UBS Group AG (UBS) 2017 Q1 法說會逐字稿

Ladies and gentlemen, good morning.

Welcome to UBS First Quarter Results 2017 Conference Call.

(Operator Instructions) And 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.

Please go ahead.

Good morning, everyone.

Caroline Stewart here, Head of Investor Relations at UBS, and welcome to our first quarter results.

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

After that, we'll be very happy to take your questions.

Before I hand over to Sergio, 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 of the firm's control, and our actual results and financial conditions may vary materially from our belief.

Please see the cautionary statements included in today's presentation and discussion of risk factors in our annual report for 2016 for a description of some of the factors that may affect our future results and financial condition.

With that, I'd like to hand over to Sergio.

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percent, and profit before tax up in all business divisions.

We also saw further improvement in our strong capital ratios.

Client activity levels in Wealth Management were the highest we have seen for some time, and this helped our global Wealth Management business to deliver pretax profit of CHF 1.1 billion, up 19% from the first quarter of last year, and one of the strongest results since the crisis.

Personal & Corporate Banking had a strong quarter and generated its best annualized net new business volume growth and first quarter net new clients acquisition in 10 years, underlying our leading position in a mature market.

Asset Management had a solid quarter, with profits up 12% and very strong net new money, primarily in

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space.

The Investment Bank had a very strong quarter and delivered a very high 24% return on attributed equity even though market conditions were suboptimal in certain areas.

UBS is the world's largest and only truly global wealth manager with CHF 2.2 trillion in invested assets.

We have grown invested assets by almost CHF 0.5 trillion in 4 years, with around 40% of the increase from net new money.

But most importantly, over the past 4 years, we have grown profit before tax by 8% per annum, despite significant headwinds from low interest rates, low client activity levels and the effect of over CHF 50 billion in cross-border outflows.

Our focus on lending and mandates has helped to drive higher quality recurring revenues, which constitute 80% of total operating income.

Our #1 objective for global Wealth Management and for all our businesses is to grow profitably and sustainably over the cycle.

That's why we have said many times that gross margin and net new money, while important, are under critical measures of our success, particularly on a quarter-to-quarter basis.

And here is the proof.

In the face of a 9 basis point reduction in gross margin over the past 4 years, we have grown net margin by 1 basis point.

At the same time, we have improved our cost/income ratio from 78% to 75%, a testament to the success of our actions on revenues and costs.

There are 4 key features that differentiate UBS from its peers, and I believe these factors will continue to drive and define our long-term success.

First, UBS is the only truly global wealth manager.

We are a leader in the largest markets, the Americas, and we are a dominant player in every other region.

We have a unique globally diversified footprint.

And we benefit not only from scale, with over CHF 1 trillion in invested assets in the U.S. and over CHF 1 trillion in the rest of the world, but also increasingly from the synergies we derive from managing our total invested assets base of over CHF 2.2 trillion collaboratively; creating, further benefits for our clients and shareholders.

Being global today is critical for clients, especially the wealthiest, as we provide a uniquely global perspective, offer genuine diversification of asset and operate global booking capabilities.

The second key differentiator is our dominance in the ultra high net worth segment.

UBS is the world's largest wealth manager for ultra high net worth clients globally with CHF 1 trillion in assets.

Over the past 4 years, we have grown this asset by 12% per annum.

And today, they comprise almost half of our invested assets.

Ultra clients have also driven approximately 70% of the growth in our combined Wealth Management profits over the last 4 years.

As a scale player, this business has very attractive economics.

Its cost/income ratio is lower than other client segments, and net margins are attractive.

Industry estimates suggest that the segment will grow at 10% per annum over the next 3 years, the fastest of any segment, and a source of sustainable growth for our business.

That said, the high net worth and high-end affluent segments are also important, particularly in regions where the creation of new millionaires is exponential.

We are working on a number of new channels to attract these clients in a cost-efficient way, leveraging our global brand, technology and investment expertise.

The third critical differentiator is -- of our business today, but also in the future, is our leading franchise in APAC.

In a region where scale matters, UBS is the largest wealth manager with over CHF 300 billion in invested assets, almost 1/3 larger than our nearest competitor.

We have grown invested assets at 10% per annum for the past 4 years, more than the entire investment asset base of our fourth largest competitor.

Scale and longevity set us apart from our peers, contributing to 21% in profit growth per annum over 4 years, double the rate of invested asset growth, highlighting the businesses' operating leverage.

Within the region, our business is well-diversified between on and offshore with a unique presence in China.

It's also dominated by ultra high net worth clients who contribute almost 80% of our invested assets.

This means we have exposure to both cyclical economic growth trends and the rapid growth of wealthy clients in the region.

We have operated in the region for over 50 years in good and bad times and also for the case longer than our peers, a commitment which is important to our clients and stakeholders in the region.

APAC is not a business where success can be measured in quarters or even years.

It's a business we are building for the next generation, and our progress here is unlikely to be linear.

Today, in China, there are around 1 million millionaires.

Even with GDP growth at a conservative 5%, the size of the Chinese economy will double in the next 15 years.

This means that the number of millionaires and billionaires will grow, making the Chinese market even more attractive.

Of course, we will not grow by trying to compete with local players in local products.

Our aim is to provide global expertise in investment and wealth planning to private and institutional investors, which should benefit not only our Wealth Management business, but also the Investment Bank and Asset Management.

We are already in the best starting position, and we'll continue to invest.

Succeeding in this market is a key and critical objective and one that will provide compelling growth going forward.

But like the rest of APAC, it's a journey that we see more as a marathon than a sprint.

The strength and focus of our Investment Bank is the fourth critical ingredient for the success of our global Wealth Management business.

Our scale leading position in APAC and dominance in ultra high net worth means that we could not succeed without a strong and successful Investment Bank.

The IB continues to be world-class in the areas where we have chosen to compete.

And it's the quality of our capabilities in research, FX, equities and advisers which are most important to sophisticated wealth manager and clients.

The strength of our Investment Bank's institutional and corporate clients franchise and its track record of strong and sustainable performance are critical requirements to serve our Wealth Management clients.

So to close on Wealth Management, we have a unique global business success -- business successful in the world's largest and fastest growing regions and dominant in the ultra high net worth space, working with a world-class Investment Bank.

Critical growth trends should support our long-term success.

But more importantly, our track record of delivering attractive growth while transforming our businesses gives me great confidence in the future.

Thank you.

And now Kirt will take you through our quarterly results.

Thank you, Sergio.

Good morning, everyone.

For the first quarter, our results were adjusted for CHF 244 million in net restructuring expenses.

My comments in the slides will compare year-on-year and reference adjusted results unless otherwise stated.

Global Wealth Management had an excellent quarter, with PBT up 19%.

We delivered 4% leverage as income growth outpaced expenses.

Net margin was up 2 basis points, and we improved our cost/income ratio by 3 percentage points.

Our results demonstrate the value of our global franchise, the inherent leverage in our model and the execution of our strategic priorities.

Revenues increased by 5% to almost CHF 4 billion, driven by improvements in all income lines.

Transaction-based revenues increased by 15%, reflecting higher client activity, notably in Asia where we saw a 32% increase as clients became more positive after 6 quarters of risk aversion.

The U.S. was the second biggest driver, with transaction revenues up 10%, reflecting more positive market conditions and a higher degree of optimism generated by the election.

Net interest income benefited from higher short-term dollar rates in year-on-year increase in loans and deposits, partly offset by increased funding costs, reflecting the changes in equity attribution and continued buildup of TLAC instruments.

Invested assets and mandate growth were the key drivers of recurring fee income, offsetting the cumulative impact of cross-border outflows, the shift to retro-free products and client moves into passive and less risky investments.

Costs increased by another -- by just under CHF 40 million compared to revenues of up over CHF 200 million.

The cost increase was driven by higher FA compensation, mostly offset by lower allocated costs and actions taken by our Wealth Management business last year.

We see net margin and efficiency as well as growth in invested asset loans and mandates as the key drivers of our earnings.

All of these metrics have had a positive year-on-year trajectory, reflecting our strategic execution in the power of our global diversified franchise, with some offset from market performance in client activity levels, which differed across regions.

Efficiency improved 3 percentage points to 74%, and net margin increased by 2 basis points to 20 despite a reduction in gross margin.

Invested assets increased 13% or CHF 244 billion from the prior year, the equivalent of acquiring a medium-sized competitor.

Over 85% of the growth came from market interest, dividends and FX factors.

Mandate penetration improved by 100 basis points, with assets under mandate increasing by just under CHF 100 billion.

And loans grew by almost CHF 7 billion, driven by WMA during 2016, with loan growth turning positive in Wealth Management during Q1.

Net new money was over CHF 20 billion, almost CHF 19 billion of which was in Wealth Management, with net inflows in all regions, but particularly strong in Europe.

This quarter included CHF 1.4 billion of cross-border outflows.

And as previously guided, we expect this year's cross-border outflows to be roughly in line with 2016, with a typical peak in the fourth quarter and a substantial reduction thereafter.

Last year, we introduced a new operating model in WMA.

We now focus more on increasing retention and productivity and are deemphasizing recruiting.

As a consequence, net overall net money was lower, but we're pleased with the significant increase in same-store contribution.

Next quarter, we expect to see seasonal outflows related to tax payments in the U.S., which were CHF 3 billion to CHF 4 billion in each of the last 2 years.

As we said in the past, profitable growth over the longer term is more important to us than quarterly net new money trends.

As an example, we've recently announced the introduction of fees charged for concentration in euro deposits in Wealth Management, with other direct competitors -- while other direct competitors continue to pay for these deposits.

This and other measures to improve profitability will lead to outflows of low-margin and unprofitable assets, which over time will benefit our results.

Personal & Corporate PBT of CHF 437 million increased 4% despite increasing net interest income headwinds.

Operating income decreased on lower NII, driven by higher allocations of TLAC-related costs, mostly as a result of our new equity attribution framework and the impact of negative rates.

Increases in corporate finance fees and fees paid by Wealth Management for client shifts and referrals helped boost transaction income.

We also had a one-time gain of CHF 20 million in other income on the sale of a real estate loan portfolio.

Operating expenses decreased by 4% to CHF 521 million, partly due to seasonally lower allocations from Corporate Center.

Our personal banking business reported a new record for annualized net new business volume growth, up 6.7%, reflecting higher net new loans and seasonal client asset inflows.

Last quarter, we provided some guidance on net interest income drivers.

As a reminder, and compared with 2016, we anticipate a full year drag of roughly CHF 116 million based on implied negative forward rates and further higher TLAC funding costs.

As a result, first quarter NII was close to CHF 40 million lower year-on-year.

In the current interest rate environment, and even factoring the effective management actions, we expect profits in our Swiss business to decrease from current levels.

Therefore, in the short to medium term, we expect P&C's average quarterly PBT to be in the region of CHF 315 million.

Our mobile and e-banking platforms are award-winning and market-leading in Switzerland.

Our clients highly value these services as evident in stronger client satisfaction, greater loyalty and increased business volume growth among active customers.

Financially speaking, these clients tend to also be more attractive for us.

We continue to invest in our digital platforms to maintain our leading position and further improve our value proposition.

Considering the relatively low digital banking penetration in Switzerland compared to many other markets and given the trends we observed, we believe that this is an important growth opportunity for our business.

In Asset Management -- in the asset management industry, the trend from active to passive investing accelerated, and we expect these structural changes to continue.

In spite of this, AM generated CHF 123 million in PBT, up 12%, with operating expenses 9% lower, driven by actions taken during 2016.

In addition, we had nearly CHF 20 billion of net new money, excluding money market flows, mostly in indexed equities.

Our ability to capture flows like this underlines our credibility in the passive space, which represents over 1/3 of our AUM.

At CHF 236 billion, this makes us a top 10 player globally and the #4 ETF player in Europe.

And we have a substantial platform and world-class capabilities to build on.

We continue to add resources to capture demand, particularly in fast-growing areas such as alternative indices, which should help us to mitigate industry headwinds.

The Investment Bank posted very strong PBT of CHF 558 million, up 51% year-on-year, with over 24% return on attributed equity.

The top line improved 12% to CHF 2.1 billion, driven by a recovery in CCS compared with a difficult first quarter in 2016.

CCS performance benefited from improved activity levels as well as targeted investments we made in the U.S. last year.

ICS revenues decreased marginally against the backdrop of substantially lower volatility in uneven client activity across asset classes.

Equities revenues increased 2%, or 5% excluding the TLAC funding cost increase.

Prime brokerage had its best quarter performance in 5 years, while cash was down, reflecting particularly low volatility levels.

FRC was down marginally from a strong Q1 2016 as unusually low volatility levels impacted our FX flow and options businesses.

Together, FX and rates dominate our FRC revenue mix, and this combined macro segment was down overall.

Market conditions were particularly favorable to credit where revenues increased 60% year-on-year.

But consistent with our strategy, our footprint is much smaller in this space.

Costs, excluding variable compensation accruals, were down 8% year-on-year, reflecting actions taken early in 2016.

While we remain disciplined on cost, we're making strategic investments.

For example, in our research business, Evidence Lab is central to how we distinguish ourselves from competitors, as also reflected in our global ranking improvement from #6 in institutional investor to #2 in the last 2 years as we build up this offering.

Our PBT performance and disciplined resource management drove a strong 24% return on attributed equity under our new allocation framework.

Just for reference, under the old framework, this would have been over 30%.

The Corporate Center loss before tax was CHF 234 million.

Corporate Center – Services costs before allocations were down, reflecting our cost-reduction program.

Personnel costs, excluding variable compensation, were down 4%.

Group ALM's profit before tax was CHF 63 million, mostly due to gains on accounting asymmetries related to economic hedges.

Total risk management net income after allocations was positive CHF 42 million this quarter compared with our guidance of around negative CHF 15 million per quarter.

This was driven by tightening of the spreads on a portfolio of hedged government bonds, which generated CHF 80 million of mark-to-market gains.

These gains are likely to unwind over the upcoming quarters.

Non-core and Legacy Portfolio posted a loss of CHF 91 million, its lowest loss since inception, mainly due to lower expenses for litigation provisions.

LRD was down CHF 3 billion quarter-on-quarter to below CHF 20 billion, mostly as a result of unwind activity, maturing trade and market moves.

The P&L drag from our Corporate Center was comparatively low this quarter, but we do not see this as a reliable indication of future performance in the short to medium term, given the profit in group ALM and lower losses in NCL.

During the quarter, we increased our net cost-reduction run rate to CHF 1.7 billion as a result of both Corporate Center and business division cost reductions.

We remain confident that we will achieve a full CHF 2.1 billion by year-end.

As we complete our cost program, we expect restructuring cost to be around CHF 1 billion for the remainder of the year and then to taper in 2018.

As discussed last quarter, we modified our equity attribution framework to reflect regulatory changes.

We now allocate the equity directly associated with activity of the group ALM managers on behalf of the business divisions.

This, together with other changes, translated into a 55% increase in total equity attributed to the business divisions.

Together with our TLAC requirements under the Swiss capital regime, which are among the highest globally, this implies a total TLAC allocation to our business divisions that equates to a ratio well above 30% of their RWA and around 8% of their LRD.

For example, the IB has implied TLAC of nearly CHF 22 billion.

We expect to see a net reduction in net income -- net interest income allocated to the business divisions of around CHF 350 million in 2017 versus 2016, principally affecting P&C, WM and the IB.

The increase of CHF 50 million compared to the headwinds described in our previous guidance reflects a more comprehensive view of all our liquidity and funding economics, not just TLAC funding cost, the investment of equity and the impact of implied forwards.

Our capital position remains strong, with fully applied CET1 capital ratio of 14.1% and CET1 leverage ratio of 3.55%.

We continue to make progress towards achieving our fully applied total leverage ratio well in advance of the 2020 deadline.

We issued CHF 6.8 billion in TLAC eligible bonds during quarter 1, improving our TLAC leverage ratio to 8.4%.

With this, our total loss-absorbing capacity increased to CHF 74 billion or nearly 11% of our non-HQLA LRD.

I will now pass back to Sergio for closing statements.

So thank you, Kirt.

And in closing, I'd like to say a few words on the shorter-term outlook.

We have clearly seen improved investor sentiment in the first quarter, particularly in the U.S., but this hasn't yet translated into a sustained increase in activity levels globally and may not, given macro and geopolitical uncertainties.

Net interest income continues to face headwinds from low and negative rates in Europe and from a rising fund cost.

But as we saw this quarter, we are well-positioned to mitigate these effects as only a small improvement in market conditions will support continued sustainable profit growth.

That's why as the world's only global wealth manager, we are positive about the future where world-class Investment Bank is a perfect complement.

And we are the undisputed market leader in Switzerland, and our Asset Management business is taking the necessary steps to adapt to an industry experiencing rapid change.

These businesses are working together to the benefit of both our clients and our shareholders.

Finally, it goes without saying that we remain committed to our strategy and our returns policy, while continuing to build capital organically.

And with that, thank you for your attention, and we can now open for questions.

(Operator Instructions) The first question comes from Fiona Swaffield, RBC.

I have questions on 2 things, and the first was on the net margins on Slide 5. Could you say how confident you are with the sustainability of the very significant recovery in the Asian margin and the very strong emerging markets relative to Q4?

How do you see those progressing over the year?

And the second there is on risk-weighted assets, and that was again better than expected.

And I just wondered where you saw risk-weighted assets going in the future and whether we should still consider them increasing towards your targets.

Thank you, Fiona.

So in terms of net margin -- and we're glad that you actually picked up on the focus in net margin.

We do, as we said before, believe that net margin is a much better metric for the business than gross margin.

And as you saw, despite the fact that we had a year-on-year reduction in gross margin, our net margin was up 2 basis points to 20 for the global business, and net margin was up year-on-year for both businesses, Wealth Management and Wealth Management Americas.

Now in terms of the margins you see by region overall, and you specifically highlighted Asia Pacific, I would just note that Asia Pacific is naturally our most volatile region.

It's where we have most transaction revenue optionality, and I expect that volatility to continue going forward.

In terms if you look at both businesses, if you look at Wealth Management Americas and you see margin is much more consistent, we would expect that to continue to trend between 10 and 13 basis points.

And I've often said before, if you look at our Wealth Management International business, we would expect over time to deliver north of 25 basis points in net margin for that business.

And we think both of those are very healthy and will translate into very attractive bottom line performance.

Now in terms of RWA, what you saw during the quarter is that we did realize an overall increase in RWA that was driven by regulatory multipliers that we've guided before and some methodology changes.

Now offsetting that, we had a large reduction in market risk, a reduction of CHF 6.7 billion.

And that was reflecting the fact that we had relatively higher market risk levels at the end of the fourth quarter that reduced during the quarter.

And that was consistent with the low volatility level that we saw in the market.

In addition to that, we also had a reduction in our multiplier from 3.65 to 3. Now as we move forward, we would expect to continue to absorb the multipliers that we guided on before, that we expect to be CHF 3 billion for the remainder of 2017, CHF 5 billion in 2018 and a little bit less than CHF 2 billion in 2019.

Now apart from that, we would actually see that our RWA growth will be commensurate with the business activity and opportunities we see in the market. .

Because, of course, notwithstanding, we have to also -- before Basel III or Basel IV finalization, so we are always talking about current regimes.

Absolutely.

The next question comes from Andrew Stimpson, Bank of America.

First question, on Wealth Management margins; and the second one, on hiring in the IB.

First one, on margins.

The net interest margin looked like it's lower.

Is that just from the TLAC costs coming through or is that the rate falloff?

I know you made some comments, so I'm just not -- I'm not smart enough to do all the sums in my head quick enough.

So I'm just wondering, are we rebased down to this level and then we should see some benefit from higher U.S. rates coming through or what?

Any comments around that would be helpful.

And then secondly, I understand there's been some hiring in U.S. credit business.

I wonder if you could tell us what the plan is there, whether -- just reassure us on what the balance sheet associated with that business would be and that it's not going to increase in aggregate, please?

That will be helpful.

Andrew, I of course commented under the previous question on net margin for the businesses.

But if you specifically...

It's the net interest margin, sorry.

Yes.

You specifically look at net interest margin for our Wealth Management businesses.

First of all, for the combined businesses, net interest income was up 4%.

Now you have to look at both businesses separately.

WMA, as you would expect, net interest income was up 17%.

And actually, net interest margin increased on the back of tailwinds from interest rate changes as well as on the back of increases in banking products that we saw in that business during 2016.

Now the overall lower levels of and the reduction year-on-year for Wealth Management was really driven by the deleveraging that we saw during the year.

We saw about CHF 2.7 billion of loan outflows.

In addition to that, that business is also exposed to euro as well as Swiss franc in addition to U.S. interest rates, so not as much tailwind there.

Now as we highlighted on Page 18 in the presentation, what we would expect going forward is WMA, we should continue to see nice growth in net interest income, commensurate with the interest rate environment and expectations that we're going to continue to have loan growth.

Whereas Wealth Management, we'll have some impact from the, in particular, from the increased levels of funding cost, that you see a total of a CHF 35 million net headwind, that we would hope to offset that through some loan growth and some other actions.

On hiring, you can comment -- you already comment on, but go on.

Overall hiring for our credit business, was that the question?

Yes, in the U.S., yes, please.

In the U.S.?

I think it's -- I cannot answer it, Kirt.

I mean, I don't think there is any -- Kirt addressed in his remarks, and he said very clearly that we had a good pickup in our credit business activity.

Whatever hiring there is, we have to look at the net impact.

And -- but the most important issue is that we are very active with our business mix in FRC and that our strategies are not changing.

Our capital allocation strategy at group level and within the IB is not changing.

And so there is nothing really to comment on that.

So it's not an event, Andrew.

The next question comes from Andrew Coombs from Citi.

One on net new money and then one on the Corporate Center revenues, please.

First, in terms of net new money, you've had a very strong result not only in Wealth Management but also in the Asset Management business in the first quarter.

I know you talked about cross-border outflows being more heavily weighted towards Q4 in Wealth Management.

But nonetheless, in both divisions, it looks like you're well on track to meet or even beat the 3% to 5% net new money run rate guidance.

So I would like to know, was there anything one-off in nature about the net new money flows in Q1?

Or is this a more sustainable trajectory?

And then shifting to the Corporate Center, there, you since had a very strong revenue result on ALM, which you attribute to HQLA management.

It's obviously very difficult for us to analyze the revenues coming from the Corporate Center.

Is there any additional guidance you could give there as well, please?

Yes, Andrew, just to comment on net new money.

First of all, I'll reiterate what both Sergio and I highlighted during our speech is that the net new money is inherently volatile.

We don't think it's something that should be focused on to the level that it is.

We certainly don't.

We look much more at the underlying growth in our invested assets.

You saw that invested assets for both of our businesses, they were up 1% year-on-year.

And also, we focus on quality.

And to make that point very directly, you saw that we had net outflows in the fourth quarter, strong net inflows in Wealth Management in the first quarter.

But as I mentioned in my speech, we've taken some actions that will result some pushout of current assets based on the fees that we're charging on some euro deposits and also some other actions that we're taking to address unprofitable and low profitability assets that will be accretive overall.

Also, as we've commented on, of course, we do expect some continued cross-border outflows.

We highlighted the CHF 14 billion for the full year.

We just saw CHF 1.4 billion during the first year.

Finally, if you look back at our Wealth Management Americas business, again, there, the quality is what is important.

We were very pleased with our increase in net new money, our flows from same store, but we actually had net outflows from net recruiting given the cost of bringing FAs in.

Again, the economic accretion of that takes a while to actually realize in the business, and we're focused much more on retention.

I also highlighted the fact that tax payments during the second quarter will likely result in somewhere between CHF 3 billion to CHF 4 billion of outflows.

Maybe, Kirt, to add on the net new money side.

The real highlight on net new money was the return of some leverage.

If you look at the last few quarters, we saw client risk -- leverage being very correlated with client risk appetite and transaction volumes.

As you could see this quarter, there is a pickup in lending, and that's the real highlight that we want to focus on because, as we said many times, getting in cash, particularly if you pay for deposit, like euros, is very reasonable.

I mean, I don't think that we should really focus on this kind of business.

Yes, just to mention Asset Management, you asked about Asset Management as well, very strong inflow of [CHF 20 billion] . That was very much, as I highlighted in my speech, that was very much focused around ETFs, particularly in equity in those products.

But there was one very large inflow of CHF 12.7 billion that was in the press, around an Asian client.

And again, that was an inflow based on our passive capability.

We do think our passive capability should continue to help us as we go forward with our net new money dynamics in Asset Management.

But generally, that's a much lower margin, of course, than active.

Now on Corporate Center, the way to look at asset liability management, we provided guidance previously, is the line that is risk management net income after allocations, that should trend around negative CHF 50 million a quarter.

The reason why we had a positive performance this year is because of the gain that I referenced that we took on a mark-to-market in our fair value portfolio, high-quality liquid asset portfolio.

And we expect that actually to revert back as we go to the next couple of quarters.

Everything else below that line is accounting asymmetries, which tends to mean revert to 0. And you'll see volatility there.

But over the course of the year, it should net out.

The next question comes from Stefan Stalmann, Autonomous Research.

I have 2 questions, please.

The first, on your interest rate sensitivity to rising rates.

You say you have actually reduced the guidance a little bit for a 100 basis point impact of rising rates.

Could you please maybe add a bit of color on why that is and maybe also talk about what kind of deposit beat you have seen over the last couple of months in your U.S. business as rates have started to rise?

And the second question regards compliance expenses.

Crédit Suisse disclosed this week that they have about 2,000 headcount and about CHF 500 million annualized expenses in what they call a compliance and regulatory affairs.

Could you maybe hint whether your numbers in this area would look similar or what they would be in?

Just in terms of your first question, I wouldn't read a lot into the change from CHF 700 million to CHF 600 million that you saw in our guidance.

It was really just -- first of all, there's rounding involved.

Secondly, it's just an update that we do on a quarterly basis.

I wouldn't read a lot into that.

In terms of your -- the question on compliance.

We said before we do have substantial resources naturally that are focused on compliance efforts overall.

Now we have, in particular, an awful lot of resources and investment that are partly as a -- in a temporary capacity to address a number of our legal entity build-out to meet resolvability requirements as well as a number of our strategic regulatory initiatives of around prudential, around CCAR.

We said before that overall, there's about CHF 700 million of expense that we defined as temporary, although a part of that is likely to become permanent as we go forward.

The next question comes from Jon Peace, Crédit Suisse.

So my first question is on leverage.

You're still quite some way from your CHF 950 million short- to medium-term target.

And is that therefore still the right number?

And when you think of a target CET1 leverage ratio, what sort of management buffer do you think is appropriate over the 3.5%?

And my second question is just on the gross margin by region.

I know you prefer to focus around net margins, and I'm sorry if I missed the disclosure, but do you have the gross margin on a regional basis?

In terms of the first one, just to clarify, importantly, we've never said that CHF 950 billion is a target.

We mentioned that as expectations.

And what we've also highlighted is that under normal market conditions where there are opportunities to put balance sheet at work that would achieve our target hurdle rates, we would expect to see commensurate growth in balance sheet levels.

Obviously, with the market conditions that we saw last year and what we continue to see now, the opportunities aren't there to that extent.

And so we're operating at lower LRD and lower balance sheet levels.

And I think as we go forward, you should see a similar dynamic.

We'll manage the business in a very disciplined way that ensures that we deploy as and when we see opportunities that are accretive to shareholders.

Now in terms of gross margin, in fact, you won't find gross margin by region in the presentation, and that's by intent.

As we highlighted before, we really believe that you ought to be focusing on net margin because it's net margin that drives pretax, and that's what drives pretax growth, and that's really what we care most about.

Right, I mean -- or I don't know if you don't want to focus -- but we are focusing on creating pretax profit and -- for shareholders.

We have -- we want to create bottom line value, not top line value.

That's -- I mean, of course, you can focus on -- everybody can focus -- but the nature of our business, and particularly if we go back to the point that with the exponential growth that we had in ultra in the last 4 or 5 years, as I mentioned before, you have a natural dilution of ROA.

And the most important issues for us is always to look how this plays out into the bottom line.

So yes, it's an interesting KPI to look at like net new money.

We look at all KPIs.

But depending on the timing, and those KPIs may lose importance in relative terms to others.

But our fundamental strategic KPI is profit growth.

And maybe, Jon, just to emphasize.

I think as Sergio mentioned in his speech, I think if you look at Slide 3, you see that dynamic.

Net margin is down 84 to 75.

Gross margin up by 1 basis point.

That's what drives profitability.

And importantly, our cost-to-income ratio, which of course is directly correlated with free cash profit growth, down from 78% to 75%.

And as Sergio mentioned, if you look at our focus on ultra high net worth, then I would ask that you turn to Slide 6, you will actually see that the cost-to-income ratio for that business is 69%, which is below the overall average for global Wealth Management, despite the fact that, that segment has lower gross margin.

So probably we missed -- we owe you the answer on the buffer that you mentioned.

Oh, buffer, yes.

I think that, that one, as I can only reiterate what we said in the past, I think that's 2 -- 0.2., 0.3, whatever.

I think that we do have clearly a buffer above 3.5% and above the 5% in order to be comfortably within the target, which is not a minimum, but is actually a level in which it would be categorized as well-capitalized.

And of course, we need to see what are the future regulatory developments.

But as we speak, all things being equal, we are running the firm based on risk sensitivity.

So our focus is still the one of looking at risk-adjusted returns, and risk-weighted assets is important.

The second levers to run the firm is stress, and the backstop is leverage ratio.

We do really believe that any other ways to run a bank, particularly in Europe and Switzerland and in Asia is totally the wrong way around.

And we are -- we still believe this is the right way to go for us.

The next question comes from Al Alevizakos, HSBC.

I've got 2 questions on Wealth Management.

Question number one is, obviously, I can see that the integration of Wealth Management and Wealth Management Americas has continued, and that's probably why you started providing these combined slides.

But I was wondering whether you can give us any concrete numbers in terms of how much of the cost-cutting has already happened and whether you can give an indication of how much you expect the combined net margin to improve?

So that's question number one.

Question number two is, I can see that you are focusing a lot on the ultra high net worth individual because that's your tradition.

But at the same time, we've noticed that you spend a lot of time and resources for investing in the robo advisers and the other side of the spectrum, both in the U.S. with the SigFig, and in the non-U.

S. with SmartWealth.

So I was wondering whether you see any actual traction, and how does it fit with the overall ultra high net worth individual strategy and how will it impact your overall margins?

So let me take the second one on the strategic element.

I think that the ultra is really where we can say we have a clear differentiating factor.

But it doesn't mean, as I pointed out in my remarks, that the high net worth space is not important.

And actually, the high end of the affluent is very important.

Actually, our high net worth individual is a big chunk of the business.

I mean, just put it the other way around, it's the delta, it's CHF 1.2 trillion of assets.

So it's a very important business for us that we will grow and we'll continue to focus on, particularly when you look at Asia where the numbers of high net worth individuals that will be generated, and they're already there, will expand over time.

In respect of our -- it's not really robotics, but we are using technology across the board, being in outside the U.S. or in the U.S. Our view is that by using those kinds of technology that are leveraging other existing technology within the group, we can expand and exploit those channels and those segments, different segments in an efficient way.

But we do still believe, by the way, that there is no way you can approach a high net worth individual or a high-end mass affluent individual robotically.

So I don't think that this really -- you're always going to see an element of human touch and desire to interact because this is what we believe is setting us apart from the rest of the industry.

So we are -- in respect of seeing the results, we, for sure, see the results of deploying those kinds of technology in the day-to-day work of our client adviser and financial adviser because they are becoming more efficient, but also more effective in the way they can communicate and translate our content and communicate our content to clients.

And as we speak, we are clearly trying to test ways to go down to mass affluent, high-end mass affluent and see how it will work, but it's premature.

It's going to be -- it's going to take some time to see the results.

And Al, maybe just to answer your first question.

First of all, we wanted importantly to highlight the fact that we are a global wealth manager, and that was really the primary impetus behind presenting the business on a consolidated basis because what you see there is the value of diversification, the value of consistency.

And as you saw in 2016, it was our Americas business that was performing quite well, whereas we had some more challenges related to client trends and risk aversion in our international business.

If you would have dialed back to 2014 first half to 2015, actually, our international business was deployed much more strongly, with a lot of the underlying growth in Asia Pacific.

And so over time, we just think the uniqueness of our leadership position in the U.S., but also dominant position in other markets is what sets us apart.

Now in terms of the businesses overall, clearly, we continue to look for areas of synergy, and some of those include -- we commonly use the CIO.

The CIO is a capability that we use across both businesses.

We obviously leverage research across both businesses.

We have a common global approach to GFO, Global Family Offices.

We also have and we recently announced the combined management for our investor product solutions organization, and that's something that should lead to more synergy opportunities as we go together as we go forward.

The next question comes from Magdalena Stoklosa, Morgan Stanley.

I've got 2 more structural questions.

First is about your lending activity.

We talked a lot about NII at the call, but the Wealth Management have seen very strong numbers.

Loans were up about 10% kind of year-on-year.

And also, in the international, you have seen 2% loan growth, again, kind of year-on-year.

This is very kind of highly dollarized book of value.

As I understand, of course, you've mentioned the European component to it too.

But if we strip out Europe and we continue seeing kind of similar levels of lending activity, would you say that if we look at your revenue mix over the next 3 years, the NII should actually see quite a nice increase in terms of weight in your kind of overall revenue mix?

Would you say that that's where you're structurally heading?

So that's my first question.

And my second question is about the operating leverage because we have, of course, seen the result of your focus on cost, that 75% cost/income ratio in the quarter.

But how shall we think about your non-comp kind of cost base over the next couple of years when we think about the regulatory costs, the underlying digitalization, which kind of should provide some benefits also against your investments in the distribution sales and so forth?

How would you see that kind of non-comp base evolving again structurally over the next few years?

So Magdalena, in terms of your net interest income question and also the impact of lending, I guess I would refer back to the question that I answered earlier that you really have to look at both business a little bit separately.

In the case of WMA, with interest rate movements, we'll continue to see positive trajectory there that, that business would benefit from.

Also, until this quarter where we saw very slight decrease in loans in that business, we actually had -- it was 26 consecutive quarters of loan growth, and we would expect to continue to see positive loan growth in our WMA business.

And that is a very important part of the strategy.

Conversely, in the Wealth Management over last year and really for the 6 quarters prior to the first quarter of this year, we actually saw net loan outflows.

And in last year, in aggregate, we saw CHF 2.6 billion of outflows.

Now in the first quarter, that turned around.

We had positive inflows of CHF 2.5 billion.

That partially reflects the fact that our clients were active.

They have more risk on.

Having said that, that is an area of focus for us going forward.

You should expect to see us actually generate, particularly as our client needs evolve, loan growth in both businesses going forward, and that should benefit net interest income.

Now the final comment there also is, if you look back on the slide where we highlighted the overall net interest headwind, again, I would just remind that Wealth Management international does face negative CHF 35 million of headwinds from increased funding cost that they would expect to offset, but that creates of course a little bit of a drag through some of the lending growth and the other actions that they're taking.

Now our non-comp cost base, obviously, the dynamics there, on the one hand, as we continue to complete our net cost-reduction program, you should see a benefit to the net non-comp cost base line as we focus on areas like consulting cost, like contractors, like what we're doing with our technology platform to modernize it, so what we're doing with Wealth Management to consolidate platforms globally.

And so that on the one hand should create positive trajectory there.

On the other hand, we do continue to invest.

We're investing in technology.

Sergio highlighted what we're doing in digital.

We highlighted our private and corporate, our Swiss business, the fact that they're a digital leader.

They're going to continue to invest in digital, and we think that that's important for positioning those businesses over time.

So we would hope on that line to be able to fund our investments without having a significant increase in our non-comp line as we go forward.

And we'll modulate that.

We'll do that in a responsible way as we manage pretax profit and cost-to-income.

The next question comes from Kinner Lakhani, Deutsche Bank.

So I have one question and one clarification.

And the question was again coming back to WMA.

And I noticed that you had removed reference to U.S. investor confidence improving in the outlook statement.

And particularly, I noticed that the fee margin that you have is the lowest that I can see in my model ever and fell by 3 basis points sequentially.

So just curious as to what's going on with the kind of recurring fee margin in WMA?

And the clarification was just on PCB, where I think I probably missed something.

But did you provide some quarterly guidance on that, on PBT?

Apologies if I completely misunderstood that.

All right.

Just in terms of your first question, we do, do quarterly surveys on client confidence, and we actually did just recently completed our updated survey.

You might recall from our last quarter, Kinner, where we highlighted the fact that we saw significant increase in optimism and willingness to invest with a little bit of caveat, there was a bit of wait and see.

With the updated survey, actually, that optimism has not abated.

In fact, it's actually increased a little bit.

Although there's still is some -- the indication that any lack of progress on the administration's agenda could result in some abatement of that confidence.

But we still see that confidence flowing through to second quarter for WMA.

In terms of our fee margin, if you look at our recurring fee margin in WMA, there were a couple of impacts.

First of all, there were a couple fewer trading days.

Secondly, actually, if you look at the way that we accrue, what we charge on our invested assets, it's actually in arrears.

So the charge base was based on the fourth quarter and invested assets.

And as assets grew during the quarter that resulted in a drag that you've seen.

But you should see some catch-up in margin as we get into second quarter.

Now in terms of your PBT...

No, he's asking if you basically have been -- have given a guidance on that -- on Personal & Corporate Banking.

Yes, Personal & Corporate Banking.

Yes, we actually did.

We provided a specific guidance.

We said it as a consequence.

First of all, if you look at the quarter, we highlighted the one-time CHF 20 million item from the loan sale.

There also is -- there was actually a net credit loss expense release of around CHF 7 million.

We did have seasonally lower expenses.

And also, we expect intensification of headwinds from net interest income.

We talked about a total of around CHF 160 million year-on-year drag on net interest income for that particular business.

And so we said with all of that, that over the short to medium term, we would expect P&C's average quarterly PBT to be in the region of CHF 350 million.

The next question comes from Kian Abouhossein, JPMorgan.

Just one question in respect to -- you talked, Sergio, about a little bit of pickup, and market environment has already helped you quite significantly on your EPS growth or earnings growth.

I just wonder, let's assume there is no market pickup, what is it that you are doing, the management team, to generate ongoing earnings growth?

Thank you, Kian.

Well, I think that I guess -- yes, I mentioned that there was a pickup in Wealth Management transactions.

But if you look at the idea, as you know, this institutional space has been a little bit more subdued in terms of -- and uneven in terms of activity.

So in general, we would continue to do what we have been doing the last 4 or 5 years, so basically work on our alpha levers, i.e., enhanced mandate penetration, review pricing, just make sure that as we, Kirt mentioned before, look at ways to turn around asset base that is either structurally not profitable or at the margins and then try to make it profitable; work and continue to deliver on our cost initiatives that, as you know, is not finished.

So I guess we're going to continue to work on those levers and while we expect, over the long term, to see a normalization of this environment.

So I don't think the story in the foreseeable future, to be honest, is much different than what we have been experiencing the last 2 to 3 years.

So we're still going to see a high degree of volatility in sentiment, in market activity, and that's the reason why the diversification is helping us a lot.

Next question comes from Andrew Lim, Societe Generale.

Can I push you a bit more on the high cost in WMA?

So I mean, your revenues are higher, in large part due to the high net interest income.

But your personal cost have picked up a cost, resulting the cost/income ratio deteriorating quarter-on-quarter and the net margin going down.

You might attribute this to faster, say, agent hiring, but your financial advisers have actually gone down 2% year-on-year and 1% quarter-on-quarter.

So perhaps you can give a bit of color there.

But it does seem that you're paying more per adviser?

And then the second question.

Perhaps, I can ask a bit more clarity on the capital situation.

So you talked about 20, 30 basis point buffer, above the 3.5% regulatory minimum.

But at the same time, your leverage exposure, your LRD is at CHF 881 billion, which is some way below your CHF 950 billion target.

So I'm wondering what happens when you get to 3.7%, 3.8%.

Would you see excess capital building up above that as contributing towards your -- towards a higher dividend?

Or do you seek expansion in your LRD as a priority before you consider that?

How does that weigh on your mind?

Let me pick up the second question, and Kirt will take the first.

I mean, when you look -- again, as Kirt just mentioned before, CHF 950 million is not a target.

It's what we think in our capital planning, in our forward-looking statement, and we see that we believe that there is capacity and it's correlated to all our other capital targets to go up to CHF 950 billion if there is a constructive market environment in which clients are demanding capital being deployed.

And those capitals deployed would generate very similar returns that you have been seeing in the last few years, okay?

So as we do that, we are happy to deploy more capital because we believe those capital deployment translates down to the bottom line and helps us accrue more pretax profit.

That pretax profit, once we reach the 3 -- our target, I have to go back to our capital return policy.

Our capital return policy is clear.

We are committed to return at least 50% of the net profit attributable to shareholders.

And the delta between the 50, 51 and 100 is driven by cyclical consideration about where the economy is, outstanding litigation matters and an ability to redeploy capital that is accretive to shareholders in terms of value creation.

If those 3 conditions are fulfilled, and we feel comfortable, of course, every excess capital then will be returned.

And we will not seek capital if it's not strictly necessary to fulfill, as I said, business or regulatory requirements.

Can I ask then, in the current market environment and what you see going forward, do you see opportunity to expand that leverage ratio denominator?

Or are you quite comfortable with the level as it currently stands?

I think, yes, but we would see opportunities to deploy more capital.

But as my colleagues tell me all the time, particularly in the IB and also in certain areas of the Wealth Management, not necessarily this deployment do translate into accretive value creation on a capital basis.

So the problem here is that we see a lot of business being done below cost of capital.

And I don't think that we should basically use our bullets at this stage for this kind of business.

When there is a constructive and sustainable demand for capital deployment by clients, we want to have the capacity to do that and not dilute our returns.

I mean, if you look at the IB, there's no way we could achieve a 24% return on allocated capital if we would just do certain businesses that we see being done.

I mean, it's very straightforward.

Great.

And I think that's very clear.

So it sounds what you're saying is that you don't see any high ROE businesses, return on capital businesses versus what you've got right now, so you're quite happy to keep things as they are.

And so any excess capital you build up above 3.7%, 3.8% will be...

Yes.

Well, look, I think that I don't want to comment.

But in general, if I look from an industry standpoint of view, this rally, this bonanza on certain parts of the businesses doesn't seem to translate into bottom line creation of -- in return on capital.

So I don't feel that both intuitively, also looking at what clients are telling us, but also if I look at the results in the industry, it doesn't look to me that we are missing anything.

Yes, Andrew, just to address your first question, I guess if you look at the cost-to-income, the efficiency ratio of our Wealth Management Americas business and to compare us to other players, there are 2 reasons why we operate in a relatively higher ratio.

The first is lower penetration of banking products.

We are -- we don't tend to be the primary bank to our wealth clients in the U.S., whereas others like Morgan Stanley, Wells Fargo, Bank of America actually do tend to have a much larger penetration of banking products.

Secondly, it's a higher concentration of recruitment loans that we built up after the crisis when we had a high degree of recruitment.

Now as we go forward, we're doing a number of things to address that.

In terms of banking products, there's been an emphasis on increasing our banking product penetration.

You've seen that in terms of the growth of our loans.

We expect to continue to do that.

In terms of the recruitment loans, we've refocused our retention rather than net recruiting.

That should result -- naturally, if you look at our quarterly disclosure, you'll see that those loans in our balance sheet have already come down to below CHF 3 billion, and you'll continue to see those loans come down.

You'll see an actual benefit to our expense line that will start to show up in the fourth quarter of this year, and that will be quite an attractive benefit.

Now if you look at the year-on-year trajectory, first, I would ask you to focus on year-on-year because there are seasonal differences.

Our cost/income ratio is down from 87% to 84%, and you'll see that that's the highest level of improvement across the industry.

So we made the most improvement of any of our competitors.

Secondly, you'll see that the increase in personnel cost is really driven by FA comp, and its payment's off the grids.

It's not really driven by any other increased hiring levels of -- within the business.

I would finally just note that we continue to have the highest level of productivity amongst our FAs in the industry.

And we expect to continue that as we look at focusing on productivity of our FAs rather than the number of FAs we have deployed in the business.

The last question for the analysts and investors Q&A session comes from Patrick Lee, Santander.

I just want to go back briefly to your Wealth Management margin and the WM excluding America bit.

I noticed that the recurring component of your income was 75% of total, which I believe is quite a bit below the usual level of 80%.

And while I appreciate politics is driven by very strong transaction revenue this quarter, at the same time, I think the fact that the recurring component of NII were also a bit flat.

But I guess from a broader level and given the -- in the context of a changing business mix towards Asia, towards ultra high net worth, should we expect this recurrent component to get gradually smaller and just accept that Wealth Management is maybe something more of a marginal and more volatile business going forward?

Or is this something that you actually care about?

Or is it just a function of where your business is growing?

So if you look at the dynamics of our recurring revenue in Wealth Management, and we've indicated before that actually tends to fluctuate between 75% and 80%, or it has some historically.

And the fluctuation is really driven by volatility around transaction revenue.

So we had a better transaction revenue quarter.

It dipped down toward 75%.

The transaction revenue are not so elevated that you'll actually see that drift off a bit.

Secondly, strategically, we're very focused on increasing the overall recurring component of our revenue across both of our businesses.

And we're doing that through one of our major areas of strategic focus which is mandate penetration, which of course provides stability to margin.

And we highlighted the fact that we actually have seen a CHF 100 billion increase in mandates over the past year.

And we've also seen increase in mandate penetration within our Wealth Management business, and we expect that to continue as we go forward.

That will add to increase stability in that recurring margin and revenue line.

Now important to note, one of the reasons why you've seen less growth in that line is the cross-border outflows, the reduction in retrocession principally impacts the recurring margin line.

And so that's why we've been working with mandate penetration to partially offset that, but that's a dynamic that we're going to continue to face this year, but that should abate as we go on to 2018.

And we no longer see the cross-border outflows levels, so the year-on-year comparison should start to become more favorable in that line in 2018.

Ladies and gentlemen, the Q&A session for analysts and investors is over.

Analysts and investors may now disconnect their lines.

In a few moments, we will start the media Q&A session.

Thank you.