DBRS Upgrades UBS AG’s Long-Term Ratings to AA (low), Stable Trend

DBRS Ratings Limited (DBRS) upgraded the Long-Term Issuer Rating of UBS AG (the Bank) to AA (low) from A (high) and the Long-Term Issuer Rating of UBS Group AG (UBSG or the Group), the top-level holding company, to A (high) from A. The Bank’s R-1 (middle) Short-Term Issuer Rating and UBSG’s R-1 (low) Short-Term Issuer Rating were both confirmed. The trend on all the ratings is now Stable. The Bank’s Intrinsic Assessment (IA) was raised to AA (low) from A (high) and the Support Assessment remains at SA1. The Group’s Support Assessment is SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS
The upgrade of the Long-Term Issuer Rating recognises the Group’s strong franchise position and scale as a global wealth manager, which has driven improved profitability in recent periods, as well as the continuing robust capitalisation. In DBRS’s view, management has executed a consistent strategy since 2011, while resolving most of the legacy risk issues that arose during the financial crisis. Furthermore, the Group has sound risk management practices and maintains a conservative risk culture.

Whilst litigation remain a key risk, DBRS considers the Group as well positioned to absorb potential charges due to its improved earnings generation and the provisions already taken in recent years. The ratings continue to reflect the Group’s strong credit performance and its solid funding and liquidity profile, which is underpinned by a sizable and stable deposit base and continued access to well-diversified wholesale funding sources.
UBSG’s Long-Term Issuer Rating is positioned one notch below the Bank’s IA reflecting the structural subordination of the holding company.

RATING DRIVERS
Given the recent rating action, any further positive rating pressure is unlikely in the short to medium term. However, it could arise if the Group demonstrates consistently strong profitability, whilst maintaining a moderate risk profile and robust capital position.

Whilst not expected, negative rating pressure could arise if litigation and reputational issues materially impact the capital position, or if any issues translate to a weakening of the core franchise.

RATING RATIONALE
Underpinning the Bank’s AA (low) IA is the strength and scale of its leading global franchise that is highly diversified by business and geography. UBSG has been successful in benefitting from the growing global demand for wealth management products and services, particularly with the attractive ultra-high net worth customer segment. UBSG also has the leading banking franchise in Switzerland, which provides it with a stable and large deposit funding base. The Group’s wealth management businesses benefit from linkages to the investment banking business. The Group’s Investment Bank operation is well positioned in key businesses including advisory, equity underwriting and equities trading, with particular strength in equity derivatives. The Investment Bank is showing consistent improving trends in earnings, despite some volatility inherent in the business.

DBRS has seen further evidence in 9M18 that UBSG continues to improve its revenue generation with strong momentum across its core businesses, and this was a key consideration for the upgrade. In 9M18 net attributable income substantially improved year-on-year to CHF 4.0 billion driven by net revenue growth across both wealth management and investment banking, and the return on equity (10.6%) was at the high end of the European peer group. The Group has also reported strong and improving income before taxes (IBT) since 2015, but the improvement has been more apparent in 9M18. IBT reached CHF 5.3 billion in 9M18, compared to CHF 5.2 billion for the full year 2017.

The quality of the balance sheet remains robust. UBSG has very low levels of gross impaired loans, 0.5% of total gross loans at end-3Q18. In addition, UBSG has made significant progress in reducing its Non-Core and Legacy (NCL) portfolio since 2011 and the NCL portfolio stood at CHF 34.2 billion at the end of 3Q18, down from CHF 524.8 billion at end-2011. In DBRS’s view, UBSG continues to face some challenges, in relation to litigation issues from past operational risk, however, DBRS expects these challenges will not damage the franchise and that they will be manageable from a profitability and capital perspective. Moreover, the Group has set aside provisions of CHF 2.3 billion at end-September 2018 for these and other regulatory issues.

UBSG has a solid funding and liquidity position that benefits from a large and stable deposit base, and a well-diversified wholesale funding profile across markets, products and currencies. Total customer deposits of CHF 401.3 billion entirely fund UBSG’s loan portfolio, resulting in a strong loan to deposit ratio of 79% at end-3Q18.

DBRS considers UBSG’s capital position as robust. This is supported by its strong risk-weighted regulatory capital ratios and leverage position, as well as the Group’s improving ability to generate capital through retained earnings. DBRS also considers that UBSG is well placed to meet future regulatory requirements. The Group has strong risk-weighted regulatory capital ratios that remain at the high end of the global peer range. UBSG reported a fully-applied Basel 3 Common Equity Tier 1 (CET1) ratio of 13.5% at end-3Q18. The fully applied Tier 1 leverage ratio was 5% at that date which compares well to European peers. UBSG is required to meet a 5% minimum Tier 1 leverage ratio by 2020. Under Swiss regulation, UBSG is also required to maintain a Basel 3 CET1 leverage ratio of 3.5% by 2020, and the Group reported a fully-loaded CET1 leverage ratio of 3.8% at the end of 3Q18.

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

Notes:
All figures are in CHF unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found 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 included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Maria Rivas, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: August 28, 2001
Last Rating Date: October 3, 2017

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