UBS Group Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2023

Key Takeaways

  • UBS met its FY 2022 targets with a net profit of €7.6 bn, a 17% return on CET1 capital and a 72.1% cost-income ratio, while Q4 delivered $1.7 bn net profit (14.7% RoCET1) and a 75.8% CIR.
  • Wealth Management attracted CHF 23 bn of Q4 net new fee-generating assets (8% growth) and €60 bn for the full year (4% growth amid equity market declines), and Asset Management net new money totalled €25 bn driven by client demand for high-yield solutions.
  • Regionally, Americas saw €21 bn of SMA inflows and €10 bn in private market commitments; Switzerland delivered record deposit and loan volumes with 7% FGA growth; EMEA posted its best Investment Bank revenues; APAC grew net new FGA by 12%, claimed #1 non-domestic share in ECM and launched the We.UBS digital platform in China.
  • Technology investments of €4 bn are driving a 20% productivity uplift in Agile teams, 600 applications decommissioned and 65% cloud penetration, delivering €200 m in cost savings for 2023 and boosting simplification and automation.
  • Capital and returns remain robust: generated €7.5 bn of CET1 capital in 2022, returned €7.3 bn to shareholders (95% payout including €5.6 bn buyback) and is targeting >€5 bn share repurchases in 2023 while maintaining 15–18% RoCET1 and 70–73% cost-income guidance.
AI Generated. May Contain Errors.
Earnings Conference Call
UBS Group Q4 2022
00:00 / 00:00

There are 16 speakers on the call.

Operator

Ladies and gentlemen, good morning. Welcome to the 4th Quarter 2022 Results Presentation. The conference is now being recorded for publication or broadcast. Star and 1 on your telephone. At this time.

Operator

It's my pleasure to hand over to Sarah Mackie, UBS Investor Relations. Please go ahead, madam.

Speaker 1

Good morning, and welcome, everyone. Before we start, I would like to draw your attention to our cautionary statement slide at the back of today's results presentation. Please also refer to the risk factors in our annual report together with disclosures in our SEC filings. On Slide 2, you can see our agenda for today. It's now my pleasure to hand over to Ralph Harmer's Group CEO.

Speaker 2

Thank you, Sarah. Good morning, everyone. Great that you're all on the call. I will take you through the results like you're used to. In 2020, we delivered for our clients and shareholders, and that was in challenging market conditions.

Speaker 2

We provided sound advice to our clients, partner with them to help achieve their goals. Our strategy and what differentiates UBS is clear and as shown on the Slide 3 here, we are globally diversified with leading positions across the U. S, Asia Pacific, EMEA and Switzerland. We have outstanding client franchises and they're underpinned by balance sheet for all seasons, a strong risk culture and an intensified focus on costs. As you know, our business model is highly capital generative, supports both strong returns on capital as well as return off capital.

Speaker 2

If I move to Slide 4, you get basically a full year of hard work on one slide. Good financial results in 2020. We achieved our group financial targets for the full year, net profits of €7,600,000,000 and our return on CET1 capital was 17% and our costincome ratio was 72.1%. Turning to Slide 5. Throughout 2020, we were a source of strength for our clients, and we relentlessly focused on their needs, While delivering for them across our platform.

Speaker 2

And you see the proof points here laid out across the different areas, invested assets, deposits loans, the global markets activities. Across our EUR 4,000,000,000,000 in invested assets, we provided advice, at Bespoke Services Seamless Solutions. We helped our clients to reposition their portfolios in a world that was changing quickly, take advantage of longer term opportunities as well. Net new fee generating asset flows were CHF 23,000,000,000 for the 4th quarter, representing a growth rate of 8%. This resulted in €60,000,000,000 of flows for the full year, which translates to a solid 4% growth rate in the context of global equity market declines.

Speaker 2

We continue to capture for our clients We continue to capture our clients' demand for higher yielding products through our savings, our certificates of deposits, our money market funds. Money market inflows in Asset Management were SEK 16,000,000,000 for the quarter and three quarters of that came from GWM clients. And this brought Asset Management total net new money to €25,000,000,000 for the year. Net new deposits turned positive in the 4th quarter, driven by Switzerland and Asia Pacific. And for the full year, we delivered 17% net interest income growth in Wealth Management and P and C.

Speaker 2

In the Americas and Switzerland, we delivered positive net new lending in every quarter, without relaxing our strict underwriting standards. And this resulted this result more than offset the continuing deleverage activity that we've seen in Asia Pacific. For our Institutional clients, 2020 was a tale of 2 halves really. The first half of the year was driven by strong equity markets activities with foreign exchange and rates then taking spotlight in the second half. Through a wide range of market conditions, our diversified product mix in global markets and our agile way of allocating capital and resources where it needs to go that allowed us to provide comprehensive services to our clients.

Speaker 2

Record performance in our equities franchise and 2nd best FRC performance on record helped offset the impact of industry wide slowdowns in activity across Global Banking. As the leading Global Wealth Manager, our diversified footprint empowers us Q2, our strategy across regions to drive growth and efficiency. And you see an overview of the regional performance here on Slide 6. And the regional picture is very important. That's where the business comes together for our clients.

Speaker 2

Just starting in the Americas, where our clients continue to turn to us for Advice and Solutions. Client demand for our separately managed account offering remained strong with another €4,000,000,000 inflows in the 4th quarter. Net new money and SMAs totaled €21,000,000,000 for the full year. We also saw continued interest in alternatives, leading to €10,000,000,000 in net private market commitments for the year. In the U.

Speaker 2

S, we already have over 20% of the Barron's top 100 private wealth management teams, and we continue to recruit high quality advisers The second half of the year to support our industry leading advisers productivity. Our recruiting efforts also supported €4,000,000,000 in net new fee generating assets and EUR17 1,000,000,000 for the full year. Our economists are projecting that EUR23 billion will be a challenging year for the U. S. Economy as inflation and higher interest rates create headwinds for economic growth.

Speaker 2

And nevertheless, our priority for the region is to drive organic growth and build on our scale with our Core Wealth and GFIW clients. We will leverage our investment banking and asset management capabilities to deliver the whole of UBS to these clients. We will continue to invest in our digital capabilities to improve client connectivity to our advisors, and we will look to become the primary bank for our core clients by improving our banking capabilities. At the same time, our efforts to simplify processes and invest in infrastructure and controls will be complemented by strategic and tactical actions and cost to support improvements in our costincome ratio. Now moving to our home market, Switzerland.

Speaker 2

The stability of the economy and our number one position continues to support a record level of deposit and loan volumes, strong profitability and growth. Net new fee generating assets flows were €5,000,000,000 in the 4th quarter, €9,000,000,000 for the full year and that's a growth rate of 7%. We also saw €8,000,000,000 in net new deposits in the 4th quarter €9,000,000,000 for the full year. For 2023, our focus in Switzerland is to deliver above market growth. We will continue to invest in our strategic technology initiatives and support our clients' transition to mobile banking, while remaining disciplined on expenses.

Speaker 2

In EMEA, we maintained our momentum with clients in the 4th quarter as well. With EUR 11,000,000,000 in net new fee generating assets for the quarter, we brought in €20,000,000,000 for the full year and after 6% growth rate, that's supported by strong close in the Middle East. In the Investment Bank, we had our best year on record for both revenue and profit before tax, supported by a record in Global Markets and Outperformance in Global Banking as well. Elevated and volatile energy prices continue to have a significant impact on macroeconomic activity, although our economies are becoming more and more optimistic about downturn being shallow. Our optimized EMEA footprint positions us well in the current macro environment, and this affords us the ability to be focused on targeted growth opportunities across Europe and the Middle East.

Speaker 2

So a strong year for EMEA. And lastly, Asia Pacific. The residual impact of the pandemic and concerns over economic growth consistently weighed on investor sentiment throughout the year. However, our clients' trust in our advice and capabilities led to 12% growth in net new fee generating assets for the year. In EIB, we moved up 5 spots to claim the number one position in Equity Capital Markets for non domestic banks for the full year.

Speaker 2

We delivered the best M and A on record, and we were recently named the best investment bank in Asia and Australia by Finance Asia. Now the easing of COVID related restrictions in China has led to a more optimistic outlook for 2023. We believe 5% economic growth is back on the table for China and an accelerating beginning in the next few accelerating acceleration of the growth beginning in the next few months. While client sentiment has improved, they are taking a wait and see approach so far. We remain well positioned to support our clients, both onshore and offshore in China and the rest of Asia Pacific as activity resumes.

Speaker 2

Longer term, we remain focused on executing our strategy to capture growth. In October, we launched We. UBS, the first digital wealth management platform from a global wealth manager in China. And in Southeast Asia, we are focusing on expanding our GFIW And as you can see, Technology is key to many of our achievements this year and next year will be no different. So I'd like to take you through our technology delivery on the next slide.

Speaker 2

You can see some examples here on Slide 7, how we are investing our €4,000,000,000 technology budget to make technology differentiator through simplification, automation and by improving our clients' experience. And this transition also directly contributes to the bottom line with approximately €200,000,000 in cost savings for 2023 and our plan is to continue to reinvest this. Let me give you some examples of how we're driving this. We now have 18,500 employees operating in Agile. In technology, 68% of these are engineers and that compares to 55% when we started Agile.

Speaker 2

So basically, you see a 13% point increase, which is a 20% productivity improvement. And next to the efficiencies and the productivity improvement that this brings, It also delivers a faster delivery of technology change, so quicker time to market of improvements. We've also decommissioned 600 applications in 2020 2, and we have now 65% of our computing power on the cloud. As you can see in the next slide, we remain very well positioned for the current environment and maintain the balance sheet for all seasons. In 2022, we generated €7,500,000,000 of capital, of which we distributed €7,300,000,000 including a €5,600,000,000 share repurchase.

Speaker 2

Our capital liquidity ratios are strong. Our balance sheet is healthy. Our strong balance sheet and risk management discipline allows us to support our clients, meet regulatory requirements and deliver attractive and sustainable capital returns to shareholders. On Slide 9, you can see our progress on sustainability. As you know, sustainability is a core part of our strategy.

Speaker 2

We reduced our greenhouse gas emissions, our own greenhouse gas emissions by another 11% as we upgrade buildings and continue to source 100 percent renewable electricity globally as well. We're proud of the progress that we're making on our objectives to better reflect the diversity of our workforce in leadership positions, and we expanded our sustainable product offering. And we're proud to maintain our industry leading ESC ratings here as well. The summary of the financial results, You see that on Slide 10. I've already mentioned the good performance for the full year.

Speaker 2

For the quarter, we had strong flows and we managed the discipline. We had solid results considering seasonality and the macroeconomic backdrop, which enabled us to wrap up the year comfortably within our targets. Slide 11, which is more or less looking forward, we leave our financial targets unchanged for 2023. We're confident in our ability to deliver 15% to 18% return on CET1 capital and to stay within the range of 70% to 73% of cost to income ratio. Our capital guidance is also unchanged.

Speaker 2

At our current capital levels, we are in a strong position to fund business growth and a progressive dividend, while returning excess capital to shareholders via some share repurchases. During the 1st 4 weeks of this year, we bought back €500,000,000 worth of shares and we are targeting at least €5,000,000,000 for €23,000,000 With that, let me hand over to Sarah. Sarah?

Speaker 3

Thank you, Ralph. Good morning, everyone. Starting on Slide 13. In 2022, we delivered a good performance in a challenging environment. Our global franchise enabled us to meet our group financial targets both on a reported and underlying basis with strong cost control, risk management and capital returns.

Speaker 3

Now moving on to the quarter on Slide 14. Net profit was $1,700,000,000 with a reported return on CET1 of 14.7% and a cost income ratio of 75.8%. The underlying performance is on the bench and the delta between reported and underlying is in the appendix. Revenue was down 8% and expense was down 13%. FX impacted both by approximately $200,000,000 for a net effect of negative $25,000,000 The net credit loss expense was $7,000,000 compared with the $27,000,000 release last year, reflecting great stability in our credit metrics and strong risk management.

Speaker 3

The effective tax rate in the quarter was 14% plus compared with 21% a year ago due to deferred tax assets. For 2023, we expect it to be around 23%. Let's start with 4th quarter revenue on Slide 15. In addition to the usual seasonality, The macroeconomic environment led to depressed equity markets and low levels of client M and A and Capital Market activity. However, we saw increased activity in fixed income and the benefit of higher rates.

Speaker 3

As such, our underlying revenue ex FX was down 9%, with an increase from NII in GWM and P&C, more than offset by lower asset base and transaction fees as well as lower IB revenue. Moving to NII on Page 16 and starting with the top chart. In 2022, we added over $1,000,000,000 in net interest income with the benefit of higher rates partially offset by deposit volume and mix. In the bottom chart, you see the quarterly movements. NII of $2,100,000,000 was up $263,000,000 or 14% quarter on quarter.

Speaker 3

This strong results reflects the benefit of our global franchise with every region contributing across GWM and P and C. Almost half of the increase was in Swiss francs and the rest mostly in euros and in U. S. Dollars. As you would expect, the benefit of rates shown in the second bar was the main driver.

Speaker 3

Moving to deposit volumes. Total deposits rose 6% sequentially. This included $9,000,000,000 of net new deposits, which reflected a 7% annualized growth rate and with strong contributions in Switzerland and in APAC. We have seen continued demand for our products in both P and C and Wealth Management with the demand for savings products exceeding sweep outflows. Moving to deposit mix.

Speaker 3

While the level of sweep outflows was similar to last quarter, We are seeing a deceleration of mix shifts in U. S. Dollars but some acceleration in euro. We haven't seen any shifts in Swiss francs yet, but we expect deposit mix impacts across currencies. Looking ahead, based on the current forwards, our exposure across Swiss francs, euros and U.

Speaker 3

S. Dollars Means we expect 2023 NII to be higher than 4Q 2022 annualized. For 1Q 2023, we anticipate a lowtomidsingledigitincreaseversus4q22. Quarter. Now turning to comments on Page 17.

Speaker 3

For the full year, as you can see on the chart, expense was down 4% or up 0.7 percent ex litigation and FX. If you also exclude variable comp, expense was up 2.6%. The size of and immediate actions on costs in the second half of the year Have contributed to us achieving our cost income ratio target for the full year despite a challenging revenue environment. Moving to the table at the bottom. This quarter's operating expense was down 13% year on year.

Speaker 3

Excluding litigation and FX, the number was up 1%. Inflationary pressures on salaries, higher technology costs and T and E were mostly offset by efficiencies. For 2023, we expect cost ex litigation and FX to increase by 2% to 3% year on year. We are managing the cost base and giving guidance considering a range of economic scenarios. The guidance also reflects the annualization of last year's elevated inflation, continued investments and the expected benefit from efficiencies.

Speaker 3

Let's turn to these efficiencies on Slide 18. In 2021, we announced a $1,000,000,000 gross savings program to be achieved by 2023. I am pleased to report that we have already achieved $700,000,000 to date, $100,000,000 ahead of plan. To deliver that result, we effectively implemented a number of measures across the board, including restructuring, structural compensation adjustments, optimizing our footprint, reducing consultant and vendor spend and executing our tech strategy with discipline. Through the addition of new initiatives, We are now extending our gross cost savings program by 10% to 1,100,000,000 and this is while absorbing FX headwinds of $100,000,000 We remain laser focused on costs and committed to delivering the structural and tactical measures necessary to achieve both our guidance and our target costincome ratio.

Speaker 3

Let's move to our businesses, started with GWM on Page 19. JWM profit before tax in the quarter was $1,100,000,000 down 14% on an underlying basis. Revenue was 5% lower than last year with Asset Based and Transaction revenue down in all regions, partially offset by net interest income. We continue to actively manage deposits across margins, volumes and mix, driving NII up 35% year on year with positive net new deposits and continued impact of deleveraging on net new loans. Operating expense ex litigation and FX was flat year on year.

Speaker 3

Net new fee generating assets were $23,000,000,000 in the quarter and annualized growth rate of 8%. We had positive flows in all regions, mostly into advisory mandates and SMAs. For the past 12 months, we attracted $60,000,000,000 of net new fee generating assets, which represents a 4% growth rate. Moving to Asset Management on Page 20 with a profit before tax of $124,000,000 total revenue decreased 31% with lower net management fees driven by market headwinds and FX and lower performance fees. The cost income ratio was 75% with lower revenue and expense down 4% as we benefited on FX and had lower personnel expenses.

Speaker 3

Net new money in the quarter was EUR 11,000,000,000 of which EUR 16,000,000,000 went into money market funds as we successfully captured high end demand for cash like solutions. Excluding money market, we saw €4,000,000,000 inflows into sustainability focused and impact investments and $4,000,000,000 into SMAs, which were offset by outflows in our active equities and fixed income businesses as clients continued to rebalance portfolios. While the Asset Management business has been impacted by markets, The franchise has important capabilities in key areas of focus, namely sustainable investments with EUR 178,000,000,000 of invested assets, Real Estate and Private Markets with over EUR 100,000,000,000 and SMAs totaling EUR 125,000,000,000. Now on to the IB on Slide 21. VIB delivered $112,000,000 in profit before tax and a 4% return on attributed equity.

Speaker 3

Revenue in Global Markets of $1,400,000,000 was down 8% ex FX against a record 4th quarter last year. In Equities, high correlation and the ongoing macro uncertainty dampened client volume, particularly in derivatives and cash equities. Our performance in the U. S. Was weaker year on year, and we are continuing to invest in the franchise to bolster our capabilities.

Speaker 3

However, we delivered the best 4Q on record in our FX, Rates and Credit Business. Global Banking revenue was down 52%, in line with very low levels of industry activity across advisory and capital markets, but with strength in APAC and EMEA. Operating expense was up 12% ex litigation and FX due to compensation adjustments that we made in 4Q 2021. Despite a challenging 4Q, DIB has delivered another year of strong results with a return on attributed equity of 15%, better revenue on RWA than any U. S.

Speaker 3

Peer and record revenue in Equities, Derivatives and Solutions, financing and prime brokerage. This was achieved in a rapidly evolving market context and with one of the lowest banking C4 is on record. Yet, we had record M and A in APAC, and we outperformed in EMEA. Wrapping up on the businesses with the excellent performance in P and C on Page 22. Profit before tax in the 4th quarter was CHF 504,000,000, the best quarter in over 10 years when excluding one off gains.

Speaker 3

This result was largely driven by 21% higher NII combined with strong cost discipline. Overall, total revenue rose 10% year on year with small decreases in recurring net fee income and lower transaction based income. We consistently engage with our clients, and we're able to deliver EUR 2,000,000,000 of net new investment products over the past 12 months, an annualized growth rate of 8%. We also saw EUR 7,000,000,000 of net new deposits and EUR 4,000,000,000 of net new loans. We delivered a costincome ratio of 54%, and costs were up 1% on an underlying basis.

Speaker 3

Included in these results are strong efficiencies and technology investments. A good proof point is the increase of 10 percentage points year on year in the share of personal banking clients that are active mobile users, which benefits our clients and creates operational efficiencies. Moving to capital on Page 23. At 14.2%, we maintained a strong capital position while delivering attractive capital returns. On the walk, starting at 14.4% at the end of last quarter.

Speaker 3

Net profit contributed 50 basis points, offset by capital returns to our shareholders also at around 50 basis points. The net currency effect was close to nil quarter on quarter as the FX impact on CET1 and RWA offset each other. Looking ahead, our guidance on regulatory driven RWA remains consistent with last year as shown in the appendix. Separately, we expect the introduction of the minimum tax in the U. S.

Speaker 3

To increase our cash tax rate and affect our CET1 capital accretion. Based on 2022 profitability, this would translate to around EUR 250,000,000 lower CET1 accretion, which will come back over time as mentioned in our report. Quarter. Wrapping up on Slide 24. For 2022, we are proud of what we delivered for our clients, Thank you for your participation and good morning.

Speaker 3

We returned $7,300,000,000 of capital for a payout ratio of 95%. We are committed to our strategy, to discipline execution and to creating value for our shareholders. We entered 2023 from a position of strength. We expect to support our client franchises and invest for growth while remaining committed to a progressive dividend and repurchasing over $5,000,000,000 of shares. With that, let's open up for questions.

Operator

Chien. The first question is from Kian Abou Sain from JPMorgan. Please go ahead. Yes. First of all, thank

Speaker 4

you for taking my questions. First question is regarding Asia. And can you just talk a little bit about What you're seeing in Asia, you made a very brief comment, Ralf, but maybe a little bit more, Do you see any releveraging change? Do you see any change in transaction volume pickup on net new fee generating asset pickup and what should we look out first in that respect in Wealth Management. Secondly, in respect to forward curves, can you discuss What interest rates you use for the key markets in your assumptions on NII guidance 1st quarter, but also more importantly for 2023.

Speaker 4

And what can you talk a little bit about beta in that expected net interest income forward assumptions for 2024, 2025, what rates you're using at this point?

Speaker 2

Thank you, Kean. So the color I can give is limited, honestly, given the fact that beyond closing the year and this update. There's only like 3 weeks, 3.5 weeks of experience of what we see. But what we can tell you is that you did see also in the 4th quarter further deleveraging in Asia Pacific. We sense that towards the end of the quarter that came to a halt there.

Speaker 2

So too early to say whether that is Stop or not, but that's what we saw. Then in terms of the mood in Asia, I think it's more upbeat. The markets clients are surprised by the quick opening of China, the action oriented approaches by the Chinese also to embrace the openness to get the economic growth, to get investors in, regulators reaching out as well. So I think that's all very positive on one side. Dan, clearly, the New Year started, everybody has their festivities.

Speaker 2

So the question there is really how does it kind of How does this continue then? So for the moment, what we have seen in the recent rally is from our wealth clients actually a wait and see approach. So in terms of activity level and flows, wait and see as well. Yes, Sarah?

Speaker 3

Yes. In terms of the forwards. We are following the forwards, and we look at them all the time. And so you can use the forwards that are available now or as of Friday for your analysis. So when you think about The right expectations that we are seeing in the different markets, we are seeing that the Fed continues to increase probably until the Q1 and then stabilizes from there.

Speaker 3

And then on that is SMB going to the 1.5% Nave level, the SCB around the 3% and then coming down a bit. And Bank of Italy learned a bit about that. So we're going exactly with the forward analysis as we do our analysis. In terms of the betas, what I can tell you is that we are really considering the mix of our businesses. We don't disclose specifically the betas.

Speaker 3

But we are considering all of the mix across GWM and P and C at a granular level. And What you are seeing is the experience that we have had is reflective of actually So far, our models have been productive on the better side. We have seen a fair bit of mix in the U. S. And as I mentioned, in terms of euro.

Speaker 3

We are seeing to see some mix. And in Swiss francs, we would expect it to come, but it hasn't come.

Speaker 2

Thanks,

Speaker 3

Jeff. Yes.

Speaker 2

Next question. Thank you,

Operator

The next question is from Flora Bocahut from Jefferies. Please go ahead.

Speaker 3

Yes. Thank you for

Speaker 5

The first question I wanted to ask you is regarding the cost income target, which you have reiterated EBITDA today for the midterm on 70% to 73%. It's been now when we look at the underlying profit level, so ex any one offs. It's been 3 quarters that you've been outside that range. So what makes you think you can get back towards the range and how quickly can we expect that you will get back towards that level of cost income ratio already in the next few quarters? And the second question is just coming back to the net new money in APAC.

Speaker 5

I mean, obviously, you had stronger than usual run rate in Switzerland, in Europe, but then not so much in APAC. You're talking about the wait and see approach. Would it be fair to say that some of the outflows that have been seen elsewhere may not yet have been transferred to one of the competitors and could be waiting to be picked up. Is that a fair assumption?

Speaker 2

So we'll start with the second one and then Sarah can take you through the first one there. So on the flows in Asia, actually, we saw healthy flows in Asia throughout the year really in net new fee generating assets and also in the 4th quarter at EUR 3,400,000,000. So that was actually more continuation of flows coming through, very solid client relationships. If your question is to which extent is some of these flows related to the status of other financial institutions. We can only say that Our growth is that is not the primary source of our growth at all.

Speaker 2

You should know and you do know that we're the number one wealth manager in Asia. We have a very clear position around how we deal with our clients and also what our risk appetite is with clients. And therefore, it is more because of what we represent and what we do that we attract these flows than the other way around. Sarah?

Speaker 3

In terms of the cost income ratio underlying, and when you're looking at what's coming ahead, first of all, you have the benefit of rate. So NII is continuing to be a strong contribution to our results. 2nd of all, you've got the contribution from the flows that we are continuing to generate. And after that, in terms of the equity markets, obviously, there are different ranges of scenarios and everybody can make their assumptions there. In terms of the cost side, you're seeing us be a very rigorous there.

Speaker 3

And so the expense guidance that we gave you, 2% to 3% ex FX and litigation is, of course, reflected in our costincome ratio guidance.

Speaker 5

Thank you.

Operator

Your next question is from Andrew Combs from Citi. Please go ahead.

Speaker 6

Good morning. One on capital return and then one on FX. If I look at capital return, you've guided to greater than EUR 5,000,000,000 for The buybacks, I know it'd be greater than comment. I guess my question would be why did you not feel comfortable Coming out with guidance that was more similar to full year 2022, so the 5.6% that you executed. I know you flagged The CMT tax change in the U.

Speaker 6

S, but just trying to understand your rationale for why I mean the greater than 5, Which is obviously less than what you achieved last year. And then my second question is just on FX. I know your cost guidance So the growth in 2023 is ex FX movements. Obviously, the FX move overall should be Yes, a tailwind this year for you in terms of profitability, but potentially a headwind to your cost line. So perhaps you could give us an idea of What you think the magnitude on revenues and costs would be based on current FX rates versus the 22% average?

Speaker 6

Thank you.

Speaker 2

Thank you, Andrew. I'll take the first one, Sarah, the second one. So on the capital guidance, I think if you compare our language that we used last year around this time and this time, it's more confident because last year, we Basically, I gave you guidance of around EUR 5,000,000,000 and now basically, we're giving you above EUR 5,000,000,000. And honestly, Why don't we give precise numbers? Because it is not a precise business that we're in.

Speaker 2

So we have to deal with market circumstances, with developments, with sentiments, etcetera, etcetera, etcetera. And we think it is better to Give you a guidance that we're confident in on delivering and then update you while the year goes by. Sarah?

Speaker 3

In terms of the FX, all I would give you as a reference point is that the FX was and impact, for example, this quarter of approximately $200,000,000 in both directions, so both on the expense and on the revenue. And so That gives you an idea of what it could look like, but of course, it will depend on the FX curve.

Speaker 6

Thank you.

Operator

Next question is from Jeremy Siggy from BNP Paribas. Please go ahead.

Speaker 7

Thank you. Good morning. Two related questions, please, both on net new money flows. Firstly, your outlook comment has quite a cautious comment about client sentiment may affect flows. I know that's unchanged language from the previous quarter.

Speaker 7

I just wondered if there's anything specific in that that you're seeing or if that's just general Caution. That's my first question. And then the second one, slightly related. I know it's sensitive for you to talk about flows From or relating to your competitors. But I just wondered why you wouldn't be the natural home for out flows coming out of a competitor.

Speaker 7

You're saying that's not the primary source for your inflows, which is a bit surprising. Why wouldn't you be the natural home for some of those flows to relocate to.

Speaker 2

Thank you, Jeremy. So on the first one, it is general caution. So since you asked the question so specifically, it is general caution. And it has to do, Jeremy, with Fact that we are at the start of the year, we see some positive signals around China opening up could be a Report of Economic Growth and Constructive Market Environment. We see the LCM, the Leveraged Capital Markets Coming back to life a bit, which is normally a leading indicator for Capital Markets to open up as well.

Speaker 2

So those are positive signals. But on the other hand, We're waiting for inflation numbers and with that to get a sense for How strict central banks will have to move in order to curb that inflation to break it into a nonstructural inflation To a lower level and what the cost of debt could be to the economy. So that's why we are generally cautious because these are the things that play. I do expect in the next couple of weeks even to have a bit more clarity certainly about inflation, Central Bank movements, China further opening up, corporate results coming through as well. So I do think that the next couple of weeks could give us some hints as to how firm market recovery could be.

Speaker 2

So and that was so but for the moment, it is general caution there. On the second question, There is many places where clients can go. In general, given the fact that we are the largest Wealth Management World. There's not necessarily new clients for us, right? So we already deal with clients that others have as well.

Speaker 2

So although we are certainly the natural place for these clients to go to, they are generally already a client of ours. That is one aspect. The other aspect is that there is a bit of a difference in risk appetite in some situations as well. So those are the 2. Thank you.

Speaker 7

Thanks very much. Thank you.

Operator

The The next question is from Anke Rangan from Royal Bank of Canada. Please go ahead.

Speaker 8

Yes, thank you very much. I just wanted to ask on costs again. I mean, given we probably adjust for FX rates. I mean, I understand you don't want to give any more guidance, but can you give us maybe like the FX mix on costs? Or If we think about the cost income ratio, should FX effects basically be neutral for the cost income ratio?

Speaker 8

And then in terms of the Investment Banking, you said 2022 is a good revenue year, The cost income ratio is obviously 78%. Is that sort of like where you think the cost income ratio should be? Or do you think it to be trending lower in the investment bank. Thank you very much.

Speaker 2

Okay. So I'll start with the second question, and Sarah will take the first one, Anke. So on the second one, basically the way we look at our investment bank, as you know, is an investment bank that is has to return its cost of capital. And there was a combination here of the use of capital and it is a capital light investment bank, as you know. And with that, therefore, also the consequences for the costincome ratio.

Speaker 2

So Since we are capital light on the investment bank, we are best practice in return on risk weighted assets. The costincome ratio may not be as competitively seen because we invest heavily in technology as well, because that's the way we play in the Investment Bank. And therefore, the return in the Investment Bank. And we had the last 3 years a very good return, all 3 years good returns And also returning more than cost of capital. That is more for us the indicator that we manage the investment banking on Than per se the cost to income ratio because in the markets that we play in, we need to continue to invest in technology and artificial intelligence Because that's the game we play in the Investment Bank.

Speaker 2

So that, I hope, explains you as to how we look at the Investment Bank.

Speaker 3

And in terms of the costincome ratio, you mentioned it and it's a great way to think about it. This is really very neutral in terms of how it's affected by FX. So the best way to think about it is that all of our guidance is stunning regardless of the FX Because on the cost income ratio, both the numerator and the denominator are affected in opposite directions.

Speaker 8

Okay. Thank you very much.

Operator

Your next question is from Adam Terlak from Mediobanca. Please go ahead.

Speaker 9

Good morning. Well, thank you for the questions. I've got another one on cost and then one on capital. On expenses, I'm actually a little bit surprised on the cost guide, 2% to 3%, Given that previously you've spoken ex variable compensation, but now you seem to bake that into the guide. So you can give us a bit of color about kind of base case for revenues opposite that, particularly in GWM, which is clearly FA comp is very much linked to the fee line there.

Speaker 9

So just a feel for your base cases on planning and why a switching guidance from Kind of an underlying inflation figure to which excluded variable comp to one that's now all in. And then secondly, it's a bit of A technical question around Basel IV. I appreciate the slide in the appendix. Can you just give us a bit of a color about How the short term inflation to your risk weight is front loading some of that Basel IV impact, The relation between kind of the 2022, the 2023 inflation and what that's done to Your 2025 Basel IV impact. And can you split that out a little bit between credit risk and operational risk and how we should be thinking about Short term versus the longer term there and the interaction between the 2.

Speaker 9

Thank you.

Speaker 3

In terms of the costs. We wanted to give you a guidance that is reflective of how we manage the place, which is the And of course, I think ex FX and ex litigation is helpful in terms of the exclusions. The reason for the range is actually to consider different revenue outcomes as well as on the different paces of investments that could be related to that. So that's really on the first one. On the second one What you're seeing is exactly how you framed it in your question, which is that we are seeing Some timing difference.

Speaker 3

So the total trip between the end of 2021 and the adoption of Basel is about that $30,000,000,000 that we talked about exactly a year ago. But we are able to offset on the increases that happened along the way with reductions in the final adoption because it is addressing the same risks that have already been covered by some of the model updates that we put in place. So it's exactly as I think you expected in the framing of your question. In terms of where it's coming from, There is also one element that is interesting, which is that as you are moving from 2024 to 2025, because of the operational risk and how it's calculated, there is some of the exposure that just drops from the record, and so there is a little bit of help there.

Speaker 9

Can I just follow-up on operational risk? I know Switzerland hasn't quite Defined ILM, whereas Europe has gone to 1. Do you know where the debate on that is? Because I assume you've got Operational losses as part of the calculation on your Basel IV impact.

Speaker 3

Yes. So operational losses is included,

Operator

Your next question is from Amit Goel from Barclays. Please go ahead.

Speaker 10

Hi, thank you. I have one kind of follow on question and one different question. The follow on question, I guess, come back to and you see generating asset growth. I guess there have been a few moving parts in 2022 Yes, driving that strong performance. But I'm just kind of curious if in 2023, given the China reopening, You would kind of put it as a base case that net new fee generating asset growth should be stronger this year than last.

Speaker 10

And the second question, Just relating to the medium term investment plans and in particular on the digital side in the U. S, Just curious your thinking in terms of investment there. With the Wealthfront transaction not happening, Is that an area where we should expect some cost growth? Or is that segment of the market not something that you're looking to continue or looking to play into. Thank you.

Speaker 2

Thank you, Amit. So on the first question, So you know that the way we look at net new fee generating assets when we came out with our strategy over the last 2 years in pieces, but specifically also came around with guidance around net new fee generating asset growth is that we expect this to grow around to 5% and Some years maybe a bit below and some years a little bit higher, but it's the 5% that you can count on and that's also the way we see things developing more or less. So that's on net new fee generating assets. Now back to the U. S, Just to kind of make that case once again, I think it's important that we are large in the U.

Speaker 2

S. We are very well recognized brand in the U. S. As I explained in my opening, we're very focused on our wealth clients and on our family office clients there as well. And those need financial advisers that need to be supported by digital tools.

Speaker 2

So we have launched The initial versions of an improved workstation that will be further improved over time. And then we are working on further digitization some of the processes to support their business and increase their productivity as well. As you know, banking in itself is important to us as well in order to develop the product slate for them to be more successful also on the banking side. And since we started this and this is before the update even, we have increased our banking business around deposits by €48,000,000,000 And the loans by €41,000,000,000 So you see the banking business really coming through. And therefore, we will need to continue to invest in that.

Speaker 2

Also in the process of supporting debt flow into our bank in the U. S. Is important as well. Now if you read all these digital components that we have to deliver for the for our Wealth Management clients. And automatically, we are building a base that we can also then develop specific propositions for our workplace wealth clients that we have €2,000,000 of.

Speaker 2

So that's the way you should look at it. Now Honestly, I do think that and most of the people who know me, think there was never an end to technology expenditures and that will also not ever end in the U. S. So for us, this is more a program of continuation of investment and improvement and moving to an agile way of working there as well, like we have done in many other parts of UBS. And then you will have a continuation of technology investments in order to improve each and every part of our franchise there to make it more efficient and make our financial advisers more productive.

Speaker 10

Okay. Thank you.

Operator

The next question is from Magdalena Stoklosa from Morgan Stanley. Please go ahead.

Speaker 11

Thank you very much. I've got 2 questions, both on wealth. The first one is literally a follow-up on your explanation about the kind of U. S. Business over the last couple of years because, of course, we've talked over quarters about that kind of banking penetration, about business banking penetration about the loan penetration as the way to growth to grow that product franchise in the U.

Speaker 11

S. But first, can I ask when it comes to kind of deliverables going forward that you will be holding that kind of U? S. Wealth business to, what would be your key one? Is it still about the deposit, the loan growth, the balances of which you've just mentioned?

Speaker 11

Or is it kind of more nuanced than that? So that's the first question. And the second question is about the Middle East as an opportunity in wealth. I think you very briefly mentioned it in the slides talking about EMEA flows or net flows. But can I just ask, because of course, we don't really focus on the region kind of as much as we probably should, How do you see it as the Wealth franchise?

Speaker 11

What's the plan going forward? And actually, could you give us a sense just how much of those India inflows were actually generated in MENA. Thank you.

Speaker 2

So thank you, Marta. So on the first one, clearly, we go into much more details as to Getting a feel for how the U. S. Business is developing. But what is important here is that we are a top 5 player there.

Speaker 2

We are we have a very specific brand recognition there and we have to build on the strength of our brand there, which basically means that the core of our business is done through our financial advisers, if not almost all. And that is the crucial aspect of it. And what we want to do is support them to be much more predictive. So in terms of the levers that we pull is financial advisor productivity, Not only by supporting them with much better processes, but also with the right and more sophisticated products than everybody else can. Also Global Products, which is basically where the UAS as a global wealth manager comes in as a differentiating tool there as well.

Speaker 2

But on top of that, we are Specifically recruiting those financial advisers that are more productive and that have higher net worth and ultra high net worth clients and are in those geographies where we expect much faster growth. General geographies where there is quite some entrepreneurial wealth creation because the fastest growth in the U. S. Wealth pool comes from entrepreneurial wealth. So it is much more than just a couple of top lines.

Speaker 2

It is very specific as to where do we recruit our FAs, where do we expect the wealth creation to be, who have a proven track record through which we can work, How can we support them with sophisticated products? Where does banking play a role there in the stickiness of those relationships so that they can continue to build the franchise. So there's a couple of indicators that we are looking at as to how we actually grow this business sustainably and not only tactically, that is the important element of our U. S. Business.

Speaker 2

Now when it comes to the Middle It's not new to UBS that we bank the Middle East, but we are growing our teams there. Over the last 2 years, we did open our office in Qatar, in Doha. We have recruited people there. Beyond the Wealth business, we also do services activities there as well. So we're committed to that.

Speaker 2

And you see on the back of recruiting teams in the Middle East, you see more clients coming through and also the flows coming from those clients. And in the 4th quarter, Yes, there were also flows coming through there. These are the ultra high net worth individuals in the Middle East. So that come with high tickets.

Speaker 11

Great. Thank you very much.

Operator

The next question is from Stefan Stalmann from Autonomous Research. Please go ahead.

Speaker 12

Hi, guys. Good morning. Thank you very much for taking my questions. I would like to start with a question on NII, please, on your guidance. You're guiding quite specifically about what should happen between Q4 2022 and Q1 2023, but you were

Speaker 13

a bit less specific for

Speaker 12

the whole year. Do you see any reasonable scenario where on an FX neutral basis, your NII in any of the following quarters, Q2 to Q4 2023, Could be lower than it was or than it is expected to be in Q1 'twenty 23. And the second question, I guess, goes back somewhat to what Magdalena just asked in GWM and the U. S. Business.

Speaker 12

Your Chairman toyed with the idea in a recent interview about publishing separate KPIs for the U. S. Wealth Management business. And I was wondering whether you would consider doing that. And given that you're currently not breaking out the U.

Speaker 12

S. Business at all, whether that would require a change in the divisional setup? Thank you very much.

Speaker 2

Thank you, Stefan. I will answer the last one and then Sarah will answer the first one. So on the last one, it's under consideration.

Speaker 3

Presentation. So in terms of what you should expect, first of all, if you look at The forward, that is what is underlying our guidance. So if you take different forwards, you could certainly see different scenarios going there. And we give you each quarter more information very precisely about the following quarter, But we wanted also to cement that there is a very good story for the full year, which is why we gave you the annualized guidance.

Speaker 12

Right. Thank you.

Operator

The next question is from Andrew Lim from Societe Generale. Please go ahead.

Speaker 13

Hi. Thanks for taking my questions. I'd like to drill down a bit more into Wealth Management Americas and discuss that as Arthur has done. So I mean relative to other regions. As we've seen in Slide 31, that decline of 20% in PBT seems quite This point in compared to other regions.

Speaker 13

I was wondering if you could give a bit more color on whether they're suffering a bit more on the deposit beta or migration side there and whether that represents a CE change going forward in the profit trajectory. And then perhaps you could talk maybe you could talk a bit more specifically about that structural difference in the Americas versus peers in the They didn't suffer such a big decline in PBT in the 4th quarter. It was rather flat or up. And then if you look at the cost income ratio, yours was 86% is still a good 60 percentage points higher and peers. So what are the differences here in UBS Americas versus And what can you do here to really improve that?

Speaker 2

So if you compare us with the peers in the Americas is that the peers that we compete with have a local Banking business, which is very stable in terms of what if it comes to The production of their business of new clients as well as the stickiness of the money and the and with that, where they may need to price in order to manage the shift in the mix of the business. We're very much a wealth manager. That's what we do. And they are a combination of a wealth manager and some have a larger exposure to the local business, Anything to add?

Speaker 3

No. We just obviously, this is also reflecting the level of investments The expense both in the investment side, wallet share as well as the banking wallet share. And on the cost side, both are strategic and tactical. And we certainly plan to improve, but it will take some time for the mix to start becoming more in line with what you are seeing in some of the peers that you're comparing to.

Speaker 2

Okay. Thank you. Thank you.

Operator

And next question is from Benjamin Goy from Deutsche Bank. Please go ahead.

Speaker 10

Yes, hi, good morning. Just one major question left from my side. We got 95% payout in 2022. I was wondering whether we Think about just below full payout as well for this year and this is the main determining factor on how large the buyback can be. Thank you very much.

Speaker 2

Thank you, Benjamin. Thank you for trying again as well. But As you know, we have a very capital generative model. Certainly, in an uncertain environment for us, The first priority is to have a strong balance sheet. The second priority is that where we see growth that we can actually support that growth using capital as well.

Speaker 2

The 3rd priority is that we have a dividend that we want to increase progressively in order to have a good mix between dividends and also a share buyback. But since we feel we are undervalued, we find the buyback even more important. And therefore, we came out with this guidance that we have given. And again, I can't give you more than what we have given, which is the over EUR 5,000,000,000 that we're confident with. And clearly, as the year progresses and there There is further progress on it, and we can update you on it.

Speaker 2

As to where we are, we think where this is going, we will certainly do so. Thank you.

Speaker 10

Fair enough. Thank you.

Operator

The next question is from Nicholas Paehn from Kepler Cheuvreux. Please go ahead.

Speaker 14

Yes, good morning. Thanks for taking my question. I have 2 on Wealth Management. The first one more on APAC and We can see that your number of adviser is decreasing despite China reopening and probably a higher level of activity expected. So Wanted to know how do you intend to capture this higher level of activity with potentially less advisers?

Speaker 14

And the second one is on the U. S. I'd like to know if it's possible to get a bit of color regarding breakdown of your net inflows between an increase of share of wallet from existing clients versus new clients coming in at UBS U. S. Wealth Management.

Speaker 14

Thank you.

Speaker 2

Thank you, Nikolas. So on the first one, we're not really kind of After a specific advisor count, so to say, for us, it is Important that the adviser that we have to have the right clients, to have the right client relationships, they can increase the share of wallet. The productivity of each adviser is important to us as well, and that is what we truly manage on. And we feel that with the current level of advisers and we continue to optimize that and clearly manage for performance and pay for performance that we can certainly cope with some of the upside there. And clearly, we will continue to hire the right advisers as we have been doing up to now, and we will continue to do so also going forward.

Speaker 3

And on your question for the U. S. You can think of the inflow for this quarter as being about half half related to net recruiting versus same store, and same store usually is exactly with the same clients. So that gives you

Speaker 14

Thank you.

Operator

Next question is from Pierce Brown from HSBC. Please go ahead.

Speaker 15

Good morning. Yes, I've got one on Global Wealth and one on litigation. So Global Wealth, actually just a follow on from the previous question, but in terms of the U. S. Advisor numbers.

Speaker 15

I think you talked last quarter about having a strong hiring pipeline, but actually the advisor numbers Look like they've dipped in the 4th quarter. So if you could just talk to what the hiring plan looks like for this year in the U. S. On the advisor front. And the second question on litigation, the French tax case, it looks like the wording in the 4Q report is pretty much Identical to the 3Q report.

Speaker 15

I just is there any update on timing at all on that particular issue? Thanks.

Speaker 2

Yes. And the second one, So what you have read is what you have read and that is what we disclosed and I can't give you more color there. Otherwise, it would have been in that disclosure anyway. So you read it well, Piers. On the first one, also there, We have a we will continue to recruit in the U.

Speaker 2

S. It's just that in the last year when the marks were so high, We basically held back on recruitment in the Q1 and also the Q2 a bit, because with every recruitment, you basically I mean, you have to pay for the business they bring. So and at that moment, we held back a bit and then we accelerated the recruitment and we will continue the recruitment of FAs in the U. S. As I said, it's very important for us to get the FAs that come in at the level of productivity that is basically the market bench for us, right?

Speaker 2

So we are a market leader in terms of FA productivity. We want to keep it at that level as well. And therefore, we have to continue to kind of train our FAs, support them as well on one side, but on the other side also recruit new FAs that come in with a higher productivity level, that come in with the higher wealth clients and that are in areas where we expect the wealth growth to be the fastest. So with that, therefore, also deliver that productivity. So No specific plans other than continuing to further improve the FA productivity as we have been doing over the last couple of years.

Speaker 2

And Actually, over the last couple of years, you've seen our FA count going down, while productivity continued Overall productivity continued to be at least the same level, and that's where you saw that shift towards higher net worth individual clients, higher productive FAs in geographies where we expect wealth to grow as well. And That is basically a campaign that we will continue to run. Thank you.

Speaker 15

That's great. Thank you very much.

Speaker 2

Okay. Okay. In absence of further questions, let me thank you for being with us this morning. As Sarah and I noted, we delivered good results this year and continue to show our strategy performance well across the cycle. It was by no means an easy year, but it was a year of many achievements and strong execution across the regions.

Speaker 2

And I think that our pledge to stay very close to our clients, make sure that we can advise them through challenging times as well that creates the momentum that you have seen also in the Q4 and throughout the whole year. Now while macroeconomic outlook remains uncertain, our strategy and what differentiates us as GBS is clear. We're the only truly Global Wealth Manager. We have outstanding client franchises. We have geographic diversification, which is very helpful.

Speaker 2

We underpin all of that by disciplined risk management, also disciplined cost management. That's what you have seen over the last couple of years as well with our savings program and executing on the savings program and actually increasing the savings program now as well. Our capital position is strong. Our balance sheet is healthy. And that puts us at a great position to serve our clients, deliver strong capital returns to our shareholders in the next year as well.

Speaker 2

Thank you very much and see you next quarter.

Operator

For analysts and investors is over. You may disconnect your lines. We will now take a short break and continue with media Q and A session at 945 UK, 1045 CT.

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