Third quarter 2015: Divisional and Corporate Center performance overview
Wealth Management delivered a resilient adjusted1 profit before tax of CHF 698 million against a backdrop of high market volatility, pronounced deleveraging in Asia and very low client activity levels. Net interest income rose on higher lending and deposit revenues. Despite lower average invested assets, recurring net fee income fell only slightly, as it was partly offset by increased mandate penetration, up 70 basis points to 27% of invested assets, and the continued effect of pricing initiatives. Transaction-based income declined primarily in Asia Pacific and Europe, mainly reflecting reduced client activity in response to market volatility. Net new money adjusted for the outflows from the balance sheet and capital optimization program was CHF 3.5 billion, driven by inflows from all regions.
Wealth Management Americas delivered a solid adjusted1 profit before tax of USD 287 million, up 24% on the previous quarter. Overall operating income was broadly unchanged and productivity per advisor for revenue and invested assets was industry-leading. Recurring income reached a new record as net fee income rose on higher managed account fees and net interest income increased mainly from loan and deposit growth. Costs fell primarily on lower net charges for provisions for litigation, regulatory and similar matters and other provisions. Net new money was USD 0.5 billion.
Retail & Corporate had its best result for the first nine months of the year since 2010 with an adjusted1 third-quarter profit before tax of CHF 428 million. Net interest income from lending and deposits increased slightly as did recurring net fee income, while credit loss expenses were negligible in the quarter. Annualized net new business volume growth for retail clients was good at 2.5%, mainly driven by net new client assets and, to a lesser extent, net new loans, in line with its strategy to grow its high-quality retail loan business moderately and selectively. Year-to-date net new client accounts for retail customers hit a new record level, up 35% year-on-year, solidifying UBS's position as the leading bank in its home market.
Asset Management recorded an adjusted1 profit before tax of CHF 137 million. Management fees increased primarily in Traditional Investments and Global Real Estate. Performance fees also rose, predominantly in Global Real Estate. Excluding money market flows, net new money outflows were CHF 7.6 billion, largely from lower margin passive products, driven by client liquidity needs.
The Investment Bank delivered a very strong performance with an adjusted1 profit before tax of CHF 614 million. Despite the challenging market conditions, revenues were up 6% year-on-year. Compared to the prior year, Investor Client Services performed well with increased revenues in both Equities and FX, Rates and Credit. Costs were well controlled, with expenses falling compared to both the prior quarter and the prior year. The adjusted return on attributed equity for the third quarter was 33.6%.
Corporate Center - Services recorded a loss before tax of CHF 257 million. Corporate Center - Group Asset and Liability Management reported a loss before tax of CHF 111 million. Corporate Center - Non-core and Legacy Portfolio recorded a loss before tax of CHF 818 million, driven by additional net charges for provisions for litigation, regulatory and similar matters, while achieving further progress in reducing the Swiss SRB leverage ratio denominator by CHF 12 billion to CHF 59 billion.
Capital and costs
UBS remains the best-capitalized large global bank, with a fully applied Swiss SRB Basel III CET1 capital ratio of 14.3% as of 30 September 2015, above the bank's target of at least 13%. UBS's fully applied Swiss SRB leverage ratio increased to 5.0%. The bank issued CHF 1.5 billion of high-trigger additional tier 1 (AT1) perpetual capital notes in the third quarter. Also during the quarter, UBS completed its inaugural issuance of senior unsecured debt which will contribute to its total loss-absorbing capacity (TLAC), successfully placing CHF 4.2 billion of senior unsecured notes in anticipation of international regulatory developments, including revisions in the Swiss too big to fail framework.
The bank remains fully committed to its cost reduction target of CHF 2.1 billion and made good progress in the third quarter, while continuing to carry significant regulatory costs. Improved efficiency allows UBS to continue its investments in technology, compliance and risk control, while creating the right cost structure to support long-term growth, particularly in Asia and the Americas.
Changes to UBS annual performance targets and key expectations
In light of actual and forecasted changes in macroeconomic conditions and the announcement of a newly proposed too big to fail regulation, UBS has amended certain external performance targets and expectations for the Group and the business divisions for 2016 and future years. An overview of amended annual performance targets and expectations is provided below. These performance targets exclude, where applicable, items that management believes are not representative of the underlying performance of UBS's businesses, such as restructuring charges and gains and losses on sales of businesses and real estate. The performance targets assume constant foreign currency translation rates unless otherwise indicated. The following performance targets and expectations have been amended:
Adjusted cost/income ratio target remains 60-70%, with a short- to medium-term expectation of 65-75%.
UBS expects to achieve an adjusted return on tangible equity (RoTE) in 2016 at approximately the same level as 2015, an adjusted RoTE of approximately 15% in 2017 and targets an adjusted RoTE of above 15% from 2018 onwards.
Group risk-weighted assets (RWA) are expected to trend around CHF 250 billion in the short to medium term mainly due to regulatory inflation.
Group BIS Basel III leverage ratio denominator (LRD) is expected to trend around CHF 950 billion in the short to medium term.
The RWA limit for the Investment Bank has been replaced with an RWA expectation of around CHF 85 billion in the short to medium term.
The funded assets limit for the Investment Bank has been replaced with a BIS Basel III LRD expectation of around CHF 325 billion in the short to medium term.
The Investment Bank will continue to represent no more than 30-35% of the Group's total LRD and RWA.
The separate aggregate net cost reduction targets for Corporate Center - Services and Corporate Center - Non-core and Legacy Portfolio have been replaced with an equal Corporate Center aggregate net cost reduction target of CHF 2.1 billion by year-end 2017, of which CHF 1.4 billion by year-end 2015.