UBS Group AG (UBS) 2015 Q4 法說會逐字稿

Ladies and gentlemen, good morning.

Welcome to the UBS fourth quarter results 2015 conference call.

The conference is being recorded.

(Operator Instructions).

The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to UBS.

Good morning, everyone.

It's Caroline Stewart here, Head of Investor Relations.

Welcome to our fourth quarter results presentation.

This morning, Sergio will provide an overview of our results, and Kirt will take you through the details.

Before I hand over to them, I'd like to remind you that today's call may include forward-looking statements.

These statements represent the Firm's belief regarding future events that may, by their very nature, be uncertain and outside the Firm's control, and our actual results and financial condition may vary materially from our beliefs.

Please see the cautionary statement included in today's presentation, and the discussion of risk factors in our annual report 2014, for a description of some of those factors that may affect our future results and financial condition.

Thank you.

And with that, I'd like to hand over to Sergio.

Thank you, Caroline.

And good morning, everyone.

2015 was another year of disciplined execution where, once again, we showed that we can deliver sound advice to clients, and strong returns to our shareholders in a variety of market conditions.

For the full year, we reported a net profit attributable to shareholders of CHF6.2 billion; a 79% increase over 2014.

Adjusted profit before tax more than doubled to CHF5.6 billion.

And we delivered a return on tangible equity of almost 14%; above our 2015 target of about 10%.

Diluted earnings per share totaled CHF1.64.

As we expected, we were faced with exceptional levels of volatility; a challenging macroeconomic outlook; escalating geopolitical tensions; and a continued deterioration in the risk appetite of our clients.

It is no surprise that the turbulent markets continued to impact investor sentiment.

And our clients' reluctance to remain fully invested has not changed.

Our response is simple and consistent.

We stay close to our clients, and maintain our strong risk discipline, while carefully managing resources.

We made excellent progress meeting future regulatory requirements in 2015.

We created UBS Switzerland AG; established our Group's service company as a subsidiary of UBS Group AG; and we successfully issued our first TLAC AT1 instruments from our holding company.

In addition, we delivered a net cost reduction in the corporate center of CHF1.1 billion, compared to the full year 2013.

While we are slightly behind schedule on cost reduction, we are picking up the pace of execution.

I'm confident that we can deliver on our CHF2.1 billion net cost reduction target by the end of next year, as previously communicated.

In non-core and legacy portfolio, we continued to successfully reduce resource utilization by taking down risk-weighted assets by 14%, and LRD by CHF47 billion.

Maintaining a strong capital position remains a key competitive advantage for UBS.

We continue to have the best BASEL III CET1 basis among large global banks, with a fully applied CET1 ratio of 14.5%.

Our fully applied Swiss SRB leverage ratio increased to 5.3%.

And we believe we are well positioned to comply with future Swiss too big to fail requirements.

As a consequence of our strong financial performance last year, and in line with our capital returns policy, the Board of directors intends to propose for shareholders' approval an ordinary dividend of CHF0.60 per share, up 20% compared to 2014; and a special dividend of CHF0.25 per share.

UBS is the world's largest wealth manager, and the only large-scale player with a truly global wealth management franchise at the center of its strategy.

Our wealth management business's number one focus is to stay close to its clients, and guide them in achieving their wealth objectives.

And we lead the industry at doing this.

In better markets, the businesses put clients' money to work and that happened in the first half of the year.

In more challenging markets, they advised clients to ensure they remain positioned to achieve their long-term objectives, including reducing risk when appropriate.

In the past two years, we have gone -- we have grown invested assets in our wealth management businesses at 8% per year, on average, due both to strong markets, and significant net new money.

Taking our invested assets base to around CHF2 trillion.

Most importantly, profits have grown at nearly twice the rate of revenue, which is a testament to the success of our strategic initiatives to grow higher-margin products and services, like our banking, lending, and mandate offerings; as well as careful management of pricing and good cost control.

While markets have not been kind so far this year, and as the world-leading wealth manager, we will not be distracted from our objective to deliver 10% to 15% annual-adjusted pre-tax profit growth in these businesses over the cycle.

All our business divisions delivered strong results in 2015.

Wealth management delivered its highest adjusted pre-tax profit since 2008; and also made good progress on one of its most critical strategic objectives, growing mandate penetration by 200 basis points.

Net new money was solid in aggregate, despite the effects of our balance sheet optimization exercise and elevated client deleveraging.

We remain focused on attracting high-quality assets, which will drive long-term growth, rather than short-term headlines.

That means we are seeking assets that will be invested over time, and accretive to our results.

Wealth management Americas delivered record operating income, and record net interest income, as we saw continued growth in our banking and lending products.

Net new money was driven by advisors who have been with the firm for over one year, and by very strong recruiting in the fourth quarter.

Personal and corporate banking recorded another excellent performance, posting its best full-year pre-tax profit since 2010, and attracting a record number of new clients, while managing significant interest rate headwinds.

Asset management progressed towards its medium-term goal, growing pre-tax profit by 20% compared with 2014.

In the second half, net new money was affected by money market outflows, and material withdrawals by institutional clients to support their liquidity needs.

While overall net new money for the year was negative, the inflows we saw were materially higher in margin, and, thus, we expect a positive net effect on our revenues in 2016; another example where quality is much more important to us than quantity.

Our investment bank delivered an adjusted return on attribute equity of 31%, substantially above its target of greater than 15%.

The IB achieved excellent financial returns, and stayed close to its institutional and corporate clients, helping them to manage through volatile markets.

We saw strong growth in revenues in FRC and equities, with continued efficient and discipline resource utilization, in line with client activity levels.

We advised on several of the year's landmark transactions, including the two deals named Equity Issues of the Year by IFR.

UBS acted as joint bookrunner on the Santander capital increase; and, in North America, we were sole global coordinator and lead left bookrunner on the $1 billion listing of Ferrari.

For the first time ever, International Financing Review named the investment bank Bank of the Year, highlighting the recognition of our innovative and sustainable operating model that has attracted rewards from the industry.

This is yet another example of the remarkable turnaround of our investment bank.

A few years ago, it would have been inconceivable for UBS to win an award like this; and this is a credit to our employees and our clients, who allowed us to deliver such an achievement.

As I mentioned earlier, our Board intends to recommend an ordinary dividend of CHF0.60 per share, and a special dividend of CHF0.25 per share, which will be paid in May, following approval at our AGM.

We view the ordinary dividend as a reflection of our strong operating performance, while the special dividend reflects the substantial upward revaluation of our deferred tax assets in 2015.

Going forward, we remain committed to our policy of returning at least 50% of net profits to shareholders.

Although it's still very early in the year, our aim is to continue to grow our ordinary dividend, while building the capital needed to address regulatory requirements and to support our growth.

I would like to add a few comments about our fourth-quarter results, before I hand over to Kirt.

The last quarter of 2015 was the most challenging we have experienced in several years, and the risk-off sentiment among our clients intensified.

Having said that, one can't overlook that on an adjusted basis fourth quarter results were up 47% at CHF754 million.

No matter how you look at it, risk aversion is still very high.

Clients know they should invest more, but cash helps them sleep better at night.

And while the long-term outlook remains sound, they are questioning the predictability of tomorrow.

Underlying results in WMA, personal and corporate, and asset management were strong, while our largest businesses were most affected by market volatility and client risk aversion.

Despite this, we were not tempted to deploy more risk or buy unprofitable net new money to flatter our results.

Instead, we stayed close to our clients, took risk off, and continued to focus on our efficiency measures.

Driving sustainable performance and growth are our main priorities; and, as in the past, short-term vagaries of the market will not distract us from our goals.

Kirt?

Thank you, Sergio.

Good morning, everyone.

My commentary will reference adjusted results, unless otherwise stated.

This quarter, we excluded CHF28 million of net gains and a CHF115 million net foreign currency translation gain from the sale of subsidiaries and businesses; and own-credit gain of CHF35 million; a charge of CHF257 million for a debt buyback; and net restructuring charges of CHF441 million.

Reported net profit attributable to UBS Group AG shareholders was CHF949 million, up 11% year on year.

And profit before tax was CHF754 million, up 47% year on year.

We had a reported net tax benefit of CHF715 million, which included a CHF794 million benefit with respect to DTAs, partially offset by current tax expenses.

The annualized return on tangible equity was 11.4% for the quarter.

Wealth management performance reflected very challenging market conditions, with the lowest client activity levels seen since the financial crisis.

Profit before tax was CHF505 million.

It included CHF79 million in charges for provisions for litigation, regulatory and similar matters.

Excluding these charges, profit before tax was CHF584 million.

Operating income was CHF1.9 billion, down 2% sequentially, driven by lower recurring net fee income mainly due to the ongoing effects of cross-border outflows.

Net interest income was stable as higher fee revenues from deposits were more than offset by lower lending revenues, reflecting deleveraging and disciplined lending practices.

Transaction-based income was CHF364 million.

It included a CHF45 million fee received from personal and corporate banking.

Excluding this fee, transaction-based income decreased on significantly lower client activity, primarily in Asia Pacific and emerging markets.

Operating expenses increased to CHF1.4 billion, largely due to provisions as well as the annual UK bank levy and other regulatory charges which totaled CHF102 million.

In addition, allocations from corporate center increased due to higher charges from Group technology as we continued to invest in our platform.

Net new money outflows of CHF3.4 billion reflects both the challenging environment and wealth management's consistent disciplined approach to managing its business.

Net outflows were driven by continued deleveraging as clients reduced risk in response to extreme uncertainty, as well as cross-border outflows and proactive and disciplined balance sheet management.

Invested assets increased to CHF947 billion on positive market performance and currency effects.

Mandate penetration decreased by 60 basis points to 26.4%, largely driven by cross-border outflows.

Monthly gross margin was 79 basis points in October, decreasing to 77 basis points in November and picked up slightly to 82 basis points in December.

For the last two quarters, gross margin from transaction-based revenues has been 16 basis points, the lowest since the crisis; while margins from recurring net fees and net interest income have held up.

Net new money was positive in APAC, despite continued client deleveraging, and together with net inflows in Switzerland, was more than offset by net outflows in emerging markets and Europe.

We expect to meet our 3% to 5% net new money growth target while absorbing cross-border related outflows and maintaining our quality standards.

Despite a challenging quarter, the trends over the past three years underline the business's success in delivering its strategic agenda.

Since the end of 2013, mandate penetration has increased by 440 basis points to 26.4% and we continue to strive to increase this further to 40%.

The business has attracted nearly CHF100 billion in adjusted net new money over the past three years, which is more than double the prior three-year period.

This strong performance was driven by our ultra-high net worth segment.

We'll build on this success and look to capture additional growth opportunities, particularly in high net worth.

Pricing discipline has added almost CHF300 million to annual revenues over the last two years, helping offset the effects of cross-border outflows.

Growth in top-line revenues has been complemented by successful management of costs and we have met our cost-to-income ratio target for the last three years.

The balance sheet and capital optimization program resulted in CHF9 billion reduction in LRD.

Looking ahead, we see additional opportunity to improve both our client offering and our efficiency.

We intend to further optimize the delivery of content by deploying a globally consistent distribution model to capture synergies, as we believe this provides the most value for our clients and shareholders.

We will focus on capitalizing on our scale benefits by streamlining non-client-facing functions.

We are investing in select growth markets and remain committed to a balanced onshore and offshore model.

And we will continue to optimize our financial resource usage and focus on net new money quality to drive growth.

UBS is the only wealth management franchise that is truly global, which benefits both clients and shareholders.

These benefits were evident in the fourth quarter, as US markets were less challenged than the rest of the world and WMA delivered excellent underlying results with record net interest income in $16.8 billion of net new money.

Profit before tax was $63 million and included $233 million of litigation provisions.

Excluding these charges, PBT was nearly $300 million.

Operating income decreased by 3% as recurring net fee income was impacted by lower invested assets at the end of the prior quarter, and as transaction-based income decreased on lower client activity.

This more than offset higher net interest income, which increased by 5% to a record $326 million as lending and deposit volumes continued to grow.

Excluding provisions, operating expenses decreased on lower personnel costs and charges from other business divisions and corporate center.

Net new money was $16.8 billion, a 6.8% annualized growth rate, mainly reflecting significant inflows from newly recruited experienced advisors, as well as $4.9 billion from advisors who have been with the Firm for more than one year.

Invested assets increased by 4% to over $1 trillion.

Managed account assets were up 3% to $351 billion and were 34% of total invested assets.

Annualized revenue per FA remained industry leading.

We had a very strong successful recruiting quarter, increasing the number of FAs by 151, with 76% of recruits ranked in the top two quintiles.

Loan balances continued to grow, increasing by 3%.

Personal and corporate banking delivered a profit before tax of CHF396 million, its strongest fourth quarter since 2011.

Operating income was CHF915 million, down 5% as higher net interest income was more than offset by lower transaction-based income, which included the CHF45 million client shift fee paid from P&C to WM.

Net credit loss expense remained at historically low levels.

Operating expenses decreased by 3% and the cost-to-income ratio was stable at 56%, comfortably within our target range.

Annualized net new business volume growth for our personal banking business was seasonally slower at 0.6%.

Personal and corporate banking closed another very strong year, further enhancing our leadership position in Switzerland.

We were recognized as the Best Bank in Switzerland by Euromoney for the fourth consecutive year.

We achieved the highest level of full-year profits before tax since 2010 as we successfully offset headwinds with management actions to drive revenues, reduce costs and increase new business volume growth in our personal banking business.

Our Swiss franchise is an integral part of our business portfolio and it underpins the strength of our global brand.

Asset management delivered a solid quarter, with profit before tax up 12%.

Operating income was up 2% on higher performance fees, mainly in traditional investments and global real estate.

Net management fees decreased by 2% as higher fees in global real estate were more than offset by lower fees in other segments.

Net new money outflows, excluding money markets, was CHF8.9 billion, driven by a small number of institutional clients with liquidity needs.

Excluding these outflows, net new money was over CHF6 billion.

The investment bank delivered a profit before tax of CHF223 million, which included a CHF98 million charge for the annual UK bank levy.

As clients were less active, the business demonstrated disciplined resource utilization, with balance sheet, RWA and average VAR decreasing quarter over quarter and year over year.

FX rates and credit performance was strong as revenues increased by 30% year over year on a strong result in flow rates in macro options and improved performance in credit flow.

In equities, revenues were down 19% year over year from a strong fourth quarter 2014.

The decrease was largely driven by derivatives as we saw lower client activity in a challenging trading environment for structured products, particularly in Asia Pacific and EMEA, where we have a significant presence.

This, along with lower revenues and cash, more than offset a strong performance from financing services, which delivered its best fourth quarter performance in the last five years.

Corporate client solutions delivered CHF650 million in revenues, down 8% year over year, less than the decline in the global fee pool.

Revenues in ECM were down from a strong fourth quarter last year.

In advisory, revenues were down, but to a lesser extent than the market fee pool, while DCM revenues were relatively flat.

Net credit loss expense was CHF50 million and mainly related to the energy sector.

As of year-end, our total net lending exposure to oil and gas sector was CHF6.1 billion, predominantly in North America.

The majority of this exposure was investment grade and about half of this exposure was to integrated and midstream segments that we expect are less affected by the currently low energy price levels.

Exposures potentially vulnerable to low energy prices are closely monitored and macro hedges are in place.

Nevertheless, a sustained period of depressed energy prices could result in increased credit loss expense for this sub-segment of our portfolio.

Operating expenses decreased 9% to CHF1.5 billion, driven by lower G&A expenses, primarily reflecting lower litigation provisions.

Profit before tax in corporate center services was negative CHF326 million, down CHF71 million as full-year costs incurred by corporate center services exceeded the cost allocations to the business divisions in non-core and legacy portfolio.

Expenses before allocations increased, mainly due to vacation accruals and higher depreciation charges.

Profit before tax in Group ALM was CHF51 million, compared with negative CHF116 million in the prior quarter.

We saw a gain of CHF81 million from interest rate derivatives used to hedge our high-quality liquid asset portfolio, compared with the loss of CHF201 million in the prior quarter.

Gross funding costs increased by CHF91 million to CHF292 million, mostly due to higher fair value gains on internal funding transactions in the prior quarter, but also higher costs following the recent issuance of AT1 instruments in TLAC eligible debt.

We expect the bond -- buyback from December in 2016 maturities to generate a benefit to funding costs of around CHF170 million in 2016.

Profit before tax in non-core and legacy portfolio was negative CHF312 million.

Operating income was negative CHF71 million, driven by losses from novation and unwind activities as valuation losses in financial assets designated at fair value.

Operating expenses decreased by CHF436 million as costs decreased, mainly due to lower litigation provisions, partially offset by a CHF50 million charge for the annual UK bank levy.

The non-core and legacy portfolio, LRD, was CHF46 billion, or 5% of the Group's total LRD.

Excluding operational risk, RWA, non-core and legacy portfolio RWA is down 40% year over year to less than CHF10 billion.

Delivering on our cost reduction initiatives continues to be one of our key priorities and is a top priority for me as Group CFO.

We achieved an additional CHF100 million of annualized net cost reduction in the corporate center during the quarter, bringing the total to CHF1.1 billion.

Savings in the quarter were largely driven by lower personnel expenses in Group operations.

Full-year restructuring charges were at CHF1.2 billion.

We still expect to incur the full CHF3 billion we've guided for between 2015 and 2017.

We've encountered higher permanent regulatory costs and business demands than was originally anticipated.

Over the past two years, we generated CHF1.7 billion of gross saves, which has partially been offset by CHF400 million increase related to higher permanent regulatory costs and a CHF400 million increase related to higher business demand.

Despite these headwinds, we are fully committed to our net cost reduction targets.

We currently expect to achieve CHF1.4 billion of net savings by around the middle of the year and we continue to target CHF2.1 billion by year-end 2017.

To deliver our cost targets, we continue to focus our efforts on the strategic levers described in previous quarters.

The majority of savings can be categorized into one of three areas: workforce and footprint, organization and process optimization, and technology.

Today, 27% of employees and contractors are in offshore or nearshore locations, compared with 18% only two years ago.

In addition to lower future personnel expenses, this is allowing us to realize efficiency in high-cost real estate.

Through organization and process optimization, we look to increase effectiveness and efficiency by leveraging common capabilities and creating size functions.

To give one example, we've created a reporting and analytics services unit, adopting common reporting processes and leading-edge technology to provide better quality and lower cost service to the business.

Within Group technology we continue to modernize our infrastructure and simplify our portfolio of applications.

For example, we are migrating databases, servers and shared internal -- to shared internal cloud services, which are less costly to run and more responsive to business needs.

We are also rolling out our virtual desktop platform which helps our employees to become more efficient while reducing costs.

In time, the platform will also lead to reduced real estate cost as more of our employees can work flexibly, both in the office and from home.

We invested around CHF300 million in 2015 in our application portfolio to significantly reduce the number of applications, simplify and modernize our technology, and reduce operational risk.

The savings associated with our technology initiatives require more lead time, but, by the completion of our program, we expect technology to contribute a sizeable portion of our cost savings.

Our capital position improved from already strong levels with our fully applied Basel III CET1 capital ratio, increasing to 14.5%, and a fully-applied Swiss SRB ratio at 5.3%.

Our CET1 capital ratio increased by 20 basis points as we reduced RWA by CHF9 billion, mainly reflecting book-size reductions, partially offset by currency effects and methodology changes.

This more than offset the impact of lower CET1 capital, which decreased as we accrued for dividends to shareholders and due to tax effects.

We issued a CHF1.4 billion of TLAC-eligible debt in the fourth quarter, which will contribute to the proposed [going-concern] capital ratio.

AT1 capital increased by CHF0.6 billion, mainly due to deferred contingent capital awards to be granted to employees for the 2015 performance year.

Our fully-applied Basel -- BIS Basel III leverage ratio denominator was CHF898 billion, and we've provided further details on LRD movements in the appendix of this presentation.

From December 2015, the Swiss SRB/LRD calculation is fully aligned to the BIS Basel III rules.

It is worthwhile highlighting that given our balance sheet composition, our LRD is sensitive to foreign exchange, as well as to other market moves.

For example, currently a 1% appreciation of the US dollar against the Swiss franc would cause approximately a CHF4 billion increase in our LRD.

Thank you.

With that, I will now hand it back to Sergio.

Thank you, Kirt.

Before I open up for questions, I'd like to close with a few remarks.

While [dovish tones] from the Fed and the ECB have helped stabilize markets in the last few days, uncertainties around energy prices and the outlook for China are still driving a very cautious (technical difficulty).

We have begun a year that clearly looks very challenging and our outlook remains in line with our previous guidance.

So, what does that mean for us?

By focusing on our strengths, including capital and the clarity of our strategy, we believe we have the ability to gain a share of wallet and market share.

We need to maintain our global perspective on the trends driving long-term wealth accumulation.

That's the reason why we are keen to invest in those businesses and geographies that will sustain growth over the long term.

Opportunities exist, particularly in the US and Asia.

We must also keep our focus on execution, including our cost reduction program.

Our goal is to deliver sustainable cost savings that improve our long-term effectiveness.

As we do that, we will free up resources which enable us to selectively invest for growth.

Most importantly, in the current environment, staying close to our clients and delivering on our commitments remain paramount.

These factors will underpin our ability to deliver value to shareholders and I have every confidence in the future success of UBS.

Thank you, and now Kirt and I will take your questions.

We will now begin the question and answer session for analysts and investors.

(Operator Instructions).

Kinner Lakhani, Deutsche Bank.

I had three questions, firstly, on, at the Group level.

I just wanted to crosscheck your guidance for 2016, which is for a stable adjusted ROTE.

In the context that we had, I think, a CHF2.3 billion DTA recognition benefit in 2015 and I think the guidance for 2016 was CHF0.5 billion, so that's, I think, about CHF1.7 billion less supporting in 2016 versus 2015, would suggest quite strong improvement in operating performance.

Are you still confident with that previous guidance?

Secondly, on the EM deleveraging, if you could give us some more guidance as to, or some more color, as to which geography that came from?

And do you see any deleveraging pressures coming from APAC?

I just wanted to crosscheck, again, on the guidance here, the 3% to 5% target.

Is that something that you also hold for the current year?

And finally, just on the retained funding cost, I'm not sure I saw that number for 4Q, 2015 or this quarter, and if you're still committed to the outlook of significant reduction as we exit 2016?

Thank you.

I'll take the first question and Kirt will step in on second and third question.

I think it's premature to make predictions about full-year revenues and cost, but the business plan -- our business plan is clearly based on underlying assumptions on macro factors, such as FX, interest rates and market conditions.

We clearly are still focusing on driving new synergies across our businesses and saving costs, particularly between our wealth management businesses.

I think this is clearly a great focus for us, how to master these challenges and looking at cost on a front-to-back basis, other than what Kirt's referred to in respect of our cost targets at our corporate center only.

We are looking at ways to really enlarge these programs to create this additional buffer that can help us master those challenges.

In short I think that we are still aiming to deliver on our goals and I think that unless there is a total destruction of the macro assumption that we have in our business plan on rates and macro conditions, we still can work on it, despite the fact that as you point out, we don't expect such a substantial revaluation of deferred tax assets for 2016.

Let me address your second question regarding emerging markets deleveraging.

First, just to step back; I think as we highlighted, during the quarter we saw quite extensive deleveraging and we ordered the impacts of the outflow in terms of their magnitude and deleveraging was at the top of that list.

You recall that we actually saw deleveraging in Asia Pacific in the third quarter, which was natural given the meltdown of those markets.

And what we saw extending into the fourth quarter is we continued to see our Asian clients sell down on their loans and to reinvest those proceeds either in more liquid assets or to take it externally for their liquidity needs.

But in the fourth quarter we also saw this behavior extending in emerging markets.

I think it's quite natural if you reflected, in particular, the deleveraging is concentrated at the higher end of our client base, so it's really the upper end of ultra clients.

And they do tend to have more volatile liquidity needs.

If you reflect across our major emerging market geographies, Russia, the Middle East, Brazil, Mexico, all of those markets are going through macroeconomic and geopolitical turmoil, and in particular with the sustained lower energy prices, that naturally has led to liquidity requirements for these clients.

That really underpins the deleveraging that we naturally saw during the quarter.

I would also highlight, and Sergio mentioned this in his notes, that importantly we maintained our lending discipline.

I think we easily could have gone back out to the market and actually we could have been aggressive in our lending, and we could have offset some of that deleveraging.

But that's not consistent with our focus on quality, not consistent with what we think is right for our clients and our shareholders.

Now you also mentioned the 3% to 5% target.

As I mentioned in my speech, we continue to be committed to absorb any deleveraging going forward, any cross-border outflows, any consequences of our disciplined management of the business, while still delivering the 3% to 5% range for our -- growth range for our net new money, and that includes the share in 2016.

Let me turn to your third question now, you asked about retained funding costs.

As I highlighted in my notes, we executed on a buyback during the quarter; that was one of our adjusted items for CHF257 million.

And I mentioned that we expect CHF170 million reduction in our central funding costs related to this buyback.

Clearly that will provide a benefit to our retained funding cost.

Beyond that, clearly, as we meet our too big to fail requirements through additional AT1 and TLAC issuance, that is going to cause of course an increase in our total funding cost.

On top of that as we continue to work through the liquidity requirements for managing our emerging legal entity structure, which includes an increased level of subsidization, the liquidity requirement for those subsidiaries is something that we're going to have to fund centrally.

That includes, of course, our intermediate holding company in the US for example, where the Fed is going to require quite significant liquidity levels to be maintained within that subsidiary.

And that additional liquidity is also going to have to be funded by ALM.

I'll just finally comment that clearly the centrally managed structural risk positions on our balance sheet is something that will remain volatile in our ALM results going forward.

Thank you very much for the answers, very helpful, thank you.

Huw Van Steenis, Morgan Stanley.

Two questions; first considering the tough environment you've discussed today, do you feel there's more you need to do on cost?

And in particular I was looking at the regional disclosure at the back of your presentation.

It looks like in EMEA, the investment bank was loss-making in Q4 and pretty much only broke even in the second half, and I was just wondering in the light of that, certainly is there a lot more one could do in EMEA?

And then secondly, obviously in wealth management, appreciate it's a seasonal business, but the second half has been quite challenging in net new money.

What can you point to which gives you such confidence to hit your 3% to 5% net new money for this year and any color you could give on that I think would be helpful?

Thanks ever so much.

When we look at the environment as I pointed out, of course we are keeping even more focus on delivering on our cost initiatives.

As I mentioned before, not only we look at corporate center cost savings but we tried really to focus on enlarging this to a front-to-back environment.

And it's very important to understand that the regulatory trends, something that we believed, I guess, in the industry, but specifically for UBS, to be of temporary nature, is translating into -- some parts of it are translating permanent costs.

That's the reason why we are expanding the scope of our cost savings to broader front-to-back analysis, to look deeper into cost savings that are driven by sustaining long-term profitability, and not just something that provides a short-term effect for the quarter.

Yes, we can look at ways to sharpen our pencil and manage the environment, but we are not going to make decisions that are putting at risk the sustainability of our business model.

When I look at the investment bank, I think again we have to look into the last 12 months, and actually I would call it the last 36 months.

Despite everything that went on, the investment bank delivered a 12% return on allocated capital in the fourth quarter.

It's a [respectful] performance and one that is driven by the fact that, instead of deploying more risk to offset those negative trends, we stayed very close.

The short answer is that we are not reacting to short-term issues; we are very pleased with the results for the year.

Of course we are monitoring the environment and we are not complacent about this topic.

On net new money, I tell you, we could be inundated by net new money if we want.

We just need to pay a few basis points and we get inundated, literally, by billions of net new money.

But with this net new money, we're not going to grow our profit before tax, we're just going to absorb more capital and it's not what our business model is all about.

So we have been crystal clear that the quality of net new money counts much more than the quantity.

And we cannot afford to deviate; otherwise, we go back into Q2 and Q3.

We basically made an exercise of cleaning up this kind of balance sheet by almost CHF10 billion or more.

And everything would be totally destroyed by managing an environment which is quite well explainable by what's going on.

Actually, you should be surprised and you should question if you would have seen other effects of net new money in this environment, like leverage going up or us taking more risk in the investment bank.

Sergio, perhaps I can add just a couple of comments about net new money.

Firstly, I'd point out that it's important to look at our global wealth management business, so it's not just wealth management international.

And that's one of the uniqueness of our franchise and the fact that, actually, wealth management America's had a very, very strong year.

They were less impacted by the market factors.

We saw $16.8 billion inflows.

And so as we think about the business going forward, I think it's the globality in the portfolio that will help the overall franchise deliver.

Now in terms of our confidence going forward, in addition to the comments that Sergio made, we continue to feel very, very comfortable with the underlying fundamentals of the business.

This is an industry structurally that will continue to grow.

Asia Pacific's going to continue to be the highest growth region over time.

Naturally, as we go through periods that we experienced in the third and the fourth quarter, we're going to see a quarter or two quarters where there's going to be a downturn in flows and potentially, actually, outflows.

But we think that that's very much of a one or two quarter overall factor.

It's not something that represents the overall trajectory of the business.

And as we indicated, we still feel very comfortable with the 3% to 5% growth targets and with our ability to deliver that, while maintaining the quality standards that Sergio highlighted and also absorbing any related outflows.

Okay, thanks.

Andrew Lim, Societe Generale.

Coming back to the wealth management division, you've said here that cross-border outflows are a reason why the recurring fees have gone down.

And I'm just trying to understand in more detail why that is when invested assets has gone up.

Is it that part within invested assets where you've got AUM driving that higher recurring fee business falling away somewhat.

Is that how we should think about it conceptually?

Then if we look at the net new money, again, we're seeing reference to cross-border outflows.

Could you quantify that within the minus CHF3.4 billion outflow?

But then you also talk about the effect on balance sheet management.

And you've made a specific adjustment in the two prior quarters.

Is that also relating to capital optimization?

And if so, could you give the same adjustment related to the fourth quarter?

Then perhaps just wrapping up on cross-border outflows, when should we expect this to come to an end?

We should be close to this being a non-issue now but it still seems to be featuring quite as an important issue.

Then on to my other questions, sorry for talking a bit more about the oil and gas exposure, could you explain what the unfunded commitments are on top of the CHF6.1 billion funded commitments?

Then we've seen some guidance on the US peers, as to what loan losses might be incurred if oil stayed at around $30.

Could you give the same indication going forward?

And then very lastly, I think your CET1 leverage ratio at 3.5% required minimum, that's the great constraining factor on excess capital.

I'm just wondering what kind of buffer above 3.5% you would consider before you did consider excess capital above that requirement, say 3.5% plus maybe 20 bps or so?

What do you have in your mind?

Many thanks.

Andrew, thank you for your very impressive list of questions (laughter).

Well, let me tackle the last one and then, Kirt, you take the rest.

I think on the capital buffer you mention, I think that as you know, we are at 3.3% right now versus a target of 3.5%, which is not a minimum but rather is a well-capitalized target statement.

So it clearly is not practical for us to think about managing the Bank at 3.5%, since we want to have a decent buffer.

So maybe 10/20 basis points that you mentioned, depending on market conditions.

It depends everything on market condition and our outlook for the future at that point in time.

But it's very important also to underline that we are, as we previously discussed, we are going to take our time to build up this minimum standard because we are well within the phasing capital required.

We have a strong capital position.

We are confident that we can build up our capital base.

So we are not in a hurry to implement tomorrow morning what is effective January 1, 2020.

Kirt, the rest.

Thank you, Sergio.

Let me, Andrew, just explain the economic dynamics of the outflow.

Of course, most of the outflows have been concentrated to date in Europe, as we previously, of course, have guided and is consistent with the industry.

So the nature of those outflows, as the European countries go through their amnesty programs and we participate in those programs, they tend to impact primarily our smaller clients, our core affluent clients and our high net worth clients.

And those clients, in general, have very high margin products that they book with us.

And, typically, they're higher margin than our larger ultra-high net worth clients.

And so as we go through this regularization process, through the amnesties across Europe, we tend to see outflows as those clients actually become fully compliant.

And that results in outflow of very high margin products.

And what you've seen, if you look at the trend of our business over the last couple of years, you've seen the shift in client segmentation.

We've brought in, and a lot of our net new money growth has come from our ultra-high net worth clients, they tend to be lower gross margin but, actually, tend to have higher net profit margins.

They tend to be more profitable because of their scale.

And that dynamic will continue, as we work our way through the remaining portion of the outflows.

To comment, since we're discussing outflows, you mentioned also how should you think about [first] quarter outflows and there was some expectation that they were tapering.

Clearly, the outflow from Europe has been tapering, although we did see a step-up in the fourth quarter which is not unusual; there tends to be seasonality around how these outflows take place and as clients actually look to close the year and to go through the regularization process, we saw that in the fourth quarter.

But in addition to that, as automated exchange for information is implemented in 2016, and as other countries outside of Europe begin to execute on amnesty programs, that's going to result in some cross-border outflows from other markets, and principally in our emerging markets.

And we're going to continue to see that going forward to next year.

I think your second question, if I bounce back to your second question, was you asked about adjusting for the impact of the balance sheet optimization program that we ran during the beginning of the year.

The way we looked at that is that was a very focused one-time program where we targeted a large number of our clients that had non-operating balances with us and actually were a drag on economic profit.

And because we were focusing on a very large number of clients and we had a very orderly and structured program that we executed, we chose to disclose that externally.

Now, while we were not running that program in the fourth quarter, we continue to have very disciplined focus around balance sheet management.

And that ongoing disciplined focus is going to result in some cash outflows, and it's going to result in some reduction in balance sheet.

But it's not -- we did not disclose it in the fourth quarter, and we won't disclose it going forward.

That becomes part of how we're going to run the business; we're going to run the business focused on quality, as Sergio mentioned.

And, while running and driving the business on a quality basis, we'll continue to operate within that 3% to 5% overall growth target for net new money.

And I think, finally, you asked about oil.

And you'll see that in our appendix on page 32, we provide you with the disclosure of our funded positions and we run you through the segmentation, as well as the concentrations of that exposure.

We're not going to disclose any further information, but we think the lending exposure is the most relevant for a discussion of any potential credit losses going forward.

I think also, as we've guided, that the portion of that exposure that is most vulnerable to sustained lower energy prices could result in additional credit loan expense, but we haven't guided on what that is and we're not going to provide any further information.

Thank you very much for all your comments there.

Just a follow-up question then, you're not able to disclose what the cross-border outflows were in the fourth quarter then?

No, we don't provide specific disclosure, nor have we.

Right, okay.

No problem.

Thank you very much.

Andrew Coombs, Citi.

Three questions please, on dividends, capital and gross margins respectively.

Firstly on dividends, looking at the split between ordinary and special within slide 5, you mention the CHF0.25 special reflects the DTA write-up.

Given that you're guiding to CHF0.6 billion in 2016 versus CHF2.3 billion this year, should that imply you're only looking at a CHF0.05 special dividend next year, plus the ordinary, subject to that 50% payout ratio?

Or am I reading too much into that?

The second question would just be with respect to the capital in the investment bank.

You've seen a CHF5 billion reduction in RWAs, a CHF20 billion reduction in leverage exposure there; could you just elaborate on what drove that reduction?

And then finally, on gross margins, particularly in Asia Pacific, you've seen a 7 basis points decline Q-on-Q to 70 basis points.

I assume a large part of that is because of the deleveraging impact you've had.

But perhaps you could elaborate if that's now been rebased to FX levels, or is there more to go?

Or, on the flipside, do you think there was a seasonal element in that, given lower transactions?

Thank you.

On dividend, I guess the short question would be to say yes, you are reading too much into it.

I think that our policy and our commitment is to pay more than 50% of net profit attributable to shareholders.

And that, when you look at the driver, the ordinary dividend is based on our operating profitability and our outlook; actually we want to make sure that this is a sustainable dividend going forward.

And our aim continues to be even, in this challenging environment, to continue to have progressive policy in terms of our ordinary dividend.

The special dividend is that this year we took basically the deferred tax assets revaluation as the triggering point for distribution of this CHF0.25 which, as I mentioned before, is unlikely to be as high as the one that we had in 2015.

So the dividend policy has not changed, will continue to be the one I just mentioned, and so it will depend very much on how the year ends.

I'm happy to take your second two questions, Andrew.

It might be useful to, in your question regarding capital, balance sheet and financial resources in the IB, to ask you to turn to slide 29.

And I think this gives a general overview of what happened at a Group level, and I can specifically reflect on the IB.

And as you see, and what we announced is that we transitioned from Swiss SRB to Swiss SRB that was fully aligned with BIS.

At the end of quarter, we early adopted the FINMA requirement that was issued in 2014.

That resulted in a CHF14 billion reduction just from methodology changes.

Part of that is reflected in the investment bank but then, as you see, the other categories of reductions, to a larger extent what that reflects is de-risking.

And the IB in particular was confronted with extremely low client activity and a very complex and treacherous trading environment, based on our client-driven low risk/high velocity model; they took risk off the books.

They reduced RWA, they reduced LRD, and they reduced VAR, and that's just naturally how we run the business and it's part of our strategic model.

Your third question refers to gross margin decline.

So if you look at the decline in APAC gross margin to 70 basis points, that actually is not reflective of gross margins -- of deleveraging.

Deleveraging has some impact; deleveraging results in a reduction in our loan portfolio and lending is accretive to our gross margin.

But the largest portion of that reduction is really due to lower transaction revenue.

In Asia, we actually have the highest concentration of transaction revenue, so that when we see conditions that we witnessed in the fourth quarter, and our clients are completely understandably inactive and are taking risk off, then we see a very sharp decline in transaction revenue and also in transaction revenue margin.

Asia Pacific is the business that's going to be most impacted with that, just as if we were to see a sharp rebound in market activity, we would actually see a sharp rebound in our margin in Asia Pacific wealth management.

Very clear.

Thank you.

Andrew Stimpson, BofA Merrill Lynch.

You've got one of the strongest LCR ratios of your peer group, which is very good obviously, but clearly having so many low or negative yielding assets, there's a cost to all of that.

I know it's in the weeds a bit, but I find it interesting that your LCR outflows keep rising, despite your efforts to calm it, especially in wealth management earlier in 2015.

Can you say what's powering that continued expansion, please?

I think you said at the start of 2015 that the wealth management cuts would result in a CHF9 billion lower LCR outflow, but the Group number's gone up by CHF11 billion.

So if you could say where that CHF20 billion delta is coming from, please?

And then can I come back to the question on the CET1 leverage buffer, please?

The 10 to 20 basis points you mentioned seems very narrow surely.

3.7% is only 6% more capital than your reg minimum will eventually be.

And on LCR, as I mentioned, or on a CET1 to risk-weighted assets, you're offering -- operating and targeting more like a 30% buffer on top of those ratios.

So it just seems like a very small buffer to feasibly run the whole Bank on.

I appreciate there is many, many years to get there, I'm not expecting you to get there any time soon, but if you can just clarify that you think that's a sufficient buffer.

And then on the oil, you mentioned you've put various macro hedges in place, could you just say exactly what you're doing there, is it short oil you've bought CDS protection on proxies or what exactly you're doing there?

Thank you.

So let me take, Andrew, the first -- the last -- the question on the buffers and then Kirt can take the rest.

Andrew, I think that if you look at the nature of our business, the volatility of our earnings going forward, I -- and the fact that again 3.5% the total capital is a well-capitalized status.

It's -- I don't --

3.5% is the minimum right, that will be the minimum --?

This time, please, look well, so that we don't have like last quarter differences in interpretation between (multiple speakers) assets and LRD.

So 3.5% is a well-capitalized status, it's not a minimum.

Okay.

So the minimum is well below that.

If you look at the additional 1.5% in AT1 you get to the 5% which, if you add on the (inaudible) part, the TLAC part, goes to the overall 10%.

Right, so then you get to the 10% of which then on the TLAC basis, on the going concern, you'll get potential room for rebates.

But once you have a north of 5% going concern capital position, it's a solid, very solid position.

So as we said, we're going to have a buffer because you can't run a Bank at a 5%; our status is to have a strong CET1 and leverage ratio.

But we're going to need to evaluate the situation based on market condition, outlook going forward.

So it's premature to judge on how big the buffer will be, but it cannot be substantially higher than the one I just mentioned because that's the [status] right now.

So is it going to be 10 basis points higher?

Maybe, but it's not 50 basis points higher for sure.

Okay.

Andrew, let me address your first question about liquidity and LCR.

Just firstly, so what's been driving our unusually high LCR ratios and we closed the quarter at 128%.

There are a couple of factors.

Firstly, obviously is we've been issuing in the market both AT1 and TLAC; that results in an over-funding position as we issue ahead of the maturity profile of our senior debt.

We expected actually there's going to be some lumpiness and volatility as we go forward over the next couple of years, and we decide how we want to go to market, when we think markets are constructive, when it's appropriate to issue, and as we manage the role of our senior debt versus the build-up of TLAC, that's naturally going to cause some volatility centrally.

The second reason is, as you saw, the significant reduction in balance sheet and risk during the quarter; the consequence of that is that we hold higher liquidity centrally.

So essentially what we're doing is we're providing the business, the IB, with the option to reduce the overall consumption they have of resources when the market opportunities aren't there, and that's just the strategy model that we run, and the funding model.

We run a consumption-based funding model, and we think it gives the right incentives to the businesses.

It avoids having them put on any carry trades and we think it's healthy.

Now the third point is, and in general this is something that we're all working through, the industry is working through, is with our legal entity structure, that is naturally going to cause some inefficiencies in LCR because we're going to have to hold liquidity to meet the local regulatory requirements.

So when we actually then will diminish the fungibility we have for managing liquidity across the Group, and that's something we're coming to terms with.

So I think the days of when you could operate at 105% are behind us.

Now, what's the right ratio?

That's something we're working through and will continue to work through over the next several quarters.

The final question you have is on oil and gas.

The macro hedges is really just that, and naturally, as you would expect, that provides protection under the scenario of further reduction in oil prices.

We won't say anything more and we haven't disclosed the specific composition of that macro hedge.

Brilliant, that's really helpful.

Thank you, guys.

Kian Abouhossein, JPMorgan.

The first question relates to equities, and in particular equity derivatives where you had a 60% decline in revenues quarter on quarter.

I'm just wondering what the drivers are here.

Is it more on the flow side, is it more on the structuring side, and how should we look into this year how things have developed considering that the volatility has continued in the equity area in 2016?

If you can talk a little bit about this topic.

Secondly is on trading risk review, and the Basel document on market risk.

I'm just wondering if you could tell us what your market risk-weighted asset increases will be?

And in that context, have you thought about potentially floors that the Basel could introduce, [60, 70, 80], can you talk a little bit how you think about that in your capital calculations?

Or is that something that is not included at all in your thinking when you set dividends etc?

And the last question relates just more from a kind of helicopter view on Asia.

Can you just talk just generally in terms of what are the issues around Asia that you as a management team discuss today within the Board as issues, opportunities?

And I'm talking in the current environment.

Thanks.

Okay, Kian, let me tackle the last questions and Kirt will take the others.

When we look at Asia, first of all, of course, you have to put things into perspective.

We have been in Asia for 50 years; we have been in China for more than 10 years as a local domestic licensed presence.

When we look at -- do you remember in the first two quarters of last year we were basically very cautious about the sustainability of that kind of growth outside the range of the growth we saw in the last few years.

And that's the reason why right now we can look also at the last six months in a different perspective.

The opportunities we see for us in Asia are the ones of growth.

If you look about the fact that there is -- more than one million people are high net worth and becoming more and more ultra-high net worth people, it's a huge opportunity to expand our onshore wealth management capabilities.

As China opens up its capital markets to foreign investment there is a huge opportunity.

There is 9 trillion of deposits in China, and only 1% of that is invested abroad.

So, our view is that by continuing to use our leadership position in China, as China opens that market, we can facilitate those investments outside.

So I think that clearly we have to manage this next few quarters of volatility in China, but the trend remains intact and that's the reason why we will put more resources into China.

In the next five years we think that we're going to double our headcount from around 600 to 1,200 people because we really believe that across the board, but particularly in wealth management and asset management, but also in the investment bank, we have room for expansion.

And on that very insightful detail, can you just tell us of the 600, of more or less doubling the staffing, how much of those would be in the wealth management business?

We are not breaking down, but a big chunk of it will be in wealth management.

By the way, some of the staff will also -- as you saw on Kirt's slides, we are also expanding our offshoring capabilities.

You saw that Shanghai is already mentioned as one of the centers.

So we're going to also put more services there to basically cover for the needs of the entire Group, but a big chunk will be in wealth management.

And, again, it's 1% of our headcount.

It's a 100% increase there for China, and it's going to be done over the next five years.

So in a very gradual way making investments, because we need to accept taking some investment risk, but also carefully monitoring timing on how we do that.

Okay.

Kian, perhaps I can -- to answer your first question on equity derivatives and, maybe first, just to step back a second.

The comparison, first of all, is on a very, very strong fourth quarter 2014, so obviously that creates a more pronounced downturn.

Secondly, I think it's important when you look at the nature of the equities derivatives business, first of all the European banks tend to have a much higher concentration in structural product than the US banks.

The US banks tend to be flow shops, institutionally focused flow shops, and Europe and us in particular, we actually have a higher share of structured derivatives than some of the European peers.

Then I would also comment on, from a regional perspective, we have a leadership position in Asia Pacific.

We also have, of course, a very strong position in Europe and we are less weighted in the US.

During the fourth quarter the US held up better, US flow products, or flow products, in general held up better, and structured derivatives, structured retail derivatives, and we distribute both to the retail market as well as to institutionals, were particularly hard hit in the fourth quarter as clients -- and it was really part of the similar trends that Sergio mentioned in his notes and I also mentioned in mine, my comments, that our clients completely sat on the sidelines.

That resulted in volumes drying up and that, in turn of course, resulted in very substantial reduction in revenue from that part of our business.

And looking at structured product volumes that we collect some data in Asia, it looks like that dry-up has continued.

I think naturally you're going to see that as markets go, the Asian market will come back eventually, but clearly that trend is going drive demand for those products and it's going to volatile.

Let me talk a little bit then about -- you asked a question about the market risk framework and the BCBS guidance that came out in January.

First of all, we're not guiding on the impact to UBS.

We think it's premature.

It would actually be a bit irresponsible because, while there has been specific guidance on the internal model changes and also the more risk-sensitive standardized approach, there has not yet been a definition of how the interplay between those two requirements are going to actually be implemented across the industry.

That interplay has very substantial impact on the ultimate effect of the new market risk framework.

And given that we have that uncertainty, it would be irresponsible for us to give you any kind of range of impact.

But basically the CHF250 billion is likely to go up.

I don't think that we want to enter into speculation at this stage.

If there is a review, and it's quite clear what it means for the industry, we will review those numbers for the foreseeable future.

You also ask about if we have planning, thinking about those topics in our capital plan; of course, Kian, we are doing that.

So we are not -- we know exactly the dynamics for the foreseeable future.

We still believe that the binding factor for us is leverage ratio and we have enough buffer and time to reassess the situation as we speak.

Great.

Thank you very much for your time.

Fiona Swaffield, RBC.

I had a few questions.

Firstly, just coming back to the ordinary dividend and the CHF0.60, given your comment on the deferred tax being the driver for the special, should we look at the CHF0.60 relative to earnings excluding the deferred tax asset?

Is that the way you're looking at it as a parent ratio on ordinary dividend?

Or, how do you come up with setting the part that's ordinary?

And then the second issue is on leverage, the leverage exposure denominator, that's come in lower due to a revision in the rules.

Does that change your -- you haven't changed your CHF950 billion, but is there not scope for potentially changing that number?

Could you talk through that?

Then the third question is, historically at the end of the year you've given some information on variable compensation.

I don't know if you could discuss where the grant is or what's in the numbers for variable compensation this year versus last.

Thank you.

I think you are correct.

I think that when we look at our dividend as a CHF0.60 dividend, this is our baseline dividend, our ordinary dividend that is driven by our operating profitability.

It's the base going forward.

So, as I mentioned before, we are still confident at this stage to be able to continue to, not only to fulfill our commitment of at least 50%, that's very important that it stays there and it's quite clear.

But also that our aim is to have a progressive and sustainable growth of our baseline dividend.

So I think it's premature after a month in the year to make a statement about future dividend, but the trend in that respect and our policy, I hope, is clear.

Of course, we're going to need to see how the operating environment goes in 2016.

On compensation; I think that our disclosure is based on market standards.

If you look at the total salaries and variable compensation align in our reports, is up I think 1.5% year-on-year.

Of course, we are -- the mix on how those things change, we are running the Firm on a total [calm] basis.

There is different dynamics and performances and competitive dynamics that we need to take in consideration in all businesses, but considering the very solid environment we continue to aim at being competitive in the marketplace.

We will give all the disclosure, as usual, in March as we publish our compensation report and our -- in preparation for our AGM.

Just to comment on your leverage ratio denominator.

I think first it's important just to be clear around how we think about the expectation of CHF950 billion.

Obviously we will deploy balance sheet when we feel that there's market opportunity that is beneficial for our clients and beneficial for our shareholders.

We believe that the ability to deploy and expectations up to CHF950 billion for the foreseeable future is the prudent amount.

And that balance is what we think is the right combination between our strategic model, our overall objectives for our shareholders and also how we want to run the business from a funding and a capital perspective.

Now clearly if the markets are not present -- if the opportunities are not present in the market, we will not obviously utilize that full amount and you saw that play out very, very clearly in the fourth quarter where we closed based on the old definition at CHF946 billion and we actually ended up at CHF898 billion so you saw a CHF48 billion reduction in leverage ratio because the markets weren't there to allow us to deploy that in an effective and profitable way.

Now if you look at page 29, just to get into some of the specifics, where we show you a walk of what took place during the quarter, what you see is, it's only CHF14 billion as a result of methodology change.

If you think about the conversation we had around liquidity management and you reflect on what we are going to require from a central liquidity management perspective to run the business, you could easily see that CHF14 billion getting absorbed through the cost of actually running a more complex organization.

So I think what's going to happen going forward is that hopefully we're going to find ways to optimize based on the rules that the IAS provide and at the same time, we want to use that optimization to then redeploy back in the business, just to make sure we're making the right trade-off decisions economically.

Right.

Also, Fiona, it's also very important that our strategy is not to shrink to [greatness].

And we hope, if market conditions are more constructive, to be able to invest and to be able to facilitate clients' activity being in the IB, being in wealth management, being in our personal and corporate banking in Switzerland.

So that's the reason we need buffers also in respect of our limits and I think that, as Kirt just mentioned, those are, relatively speaking, it's a 5% buffer.

So I don't think that, if you look at the conditions, we have a lot of room to change our targets.

Thanks.

Stefan Stalmann, Autonomous Research.

First of all, very helpful disclosure on oil and gas, thank you very much for that.

I appreciate that you don't really like to give additional numbers but I have a couple of questions of more qualitative nature around this disclosure.

Could you please confirm that this exposure is sitting in your accrual books?

Or is some of it actually sitting in the trading books and may already have been marked down?

Related to that, the macro hedge, could you confirm that that is actually accounted for as a hedge or is the gains -- or the gain and loss on this hedge actually reflected in your trading result as a stand-alone item or maybe goes directly into equity?

Could you maybe confirm whether this disclosure includes trade finance that you may do out of your Swiss business with oil and gas collateral?

And finally, I am a bit surprised at the number, CHF6 billion net.

If this is the funded exposure, it's about 40% of your loan book that you disclosed in the investment bank.

I am quite surprised to see such a big share of your loan book in oil and gas.

I'm just wondering what the strategic context is for this kind of exposure?

Unrelated to that, a second question as a follow-up to the leverage question that was asked earlier; I am not quite sure I understood the characterization of well capitalized versus lower minimum.

I thought you have to work towards the 3.5% minimum CET1 leverage ratio and I think that's also how you described it in your last interim report.

So I'm wondering what I'm missing here.

Thank you.

Yes, I'll take the last question and then you can go on to comment on the rest.

Stefan, I think that maybe we can take this discussion off.

I think that the ordinance on capitalization is crystal clear.

I think that 3.5% is not a minimum, it's a target and that target means that you are well capitalized and if you add up for the 3.5% plus the 1.5% AT1, plus the TLAC, gets to 10% so it's quite intuitive why it's a well-capitalized status, I guess.

But I guess it's better time spent off the line, I think the ordinance is quite clear in that [regard].

So Stefan, let me address your questions on our oil exposure.

First let me clarify the CHF6.1 billion is total lending exposure, which includes funded and unfunded.

We haven't disclosed but you can assume a large portion of that is unfunded.

Secondly, you asked about trading exposure.

Our trading exposure is not reflected here.

Our trading exposure by definition is very high quality with -- mostly with investment grade counterparts and it's not a part of our oil and gas exposure that we're concerned about.

Thirdly, you asked about the Swiss business.

I would just say that there's no material exposure, oil and gas exposure, in our Swiss business.

I'm trying to think were there any other points that you were --

Yes, in particular the accounting aspect of this.

The exposures would be part of your loans and receivables, I guess, at accrued values, at accrued cost.

But your hedge, the macro hedge.

The lending exposure is accrual-based.

The macro hedge, as you would expect, is mark-to-market.

And that would have gone through the P&L?

Yes, it would have gone through the P&L because it's not a pure economic hedge from an accounting perspective.

Right.

And that could have been quite positive in the fourth quarter, I guess, directionally?

We wouldn't comment.

Right.

Okay, thank you very much for that.

Jon Peace, Nomura.

Sorry to go back to the gross margin in wealth management; you said you were confident about your net new money target and I know you have no gross margin targets, but it looks like the structural pressure from NII has largely stabilized.

Would you have similar confidence that the overall gross margin could have stabilized in that business?

And then just a second one on the supplementary capital returns.

We talked a lot this morning about special dividends, but you did also suggest in the past that buybacks could be part of your capital return toolkit.

I just wondered how you think about a special dividend versus a buyback; could a buyback give you more flexibility around capital return?

Thank you.

On future ways to address capital return policies, I think it's really premature.

I think that, for the time being, we consider special dividend in cash to be the most effective way to return capital to shareholders.

In the future we say that we have all options open.

One is to basically have a more aggressive policy on baseline dividend, which is very unlikely at this stage.

But what I would say is that it's more likely that we would use again special dividend, or share buyback, if it's the most convenient way, again from a shareholder standpoint of view.

We're always going to evaluate towards the end of the year what is the best option, in our view, for shareholders and make a recommendation to our Board in this sense.

But Jon, I'll address your question on gross margin.

Could I just clarify, were you referring to gross margin on our wealth management international business?

Yes, that's right, thank you.

Okay.

So maybe just a couple of thoughts here; firstly, I believe that the best way to look at the economics of the business is on net margin, not on gross margin.

Because that really gives you then the more direct impact that we're going to have in terms of driving pre-tax profit growth.

We usually look, when we look at the business, we think anything over 30 basis points is quite healthy on a net margin basis.

But to circle back to gross margin, and clearly, as you've seen over the last couple of quarters, there's been a decline in our gross margin.

As I commented on earlier, that's purely driven by our transaction margin.

That's where you see all the volatility in gross margin.

Because, as you have observed, our net interest income margin is relatively stable.

I would comment that if interest rates were to increase and we are positively leveraged to US dollar interest rates, we would actually see some improvement in net interest income and in net interest margin.

Our recurring fee margin has also been relatively stable recently, but also, as we continue our book transformation, we would hope to improve that margin component of our business.

And so, if you take out the volatility of the transaction margin, I think you have the stable portions.

I had mentioned, if you just look historically, our transaction margin was down around the 16 basis points level in the third and the fourth quarter, and normally we operate at 20 to 23 basis points.

And so that gives you a little bit of an idea of where you can see the gross margin trending.

But the final point I will make is that there will be further impacts from our client segment mix; higher mix of ultra tends to bring down gross margin a little bit.

And also, on our regional mix; as you've seen from our disclosures, we have lower gross margin, for example, in Asia Pacific, than we do in emerging markets.

Okay, got it.

Thank you.

Amit Goel, Exane BNP Paribas.

I've got two questions.

One just actually going back to the cost reduction; I see obviously the CHF2.1 billion reiterated for 2017.

Just checking for 2015, I think the exit run rate targeted was a CHF1.4 billion reduction versus the CHF1.1 billion which has been delivered.

I just wanted to check what the difference was, and whether that's a timing effect which you expect to come through in the first half of this year?

And then, secondly, again my question is relating to the capital allocation, the discussion about leverage and risk-weighted assets.

Clearly within the IB, RWAs are down to CHF63 billion.

Going forward, obviously as you do factor in market risk and some of the other changes, the actual ex-op risk amount of capital to run the business is getting quite small.

I'm just curious if actually we are going to see some shift in mix from a capital perspective going forward as some of these regulatory changes come through?

Thank you.

Just on your first question in terms of overall cost reductions; if you look back at slide 21, I think, as I highlighted in my comments, we have a net cost save target.

We are the only bank on the street with a net save target, and we wanted to highlight the gross saves that we have generated of CHF1.7 billion to deliver our net saves.

One of the reasons we're slightly behind our CHF1.4 billion target is because we've encountered an increased level of permanent regulatory demand than we anticipated a couple of years ago when we launched the program.

Also what I highlighted in my comments is we would expect to achieve the CHF1.4 billion sometime around the middle of this year, and we're still committed to the CHF2.1 billion by the end of 2017.

Now just in terms of capital allocation for the IB.

First of all, I would just remind you during last quarter what we guided is our medium-term expectation for the investment bank is up to CHF85 billion RWA, CHF325 billion in LRD, are roughly 30% to 35% of the total balance sheet usage of the Group.

Beyond that we won't really speculate what the impact might be of any changes in regulation, or any further adoption of standardized or the like.

It would be premature and really just actually a bit irresponsible.

And by the way, I think this is extremely unlikely, nevertheless, to change the capital allocation of the Group.

That will stay at around one-third to the investment bank, as it is today.

So, fundamentally speaking, if there is, for lack of better description, regulatory inflation, it is going to be spread across the board and is not going to change our capital allocation.

Okay, thank you.

Sorry we're going to have to close the call now; I realize there's a couple of you still left on the line, but we're very happy to get back to you afterwards.

For the media who've dialed in, just to remind you that there is an in-person event here in Zurich.

It starts at 11:00 Swiss time and obviously there's an opportunity to dial into that again.

Thank you.

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