Chris Hallam
Goldman Sachs Group, Inc.
It's my great pleasure to introduce our next speaker, Todd Tuckner, Chief Financial Officer of UBS, a role which he has held since 2023, prior to that having been CFO and Head of Business Performance and Management for the GWM business. It's been a pretty hectic past few days. The format, as for the other sessions, we have 35 minutes. We've got a handful of questions to run through together. We're going to leave some time for audience Q&A. But first of all, look, Todd, I know it's been long going on. So sincere thanks for making the trip up here to speak to everybody.
Todd Tuckner
Group CFO & Member of Executive Board
Chris Hallam
Goldman Sachs Group, Inc.
But let's just jump in straight on capital. I mean, how do you assess the current situation regarding the review of the capital requirements in Switzerland?
Todd Tuckner
Group CFO & Member of Executive Board
Well, as you know, on Friday of last week, a lot was published, supporting various things, supporting financial stability in Switzerland. And by and large, we're in favor of the vast majority of the proposals.
Now naturally as to capital, we're disappointed certainly as we think, ultimately, that framework were to come to pass would be misaligned with international standards and clearly, would be disproportionate. We also struggle a little bit to reconcile how the proposals are an appropriate and proportionate response to lessons learned from Credit Suisse.
But let's unpack maybe the numbers a little bit. So if -- again, if these proposals come to pass, they would increase the CET1 capital of our parent bank, which is the first tier subsidiary of group by $24 billion, mostly relating to the capitalization of foreign subsidiaries. Now that becomes -- that capital is effectively trapped and that creates, at the group level, a CET1 capital ratio of 19% as we illustrated in what we published on Friday in response.
Now interestingly, the proposals also would see the capital supporting select assets like deferred tax assets and software to be eliminated. And so that has the effect of reducing the CET1 capital ratio from 19% to 17%. But for me, the key takeaway is that the $24 billion is the binding requirement. So the fact that our CET1 capital ratio may look -- it doesn't look as severe as a result of these capital deductions is, I would say, interesting. But we shouldn't lose sight of the fact that the key is the $24 billion capital build.
And I would just finish by saying on this point that we were already catering for around $18 billion of additional CET1 capital from the acquisition of Credit Suisse, the removal of the regulatory filter, $9 billion because we're bigger as a result of the acquisition, our market share has increased. So it's over $40 billion of capital that we would have to cater for where these proposals to come to pass, and it's just a result that we think is just not proportionate.
Chris Hallam
Goldman Sachs Group, Inc.
So I guess, how are you positioned to navigate that backdrop? And how do you respond from here?
Todd Tuckner
Group CFO & Member of Executive Board
Well, I would say, our globally diversified business is one that has been adding value to -- for our clients and for our shareholders. Our underlying operating performance has been strong. We have a balance sheet for all seasons. We're integrating Credit Suisse quite effectively. And so we have a lot of confidence in our strategy, and we're reluctant to back down from that.
This said, it's the -- this is the beginning of what can be a long process. I mean certainly, there's a consultation process that will now ensue in light of the ordinance proposals, and we intend to contribute to that process. There's also a political process that ensues beyond that, that will address the bigger issue of foreign subsidiary capitalization. And if invited to, we'll for sure participate in that as well.
For us, really the most important thing is to ensure that those who take decisions have all the facts and have undertaken an appropriate cost benefit analysis. And we believe that if they have the facts and undertake a cost-benefit analysis, that ultimately, we can get to an outcome that's more proportionate and a situation that's better for all stakeholders, including, importantly, the Swiss economy.
Chris Hallam
Goldman Sachs Group, Inc.
And I guess in that context then, how are you calibrating your targets and your capital return ambitions?
Todd Tuckner
Group CFO & Member of Executive Board
Well, we reconfirmed, given nothing takes effect at the earliest until 2027, we reconfirmed our 2025 expectations of increasing our dividend accrual for -- by 10% year-on-year. We intend to repurchase up to $2 billion of shares in the second half of the year for a total of $3 billion.
In terms of 2026, it's important to reiterate what we've said over many quarters. Our ambition was to ultimately return more than we did in 2022. But after the white paper was published by the Federal Council in April of '24, we did say that, that ambition is subject to the Swiss capital debate question. But we also said that we wouldn't start and stop in terms of capital returns. So all of that remains intact. But in terms of what we'll do in 2026, we will articulate that early next year with our fourth quarter 2025 earnings.
But staying on the context of ambition and targets. So from a target perspective, we remain committed to our underlying -- getting to an underlying return on CET1 capital of around 15% by the end of 2026, an underlying cost-to-income ratio below 70, also by the end of 2026, both of those on an exit rate basis.
Naturally, in terms of longer-term ambitions that we've talked about in the past, we have to see what the time line ultimately is, and we have more visibility around the rules. On the time line, I would say and this does -- also, I should add that in the context of 2026, I think it's reasonable to assume that despite the fact that there was nothing specified around a phase-in period for the capital deductions around DTAs and software, I think it's reasonable to assume that there will be a phase-in period. But that -- I mean, we don't control that. We don't know, and that's something that the Federal Council ultimately has to clarify itself.
Chris Hallam
Goldman Sachs Group, Inc.
That's just the reasonable assumption. You need clarification. Okay. Understood. I'm going to pivot away from capital a little bit. So obviously, we've got the numbers as of Q1. But then post Q1, there's a huge amount of turbulence across bond and equity markets, fresh concerns about inflation, et cetera. So how did that shift in market backdrop impact the performance of your businesses in the second quarter in the near term?
Todd Tuckner
Group CFO & Member of Executive Board
Yes. So we published first quarter earnings a few weeks after the trade and tariff announcements out of the U.S., and we had already seen, Chris, as you'll recall, I mean we had already seen a fair bit of market dislocation at that point in time. And we said that if that market uncertainty persists, we could see that weighing on client sentiment and ultimately, activity levels.
Now in May, ultimately, markets were calmer. Equity markets were recovered their year-to-date losses. Bond markets though, remain -- were pricing a lot of uneasiness still, however. But by and large, we're really pleased with the progress we're making across our businesses.
I would highlight, on the banking side, we see across the street, deal-making down. We see global fee pools down across the street, mid- to high teens is at least the expectation or at least where we are at present in 2Q. We are, in our banking unit, tracking market performance. I would add, however, that we expect an additional $75 million adverse P&L relating to our LCM business, in relation to a mark on an individual position and some risk management transactions that lost value as markets recovered in May.
I'd also highlight a few other points, I think, that are relevant for the quarter. We've seen the dollar weaken against, in particular, the Swiss franc in the quarter by 7%. That does have an impact on businesses, in particular, GWM, whose cost base is fairly highly indexed to the Swiss franc in a way that the revenues aren't as indexed. And so for GWM, we expect that the weakening of the dollar will have an adverse impact on underlying operating expenses of around $150 million. We'll see some offsetting relief on the revenue line, but I wanted to specifically call it the expense line. And if dollar swiss stays around 82 for the rest of the year, just to give the sensitivity, we would expect in the second half of the year to see an effect per quarter around half to 2/3 of that level.
Another point I would make. Last month, we announced the settlement of the legacy cross-border matter Credit Suisse had with the Department of Justice. That will give rise to a $400 million credit to litigation expense in noncore and legacy. So it will be a credit for the group of around $400 million. There'll be an immaterial charge at the parent bank level for that same matter, where we didn't have the PPA reserve to support that particular matter.
And lastly, I would just point out that I guided in 1Q that our tax rate for the quarter, particularly because of restructuring that we're doing related to the integration, could be around 0. Now that we have more visibility around some of the planning we've undertaken, we now expect, for the second quarter, to record a tax credit of around $250 million that will support net profit in the quarter.
Chris Hallam
Goldman Sachs Group, Inc.
Okay. So there's a lot of numbers there. Maybe we jump into each of the individual businesses as well. You mentioned some of the changes in client activity you saw post April. How are clients positioning and engaging with UBS in the wealth business? And if we focus maybe in the U.S. wealth franchise, you've recently highlighted bringing a broader suite of products and capabilities to clients as you sort of progress towards that mid-teens pretax margin target. What are the key initiatives and signposts that we all should be watching to assess delivery on that ambition?
Todd Tuckner
Group CFO & Member of Executive Board
So in wealth management, Chris, our first priority is to stay close to clients and to help navigate markets like these, I think, on certain markets have been playing to our strength. We see that in the performance. I mean 1Q was particularly strong for Global Wealth Management. And I'd like to call out the APAC performance. Given that APAC has completed the integration, the client migration was completed at the end of last year. So 1Q is an indication of what the true potential of Global Wealth Management is as we get past the entire integration when we look out. So I remain very optimistic about the business.
Just turning to the U.S., we remain committed to increasing pretax margins to mid-teens by 2027. All the things I talked about in the fourth quarter of the various initiatives that we're undertaking, enhancing net interest income by building out our banking capabilities, more cost discipline, including better aligning financial adviser incentives with our group strategy, enhancing acquisition channels, particularly around assets and clients. All those things are a focus of ours. We're chipping away, and we're keeping our head down, but we're making progress.
Chris Hallam
Goldman Sachs Group, Inc.
And then if we look at the investment bank, you've got a multi-faceted franchise, right, across Global Markets and Global Banking. But equities and sales and trading are the largest revenue contributor. How do you see the mix of performance within the IB evolving from here? I mean, you talked earlier about some of the near-term challenges on the banking side of things, but how do you see that mix evolving over the next few quarters and years?
Todd Tuckner
Group CFO & Member of Executive Board
Yes, Chris, I mean, I'm really pleased with the performance of the IB and particularly, the parts of Credit Suisse that we retained in IB Core have really strengthened the investment bank as evidenced by its performance, and also has helped us to increase market share. And it's also important to emphasize that the IB and Wealth Management just work in such a complementary fashion. People can say that that's how the IBs work with their wealth management units. I mean we really live that and go to market. And that's how we successfully serve our wealthiest and most sophisticated client. You see that in the performance we've been generating.
In terms of the mix, look, I think markets will continue to improve and markets had, of course, has had a very strong run. But I do see banking actually growing faster, notwithstanding my comments about 2Q a few minutes ago. I actually see the mix improving, such that banking will grow faster. We've talked about, Chris, and I know you've asked me in the past about how do you see the ambition of doubling banking revenues by '26 relative to its 2022 performance. And I said we're on track, need supportive markets like '24 was. The first maybe 1.5 quarters, a little bit less so. Let's see how the rest plays out. But I remain optimistic.
And the right balance for banking as a function of the IB is more like 1/3. We've seen, even during the course of '24, it was probably 1/4. And even in Q1, where global fee pools were a little bit challenged and markets were strong, it was more like 1/5, but I see 1/3 is the right balance, ultimately.
Chris Hallam
Goldman Sachs Group, Inc.
And then in P&C, given the increasing likelihood that interest rates in Switzerland could move below 0 in the shorter term, how do you see NII evolving in that kind of scenario? And to what extent do the recent trade developments, I mean, how do they impact your outlook ambitions within Switzerland from the P&C side?
Todd Tuckner
Group CFO & Member of Executive Board
Well, P&C is a key part of our strategy and it's just a super reliable source of profitability. Naturally, it's been under pressure over the last year with interest rates in Switzerland coming down to where they sit at present at 25 basis points, having dropped 150 basis points over the last year, and they're very likely to touch 0, if not go below over the next couple of weeks. So that really limits their room for maneuver from an NII perspective.
That said, I've also mentioned that our Swiss franc sensitivity -- interest rate sensitivity in the business reflects positive convexity, which means if rates either go negative or go positive, that it will be accretive to NII. So we're hopeful to see now if rates touch 0 or go below, that we will have bottomed out and then see an inflection from there.
In terms of the credit book, I mentioned in the past that the CLE which was elevated in recent quarters, in particular in 2024, was a function of the inherited Credit Suisse book that we're working our way through. And I said by the end of '26, we'll get back to normalized CLE levels as we get to the backside of that back book that we've inherited. And -- but I would say on the trade and tariff point, that like our clients we're watching that -- we're watching that closely. But so far, it hasn't had a major impact on the credit book.
Chris Hallam
Goldman Sachs Group, Inc.
And then if we move to NCL, you've made considerable progress in winding down some of the legacy positions and exiting some of those with again. What are your key priorities and expectations then for the NCL unit from here?
Todd Tuckner
Group CFO & Member of Executive Board
Well, the goal for NCL is for there not to be an NCL. And they've done really -- they've made great work. They've done great work to effectively run down their balance sheet and take out costs by over 3 quarters, and it's been -- they've done that really in less than 2 years. So great progress.
So they have -- we're looking to sunset integration more broadly by the end of '26. As you know, we -- given the progress NCL has made, we've recalibrated their ambition for RWA from a market and credit risk standpoint, i.e., nonoperational risk RWA to be no more than $4 billion by the end of 2026. So they -- I mean they've done just a superb job in taking that down.
We're very focused now on costs. As I mentioned, they've run down costs quite significantly. But there's some stubborn costs in there relating to technology, real estate, legal fees dealing with legacy litigation matters and the like. And so we do see there still being a fair bit remaining at the end of '26. I guided in 4Q as much as $750 million. So our goal is to really minimize that level and then, of course, to have sites on chipping away at that even post integration.
Chris Hallam
Goldman Sachs Group, Inc.
Great. And then one last question for me before I open up for the audience. It's about the integration of Credit Suisse. Maybe just how is that progressing? Operationally, you've highlighted the decommissioning of platforms to clients' account migrations, the legal entity consolidation, there's a lot of stuff going on. Where do we currently stand in terms of the progress on the operational angle effectively of the merger? And as we look ahead, what's next? And I guess from a cultural perspective, how do you feel the 2 institutions have really blended with regards to people and to culture?
Todd Tuckner
Group CFO & Member of Executive Board
Well, I think culturally, we've brought together both Credit Suisse and UBS from the beginning. And I do think that that's been part of the secret to having integrated Credit Suisse successfully because it's been one team working together, and I think that's been critical.
In terms of some of the milestones that we're still focused on, right now, we're in the throes of the Swiss client migration, so the client migration on our Swiss platform. By the end of the second quarter, we expect to have moved 1/3 of total relationships planned, which will run through the beginning of 2026.
I've mentioned that decommissioning the Swiss platform, which will happen after we finish the client migration early next year, there's $1 billion in costs associated with that. So that's part of the sight line I have to reaching our $13 billion gross cost save ambition. It's a major -- the Swiss client migration is a major milestone, arguably among the last milestones that we have to complete. And we know that, that will bring us to our $13 billion gross cost save ambition or contribute to getting there. It's also going to be a major contributor to both P&C and Wealth Management hitting there to target cost income ratios by the end of the integration.
Chris Hallam
Goldman Sachs Group, Inc.
Okay. With that, let's see if we have any questions from the audience? Yes. Over here on the far side. Is there a microphone? No? Sean, I'll repeat it. For the benefit of the webcast, I'll repeat it.
Unknown Attendee
You mentioned phase-in period [indiscernible] measures. What's your idea of what would be a reasonable [indiscernible] phase-in period? And then related to that, you will obviously end up with quite a high quality of core capital once the admissions are in place. What could make you think about or rethink your management buffers when you have that higher quality [indiscernible]?
Chris Hallam
Goldman Sachs Group, Inc.
So for the benefit of people listening, the questions were, what's the reasonable expectation around the potential phase-in period to start with? And then secondly, with the higher quality of capital, how would you think about running the buffers maybe differently to how you have in the past?
Todd Tuckner
Group CFO & Member of Executive Board
Yes. Thanks for those questions. On -- in terms of the phase-in, as I mentioned, it's reasonable to assume that there will be a phase-in despite the fact that the draft ordinances themselves didn't have specific language. As I said, we don't know and it's something that the Federal Council is going to have to come back and talk about. But what tells me that, that's -- it must be a reasonable outcome is the fact that every change, if you look back years, that every change to the capital ordinance in Switzerland has been introduced with a phase-in period. So I think that gives me at least that perspective as to why I think would be phased in.
In terms of the length, that's unclear. But I think it's also reasonable to assume that it's going to be something in the 4-plus year range. But again, I don't know, and it's something that will have to be clarified.
In terms of your second question, look, we have to assess all of the options that we have at this point in time. We owe that to stakeholders, especially shareholders and where -- we're going to look at, and we are looking at every possible option to potentially mitigate the imposition of these extreme capital measures. As you say, the fact that the quality of our common equity Tier 1, not only the quality gets -- not only does it get larger in volume, but the quality improves. Sure, that can invite that assessment of course, and it will, but it's clearly too early to speculate on anything that we might do.
Chris Hallam
Goldman Sachs Group, Inc.
Right in the middle. If there is a microphone that we can use.
Unknown Attendee
Given there are a number of large AT1 holders in the room, do you mind if I ask a question on AT1 specifically? There's some confusion out there regarding the language that came out in the paper on the coupon front. It does say specifically that your interest costs need to go down. So in terms of economic calls, is it going to be similar to Europeans where you can argue by being creditor-friendly calling a bond within some sort of reasonable range of being uneconomic will help your funding costs going forward? Or is it bond specific where you have to prove that if you're calling a bond with a 7% coupon that you can refi at better than 7% for that specific bond?
Todd Tuckner
Group CFO & Member of Executive Board
Yes. I think there are 2 points, not to confuse. So I think what some of the languages about interest cost going down is the fact that if you have much more CET1, you need less AT1. And so therefore, if you have less AT1 over time, you have less interest expense relating to that more expensive debt, right? So I think that's thing one.
Thing two is that there are -- there's already an intimation in the proposals that suggest that certain changes, like for example, triggers that would cause you to say, stop paying a coupon, would help the loss absorption nature of AT1, right? So that it would be a better recovery tool in the minds of the authorities than perhaps it is now. So that's what their -- that's the thinking.
So I think there are 2 discrete comments in there, but also picking up on maybe a third that you made, you'll have to demonstrate, according to the proposal, that it's economic to call and demonstrate that to our regulator. But that's in effect what happens anyway because ahead of calling on AT1, because they're, of course, meant to be instruments that don't have a maturity, but for the calls, the regulators, of course, were -- because it's intended to be a recovery tool, of course, the regulators want to ensure that you're only calling them if they're economically sensible to call.
So that's always been more over-the-counter anyway as a practice that we've undertaken. And I think these proposals are just looking to legislate that. So I think those are the 3 points I would just pick up in your question.
Unknown Attendee
What's considered economic? Like is it 50 basis points or...
Todd Tuckner
Group CFO & Member of Executive Board
I think you -- if it's what we've had to do, as I said, more unofficially, it's being able to demonstrate that it's economic to call. And I think we haven't had to yet pass the threshold, there's no bright line. So I think it's just been one where we've been able to demonstrate with respect to a particular issue, that it's economic to call, and we can demonstrate why and then we're allowed to call it, and that's how it's worked.
Chris Hallam
Goldman Sachs Group, Inc.
Any others? Okay. Well, maybe just I guess one wrap-up question for me then. I think pretty much every time we talk, we discuss where you're incrementally investing in the business. We see the gross cost saves that you talk about, but obviously under the hood, there's some incremental investment going in as well.
So I guess where are you spending a little bit more? Where are you investing that? Given all the turbulence the dynamics you talked about in some of your earlier answers, has that changed at all? But then also maybe given what we saw on Friday, does that change a little bit where you want to dial up or dial down or how you think about the phasing of that incremental investment?
Todd Tuckner
Group CFO & Member of Executive Board
Well, in terms of where we invest the gross cost saves other than on the personnel side, in particular, an easy one is if financial advisers are generating more revenue and therefore more production that's compensable to the extent that they -- we pay them more that if you look at how we reconcile gross versus net, that's one factor.
It's probably less interesting to your question than the next part of my answer, which is virtually all in technology to shore up the UBS side of the equation, just given that as much for expediency than anything else, UBS has been a surviving platform in every case where we have dual infrastructure. There are some exceptions.
For example, in a location, we're only in Credit Suisse operated, then it's different. But for the most part, it's investing in technology, but also artificial intelligence and ensuring that we're doing transformational investments, especially to drive cost efficiency over time.
Now as to your question on whether Friday changes, apologies for the stock answer, but you'll appreciate, Chris, it's obviously part of what we have to assess and evaluate it now. And when I say everything is in the mix to consider, of course, that's the case. We know that the cost efficiency, achieving the $13 billion is like an ante for the game. We have to do that, if not outperform. And so that -- for sure, we have to stay very disciplined on the cost side.
Chris Hallam
Goldman Sachs Group, Inc.
Super clear. I guess all that's left to be said is, I know you and the team have been immensely busy these last 4, 5 days. So sincere thanks from me and I guess from everybody for making a trip up here and spending time engaging with us all. Thank you very much.
Todd Tuckner
Group CFO & Member of Executive Board
