UBS Group AG (UBS) 2017 Q3 法說會逐字稿

Ladies and gentlemen, good morning.

Welcome to the UBS Third Quarter Results 2017 Presentation.

(Operator Instructions) And the conference call is being recorded.

(Operator Instructions) After the presentation, there would be 2 separate Q&A session.

Questions from analysts and investors will be taken first, followed by questions from the media.

(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, and welcome to our third quarter results presentation.

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

After that, we'd be 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 by their very nature are uncertain and outside the firm's control, and our actual results and financial condition may vary materially from our beliefs.

Please see the cautionary statements included in today's presentation for a discussion of risk factors and our Annual Report 2016 for a description of some of the 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.

Good morning, everyone.

The third quarter was another example of the strength of our business model with reported profit before tax of CHF 1.2 billion, up almost 40% year-on-year, and the net profit of CHF 946 million.

Our return on tangible equity, excluding the impact of deferred tax assets, was 13.3%, and we maintained our strong capital position.

We made more progress on costs and expect to realize the full CHF 2.1 billion in savings targeted by the end of this year, which I would like to reiterate is a net number.

At the same time, we have made and continue to make substantial investments in our business, partially funded through ongoing efficiency measures.

We also addressed several legacy matters, further reducing the number of material items we need to resolve.

We saw good results across our business divisions, including another strong quarter for Global Wealth Management.

Building on a strong first half, year-to-date pretax profit reached the CHF 3.1 billion mark.

Revenue rose across all income lines, notably in recurring net fee income.

Invested assets continued to rise strongly as demanded, which now represents nearly 1/3 of assets under management, supporting recurring revenue growth, which improves earnings quality.

Loan balances increased by 7%, and our efficiency metrics were broadly stable.

Asia Pacific continues to be an important driver of profitable growth for the group, with profit up 37% year-to-date on very strong operating leverage and double-digit net new money growth for wealth and Asset Management.

Our invested assets in the region have now reached almost CHF 0.5 trillion.

Our success reflects improved client sentiment as well as our investments across the franchise.

Over the last 3 years, we have invested despite the challenging environment and will continue to do so.

An important example is our Swiss One Wealth Management IT platform, which was recently successfully rolled out in Europe and now went live in Singapore and Hong Kong, supporting around 80% of our non-U.

S. Wealth Management investor assets on a single platform.

It enhances efficiency, improves our client value proposition and is a base on which we can grow at low marginal cost.

Around this time 10 years ago, UBS was entering the most challenging period of its history.

The clearest lesson from this time is that lasting success is only possible with a durable strategy and a focus on delivering sustainable performance year-after-year.

Capital strength has always been at the heart of our strategy, and today, we remain one of the world's best-capitalized banks.

We have almost CHF 80 billion of loss-absorbing capacity, and improvements in our risk profile are reflected, not only in some of the lowest CDS spreads in the industry, but also in strong and improved credit ratings.

We have also grown our business and invested in people and technology to sustain performance.

We continue to invest in front-end capabilities that improve the client experience, but further developing our infrastructure and control system is just as important.

This investment improves our efficiency, effectiveness and risk control and creates platforms to support our growth ambitions.

For UBS, sustainable performance is not just about the results we deliver and how we deliver them, it's also about how we can help our clients achieve their investment objectives in a sustainable way.

We do this by offering a choice of products, in many cases, customized portfolios designed to achieve targeted outcomes.

This year, we reached the CHF 1 trillion mark for assets under management that is considered sustainable investments.

Our achievement in these areas is reflected in the industry recognition you can see on the slide.

And we believe these strengths are and will continue to be a key differentiator in the future.

So to sum up, the strength of our diversified business was evident in Q3.

Wealth Management clients have been more active than last year, and markets have performed well.

As a consequence, and taking into account normal seasonality, it would be a surprise to see some -- it wouldn't be a surprise to see some lower activity levels across our client base in this quarter.

That said, as, in the past, we will remain focused on disciplined execution and creating long-term value for our shareholders.

With that, Kirt, to you to go through the details of the quarter.

Thank you, Sergio.

Good morning, everyone.

For the third quarter, our results were adjusted for CHF 285 million in net restructuring expenses.

My comments compare year-on-year quarters and reference adjusted results unless otherwise stated.

PBT for global Wealth Management rose by 4%, underscoring the benefits of being a globally diversified wealth manager.

Our leading global Wealth Management business delivered another good quarter, building on a strong first half.

Net margins were broadly unchanged from the prior year.

Revenues were up 6%, with increases in all lines, with some variation in the trends across regions.

Transaction-based income increased 2% year-on-year, driven mostly by Asia Pacific.

We saw a slowdown in activity in WMA, partly reflecting fewer trading days.

Net interest income rose 8% overall, reflecting higher U.S. dollar rates and benefiting from the CHF 10 billion increase in our loan balances, as this remains a key strategic focus.

On net interest income, there are a few moving parts in WMA that I would like to call out.

Given U.S. rate rises, we've often been asked about deposit betas.

And interest expenses have risen by about $15 million since 2Q '17 when higher client rates were introduced.

In the U.S., we also offer our clients the ability to sweep balances in excess of FDIC insured limits to other banks, so they benefit from additional deposit insurance.

This reduces our required levels of HQLA, benefiting liquidity coverage and leverage ratios.

We also -- we lose a little net interest income, as a result, gain some recurring net fees and, overall, improve economic profit.

Recurring net fee income from Global Wealth Management rose 6% on strong invested asset growth and improved mandate penetration, which increased by 170 basis points year-over-year as we continue to focus in this area, which benefits our clients and shareholders.

Overall costs rose by 7%, again with notable regional differences.

Wealth Management continued to demonstrate good cost control and benefited from actions taken in the prior year.

In fact, personnel expenses, excluding variable compensation, were the lowest they've been for 7 years.

In WMA, costs rose year-on-year as we reposition the business for future growth.

FA comp increased on higher revenue, and as we changed our pay grid in January of this year to improve FA retention and productivity.

We have also invested in specialists to support our banking products platform and as we relaunched our public finance business.

These investments should become accretive over the next 12 to 18 months.

On net new money, the results were influenced by a number of management actions.

In Wealth Management, net new money was CHF 5 billion, including outflows of CHF 2.5 billion each for cross-border and related to the introduction of euro deposit fees for large balances.

So underlying net new money is closer to CHF 10 billion and just over CHF 50 billion year-to-date, a 7% annualized growth rate with fewer client advisers.

Our cross-border outflow guidance for the full year still stands at CHF 14 billion to CHF 15 billion.

During the fourth quarter this year, we expect outflows of around CHF 8 billion, which will be a headwind to our recurring revenue growth in 2018.

In WMA, net outflows were mainly due to lower recruiting this year.

Importantly, and in line with our new operating model, we saw higher same-store net new money along with lower FA attrition.

Year-to-date, inflows were substantially higher for same-store FAs.

We expect net new money to stabilize around the lower end of our target range as we continue to execute on our strategy.

WMA's invested assets reached a new record of $1.2 trillion, up 9% year-on-year, with managed account penetration of 36.3%, also a record.

Concluding on Global Wealth Management business, profit contribution was 1/3 from the Americas, 1/3 from Asia Pacific and emerging markets and 1/3 from Europe, including Switzerland.

Margins held up, and invested assets increased by double digits across-the-board on an annualized basis.

Personal and corporate delivered PBT of CHF 436 million, with management actions and client activity helping to offset some of the headwinds from funding and negative interest rates.

Transaction-based income increased 4%.

Recurring net fee income was up 3%, and net interest income from deposits also rose.

Net interest income was overall down as the positive performance on deposits was more than offset by increased TLAC-related funding cost and lower banking book income.

Higher expenses mainly related to tech spend and temporary regulatory costs.

We initiated a major investment program in P&C, focused on enhancing our digital leadership, which we expect to bring both income and cost benefits in the medium term.

Our personal banking business had the strongest 3Q and 9 months annualized net new business volume growth in a decade, as well as the highest client acquisition rate year-over-year.

Asset Management delivered 11% PBT growth, driven by positive operating leverage.

Invested assets reached a 9-year high, resulting in improved management fees in the quarter.

Cost discipline was good as management took action in the prior year to reduce personnel costs.

We are pleased to see continued momentum in net new money as we attracted CHF 9 billion, excluding money market flows, in the quarter.

It's worth noting that after a period of significant margin pressure from passive flows, our new net new run rate fees were positive.

Year-to-date, net new money, including money market flows, was a new record at almost CHF 50 billion, a 10% annualized growth rate.

The previously announced sale of our Swiss and Luxembourg fund services units closed in early October and is expected to reduce quarterly PBT by roughly CHF 10 million going forward.

The IB delivered a resilient performance in a tough quarter for our flow-based business model, with PBT up 3%.

Corporate Client Solutions had another strong performance, it's fourth consecutive quarter of revenues above the CHF 700 million mark.

All regions performed well, and results compared favorably to the market fee pool development.

ECM had a particularly good quarter, including a number of landmark transactions.

Continued low volatility levels weighed on Investor Client Services, but especially on our FRC business, which has more of a bias towards institutional clients at around 60% of revenues from FX.

Equities was only down marginally, thanks to a strong performance in derivatives.

We are pleased that we have more analysts ranked by Institutional Investor than any other research house, which, along with our innovative Evidence Lab, positions us particularly well for the MiFID II environment.

Costs were down slightly and included a net litigation provision release.

The IB's return on attributed equity was over 15%.

The Corporate Center loss before tax was CHF 479 million, which included around CHF 280 million of expenses for litigation matters in relation to substantially resolving the Banco UBS Pactual tax matter and progressing towards the resolution of the RMBS trustee suit.

We expect Corporate Center cost allocations to business divisions to increase in the fourth quarter, consistent with the pattern that we've seen in previous years as well as on higher costs related to strategic and regulatory initiatives.

Group ALM's loss before tax of CHF 66 million with a reduction in operating income, mostly due to lower net income on accounting asymmetries related to economic hedges, which mean-revert to 0 over time.

Non-core and Legacy Portfolio posted a pretax loss of CHF 21 million, a significant improvement from the prior year as a result of net litigation provision releases in this quarter compared to a material provision taken last year.

Over the past year, risk-weighted assets are down 28% to CHF 6 billion, excluding op risk, and LRD is down 29% to CHF 18 billion.

During the quarter, we increased our net cost-reduction run rate to CHF 1.9 billion, with contributions mainly from the business divisions.

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

We expect restructuring costs to be between CHF 300 million and CHF 400 million in the fourth quarter and then to taper from 2018.

In the third quarter, we reported a net tax expense of CHF 272 million, including a net increase of recognized deferred tax assets of CHF 174 million.

The DTA write-up includes a CHF 224 million upward revaluation of U.S. tax loss DTAs, mostly driven by an increase in our profit forecast for Wealth Management Americas.

Consistent with prior practice, in the third quarter, we recognized 75% of the expected full-year DTA write-up in relation to profit forecasts beyond 2017, and we expect to book the remaining 25% in the fourth quarter after we finalize our business planning process.

Year-to-date, usage of our DTAs has resulted in a reduction in cash tax expenditure of around CHF 1 billion, which fully benefits our capital.

Our 2017 year-end U.S. DTA balance is expected to increase versus the prior year, excluding any currency effects.

This reflects higher U.S. profit forecasts over a 7-year recognition period.

Let me explain some of the mechanics of the recognized U.S. tax loss DTAs on our balance sheet.

In effect, over the course of the year, we recognized an expense related to the use of tax loss DTAs against profits earned.

However, we also effectively recognize an equivalent increase in U.S. DTAs, since we have a significant amount of unrecognized U.S. tax losses with a long remaining life.

These offsetting balances do not flow through the tax expense line.

The additional amount we recognize in Q3 and Q4 is part of the revaluation essentially reflects increased optimism in our U.S. business.

On a fully applied basis, our CET1 capital increased by over CHF 700 million, mainly as a result of profits in the quarter.

Our capital position remains strong.

Our CET1 capital ratio was 13.7%, a 20 basis point increase during the quarter.

The leverage ratio was 3.7%, comfortably above the 2020 requirement of 3.5%.

And TLAC of CHF 78 billion was up CHF 4.6 billion in the quarter.

RWA increased by CHF 1 billion from last quarter, entirely due to regulatory-driven methodology changes and other regulatory inflation.

For the fourth quarter of 2017, we expect around CHF 4 billion of regulatory-driven increases.

Our RLD increases to CHF 885 billion from a historic low of CHF 861 billion last quarter, largely on foreign currency translation as well as increases mostly in our Investment Banking group ALM.

This, in combination with higher CET1 capital, results in our CET1 leverage ratio remaining unchanged at 3.7%.

In conclusion, we're particularly pleased with our performance this quarter and our strong year-to-date results.

With that, Sergio and I will open up for questions.

(Operator Instructions) The first question comes from Kinner Lakhani, Deutsche Bank.

My first question was on the implied forward curve analysis that you provided us in Q3 and Q4.

I wondered if you could give us an update.

I'm particularly interested in the WMA part of that where I think we expected about CHF 1 billion on a forward curve basis.

In the context of, obviously, the deposit beta seemingly going up since Bank of America started to reprice, and net interest margins seem to have kind of stabilized if not coming down as a result of that in the U.S. Secondly, just wanted to circle back on litigation and the U.S. RMBS issue.

I'm sure you saw Wells Fargo took CHF 1 billion provision in relation to U.S. RMBS in Q3.

Yet clearly, they had a very small precrisis market share in U.S. RMBS.

So wondered if that was a data point that you considered relevant?

Thank you, Kinner.

So in terms of implied forwards, I'm sure as you probably saw in our third quarter report, we reduce and there is rounding, of course, as a total expected net interest income increase from 100 basis point parallel shift from CHF 0.7 billion to CHF 0.6 billion.

And that was driven predominantly, as you highlighted, by Wealth Management Americas, and there're 2 factors.

One is the deposit beta that you reference.

So as you saw at the end of the second quarter, we increased our client rates, effectively pushing our deposit beta up above 50% to somewhere around 58%.

In addition to that, we had, and I highlighted this in my speech, we offered a multibank facility to our clients so that they could take advantage to move some of their deposits with us that were not insured to other banks to take advantage of FDIC insurance.

So the combination of both of those resulted in the rounding change of the lower expectations should 100 basis point shift incur.

Secondly, in terms of your question on litigation, first of all, let me just mention that, of course, prior to the quarter, we resolved our NCUA issue.

And then secondly, just to take advantage on what I highlighted that during the quarter, we saw a small uptick in the provision to address our trustee matter.

And there, we have reached a settlement agreement with selected certificate holders.

We're in the process now of obtaining majority support for that settlement.

Once that occurs, we'll effectively get that matter behind us.

Beyond that, I won't comment on any other RMBS matters.

All banks have different exposures and different patterns.

Next question comes from the Anke Reingen, RBC.

Anke Reingen from RBC.

Just 2 questions.

The first one is on the performance on the personnel expenses in the Wealth Management operation.

Clearly, you showed very good operating leverage and just wondered should we expect this to continue, or is there a trend where personnel expenses can go up also without relationship managers going up?

And then secondly, on your guidance of risk-weight asset inflation.

Is your guidance from the first -- from the second quarter you gave us about the trends, I assume that you reiterate that expected risk-weight asset inflation?

Thank you, Anke.

In terms of personnel expenses, as you have observed in our international Wealth Management business, our personnel expenses overall are down and are at a low level, down excluding compensation, variable compensation.

And that's as a consequence of actions that we took last year to restructure or reposition the business.

And going forward, we would expect, of course, as we do resume to continue to invest in the business, particularly in areas of growth like Asia Pacific, that we will see an increase in personnel expenses.

However, I would reiterate that we have built-in structural positive operating leverage in our international Wealth Management business.

And the migration to One Wealth Management Platform that Sergio highlighted will continue to give us scale advantages as we grow that business going forward.

And so we would expect positive operating leverage, but we still would expect an increase in personnel expenses as we continue to invest to grow that business.

In terms of RWA inflation, I believe our last quarter I guided that we expected around CHF 6 billion for the fourth quarter -- for the second half of the year, excuse me.

And we saw about CHF 1 billion in the third quarter.

And what I -- I updated my guidance to indicate that we expect around CHF 4 billion of further RWA inflation for the fourth quarter.

The next question comes from Jon Peace, Crédit Suisse.

My question is on the restructuring costs as we go into 2018.

You talk about that tapering, but I wonder if you could be a little bit more precise around the guidance in terms how the full year might look relative to 2017?

And then the second question is on your strong growth in APAC.

It looks like it was more driven by market effects and net new money.

Is that normal volatility that we see quarter-on-quarter in the net new money?

In terms of your first question, we indicated that we expect between CHF 300 million and CHF 400 million of restructuring in the fourth quarter.

In terms of tapering next year, we're still finalizing our planning process, and we'll provide some updated guidance in the fourth quarter.

We do expect it will come down substantially, potentially settling somewhere around CHF 0.5 billion.

But again, we'll be a little bit more specific around our fourth quarter disclosures.

Now our performance in Asia Pacific, that's really reflected fundamentally of our franchise there and the strength of our franchise and the fact that, yes, there has been a pickup of activity.

Our clients have become more active this year versus last year.

And also, we see more activity in primary and secondary markets.

But with the positioning that we have in the region, we've captured, we believe, more than our fair share of that pickup in activity.

And we've done that with limited increase in expenses, and so we've seen very positive operating leverage.

And so -- and that's really as a result of the investments that we made in prior quarters and our significant investments in positioning our franchise over time.

So we're seeing the benefit of our franchise that is showing upside in more positive markets on a year-on-year basis that's driving the growth that you're seeing in Asia Pacific.

Next question from comes from Andy Coombs, Citigroup.

If I could ask a question on Equities result.

We saw a strong performance in equity derivatives going from CHF 143 million to CHF 208 million.

And you actually saw the opposite in cash, falling from CHF 298 million to CHF 265 million.

There seems to be the opposite trend to what some of your peers have demonstrated.

So it would be great if you could just elaborate on the drivers there.

And then my second question would be a technical question, but on the updated FINMA decree, it talks about increasing the risk weights on Swiss investments from 200 to 250 on foreign from 200 to 400.

I just want to clarify, does that presume any impacts on the UBS AG accounts not the group AG accounts?

And therefore, does it factor at all in your thinking on your dividend policy?

Maybe, Andrew, I'll just address your first question and see if you could repeat your second, please.

In terms of our Equities performance, the strong derivatives results year-on-year is reflective of our very strong position in structural products and the fact that we saw pickup of activity in Asia but also in Europe.

And so year-on-year, that's resulted in a very nice increase in Derivatives products.

Conversely, on the cash side, that part of our business is more affected by the very low volatility levels and the same trends that I think others have seen that as our clients are, of course, very much susceptible to volatility swings and with low volatility levels we've just seen less trading activity and as we don't carry much in the way of inventory and positions.

So perhaps with that, could you repeat your second question?

The second question was just on the recent release that's been issued, talking about changing in the treatment of holdings in subsidiaries.

So I was just trying to clarify whether those new risk weights that have been applied subsidiaries just impact on the parent accounts or whether it does impact from the group accounts as well, and whether that's a factor or not in your thinking on dividend policy?

I'd assume not, but I just wanted to double check.

Yes.

So what FINMA has announced is that previously they had a concession and temporary treatment for the participations of -- or the investment in subsidiaries for our AG entity.

And what they've done is they've come out with now what is a more final guidance going forward to treat those participations on a gross up basis, different levels for those that are in Switzerland versus foreign subsidiaries.

And that actually, we think, is a positive confirmation, and it's quite consistent with the EU guidance.

And overall, you'll see the reporting in our [Q3] reports, we are actually fully meeting those capital requirements on a fully applied basis.

And there's no impact overall at the group level.

It's purely -- it addresses prudential capital requirements at the AG level.

Next question comes from Jeremy Sigee, Exane.

Two questions, please.

Firstly, I noticed the Newswire comments from Sergio earlier on about capital build-up is done and you're keen to move ahead to implement your progressive dividend policy, maybe complement it with share buybacks.

I just wanted to clarify, when you say capital build-up is done, are you envisaging that that takes account of Basel IV requirements as well?

Is that included in your statements in your commentary and your distribution outlook there?

Question 1. Question 2, earlier in the call, you mentioned improved client sentiments in Wealth Management, but I noticed you dropped that reference from your outlook statements.

So I just wondered if you could talk a bit about how you perceive sentiment confidence activity to be amongst Wealth Management clients at this point in time.

Yes.

Clearly, I'm not able to predict this ongoing discussion and the outcome of the Basel IV discussions.

So my remarks were clearly based on the current regulatory environment.

Although as you know, we are managing the bank with a 3 -- at least 3% buffer above the minimum requirement.

So we are also, in that sense, taking into account any potential future regulatory changes.

And of course, as a consequence of that, we would also adapt and change and recalibrate our 13% requirement.

So in that sense, we are -- if you look at our current binding constraints it's leverage ratio.

We always say that we believe 20, 30 bps in addition to 3.5 level is sufficient.

So we achieved that level, so it means that we can, looking forward, look at implementing, continue to implement our capital return story with progressive increases of our baseline dividend and complemented with share buyback.

And this is going to be driven by profitability.

So if we are able to generate cash and the cash and then we say at least 50% will be paid out.

Of course, we will take into consideration any potential outcomes of the Basel discussion and other cyclical consideration that we need to take into account, any consideration on growth additions.

But we remain firm in our intention not to retain unnecessary capital buffer above what is already a very strong and solid set of overall equity and loss-absorbing capacity.

Because I'd like to reiterate that the CHF 80 billion of capital base we have, a very strong AT1 component, very strong TLAC component, which, by the way, is not coming for free.

And so that's the reason why I think there is a point in time in which we are keen also to reflect to shareholders the cost of and compensated through a balanced but a rewarding capital return policy.

In respect of the outlook, I think I wouldn't read too much on the change of tone other than the seasonality factor.

I mean, look, unfortunately, I have to say unfortunately, but we have been quite right in our outlook statements in the last few years.

And if I look at the incoming or the current quarter, one has to look at the seasonality factor in combination with the fact that we had pretty good run in equity markets in all asset classes.

And it's quite normal during this quarter to see some people taking profits or being on the sideline, but it's nothing more than that.

You can go back into the time series of what it means at the Q4.

But the fundamental setup and trend of our Wealth Management business stays intact.

So as I said, the macro picture is quite clear but clearly the geopolitical tensions and the very good run investors had to steer clearly has to be taken into consideration.

Next question comes from Nicholas Watts, Redburn.

I have 2 questions.

The first was around your CCS business, which posted a strong quarter.

If I look at your CCS business over the last few quarters, again, some of the publicly available data on fee performance, you seem to be posting much stronger numbers.

And I think a component of that is a large number of private deals.

And I was just wondering if you could perhaps provide a little bit of qualitative guidance around the mix of public versus private in that business?

And then in that context, how much of the private business flows out to your Wealth Management business?

That's the first question.

The second question was just on the Asset Management business.

You saw another strong quarter of inflows, and there were some press, I think earlier this month, around a very large U.K. local customer mandate win.

And I was just wondering whether any of that is in the Q3 numbers?

Or if that's something we will see in quarters going forward?

Yes, Nicholas.

Perhaps I can take the second question first.

As you said, in Asset Management, we had another very strong flow quarter.

And in fact, we've had a very strong flow performance year-to-date, as I highlighted in my speech.

This quarter with CHF 9 billion year-to-date, 38 excluding money market and 50 when you include money markets and up about 9% on an annualized basis.

The very large flow that was announced towards the end of the quarter is actually not in the current numbers.

And in fact, that very large inflow is going into our assets under administration.

And that business, we've actually, as we announced, we sold that business to Northern Trust.

So in fact, we just closed that transaction.

So that was our parting gift to Northern Trust.

You won't see those numbers show up in our numbers in the fourth quarter.

Well, Nicholas, in respect of the CCS, I think that we had a solid quarter and a series of quarters.

And I think that some of the investments we made in the last few years, also in reinforcing that part of the business, are paying off.

Of course, we had a very strong pickup in Asia Pac and in EMEA, 50%.

We were involved in landmark transactions.

And as you mentioned, there is also an element of private.

But I wouldn't really say that the private side is necessarily linked to Wealth Management, actually because I could also argue that a lot of our public side is, in many cases, related to our wealth management ties.

So with this combination of banking with ultra-high net worth clients, entrepreneurs and so on has always been, and particular in Asia, a feeder to our business model.

That's the reason why it's very important for us to maintain strong, competitive capabilities in our IB because they are both, in many cases where you have monetization, it's not only good for fees and Investment Banking businesses, but it's a feeder into our Wealth Management business.

But we don't really break down publicly those kinds of dynamics, but there is always an element.

And particularly, we are keen to explore it further.

And I see a lot of potential for us that, in the U.S., to get the Asset Management, our Investment Bank and our Wealth Management businesses working closer together, more like we do in Switzerland and in Asia to create the same kind of dynamics that are very, very successful.

Next question comes from Al Alevizakos, HSBC.

So question number one in Wealth Management Americas.

Just trying to get a feeling of when do you believe that the increased personnel expenses, obviously due to the new compensation system, will be offset by the lower recruitment cost through the cycle?

Will that be also occurring in the next 12 to 18 months that's been mentioned before?

And regarding question number two, just trying to understand a very simple number.

If the U.S. tax cuts go through, what will that mean exactly for your EPS post to initial DTA impairment?

Do you expect the reported EPS to stay exactly the same because you weren't paying a lot of tax in the U.S.?

Yes.

Just to comment on your personnel expense question.

First of all, there are a couple of components of our year-on-year increase in personnel expenses.

So to isolate first FAs, which was the focus of your question.

Obviously, there's the normal revenue increase that drives typically, of course, increase in FA payouts.

But in addition to that, at the beginning of this year, we announced a change in our pay grids.

The net pay grid effectively increased the level of payout for our most productive FAs, which actually resulted in a year-on-year increase in it to what we otherwise would have paid to those FAs.

And so you're seeing that flow through the business on a year-on-year basis.

And that's helping to drive our strategic transformation, which is focused on improving retention.

In fact, our regretted attrition is down quite nicely year-on-year, also to improve productivity of FAs.

In our FA same-store, net new money is up over 50% year-on-year.

So we're starting to see those results.

Now offsetting that though, of course, is the reduction of the reliance on net recruiting.

In there, we actually have seen a reduction in our employee loans.

They're down 16% year-on-year to CHF 2.7 billion.

But the benefit of that reduction in terms of the amortization of flow through our P&L is not yet showing up completely into our results.

We'll really start to see that as we get into the first quarter of next year.

And we said before that we expect that to be greater than CHF 100 million.

So what you'll see as of the first quarter, the year-on-year comparison from the pay grid change will effectively be fully in our numbers, but you'll start to see the benefit of the employee forgivable loans flow through.

Now in addition to that in our personnel expenses, we've also added to our banking platform.

We've hired banking experts, which, for us, is a critical part of our strategy to continue to increase our bank penetration.

And we also launched our public finance business.

And you're seeing some of those expenses and the benefits, the revenue from those investments will start to show up as we get into next year.

The DTA?

In terms of your DTA, so effectively, we see an impairment in our overall U.S. taxes.

There will be no impact at all in our EPS because, of course, we're not paying U.S. taxes, and we wouldn't expect to pay U.S. taxes for the duration of the life of our NOLs.

And so at a lower tax rate, we would have to realize an impairment of some of those DTAs.

We've indicated that every 1% would be a net impairment of CHF 200 million.

That would have an impact on reducing our current shareholders' equity balance in DTAs, would have no impact on our regulatory capital.

But net-net, we would no longer pay that amount of tax, which already is offset through DTAs.

So effectively, no impact at all to our bottom line results in our EPS.

Next question comes from Kian Abouhossein, JPMorgan.

Sergio, I had to adjust my numbers by CHF 500 million on a pretax basis to go from stated CHF 1.2 billion to CHF 1.7 billion.

Kirt just mentioned CHF 500 million potential more restructuring next year.

I'm wondering, considering that you have restructured for the banks, the bank is in a superb position in terms of business mix, et cetera.

When do we see stated numbers equal clean pretax numbers?

And the second question is regarding recurring fees in WM.

Kirt, you mentioned CHF 8 billion of outflows in the fourth quarter, which could impact 2018.

Can you talk a little bit about that impact and maybe give us an indication in terms of basis point impact potentially?

And secondly, if you can talk a little bit about how we think or should think about recurring fees in 2018 relative to '17?

What are the drivers that we should think about?

Yes.

Thanks, Kian.

I think that what you see on the restructuring charges is fully aligned with what we have said in the past.

And Kirt clearly outlined what it means for next year, CHF 500 million.

And '19, being the last year, will be effects of the ongoing restructuring charges initiatives that we took until 2017 and the rolling effect of the same initiatives.

We are not opening new initiatives in 2018 or 2019 that drives this issue.

So as we move into '18, our -- more and more, our focus will be on reported numbers to basically start to go in the direction that you're mentioning.

But still, keeping the transparency on the adjusted items because other than restructuring charges, in many cases, the adjusted figures may be positive or negative, and there are maybe extraordinary items that needs to be taken out, and therefore, we would probably never stop to even adjust the numbers, but the restructuring effect will go out as a function of us completing the ongoing exercises.

As I said clearly, at the end of 2019, let's say, entering into 2020, restructuring charges equal 0. So next year, we'll define the AXA's expected numbers for '18.

We'll try to also figure out and give you guidance on what is to be expected in '19.

And then for 2020, you can already put a 0 to your spreadsheet.

Yes, Kian.

And maybe just to complement Sergio's comments, I would also mention, you're already starting to see a bit of a convergence in our reported and adjusted results.

So if you look at our results within the quarter, year-on-year, we're up almost 40% on reported, and we're up only 16% in adjusted and that's just because we realize less restructuring, CHF 258 million this third quarter versus CHF 444 million last year in the third quarter.

So I think you'll start -- you'll continue to see actually our year-on-year trajectory, and reported is going to be better than our year-on-year trajectory in adjusted as we converge to fully eliminating the adjusting items, the restructuring.

In terms of your second question, just given the fact that, of course, that as we saw last year we'll see an acceleration during the year in our total outflows related to cross-border activity, and as I mentioned, around CHF 1 billion.

That obviously, since those outflows are typically at a much higher margin and are almost fully concentrated in under contract product that will have a direct impact on our recurring revenue.

And I think you kind of see that with the pattern of what our recurring revenue has been doing in our Wealth Management business where we actually had throughout 2016 year-on-year flat to down slightly.

Our recurring revenue turned positive.

We had 4% growth in the third quarter year-on-year as the actions that we've taken through growing invested assets and also mandate penetration started to offset some of the cross-border impact.

But I think what we would expect is after the outflows in the fourth quarter, you'll see a drop-off in recurring revenue as a consequence and also a reduction in margin, but that should start to actually return and improve as we get into the second quarter.

You'll start to see that strengthen as our ongoing mandate penetration program continues to improve that margin and as we grow our invested assets.

And very importantly, we will fully remove that as a headwind, and that's been the most significant headwind to our business and to our margins now over the last almost 4 years.

And that will be completely removed from the business beginning the first quarter of next year.

Next question comes from Magdalena Stoklosa, Morgan Stanley.

My first question is about your One Wealth Platform.

You've mentioned earlier that you are at the 80% rollout ex U.S. and also the resulting potential for lower marginal costs of the new and existing business.

Now my question really is how should we think about the medium-term cost impact of the One Wealth Platform?

And my second question is about what kind of lending is the strategic focus, again that you've mentioned in your remarks?

Now the loan growth was up 7% year-on-year this quarter versus 4% the quarter before.

And really, how do you see the lending activity shaping up going forward across your global wealth?

So on the One Wealth Management Platform, I think this is really helping us achieve our medium- to long-term targets in terms of profitability, cost/income ratio, productivity.

It's a double effect.

I mean, if I look at Asia, I mean we -- our current -- after, of course, people are getting used to the new systems, but after a while, then we'll be able to serve their other clients, not only in a faster and more efficient way in terms of cost but also in a more professional and complete way, opening up capabilities that we already use in Switzerland and, as I said, in Europe.

And last but not least, very important, the productivity of our client advisor will go up, and the capacity to serve more clients will go up.

That doesn't mean, by the way, that we are not also going to pursue a growth pattern in terms of hiring further client advisors.

But -- so this is very much embedded in our long-term planning.

And I'm totally convinced that this will be a very, very important base from which to grow particularly in our Asian businesses.

Perhaps, Magdalena, to your second question, let me just address that.

Firstly, for the U.S. business, as I just highlighted in the last question, we have been invested in building out our banking products platform.

And we've been adding lending specialists to the business in the U.S. as we intend to look to increase our penetration and our share of that business with our clients.

And so as a consequence of that investment, we should continue to see very good lending growth in the U.S. going forward over the next couple of years.

In fact, as we've been planning for that business, we've allocated capital to accommodate for that growth for Wealth Management Americas.

In Wealth Management, there's really a fairly similar story.

As long as our clients stay positive and as long as they continue to have an overall risk-on attitude towards their investment, we would expect to see their demand for leverage.

And we would also expect to see leverage as a vehicle to have a very positive input for their ability to achieve their wealth objectives.

And I think, consistent with that, we would expect to see growth in our loan book on the flow side.

Now if those attitudes change, I think you would see our lending growth slowdown.

In addition to that, we have been and we just launched a greater focus on the structured end of our lending with the more sophisticated clients with GFOs, with the upper-end ultras, where we have a joint venture with the Investment Bank.

And there, we do and we will expect to see some growth in loans from that joint venture and from that activity going forward.

So Magdalena, I think it's very important what Kirt outlined, there was a series of alpha-generating capabilities on lending.

But consistent -- you go back into the last couple of years, one of the main drivers still is client risk appetite.

So we're not going out and trying to deploy and force our lending activities just to lever -- leverage and get momentum on the top line.

There is a balanced approach.

And the correlation between client risk appetite and lending is one of the main drivers.

And then, of course, you have to complement with everything that Kirt just mentioned.

Maybe just another closing comment.

Importantly, though, we will always retain our conservative orientation towards lending.

And that means our loan-to-value ratios will always be very, very strong and solid.

We're not going to -- we're never in our Wealth Management business are going to pursue cash flow alone.

So you'll see that while we look on the office side to increase our focus, it's still going to be within the philosophy of how we think about lending overall.

Next question comes from Jernej Omahen, Goldman Sachs.

I only have 2 questions left, please.

The first one relates to Page 5 of your presentation where you show us the return on tangible equity, excluding DTA of 15.5%.

And I was just wondering what you're trying to tell us with this chart and why that's a relevant indicator of returns?

And the second question I have is on the fixed income operation.

It seems to be -- so the revenue line in FICC seems to be, I guess, accelerating in its decline, [synthetically] almost seems to be trending towards 0, if I exaggerate a bit.

And I was just wondering what is the plan there?

Is that purposeful?

So is UBS trying to further reduce FICC?

Is this number around CHF 250 million something around we have in mind when we talk about the relative size of FICC within the Investment Bank?

Or are you still trying to, I don't know, invest or reconstitute the FICC operation?

Yes.

Be assured that we are not masochists.

We are not trying on purpose to take down our revenues.

And if you look on a quarter-on-quarter basis, actually it's flat.

And actually, our FRC business is highly influenced, as Kirt mentioned before, on a 60% penetration on FX.

And if you look at major currencies, volatilities and institutional activity levels are that.

So our FRC business is positioned to serve clients, accommodate clients, facilitate clients using capital in that kind of environment.

And while looking at adequate return on capital deployed, it's not dissimilar to what's going on in the rest of the industry.

But I would say that, at least, we feel very comfortable about the risk-adjusted return on capital deployed in our business, and I don't really believe it's going to converge to 0. Now when you look at -- and Kirt will step in, but if you look at what we're trying to tell on Page 5 on looking at the return, excluding deferred tax assets, is that if you look at, we tried to give, to normalize for a relative performance basis at those numbers.

The significance and the amount of deferred tax assets that we have on our equity component is, compared to competitors, is very high.

And this is an important element to normalize our return on tangible equity.

And notwithstanding that, at the end of the day, as Kirt mentioned in his remarks, I guess there was a -- is that, at the end of the day, we are producing capital.

And we are creating capital, this year alone it's almost CHF 1 billion of capital generation coming through deferred tax assets.

So it is a way to normalize returns, nothing more than that.

And maybe just add to Sergio's comments, so if you look at our return -- our tangible equity, over 20% of our tangible equity is DTA balances, including temporary differences.

And there's really no other bank in the world that has that percentage of their tangible equity in DTA balances.

And so it does provide a much more normal point for comparison.

Also I would argue, and you start to see this, is that there is I think a trend towards looking at return on regulatory capital.

And we think that's another measure that takes some of the noise of some of the other accounting components can actually be in tangible equity if you want to get kind of a level comparison across banks.

And there, actually, our returns are even higher than they are on our return on tangible equity, excluding DTA basis.

Can I just ask on this Page 5 question?

So when you exclude deferred tax assets from your base, from the denominator, do you take up the tax as well with your P&L?

Yes, we excluded both on the denominator and the numerator.

So can I just ask, so what would the tax rate be if you took out the DTA?

What's the number that you use?

See it's -- and if you want, we can provide a technical explanation of how we calculate it, so we're happy to do that as a follow-up.

Yes.

Also, Jernej, if you look on Page 15 of the report, you will see how we do all the calculations on return on equity, tangible equity adjusted, et cetera, et cetera.

So is it on Page 15, what is the tax rate that is used then?

So it is not disclosed in tax rate, but we can discuss it with you offline.

Next question comes from Andrew Lim, Societe Generale.

So my first one is on the PCB division on Page 9. So you talked about management actions that stabilized the net interest margin here.

Can you elaborate more on what you've done here, is that a permanent fix?

And if so, does that mean that your prior guidance of that falling towards 140 basis points needs to be revised?

And then secondly, just on (inaudible) inflation, you've given guidance towards the end of the year.

What about 2018 and beyond?

Do you have any of revision to your visibility there?

I'll take your second question first and ask if you could kindly repeat your first question.

In terms of RWA guidance, of course, we've only given guidance through year-end.

We're still in the process of finalizing our planning process.

And we're also in discussions with our regulators just to confirm our understandings of any potential, further regulatory multipliers or increases that we're likely to see in 2018 and beyond.

I would mention though that we do expect some further increases based on what the FINMA has asked us to implement in the past, and we're just finalizing what that actually means going forward.

And also just to re-highlight that that will be fully in advance on Basel IV.

So essentially, we're accelerating the absorption of what Basel IV is likely to bring eventually.

So maybe with that, could you repeat your first question?

Personal & Corporate banking, your net interest margin there was 157 basis points, Slide 9, you've talked about actions to stabilize that.

But your prior guidance, was that -- you've got a range of 140 to 180 in the near term, near to medium-term it should decline towards 140?

Is that -- what's your expectation there?

We actually never guided on where we expect our net interest income margin to be.

What we've highlighted is the fact that we do see quite substantial headwinds in the way of increased funding costs, and that really comes through the TLAC allocation to our Personal & Corporate business.

It's a consequence of the equity that we attribute to that business.

And on top of that, of course, we see interest rate headwinds in the banking book as we roll over our hedges at lower rates.

Now what we've indicated is that in the quarter the business has been very successful to offsetting that through some of the product results, including continuing to look at pricing and other actions on deposits and loans.

And obviously, the business will continue to face those headwinds going forward.

They'll do to the extent possible but we'll continue to pursue management actions to try to stabilize that margin as well as they can given the headwinds.

Is your expectation then, is that we should still see some modest pressure going forward?

I see we still have headwinds going forward, yes.

Next question comes from Stefan Stalmann, Autonomous Research.

Two questions.

First one, approaching the dividend angle from a slightly different perspective.

Your net profit after 9 months is up 32% year-on-year.

Do you think it would be reasonable to assume that your dividend could grow in line with this, at the end of the day, assuming there are no big surprises in fourth-quarter profits?

And the second question is, you mentioned that you are thinking about relaunching the public finance business in Wealth Management Americas.

And I was wondering if you could elaborate a little bit on what you're planning to do here, whether that would be a joint venture with the Investment Bank, and maybe also what kind of balance sheet capacity you would have to set aside to restart this business again?

Yes.

Thank you, Stefan.

No, it's not reasonable to expect that we will increase our dividend by 32%.

I think that we have a clear policy that we say that we want to have a progressive yet sustainable increase of our cash dividend.

And then of course, over time, we need to also consider share buyback as a complementary action on capital returns.

But at this stage, I don't -- it's not credible to do that.

So in terms of public finance, I think this is a sector that we are keen to re-enter, to reboost because there is a high affinity and high penetration of this product in our -- with our Wealth Management clients.

In the past, we used to also do a lot of activity through joint ventures with other major U.S. banks.

But I think that if we look at the demand and also in a rising interest rate environment, this kind of product will become even more important.

We think it's time for us to build up our own capabilities so that we can have a more direct service and keep more of the profitability for us.

This is going to be a fairly plain vanilla business.

We are not going to enter into derivative contracts with municipalities or things that we all know how they end up.

And we stay focused on velocity of our inventories and facilitation, so origination and facilitation, very low capital consumption.

And of course, when we do that, we try to leverage as much as we can, the infrastructure and that we have in the IB, the risk management engines and supervisory is the same as we have in the IB.

So I'm pretty comfortable that this is a big -- is an important initiative that can be sustained with an appropriate low level of capital and in a profitable way.

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

Analysts and investors may now disconnect your lines.

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

Thank you.