NII bottom in GWM?
A: We expect Net Interest Income in Global Wealth Management to bottom around mid-2025, based on the implied forward curve projecting 25 basis point rate cuts through the end of the year and up to seven cuts by mid-2025. However, in a lower-rate environment, we'll see significant tailwinds like increased transaction revenues, releveraging, and higher recurring fees from mandate sales. -
Capital Upstream from Subsidiaries
Q: Will UBS upstream excess capital from subsidiaries?
A: Yes, we are working on restructuring our subsidiaries to upstream excess capital, particularly from entities like Credit Suisse's UK subsidiary, which has excess capital. This will help alleviate the capital position at the parent bank. -
Non-Core Unit's P&L Drag
Q: Is NCL's P&L drag improving faster than expected?
A: While we're pleased with NCL's performance and the narrowing uncertainty, our guidance remains unchanged. We still expect a P&L drag of $2 billion exiting 2025 and $1 billion exiting 2026. It's too early to extrapolate current successes, but we'll update our outlook later this year. -
Cost Savings Ahead of Plan
Q: Are cost savings progressing faster than expected?
A: Yes, we've realized an extra $500 million of cost saves earlier than expected, reaching 55% of our total target by end-2024 instead of the previously expected 50%. This outperformance is driven largely by the Non-Core and Legacy unit (NCL), benefiting from the restructuring of Credit Suisse. -
Basel IV Impact on Capital
Q: What's the expected Basel IV impact on RWAs?
A: We still expect a $25 billion increase in Risk-Weighted Assets due to Basel III finalization on January 1, 2025, representing a 5% increase. This includes $15 billion in the core and $10 billion in non-core. The estimate remains the same, and we'll update if there are changes. -
Wealth Management Sweep Deposits
Q: How are sweep deposit rates and balances changing?
A: Our sweep deposit balances have decreased slightly from the previous $35.7 billion, with about one-third being advisory assets. We'll introduce new rates in the fourth quarter, factoring in competitive dynamics and the value of our insurance coverage. The impact on pretax profit is expected to be around $50 million annually, net of offsets. -
Investment Banking Costs
Q: Why did IB costs rise more than revenues?
A: The quarter-on-quarter cost increase in Investment Banking is due to compensation-related effects and having Credit Suisse personnel for the full quarter, compared to only one month in the prior period. This caused costs to drift up slightly more than revenues. -
Return on Core Tier 1
Q: How is the return on core Tier 1 progressing?
A: Our underlying return on CET1 capital is 9.2% for the first half, ahead of our mid-single-digit target for 2024. While we're performing strongly, we'll provide an updated outlook for 2025 later this year. -
Wealth Management Americas Profitability
Q: How will you improve Wealth Management Americas margins?
A: We're working towards achieving a mid-teens profit margin in Wealth Management Americas over the next couple of years. The impact from sweep deposit repricing is modest and manageable, and we're focused on actions to enhance profitability. -
Loan and Deposit Growth Expectations
Q: What are your assumptions for loan and deposit growth?
A: We expect loans in both Global Wealth Management and Personal & Corporate Banking to decline slightly due to balance sheet optimization efforts. Deposits in GWM are expected to remain flat, while P&C deposits are anticipated to grow over time. As interest rates decline, we foresee a tapering in deposit mix shifts.
Research analysts covering UBS Group.