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Fitch Upgrades UBS Group to 'A+'; UBS AG and UBS Switzerland to 'AA-'
September 28, 2017 / 9:15 PM / 2 months ago

Fitch Upgrades UBS Group to 'A+'; UBS AG and UBS Switzerland to 'AA-'

(The following statement was released by the rating agency) LONDON, September 28 (Fitch) Fitch Ratings has upgraded UBS Group AG's Long-Term Issuer Default Rating (IDR) to 'A+' from 'A' and UBS AG's and UBS Switzerland AG's Long-Term IDRs to 'AA-' from 'A+'. Fitch has also upgraded all three entities' Viability Ratings (VRs) to 'a+' from 'a'. The Short-term IDRs of UBS AG and of UBS Switzerland AG have been upgraded to 'F1+' from 'F1'; the Short-Term IDR of UBS Group AG has been affirmed at 'F1'. The Rating Outlook on UBS Group AG's Long-term IDR has been revised to Stable from Positive; the Outlooks on UBG AG's and on UBS Switzerland AG's Long-term IDRs are Stable. A list of all rating actions is at the end of this rating action commentary. The rating action reflects the improvements the bank has made in its business, by reducing tail risk through tightened risk controls, which should allow it to generate sound and less volatile earnings. UBS AG's and UBS Switzerland AG's IDRs continue to be rated above their VRs to reflect the pre-placement of a sufficient buffer of junior debt and loss absorbing capacity to protect senior creditors. The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. KEY RATING DRIVERS VRs UBS AG and UBS Switzerland AG have common VRs as we believe that the credit profiles of the two operating entities will remain closely connected, at least for as long as UBS Switzerland AG remains a subsidiary of UBS AG. UBS Switzerland AG's large size, with just under CHF300 billion total assets under Swiss GAAP, in relation to UBS AG's consolidated assets also drives the common VR. The two entities continue to be closely integrated despite the gradual wind-down of the joint and several liability assumed for various contractual obligations. At end-1H17, UBS Switzerland AG continued to assume joint liability for about CHF80 billion of contractual obligations of UBS AG. The joint liability of UBS AG for obligations of UBS Switzerland AG at the same date was immaterial. The VRs reflect the group's well-defined and implemented strategy to remain a leading global asset gatherer, while maintaining a leading position in domestic personal and corporate banking activities and running a sizeable investment bank. The group has reduced its risk profile by tightening controls and outlining a clearly defined risk appetite. It has strengthened its balance sheet by building up capital and reducing tail risk by exiting businesses that it considers higher-risk and no longer strategic. Funding and liquidity are strong and stable and benefit from the group's global wealth management operations, as well as a strong domestic retail and commercial banking franchise. However, a factor of high importance in our assessment of the VR is the business model, which is relatively complex and reliant on market sentiment and customer transaction volumes, both of which contribute to earnings volatility. This constrains the VR of UBS Group AG within the 'a' range because of the continued material weighting of capital markets in the group's business model. Fitch believes that the bank's presence in this field represents a medium- to long-term strategy as it supports the group's leading global wealth management presence, particularly for ultra-high net worth individuals. Market conditions in most of its businesses, including wealth management and domestic banking, have remained challenging in 2017 because of a low interest rate environment, although the bank is benefiting from higher domestic interest rates in the U.S. The bank has addressed the pressure on margins with a plan to reduce net costs in the bank by CHF2.1 billion p.a. by end-2017, and is well on its way to meeting this target. We believe the actions taken so far have enabled the bank to generate robust and stable earnings, particularly when restructuring charges, which have been significant, subside. Provisions for litigation, regulatory and similar matters have been material and Fitch expects them to remain a drag on earnings, given pending legal cases and regulatory investigations. While the extent of further litigation costs is hard to predict, the ratings factor in our assumptions that the bank's litigation reserves and capitalisation, if required, could absorb sizeable further misconduct and litigation costs. Capital ratios based on risk-weighted assets (RWAs) are in line with the bank's risk appetite, in our view. UBS Group AG reported a consolidated 13.5% fully-applied Basel III common equity Tier 1 (CET1) ratio at end-1H17. We believe that this could fall slightly as the bank targets a minimum ratio of 13%. Leverage is a greater constraint, however. We expect the group's leverage ratio to continue to improve as the group retains earnings and issues additional high-trigger Tier 1 (AT1) instruments to meet the Swiss regulatory requirement of a minimum 5% going concern leverage ratio from 1 January 2020. Fitch's ratings reflects our view that the group is well on its way to meeting the new requirements for going- and gone-concern capital, as per Swiss too-big-to-fail regulations for the country's two global systemically important banks (G-SIBs). Fitch expects the group to continue to manage capital and funding on a group-wide basis, but regulatory requirements for individual legal entities will, in our opinion, result in an increasing focus on local capital and liquidity requirements. We have equalised UBS Group AG's VR with the common VR of UBS AG and UBS Switzerland AG because of UBS Group AG's role as the group's holding company and the issuer (or guarantor) of total loss-absorbing capacity (TLAC), including AT1 instruments and senior unsecured long-term debt. Holding company double leverage is low at present and while this may fluctuate, we do not expect it to exceed 120%, a level at which we would consider notching the holding company's VR below the operating banks' VRs. We expect the holding company to maintain prudent management of liquidity, which should be helped by existing policies to manage liquidity across a large number of legal entities globally. IDRS, DCR AND SENIOR DEBT Fitch rates UBS AG's and UBS Switzerland AG's IDRs and senior debt ratings one notch above the VRs because we believe that the group's buffer of qualifying junior debt (QJD), combined with senior debt issued by the holding company, is sufficient to protect their senior obligations from default in case of failure, either under a resolution process or as part of a private sector solution (such as a distressed debt exchange) to avoid a resolution action. Fitch therefore views the risk of default on UBS AG's and UBS Switzerland AG's senior obligations, as measured by the Long-Term IDRs, is lower than the risk of the banks failing, as measured by the VRs. Fitch's assumption is that absent a private sector solution, a resolution action is taken on UBS group if it breaches a CET1 ratio of 6% (after high-trigger capital instruments but before low-trigger capital instruments have been triggered). We assume that the regulator would require the group to be recapitalised to a CET1 ratio of above 14.3% on a consolidated basis. This means that the group's 10% minimum CET1 ratio and 4.3% Tier 1 high-trigger capital buffer would be met with CET1 capital post-resolution as the group at that point would in our opinion not be in a position to issue capital instruments in the market. Fitch's view of the regulatory intervention point and post-resolution capital needs together suggests that a combined buffer of QJD and holding company senior debt of above 9% of RWAs could be required to restore viability without imposing losses on the operating companies' senior creditors. At end-1H17, UBS's QJD and holding company senior debt buffer amounted to about CHF42 billion, equal to 17% of RWAs or 4.8% of leverage exposure. This amount, in Fitch's opinion, should be sufficient to recapitalise the group in a resolution scenario to meet adequate CET1 and leverage ratios. We believe that the revised Swiss going- and gone-concern capital requirements provide strong and transparent incentives to ensure that these buffers remain in place. We have not applied this one-notch uplift to the IDR of UBS Group AG as its QJD buffer is insufficient to recapitalise it to minimum requirements. We also do not expect it to become sufficiently large given the single-point-of-entry resolution strategy based on issuing external senior debt at holding company level and down-streaming it to operating companies. Consequently, its IDR is at the same level as its VR. UBS AG's, UBS Switzerland AG's Short-Term IDRs are 'F1+', the rating which maps to a Long-Term IDR of 'AA-' and which reflects the high liquidity held at the operating companies. The Short-term IDR of UBG Group has been affirmed at 'F1'. The DCRs assigned to UBS AG and UBS Switzerland AG are in line with their respective IDRs because derivative counterparties in Switzerland have no definitive preferential status over other senior obligations in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Ratings and Support Rating Floors reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that UBS Group AG, UBS AG or UBS Switzerland AG become non-viable. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other junior and hybrid capital issued by UBS Group AG, UBS AG and its affiliates are all notched down from UBS AG's or UBS Group AG's VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Legacy subordinated lower Tier 2 debt is rated one notch below the VR for loss severity, reflecting below-average recoveries. Low trigger contingent capital Tier 2 notes are rated two notches below the VR, reflecting loss severity in the form of contractual full and permanent write-down language. Legacy Tier 1 securities are rated four notches below the VR, comprising two notches for loss severity, and two further notches for non-performance risk due to partly discretionary coupon omission. High and low trigger additional Tier 1 instruments are rated five notches below the VR. The notes are notched twice for loss severity, and three times for non-performance risk due to fully discretionary coupon omission. SUBSIDIARIES AND AFFILIATED COMPANIES London-based UBS Limited is a wholly owned subsidiary of UBS AG. Its Support Rating, IDR, DCR and debt ratings reflect Fitch's view that UBS Limited is a key part of the UBS group and integrated into its investment banking activities. UBS Limited's contractual counterparties continue to benefit from an irrevocable and unconditional guarantee by UBS AG, which further supports our view that the subsidiary is an integral part of the group's business. We therefore see an extremely high probability that UBS AG would support it if needed, leading to the equalisation of their IDRs and debt ratings. The DCR assigned to UBS Limited is in line with its IDR as we believe UK legislation provides no explicit protection to derivative counterparties relative to other senior creditors. UBS Bank USA is a direct subsidiary of UBS Americas Inc., which in turn is wholly owned by UBS AG through UBS Americas Holdings LLC. The Support Rating and Short-Term IDR reflect Fitch's view of UBS Bank USA's integration and important role within the group would mean an extremely high probability of support from UBS Group in case of need. RATING SENSITIVITIES VR Given the group's business model constraints, we do not believe that the VRs of UBS Group AG, UBS AG and UBS Switzerland AG could be upgraded further in the medium term. On the other hand, the VRs could be under pressure if the bank's revenue and earnings demonstrate excessive vulnerability to market volatility, which could be indicated by losses in the investment bank business division arising from spikes in market volatility or earnings volatility exceeding that of its global peers, neither of which we currently expect. Ratings would also be downgraded if misconduct and litigation costs are higher than our expectations and affect the group's capitalisation with no credible plan for restoring it over a reasonably short period. Material restrictions on the group's ability to conduct businesses, which could be the result of penalties by authorities, would also put ratings under pressure. UBS Switzerland AG's VR is also sensitive to a change in the subsidiary's integration in the group. Should it become less integrated, which could occur if higher-than-expected amounts of regulatory capital are trapped in the subsidiary, the VRs could diverge. A material reduction in UBS Switzerland AG's exposure to the parent, or the complete run-off of the joint and several liability arrangements between the two entities could also result in rating differentiation over time. We expect capital in excess of regulatory requirements and the management buffer to be up-streamed to UBS AG, at least for as long as the group entities remain strongly investment-grade. Changes to UBS group's structure, including changes to UBS Switzerland AG's ownership structure, could also result in rating differentiation in the VRs if Fitch concludes that this reduces UBS Switzerland AG's, UBS AG's and other group entities' integration with each other. The group has stated that it is considering further changes to its legal structure, which could include the transfer of operating subsidiaries of UBS AG to become direct subsidiaries of UBS Group AG and the creation of additional subsidiaries. In addition to the factors above, UBS Group AG's VR could be notched down from UBS AG's VR if double leverage at the holding company increases above 120% or if the role of the holding company changes. IDRs, DCRs AND SENIOR DEBT UBS Group AG's IDRs are primarily sensitive to a change in the group's VR. In addition, UBS AG's and UBS Switzerland AG's IDRs are sensitive to the presence of sufficient QJD to recapitalise the banks to the minimum requirements of the regulators. DCRs and senior notes are rated in line with the various UBS companies' respective Long-Term IDRs and are therefore primarily sensitive to a change to the IDRs. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the Support Rating and upward revision of the Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of UBS AG's and UBS Group AG's subordinated and hybrid debt issues are primarily sensitive to a change in the respective issuers' VRs. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the respective issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. SUBSIDIARIES AND AFFILIATED COMPANIES The ratings of UBS Limited are primarily sensitive to a change in UBS AG's IDRs. In addition, should regulatory developments lead to the subsidiary becoming less integrated within UBS AG, e.g. through restrictions on intragroup funding flows, this could result in a downgrade of the UK subsidiary. UBS Bank USA's Short-Term IDR, which is derived from the bank's implicit Long-Term IDR, is primarily sensitive to UBS AG's ability and propensity to support the subsidiary. Its ability is primarily sensitive to a change in UBS AG's VR and any regulatory restrictions placed on capital or liquidity supply from UBS AG. Its propensity to support it is driven by the subsidiary's importance and role in the group. Fitch has taken the following rating actions: UBS Group AG --Long-Term IDR upgraded to 'A+' from 'A'; Outlook Stable; --Short-Term IDR affirmed at 'F1'; --Viability Rating upgraded to 'a+' from 'a'; --Support Rating affirmed at '5'; --Support Rating Floor affirmed at 'No Floor'; --Tier 1 subordinated notes (high-trigger) upgraded to 'BBB-' from 'BB+'; --Tier 1 subordinated notes (low-trigger') upgraded to 'BBB-' from 'BB+'. UBS AG --Long-Term IDR upgraded to 'AA-' from 'A+' Outlook Stable; --Short-Term IDR upgraded to 'F1+' from 'F1'; --Viability Rating upgraded to 'a+' from 'a'; --Support Rating affirmed at '5'; --Support Rating Floor affirmed at 'No Floor' ; --Long- and short-term senior unsecured debt: upgraded to 'AA-'/'F1+' from 'A+'/'F1'; --Senior unsecured market linked securities upgraded to 'AA-emr' from 'A+emr'; --Derivative Counterparty Rating upgraded to 'AA-dcr' from 'A+dcr'; --Subordinated debt upgraded to 'A' from 'A-'; --Tier 2 subordinated notes (low-trigger loss-absorbing notes) upgraded to 'A-' from 'BBB+'; --Commercial paper upgraded to 'AA-'/'F1+' from 'A+'/'F1'; UBS Switzerland AG --Long-Term IDR upgraded to 'AA-' from 'A+'; Outlook Stable; --Short-Term IDR upgraded to 'F1+' from 'F1'; --Viability Rating upgraded to a+' from 'a'; --Support Rating affirmed at '5'; --Support Rating Floor affirmed at 'No Floor'; --Derivative Counterparty Rating upgraded to 'AA-(dcr) from 'A+(dcr)'. UBS Limited --Long-Term IDR upgraded to 'AA-' from 'A+'; Outlook Stable; --Short-term IDR upgraded to 'F1+' from 'F1'; --Support Rating affirmed at '1'; --Derivative Counterparty Rating upgraded to 'AA-(dcr) from 'A+(dcr)'. UBS Bank USA --Short-Term IDR affirmed at 'F1'; --Support Rating affirmed at '1'. UBS Capital Securities (Jersey Ltd) --Preferred securities upgraded to 'BBB' from 'BBB-'. UBS Group Funding (Switzerland) AG --Senior long-term unsecured programme and notes upgraded to 'A+' from 'A'; --Senior short-term unsecured programme and notes affirmed at 'F1'. Fitch has also withdrawn the ratings on two market-linked notes issued by UBS AG because there is insufficient information to maintain the ratings on these issues. --Market-linked USD0.02 million equity linked notes due 22 Feb. 2018, ISIN XS0338695173, rated 'a+(emr); rating withdrawn; --Market-linked JPY10 billion dual currency notes, due 10 Aug. 2038, rated 'a+(emr); rating withdrawn. Contact: Primary Analysts Claudia Nelson (all entities except UBS Bank USA) Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Johannes Moller (UBS Bank USA) Associate Director +1 646 582 4954 Fitch Ratings Inc 33 Whitehall Street New York, NY 10004 Secondary Analyst Luis Garrido Associate Director +44 20 3530 1631 Committee Chairperson Christopher Wolfe Managing Director +1 212 908 0771 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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