DBRS Confirms UBS AG at A (high), Trend on Long-Term Ratings Now Positive

DBRS, Inc. (DBRS) confirmed ratings of UBS AG (the Bank), including its Long-Term Issuer Rating at A (high) and Short-Term Issuer Rating at R-1 (middle). At the same time, DBRS has revised the trend on Long-Term ratings to Positive. The Bank’s Intrinsic Assessment (IA) was also confirmed at A (high) and its Support Assessment remains SA1. Concurrently, DBRS assigned new ratings to UBS Group AG (UBS or the Group), the top-level holding company, including an ‘A’ Issuer Rating and Long-Term Senior Debt rating, and an R-1 (low) Short-Term Issuer Rating. The Trend on these ratings is Positive. The Group’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

The change in the trend to Positive from Stable reflects UBS’s strong and improving earnings that are supported by momentum across its core businesses. UBS continues to execute on strategic initiatives, which is driving the earnings improvement and further supports internal capital generation. DBRS sees management as having established a strong culture of risk discipline and, though it has taken time to permeate the organization, the results of these efforts are becoming more apparent. DBRS also views UBS as well-positioned to benefit from the growing global demand for wealth management products and services given its wide product offering and long history in different geographies that has allowed it to build up relationships and expertise over time, particularly with the attractive ultra-high net worth customer segment.

Underpinning UBS’s IA of A (high) is the strength and scale of its global franchise that is highly diversified by business and geography. The Group caters to a diverse client base of high net worth and ultra-high net worth individuals through its global wealth management (WM) businesses, while also maintaining a dominant domestic banking franchise in Switzerland. The Investment Bank (IB) has also been performing well, benefitting from strength in businesses that have strong linkages to the WM franchise. Asset Management (AM) is a sizable business that adds product capabilities and diversity to UBS’s business mix. Further supporting its strong credit profile, UBS maintains strong capital levels and a conservative funding and liquidity profile. The current ratings level also considers the headwinds facing UBS, including a still challenging operating and regulatory environment, and the potential for past operational risk issues to have a negative impact on UBS’s reputation and disrupt franchise momentum. DBRS recognizes that UBS has put behind it many significant litigation issues, and expects that any remaining issues, such as the US RMBS case, will be resolved at manageable levels and will likely not be damaging to the franchise.

The Group has made considerable progress in achieving its strategic objectives and demonstrating a more stable earnings performance. UBS reported net income attributable to shareholders of CHF 3.2 billion in 2016, and net income of CHF 2.4 billion in 1H17, with improving trends driven by net revenue growth across businesses combined with cost control initiatives. Returns are strong and consistent, with a return on equity of 9.4% and return on average assets of 0.54% in 1H17, which is in line with higher-rated European peers. Earnings pressure could emerge from further litigation resolutions, as the US RMBS investigation and further inquiries regarding cross-border wealth management business activities remain outstanding, and resolution costs continue to be extremely elevated across the sector. Other headwinds include the continued uncertain operating environment, which is driving lower client activity, and the shift from active to passive investing, which could pressure transactional revenues.

Given its track record of successfully adjusting to the current market environment, DBRS views UBS as having a strong ability to continue to adjust to the evolving operating environment. DBRS sees UBS’s risk profile as benefiting significantly from the generally low credit and market risk characteristics of many of its businesses, especially in wealth and asset management. The Group’s impaired loan ratio of 0.38% at the end of 2Q17 remains very low. The Group’s Non-Core and Legacy Portfolio has been much reduced from post-crisis levels, with risk-weighted assets of CHF 18 billion as of 2Q17 down from just over CHF 100 billion at the end of 2012. UBS has completed its proactive reduction of this portfolio, which will now runoff as the assets mature. In addition to reducing its risk profile with the successful reduction of this portfolio, DBRS also sees UBS as having eliminated a significant distraction that consumed valuable time and resources. Critical to UBS’s success is the continued enhancement of its operational infrastructure, which supports risk management, compliance and control functions, as well as its cost-efficient execution capabilities.

UBS’s business lines provide it with sizable and stable deposit funding. Overall, funding sources are diverse across markets, products and currencies. The Group reported a strong liquidity coverage ratio of 131% and a pro-forma net stable funding ratio of 110%. Further supporting its fundamental credit profile, UBS maintains strong capital levels with a fully-loaded CET1 ratio of 13.5%, and leverage ratios are also solid, with a tier 1 leverage ratio of 4.7%.

The Grid Summary Grades for UBS Group AG are as follows: Franchise Strength – Very Strong/Strong; Earnings – Strong/Good; Risk Profile – Strong; Funding/Liquidity – Strong; Capitalisation – Strong.

RATING DRIVERS
Continued franchise momentum, and strong levels of profitability and capital, while maintaining risk discipline, would add positive pressure to the rating.

Negative rating pressure could arise from an inability to deliver on key performance goals. Litigation and reputational issues could also pressure ratings, if damaging to the core franchise.

Notes:
All figures are in CHF unless otherwise noted.

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include SNL Financial, Coalition Data, Dealogic, The Swiss National Bank and Company Financials. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski, Senior Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Global Credit Policy
Initial Rating Date: August 28, 2001
Most Recent Rating Update: July 14, 2017

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.