UBS AG Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.29.13 | About: UBS Group (UBS)

UBS AG (NYSE:UBS)

Q3 2013 Earnings Call

October 29, 2013 4:00 am ET

Executives

Caroline Stewart

Sergio P. Ermotti - Group Chief Executive Officer, Member of the Group Executive Board and Chairman of Global Community Affairs Steering Committee

Thomas Naratil - Group Chief Financial Officer and Member of the Group Executive Board

Analysts

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Kinner R. Lakhani - Citigroup Inc, Research Division

Jon Peace - Nomura Securities Co. Ltd., Research Division

Huw Van Steenis - Morgan Stanley, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Stefan-Michael Stalmann - Autonomous Research LLP

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Jeremy Sigee - Barclays Capital, Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Jernej Omahen - Goldman Sachs Group Inc., Research Division

Caroline Stewart

Good morning. It's Caroline Stewart here, Head of Investor Relations for UBS. Welcome to our Third Quarter Results Presentation. This morning, our CEO, Sergio Ermotti, will take you through the highlights of our performance; and then our CFO, Tom Naratil, will take you through the details of the Q3 results. We'll then take questions from analysts, and this will be followed immediately by a Q&A session for journalists.

Before I hand over to Sergio, I'd like to draw your attention to this slide which contains our cautionary statement regarding forward-looking statements.

Now I'd like to hand over to Sergio.

Sergio P. Ermotti

Thank you, Caroline. Good morning, everyone.

It is almost 1 year to the day that we announced the acceleration of our strategy to transform the firm and create the UBS of the future. At that time, we announced plans to further exit Non-core assets and drive greater efficiencies, and we also established a set of ambitious but achievable targets. In the past year, we executed our strategy in a focused, determined and disciplined manner. And despite challenging market conditions for both our clients and ourselves, we have proven that our business model works. Our industry-leading capital ratios are significantly stronger and our businesses have delivered solid results.

Let me outline the most important achievements. At the end of the third quarter, once again, we were the best-capitalized bank in our peer group, with a Basel III fully applied common equity tier 1 ratio of 11.9%. In 12 months, we added 260 basis points to this ratio, and we are ahead of our targets for 2013.

Our strong capital position is primarily the result of our success in reducing risk-weighted assets. In the past year, we have reduced risk-weighted assets by over CHF 80 billion or 27% to CHF 219 billion, putting us ahead of our 2013 and '15 year-end group targets. Over 85% of this reduction was due to sales-related and other exposure reduction effects, not model adjustments. More importantly, the reduction was executed in a manner that maximized shareholder value.

We also continued to make significant progress in deleveraging our balance sheet, which we reduced by more than CHF 300 billion, an amount larger than our existing Investment Bank. This effort helped improve our phase-in leverage ratio to 4.2%, and at all times, we have also remained well above regulatory requirements for funding and liquidity ratios.

During the third quarter, we notified the Swiss National Bank of our intention to acquire the equity of StabFund. Today, we know that this will be even more beneficial than we originally anticipated, as it will add CHF 2.5 billion to our CET capital and boost our fully applied Basel III CET1 capital ratio by around 100 basis points in Q4. The remaining assets and risk-weighted assets we acquire will be immaterial, amounting CHF 1 million and CHF 3 million, respectively. I'm pleased that we can now close this chapter on UBS' past and even more so knowing that, financially, this event has been a resounding success for all parties involved.

Financial strength is the foundation of our success, and our solid capital funding and liquidity positions have been critical in rebuilding confidence and trust in UBS. Our capital position is also a key driver of our improved financial performance in the past year.

We have proven that we have the right business model, as evidenced by our improved financial performance in a challenging environment. Looking at our performance in the first 9 months of the year, we have delivered a 19% increase in net new money in our global Wealth Management businesses to over CHF 43 billion. Invested assets in our Wealth Management businesses increased 7%, and at CHF 1.7 trillion, we are the largest and fastest-growing large-scales wealth manager in the world. Both businesses contributed to the 22% increase in profits delivered over the first 9 months of this year.

Our Retail & Corporate business has shown sustained profitability and attracted strong deposit inflows. Notably, Global Asset Management delivered 16% growth in pretax profit. And our Investment Bank has defied its critics to delivering CHF 2.1 billion in profit before tax, over 4x higher than the same period last year.

Year-to-date returns on attributed equity was 34%, significantly above our greater-than-15% target. This result was achieved while operating with much greater front office efficiency and tightly managed resources. At group level, we are on track to deliver our expected mid-single-digit ROE for the year. We also achieved our CHF 2 billion gross cost saving target this year, with CHF 2.2 billion in annual savings since the summer of 2011.

Our strong performance across all of businesses was the result of excellence in the execution. It is also a demonstration that we clearly continue to commit on our plans and, most of all, the dedication of our staff. I would once again like to extend my thanks for their continued and wholehearted support of the bank.

Unfortunately and in line with our second quarter outlook statement, our expectations of challenging markets were confirmed once again. The lack of resolution and, in some cases, the escalation of macro and geopolitical issues translated into exceptionally low client activity levels and increased risk aversion beyond the typical seasonality of the third quarter as clients intensified their focus on capital preservation. However, our results in the third quarter demonstrate that we can deliver positive performance even in a difficult environment. It is true for the group as a whole and, in particular, for our new Investment Bank model. At the same time, we continue to address matters from the past.

At group level, we generated an adjusted profit before tax of CHF 484 million in the third quarter, which includes CHF 586 million related to provisions for litigation, regulatory and similar matters. Net profit attributable to UBS shareholders was CHF 577 million. On capital, we reduced risk-weighted assets by CHF 20 billion at minimum cost, and as I mentioned earlier, once again, we reported industry-leading capital ratios. But as I said before, on any journey, there will be bumps in the road, and it is still too early to declare victory. UBS and the industry will continue to be challenged not only by the markets but also by changing regulatory environment and legacy litigation issues.

At the end of the third quarter, our regulator, FINMA, imposed a temporary 50% add-on to our operational risk-weighted assets with effect from the fourth quarter. FINMA has committed to review the temporary add-on periodically for possible reduction as they consider provisions established as well as the development of relevant litigation and other matters over time. As we continue to address litigation and other issues from the past, I'm confident we will become eligible for reductions. It is also important to know that we -- benefit from the exercise of the SNB StabFund option in Q4 will largely offset the 130 basis points impact from the temporary add-on. Taking into account both effects, our pro forma fully applied CET ratio at September 30 was 11.6%. So despite the add-on, we remain the best-capitalized bank in our peer group.

Our ability to absorb this event is a prime example of the benefits of our strong capital position and our emphasis on building best-in-class capital ratios. We continue to target a fully applied Basel III CET ratio of 13% in 2014, and therefore, we can reaffirm our commitment to a capital payout ratio of greater than 50% after we achieve our capital targets. However, in the absence of the removal of the temporary add-on, our ambition to achieve a group return on equity of 15% by 2015 will be delayed by at least 1 year.

Despite this, we can secure our future success by concentrating on what is controllable and predictable and by executing with the same discipline we have demonstrated over the past 2 years. We will focus on our clients with the same energy and strive for excellence in everything we do. Our progress has only served to reinforce our confidence and commitment to delivering sustainable performance and profitable growth to our shareholders. Our franchise is unrivaled, our growth prospects are compelling and our capital position is stronger than ever. That's why I have every confidence in our future.

Now I will turn over to Tom to take you through the details of our performance for the quarter.

Thomas Naratil

Thank you, Sergio. Good morning, everyone. As usual, my commentary will reference adjusted results.

This quarter, we excluded a CHF 207 million gain on the sale of real estate, an own credit loss of CHF 147 million and net restructuring charges of CHF 188 million. We did not adjust for CHF 586 million in charges related to litigation, regulatory and similar matters.

As we anticipated, the third quarter saw a number of headwinds. Client activity decreased significantly and risk aversion increased as clients intensified their focus on capital preservation. Nevertheless, performance was resilient, as we delivered a pretax profit of CHF 484 million in a challenging quarter.

We reported a net tax benefit of CHF 222 million. As in prior years, we remeasured our deferred tax assets as part of the business planning process, and this contributed CHF 384 million to the tax benefit recorded this quarter. We expect to complete this year's DTA remeasurement process in the fourth quarter.

Wealth Management earned a pretax profit of CHF 617 million in a seasonally slow quarter with exceptionally low client activity. Recurring income remained resilient despite cross-border outflows in Europe. Costs decreased mainly on lower personnel expenses, while the business reported net new money of CHF 5 billion, with positive contributions from all regions.

Seasonality, economic uncertainty and deleveraging impacted client activity and net new money across all regions, particularly in APAC and the emerging markets. The annualized net new money growth rate slowed in APAC to 4.6% primarily as a result of deleveraging as declining demand for Lombard lending led to approximately CHF 2.5 billion of gross outflows. Seasonal factors also contributed to lower net new money. The net new money growth rate in emerging markets was also seasonally slower and was affected by concerns related to local economies as a result of the anticipation of the Fed's announcement on tapering.

Europe saw positive net new money but continued to be impacted by cross-border outflows. We expect to face ongoing headwinds from this trend in Europe and certain other countries, but we can absorb it within our existing net new money growth rate target of 3% to 5% for the division. Wealth Management experienced strong net new money growth in Switzerland as we continued to enjoy good momentum in our home country.

UBS is the largest wealth manager in Asia, and this region is a key source of growth for our business. Client activity here tends to be more heavily geared towards trading with significantly more advisory relationships than discretionary mandates. Thus, client behavior in APAC has a more pronounced effect on gross margin compared with the rest of the world, with stronger results when markets are active but lower gross margin when markets are slower, such as the quarter we just experienced. In addition to deleveraging and seasonality, client sentiment was affected by sharp FX and equity market corrections in the region, notably India, Indonesia and Malaysia. However, we're pleased to see higher penetration rates for discretionary mandate solutions in APAC, which contributed to an increase in recurring income margin. Gross margin also decreased in Europe, Switzerland and emerging markets, albeit less significantly and primarily due to seasonal factors.

For Wealth Management as a whole, gross margin decreased by 5 basis points to 85 basis points. We continue to see month-to-month volatility in gross margin, similar to what we experienced in the first half, beginning with 89 in July, dropping to 81 in August and ending with 85 in September. Recurring fee and commission income was 2% lower due to cross-border outflows in Europe, as well as the continued impact of the migration to retrocession-free products. The net interest income component declined as client deposit reinvestment rates remained low, but loan and deposit volumes were broadly stable.

There were a number of positive developments in the quarter. 9 out of 10 Wealth Management clients have now been successfully migrated to retrocession-free products in our discretionary business. At the same time, the proportion of invested assets in discretionary mandates and asset allocation funds increased overall, reflecting growing confidence not only in the bank but also in our ability to successfully manage money. We also made further progress with our pricing initiatives, which benefited gross margin by about 1 basis point in the quarter.

We continue to believe that we can reach our target range of 95 to 105 basis points when we see a more sustainable recovery in markets, interest rates and client confidence. Clients' low risk appetite, as expressed in the significant balances of the cash in their portfolio, remains a headwind, with 28% of advisory assets in cash at the quarter end. This is one of the reasons why we continue to view our target on a multiyear rather than multi-quarter basis, and it's also why we're not overly focused on quarter-to-quarter fluctuations in gross margin, particularly as our asset base continues to grow.

Wealth Management Americas delivered a strong underlying performance earning a pretax profit of $232 million. Productivity levels remained strong as the business generated nearly $1 million per FA on an annualized basis, remaining near the top of its peer group. Invested assets and invested assets per FA reached record highs. Additionally, at $1.3 billion, recurring income increased to record levels. This was offset by a decline in transaction-based fees on seasonally slower client activity, as well as higher loan loss allowances and a $20 million trading loss related to pressure on Puerto Rico municipal securities.

Adjusted expenses remained relatively flat despite the $20 million charge related to a previously discontinued U.S. defined benefit plan. The business maintained an adjusted cost/income ratio of 86%, within our target range. WMA delivered its 13th consecutive quarter of positive net new money at $2.1 billion. FA attrition remained at historical lows, and the business continues to enjoy strong momentum.

We've always said that the third quarter would be an important test for the Investment Bank's business model. I'm pleased to say that the business passed the test, proving that our model works even in the most challenging quarter of the year. The IB delivered a pretax profit of CHF 335 million and achieved a cost/income ratio within its target range. This translates into an adjusted annualized return on attributed equity of 17%, and with a 34% return year-to-date, we're well in excess of our target of greater than 15%. The IB delivered this result while operating well below its risk and balance sheet targets, with RWAs down CHF 8 billion and funded assets down CHF 7 billion in the quarter.

We also continued to improve our efficiency, as revenues per unit of VaR increased 6% versus 2Q and front office productivity increased 16% compared with the year ago. We'll continue to focus on supporting client activity by adapting effectively to client demand, which is why our resource usage will fluctuate within our risk limits. We'll refrain from deploying unused resources for risk-taking activities other than those closely connected to client needs.

UBS acted as advisor in a number of high-profile deals announced in the third quarter, including the Vodafone/Verizon deal, which was the largest global M&A transaction in the last decade. Associated fees will be booked in a future quarter.

Corporate Client Solutions reported revenues of CHF 505 million. Advisory saw a reduction in revenues as private transactions declined, while a decrease in issuance affected our equity capital markets revenues. Our success in securing the role of advisory to Vodafone precluded us from participating in the single largest DCM transaction this quarter. Nevertheless, we're pleased with our market positioning in the areas where we have chosen to focus.

CCS operates a focused strategy concentrating on specific sectors and geographies. Thus, productivity is a key measure of our success, and revenues from front office headcount year-to-date increased 45% compared with the year ago.

Investor Client Services performed well, delivering revenues of CHF 1.2 billion. Equities continued to deliver a strong performance across all regions and products, generating a total of CHF 890 million in revenues, our best third quarter since 2010. Year-to-date revenues are up nearly 60% versus a year ago.

Cash revenues decreased as market volumes fell. Derivatives saw a decrease after an exceptionally strong 2Q, while financing services saw a seasonal decline. Our seasonal decline in equities was amplified as a result of our strategy, as we're operating with disciplined balance sheet usage and lower VaR. Our equities franchise continues to be recognized as best in class across several industry surveys. In the third quarter, UBS received the Structured Products House Of The Year award by Derivatives Week.

FX, rates and credit revenues declined, reflecting lower client activity. Volumes and revenues in FX were impacted by lower volatility in G10 currencies. At the same time, these businesses maintained high balance sheet velocity and reduced inventory, underlying our focus on flow-driven businesses.

Delivering positive revenues consistently in a slow and volatile quarter is a challenge for any investment bank. ICS had positive revenues on all but one day in Q3, proving that our client-focused flow-driven model works even in difficult conditions.

Global Asset Management delivered a pretax profit of CHF 130 million, leading to a 16% increase in year-to-date profits versus a year ago. Net new money, excluding money markets, was negative CHF 3.9 billion as net inflows in index equity products, notably from APAC clients, were more than offset by net outflows from most other asset classes, primarily from clients outside Switzerland.

Retail & Corporate delivered its best performance in 3 years, reporting an adjusted pretax profit of CHF 417 million. This included a CHF 16 million gain on the sale of a participation and a small net credit loss recovery. Our annualized net new business volume growth rate increased to 1.3%, within our target range. This metric is typically affected by big ticket items in our corporate business, which contributed to the improved performance. Net new business volume from retail clients was positive again this quarter, driven by net new loans and, to a lesser extent, net new client assets.

Net interest margin declined 3 basis points to 1.54% as net interest income decreased on a broadly unchanged average loan volume. We expect net interest margins to remain under pressure as long as deposit reinvestment rates remain low.

Our Swiss retail business successfully rolled out new tools for online and Mobile Banking, and we've observed a steady increase in usage. UBS' e-banking service currently has around 1.3 million clients in Switzerland, up 11% in the past 2 years. The number of Mobile Banking users is also growing fast. Client feedback has been excellent so far, with 85% of App Store ratings at the maximum 5 stars. We'll continue to build on our long tradition as a leader and innovator in digital services in Switzerland to capture market share and increase efficiency.

Corporate Center - Core Functions reported a pretax loss of CHF 540 million on an adjusted basis, excluding own credit losses of CHF 147 million and gains of CHF 207 million on sales of real estate in Switzerland. Adjusted revenues were negative CHF 257 million, of which CHF 219 million were related to treasury activity. This was partially due to a CHF 54 million loss related to our macro cash flow hedge accounting model.

Adjusted operating expenses not attributed to our business divisions increased by CHF 162 million, largely driven by an increase in litigation charges.

In the Non-core and Legacy Portfolio, we reported a pretax loss of CHF 688 million. Revenues declined in Non-core on higher credit valuation adjustment reserves and a CHF 47 million negative debit valuation adjustment in our derivatives portfolio, CHF 26 million lower than in the prior quarter. Revenues declined in the Legacy Portfolio mainly due to a lower gain from the revaluation of our option to acquire the SNB StabFund's equity.

Expenses decreased by CHF 395 million to CHF 588 million primarily due to lower charges for litigation, regulatory and similar matters, although these remained elevated at CHF 350 million.

Non-core RWAs decreased by CHF 9 billion in the third quarter, driven by ongoing active reductions in our cash and OTC derivatives positions. RWAs related to cash positions were reduced to CHF 3 billion. We've updated the anticipated natural rundown of OTC RWAs, which at CHF 28 billion at the end of September make up the bulk of the non-core's remaining exposures. Non-core consists of approximately 820,000 line items, down 13% in the third quarter and 40% year-to-date. We're encouraged by increasing interest from other banks and dealers to engage in trade compressions, reflecting the industry's focus on leverage ratio requirements.

Total assets decreased by CHF 42 billion, helped by a substantial reduction in PRVs, driven by a combination of unwinds; third-party novations, including transfers to central clearing houses; trade compressions; and to a lesser extent, yield curve movements. Funded assets decreased by 31% in the quarter mainly due to a reduction in physical gold holdings held on behalf of clients.

Legacy Portfolio RWAs were stable at CHF 30 billion at the end of September. Operational risk makes up 1/4 of Legacy Portfolio RWAs, largely in connection with RMBS-related and other litigation risk.

As Sergio previously mentioned, during the third quarter, we notified the SNB of our intention to exercise the SNB StabFund option. At 30 September, the residual balance of noncash assets within the fund was less than CHF 1 million, equivalent to less than CHF 3 million in RWAs. The exercise of this option will result in the reversal of the capital deduction of CHF 2.5 billion, which was applied to our CET1 capital and thus increases our CET1 ratios. We do not expect the exercise of the SNB StabFund option to result in material P&L impact.

We've continued to reduce our cost base and headcount this quarter, but charges for litigation, regulatory and similar matters remained significant, masking some of our progress. When measuring cost reduction, we exclude WMA's formula-based FA compensation as it is highly correlated to WMA production which increased significantly from the first half of 2011. To date, we've achieved CHF 2.2 billion of annualized cost savings.

Our annual intake of graduates globally and apprentices in Switzerland totaled nearly 700 FTEs in the quarter, and thus, we saw only a small net decrease in the group's headcount.

We remain focused on cost efficiency. The majority of future cost reductions will be driven by the Corporate Center and will take 2 to 3 years to be fully realized. We also expect charges associated with litigation, regulatory and similar matters to remain at elevated levels through 2014.

We continued to make good progress in RWA reductions this quarter. The largest reduction was achieved in Non-core. We also reduced IB RWAs, reflecting lower risk table. Deleveraging in the Non-core and Legacy Portfolio, as well as reduced risk-taking in the IB, were the main drivers of RWA reduction, and this largely offset a small increase to the model changes. Over the last 2 years, over 85% of the RWA decrease came through exposure reductions, including sales, hedges and other items.

We continued to successfully reduce RWAs in the quarter, with the balance down CHF 20 billion to CHF 219 billion, surpassing our 2015 target for the group more than 2 years early.

The chart also shows the impact of an order from FINMA which came into effect on 1 October 2013 and requires UBS to include a temporary add-on of 50% to operational risk-related RWAs. FINMA informed us that its decision was based on a comparison of recent loss history with the capital underpinning for operational risks, and the add-on effectively relates to unknown -- sorry, to known and unknown litigation, compliance and other operational risk matters. FINMA's approach does not correspond to the requirements under IFRS for litigation, regulatory and similar matters and other classes of provisions and contingent liabilities. It will result in an additional operational risk-related RWAs of CHF 28 billion on both a fully applied and a phased-in basis from the fourth quarter. This temporary add-on will be applied to the business divisions and Corporate Center in proportion to their AMA model-based operational risk RWAs. Our regulator will review the add-on periodically for possible reduction considering the provisions established and the development of the relevant litigation and other matters over time.

We're pleased we achieved our fully applied CET1 target for 2013 this quarter. The net effect of the RWA add-on and the exercise of the SNB StabFund option will reduce our CET1 ratios slightly, with a pro forma ratio of 11.6% on a fully applied basis compared with 11.9% as of 30 September. Our SRB Basel III leverage ratio increased 25 basis points to 4.2% mainly due to the continued reduction of our balance sheet assets. We expect the exercise of the SNB StabFund option to contribute an increase of about 25 basis points to our leverage ratio in the fourth quarter. We're already over 200 basis points ahead of our regulatory phased-in minimum, and we're confident that we'll meet our 2019 leverage ratio requirements early.

Our strategy is ideally suited to the new regulatory environment and plays to the unique strengths of our franchise which offer diversified revenue sources, predominantly from fee-generating businesses with attractive growth prospects. We're the best-capitalized bank in our peer group and operate the largest and fastest-growing large-scale wealth manager in the world. All of our businesses are performing well, and we've proven that the new business model for our Investment Bank works. Our transformation remains on track and we have every confidence in our future success.

Thank you. Sergio and I will now take your questions.

Question-and-Answer Session

Operator

The first question is from Mr. Kian Abouhossein from JPMorgan.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

I just wanted to come back, first of all, to the FINMA operational risk-weighted increase, if you could just run us through the process of how this is established. Is this based on a formula? Is this purely on discussions as a subjective number? And what triggered the change? Because clearly, one of your peers did not have that issue, so really trying to understand the additional CHF 28 billion. And if it is litigation related, why are you taking a relatively small charge relative to the increase in operational capital? The second question is on Wealth Management. You had a 5-basis-point decline in top line margins, I just wanted to -- if you could talk through the issues retrocession, interest rate levels, et cetera, wherever you are in terms of how we should think about the margin development and how you have seen the fourth quarter trend developing in that respect. And lastly, if I may, the Corporate Center, which to us is quite confusing because clearly there a lot of moving parts, it's quite a big, even cleaned-up, pretax loss. Just trying to think about how we should think about the Corporate Center cost in terms of how you're budgeting for this charge going forward so we have an idea how we should look into this into our models.

Sergio P. Ermotti

Okay, Kian, I'll take the first question, and Tom will take the other 2. So again, at the end of the third quarter, we received an order from FINMA announcing the imposition will effect the -- from October 1 of this 50% add-on to the AMA-based operational risk-related risk-weighted assets in relation to known and unknown litigation, compliance and other operational risk matters. FINMA states that's its decision was based on a comparison of recent loss history with the capital underpinning for operational risk with that risks -- with risk-weighted assets. And we have no transparency about the methodology used to come with the 50% add-on.

Thomas Naratil

So Kian, if I go into your...

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Sorry. And this is they don't specify what the litigation issue is? Because clearly, the assumption is this is FX-related. But is there any indication what this might be related to?

Sergio P. Ermotti

There is no indication about a single or -- a single item weighting into that decision. It's an assessment based on the portfolio...

Thomas Naratil

Again, if you -- and if you looked at -- Kian, at the second question that you asked, which is, how does that RWA charge relate to the provisioning we take in the quarter? As I noted in my remarks, the add-on does not correspond at all to what is permitted under IFRS. As you know, we go through a process in assessing our items to determine the probability of outflow and then estimate-ability of those particular items. I think, if you go to the litigation note and walk through the tables that we have and see the cross-references to the different items, I -- you'd also be able to get a better feel for what comprised the total of CHF 586 million in litigation charges we took this quarter. And we have been noting for the past few quarters that we expect litigation charges to remain elevated and, we have said previously, at least for 2013 and, we've said today, through to 2014. Now going to your question on gross margin, what was affecting it, if you think about our outlook statements in the previous quarter, we clearly highlighted structural issues remaining in Europe and the U.S., both in the economies; fiscal situation, in particular in the U.S. And with 80% -- although the ultimate outcome wasn't that the Fed decided to taper, about 80% of the time during the quarter, if you were listening to the news or listening to different economists, the discussion was about Fed tapering. And that clearly impacted the markets and clearly impacted clients and their activity levels. And you see that most pronounced in Asia where we saw an 8-basis-point decline in our gross margin, which was driven primarily by a decline in transactional activity. We also saw deleveraging. The reaction in some of the markets to future prospects of Fed tapering was significant declines in some emerging markets, equity markets, as well as there in their foreign exchange. That clearly resulted in deleveraging and that impacted both client activity levels and also net new money. When you ask about the fourth quarter, if you look at our outlook statement, we highlight the point that the beginning of the fourth quarter has been a -- began with the debate around the U.S. fiscal situation and the possibility of at least a technical default at one point in time, and so clearly not an environment that's been especially helpful for client confidence. And you see that -- certainly where cash levels were at the end of the quarter, at 28%. On Corporate Center costs, earlier, I referred you to the litigation table. And I think, if you do the cross-referencing versus litigation table, you'll see that a substantial amount of the litigation charges taken for the quarter were taken at both the Corporate Center core and the Non-core. I also think some of the volatility that you've seen in the markets and some of the distortions again around this debate around said policy have also, to some extent, impacted some of our charges related to our macro cash flow hedge model. And there's been some volatility there as well. Finally, as we also noted at the end of last quarter, we told you we were sort of rolling over from an environment where we had a -- we've had a very favorable environment in pricing for exiting Non-core and legacy assets. And we've moved from, as you know, our first few quarters of seeing actually positive operating income, coming from the reduction in assets, to now some negative operating income. And then second, as we -- as the StabFund portfolio has been run down to effectively 0, the potential for gains from the option is clearly eliminated.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

And if I can, if I may just follow up on that. I mean, on -- just on the gross margin into this quarter, do you think there's been a big change in transactions that you're seeing in Asia in September relative to October? Or do you feel that it's a similar trend every year in the IBs, which indicate October might be slightly better than September? Can you give us a bit of an idea on a relative basis how it feels at the moment in terms of transactions? And then secondly, on Corporate Center, I hear you on litigation, but if I take that out and take your gain out of CHF 207 million, it is still quite far off of what I think we and consensus were expecting based on your consensus collection. So just trying to understand, should we assume that the charge will be higher going forward in the Corporate Center due to exit losses, is that kind of a fair comment? Or should we look at an average over the past? I mean, how do you do your budgets on this respect?

Thomas Naratil

Sure. So going back to 4Q, I think the outlook statement is the best clue to what we think. And I'll just reiterate the fact, 28% in cash, we've always said it requires structural changes, and I don't think you've seen those structural changes in Europe or the U.S. yet, number one. Now going to the question on the Corporate Center, I think I would focus in, one, as you said, on what's the change in the turnover in terms of the costs associated with exiting Non-core and legacy assets, number one. And then second, I think a more focused effort, and we can follow up with you after the call, more focused look at the treasury income lines, I think, with -- and cost lines would be helpful.

Operator

The next question is from Kinner Lakhani, Citigroup.

Kinner R. Lakhani - Citigroup Inc, Research Division

Yes, I just had a one question on the DTAs, actually, just in terms of how you look at the DTA recognition process. You do not recognize any of the U.K. potential DTAs, and a very fractional recognition of the U.S. DTAs. And even on Switzerland, which is clearly a cash cow for you, only 55, some of the DTAs have be recognized. So wondering, what level of conservatism is being applied in your 5-year plans and whether you think the 5-year plans are consistent with industry practice.

Thomas Naratil

Kinner, thanks for that question. So first, looking at the different DTAs and the average lives on them, I think, is probably the best way to look at it. In Switzerland, with an average life of remaining of about 2 years, this one's highly volatile to short-term forecasts. And so to the extent that we have changes in our short-term forecast, that could implement -- that could affect the number quite substantially. And as I indicated, we still have the tune-up process going into the fourth quarter still to come for this year. That's also impacted, to some extent, by -- or a -- all of these are affected by locations of losses. And when you look at the U.K. and you might say, "Well, that's a -- seems very conservative to not have realized anything," a lot of the exit of the Non-core and Legacy Portfolio is U.K.-tax based. And so as a result, that's affecting the profits or offsetting the profits that we generate in other operating businesses in the U.K. And then in the U.S., as you've noted, that's where the greatest potential is for realization of future DTA benefits. On that, how conservative are we in the process? Clearly, when you're doing -- I think it's difficult enough to try to do 3-year plans and then extrapolate that out over 5 years, and there are a number of assumptions. And we do implement a certain amount of prudence that we think is appropriate in valuing the DTAs. When we get some more stability in the markets and see a little bit more visibility on movements, upward in interest rates and return of client confidence, potentially, that would impact the future valuation relative to the assumptions that we've made today in a more positive way.

Kinner R. Lakhani - Citigroup Inc, Research Division

Great. And I have -- and can I just follow up with one more question? How are you looking at the Basel proposal on leverage and how that might impact your leverage ratio plan going forward?

Thomas Naratil

So I think, on the leverage ratio debate, we've been very clear that we don't think it's helpful for 6 different competing proposals to be out there. And hopefully, the answer isn't that we have 6 different approaches across the globe. Moving to a position where there's more harmonization, more common definitions of numerators and denominators will clearly help investors and creditors and also you. Our view right now works. Switzerland implemented Basel III on the 1st of January. We're required to comply with the Swiss SRB Basel III leverage ratio requirements. We're significantly ahead of that, as you can see, and we continue to target to that. When we've done the review of the different proposals and made some assumptions about what could potentially come out in an ultimate compromise, our view is we're very comfortable that, whatever the regime is, we'll be able to meet it in advance of the deadlines. And I think you see that 25-basis-point improvement just in 1 quarter. We had 25 basis points already coming to us as a result of the SNB -- exercise of the SNB StabFund option. We were talking about this a year ago when we accelerated the implementation of our strategy. A key factor in choosing the business model approach strategy that we did was the fact that we believe the leverage ratio was going to become more important in the next year or 2, and it has.

Operator

The next question is from Mr. Jon Peace, Nomura.

Jon Peace - Nomura Securities Co. Ltd., Research Division

I have 2 questions, please. The first one was the readthrough of the FINMA charge for the dividend. Do you think there's any chance that you'll be able to move to a 50% payout for the 2014 dividend, paid in 2015, or the impact of having to accrue, meaning that that's more likely now for the 2015 dividend, paid in 2016? And then the second question was to your Investment Bank: Having delivered a return on equity of 17% pretax in the third quarter, arguably a very tough quarter, and it's still ahead of your 15% target, are you thinking about increasing that 15% target ROE in the Investment Bank?

Sergio P. Ermotti

Thanks, Jon. I think, in respect of our dividend policy, as I mentioned during my remarks, we are still very focused and determined to achieve our 13% CET ratio fully applied by the end of 2014. And that means that, at that time, we will pay at least 50% to shareholders for the dividend paid for early 2015. So this has not changed and we will continue to work on this matter. In respect of the Investment Bank, model of the IB and the -- and its targets, nothing has changed. I think that we are very pleased with the outcome. We need to continue to work hard to consolidate this position and improve our position, but that's the reason we are very specific when talking about a 15% annualized minimum. Depending on market condition, year-on-year or quarter-by-quarter, this may vary, but I don't think it's necessary for us to adjust our targets.

Operator

The next question is from Mr. Huw Van Steenis, Morgan Stanley.

Huw Van Steenis - Morgan Stanley, Research Division

Two questions. Just going back to Kian's question, is there a process you agreed with FINMA on the process to unwind the operational risk add-on? What sort of milestones or triggers would be foreseeable? And then number two, on your comment about potentially the inflection of the Non-core runoff now divesting but behind us, I was just intrigued in the Legacy Portfolio why there was almost a CHF 2 billion in either other or operational risk RWAs in the quarter and which obviously subdues the ability to shrink that, if there's any more clarity about what's behind that. And is the progress from here on out getting delivered more slow?

Sergio P. Ermotti

Okay, Huw, again, on our -- FINMA has committed to review the add-on periodically. I think that's at least on a quarter-by-quarter basis, I would say, and that's for possible reduction and as they consider the provisions we establish or developments in the litigation portfolios. So it may not necessarily be a provision that triggers a newer [ph] add-on but rather also a good outcome of a litigation process. And this will happen over time but, I would say, at least on a quarter-by-quarter basis. And as we address those issues, I'm confident that we will be eligible for such deductions.

Thomas Naratil

Huw, the only question -- the way you paraphrased it was, the best is behind us. If I separate 2 different aspects of it, I think, from a realization or the cost of exit, we were advantaged because we had started early. We're ahead a lot of the movements on deleveraging -- leverage ratio of deleveraging a little bit earlier than the industry. And we also began that in some friendlier quarters, certainly 4Q last year, 1Q and 2Q. So we were able to realize positive operating revenues on that rather than negative. And so I think we had a favorable environment and we're just returning to a more normalized environment on those exits. In addition, the other comment that I made and, I think, you've heard through a number of the earnings calls this quarter, and particularly from the American banks, more talk about trade compressions and their focus on leverage ratio and how they're managing that, and we're seeing the uptick in interest, which is mutually beneficial obviously to all of us. And we're encouraged by that in getting the line items down in the OTC portfolio. 820,000 might still sound like a lot, but it's down 13% in the quarter, 40% in a year, so that's pretty substantial progress. If you look at the legacy, there's 2 -- there are always a number of movements in and out, and you can see that detailed on the table on Page 63 in the report. But the 2 big numbers that offset each other for no movement, we had a CHF 1 billion reduction in the CDO line on some CDO sales, but we had a CHF 1 billion uplift in operational risk RWAs. That's physical result of the model flipping over increased ORWAs as a result of the RMBS settlements that we've had in the past in the Legacy Portfolio. So we do think the combination of our provisioning on an IFRS basis as well as our AMA model on a standalone basis are sufficient to provide the underpinning of capital that we need.

Operator

Next question, from Mr. Christopher Wheeler, Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

A couple of questions and a clarification, if I may. The first question is on Wealth Management Americas. There's been a lot of press about the changes in compensation that are emerging. And I think we've had James Gorman at Morgan Stanley being quoted on the fact that some of the upfront bonuses paid to the FAs have been a tax on the industry dealing with the market during the -- or post-crisis period. And that seems to be now going away. I'm not quite sure how that's been achieved. But what's your view on that and how that might impact your compensation costs? Because clearly, you have been hiring people and obviously paying them at traditional market rate in terms of upfront payments. And I wonder if that would -- or you, do you think that would change and that would beneficial to your pretax margin? The first question. Second question, Tom, when we chatted back in May, you pointed out that [indiscernible] was doing a job in cutting costs. But third -- if we'd look at the third quarter when the market was tougher, and obviously you've done really well in getting to the 80%, top of your range. I mean I don't know, is this a hostage fortune? But can we already assume now that, having got down to 80% in Q3, really we can look at that as some kind of ceiling, unless we have a major issue, and that we can actually see you pushing down towards the bottom range? And then just finally, Sergio, I know you'll think this is a pain, but I don't know if anybody is getting enthusiastic about dividends in 2015, but let's be absolutely clear, I think what you're saying to us is that, in 2015, you would pay out a dividend that would obviously not take the ratio down below 13% and will be limited to 50% of earnings. I think that's what you're telling us, isn't it?

Sergio P. Ermotti

Okay, Christopher, I'll take the first question in respect to the compensation changes. Of course, this introduction by [indiscernible] disclosure, I think what is really changing is this demand that -- to financial advisor that are moving from one bank to another, to disclose any financial package to their clients in a very transparent way. And that, we think, is going to clearly prevent or slow down the amount of people, the turnover of financial advisor, in the industry. And hence, this payment that are done will, over time, have a beneficial effect on compensation. But is -- this is not something that you will see on a quarter-by-quarter basis. It's going to take time. And but it's clearly a good news in respect of improving the economics of the difference. And I'll let Tom respond to questions you just spoke to him in May.

Thomas Naratil

Yes. So if I could just add onto what Sergio said on the trends on in the U.S., the only thing I'd note is, first, we are not the high payer for recruiting bonuses at this point in time. We have a very disciplined process on that. We think that we've got a very attractive model as a firm that's focused on wealth management. As a result, we don't have to pay the highest price to get the best-quality advisors. And I do think that, that's an important aspect in the model for competition. It's not about buying, it's just about compensating people for making the move, which is difficult across firms. And those payments are a function of record-low levels of industry attrition. The industry has -- pays those amounts because people don't want to move and not because they do them -- they do want to move. The question that you asked, I think it was a discussion about how we were doing more in the -- as I think as I already [ph] mentioned, the cost/income ratio, that tied-in with the Investment Bank rather than Non-core and legacy, so I assume it was my comments about Andrea's team and their focus on costs and how they were doing on their reductions.

Christopher Wheeler - Mediobanca Securities, Research Division

I think you're probably right, yes.

Thomas Naratil

Yes. So on that, I think what we -- what the context of that discussion that we have had was, what about the range on cost/income ratio? We were performing down towards that lower end of the range, and you had asked me, "Do you really think you just got the range wrong?" and as to why, and my answer was, "No, I don't." And I think this quarter sort of proves that out. Based on our model very databased, very client focused, is if client volume goes down, seasonally slower quarter, we'll be at the higher end of the range. And at the same time, in the better parts of the cycle, we'll be at the lower end of the range. And to the extent we've reached either one of those a little bit, it's more an anomaly than a reason that we should be changing the ranges.

Christopher Wheeler - Mediobanca Securities, Research Division

No, I don't think I was saying that, Tom. I think what I was saying was, can we now look at that 80%, which is I think a pretty good performance in a political quarter for most people, as something where you can say, actually, now you'll sit below that probably as you forward quarter-by-quarter? That was my question.

Thomas Naratil

I would still stick with the 65% to 85% range. And then last, on the question of, what are we telling you? The 13% target isn't a "one point in time, hit 13% and walk away." It maintained, that 13% ratio, and a 10% CET1 ratio post stress after we pay the whatever dividend or returns of cash flows that we have. And we'll pay that when we reach that amount, with a target of above a 50% ratio on capital returned to shareholders.

Operator

Next question, from Mr. Stefan Stalmann, Autonomous Research.

Stefan-Michael Stalmann - Autonomous Research LLP

I have 2 or 3 questions again revolving around this operational risk surcharge. You are actually taking this as a reason to postpone your 15% group ROE target. And given that this shouldn't really impact earnings, does that imply that you actually feel forced to hold more capital than you would have budgeted for otherwise without this operational risk charge? Or alternatively, is there also an earnings-driven reason why you're postponing the ROE target for 2015? The second question, again regarding this operational surcharge, is it fair to assume that a lot of these CHF 28 billion will actually be reflected in the Investment Bank? And would that have any implications on your targeted risk-weighted assets in the Investment Bank, in particular if this turns out to be more than an interim issue for 2 or 3 quarters? And finally, it strikes me a little bit strange that you essentially just get a letter from FINMA on something like this basically slapping a very meaningful add-on on a key capital metric without much of an additional explanation and without a forewarning and apparently without much discussion going into this. Do we need to read anything more broadly into your quality of communication with FINMA?

Sergio P. Ermotti

Yes, I'll let you come to your own conclusion about the last question. And that's, what we have told you is how things have happened. And for the rest, I leave Tom to answer.

Thomas Naratil

Okay, So Stefan, going back to your first question, why is the target pushed out on the ROE. If you take the CHF 28 billion and our 13%, that's CHF 3.6 billion in additional equity we have to carry. That's the primary driver, more than it is the earnings impact, which certainly moves into your second question. I'll cover it in a couple of parts: If you look on Page 78 of the quarterly report, you'll see the breakdown of the risk-weighted assets by division by category. So we're applying the add-on in proportion to the operational risks in each division. And so out of the approximately CHF 55 billion in operational risk of the IBs, that CHF 13.6 billion, so they'll take CHF 6.8 billion of the CHF 28 billion. And you can see the rest of the distribution across the other divisions when you come to that page of the report. We believe that we can accommodate the add-on within all of our existing targets for RWAs. That's one of the advantages of all the work that we've done over the past 2 years and certainly over the past year to get our group RWAs down not only below our 2013 target but also below our 2015 target. It gives us the capability to withstand an unwanted action like this. And when you think about, in the short run, might that make things a little bit tighter? Certainly, fourth quarter has a little bit of a seasonal slowdown, but that might make that a little bit easier for us to accommodate.

Operator

Next question, from Mrs. Fiona Swaffield, Royal Bank of Canada.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Could you talk about a few more things on in wealth management? Two, is it just a trend in Asia and emerging markets? To what extent do you think that the setback in Q3 was seasonal, transactional in terms of the implications going forward? And the second issue is, historically, or in the last year or so, you've been lending quite a lot to private banking customers, and that lending seems to have stalled in the third quarter. I just wondered if you could talk about the strategy on the lending side going forward as well.

Thomas Naratil

Okay. So Fiona, on your first question, there really is a seasonal and then sort of a secular piece in terms of this. One, clearly, seasonally, we had the summer, traditional summer, slowdown that we had flagged in our outlook statement. But additionally, this move discussion/debate around when the Fed begins to taper clearly had an impact on the way clients thought about the cost of their leverage, the way asset prices performed in certain markets. And as a result, clients, in order to adjust their risk exposures, took leverage off and also didn't initiate new transactions. So some summer, but some of this is affected by what happens as you move into a -- as move from a accommodative monetary policy into a more neutral to eventually tight policy. Clearly, that will have some impact in the turnover phase, in the transition phase on borrowing activity and some other items. So it's more than just the seasonal. At the same time, as Sergio mentioned these, exceptionally high cash levels of 28%, our concern about structural issues in the U.S. that we flagged in our outlook statement for the fourth quarter, I think, give you a view that it's -- there's also some hangover effect that could continue. On your comment about the lending and a -- did you -- what does that look like. We had a slower -- clearly, a slight decline in terms of our Lombard lending in the quarter. But as I mentioned, it's logical one in response to market prices, in response to views on additional future cost of borrowing. And at the same time, let's not forget that we did have a decent decline of the dollar against the Swiss franc, and so any of the asset classes -- or so any of the loans that are denominated in the dollar would, as a result, have been marked down in the report.

Operator

The next question is from Mr. Jeremy Sigee from Barclays Capital.

Jeremy Sigee - Barclays Capital, Research Division

I -- sorry, but I want to get back to a couple of the topics that have obviously already been raised. On the operational risk add-on, is your judgment that this is primarily about future settlements that you've not -- future risks that you've not yet settled and not yet provisioned, as opposed to a backward-looking calculation that's capturing some of your recent charges? You mentioned both things, and I just wanted to check, in your judgment, is it primarily a forward-looking or a backward-looking calculation? The second question I had, really just echoing Stefan's question actually, which is that, even with this, you're below your RWA glide path, so I don't understand why would this affect your ROE targets. You're still well within your guided RWA reduction even with this, and you yourself have highlighted that, so why would ROE target be affected? And third question, on the leverage exposure, you made some more fantastic progress here in the quarter down from CHF 1,141 million to CHF 1,063 million. You've talked previously about a sort of, I think, 2018 target around CHF 900 billion, but it looks like you could be achieving that sometime next year already. Is that a realistic expectation? Can we expect something approaching this pace of leverage exposure reduction to carry on in the next few quarters?

Thomas Naratil

Jeremy, thanks for those questions. I think, looking at the upper set on this question of future and past, as I mentioned, we think current with -- our view, we think current and future is captured by the provisions that we carry. In the past, it's captured by our AMA model. I'd say our regulator's add-on probably deals with the difference in their view on the future. Second, your question, "You're ahead, but why are you pushing out the target?" I think, if you go to our Slide 22, although the CHF 247 billion is certainly below the CHF 250 billion target we set for this year, if you go out to 2015 what we're looking for the ROE target, it is CHF 25 billion -- sorry, that's CHF 22 billion greater than that target. And so as a result, without the complete removal of that, we think we missed the 15% ROE target and so pushed it out at least a year. And then lastly is pace of deleveraging, we certainly have the energy, desire, focus, and as we mentioned, we're encouraged by seeing some other banks and dealers that are also giving that focus. So I'd hate to extrapolate great progress forward, but we are encouraged by what we hear about other dealers also being willing to engage with us.

Operator

The next question is from Mr. Michael Helsby from Bank of America Merrill Lynch.

Michael Helsby - BofA Merrill Lynch, Research Division

Just 2 questions, firstly on the add-on. Clearly, this was -- this is quite a material change, such as to be wondering why you chose not to tell the market as and when you received this. And secondly, Tom, you've talked, I think, quite a lot about the volatility in the gross margin on a month-by-month basis, particularly in Q1, so I was wondering if there was equal volatility in Q3, if you could talk about maybe the exit rate. And you referenced the outlook statement. And I think, reading that, you're clearly emphasizing the headwinds going into Q4. So I was just wondering, is that a headwind incremental to Q3, i.e., are you guiding those to a lower margin [indiscernible]?

Thomas Naratil

Michael, thank you. So on your question about the timing of our announcement for the add-on charts, it's in line with our announcement or disclosures for this quarter because, one, we received the order at the end of the quarter; two, it takes effect in the fourth quarter and doesn't affect the third quarter numbers; and three, the effect of it was largely offset by the SNB StabFund option, positive effect. Going to your second question, on volatility in gross margin, you're correct to point out we've seen exceptional volatility this year. It did continue into this quarter. The month series during 3Q is 89, 81, 85, so we finished at the average for the quarter. But clearly, you see there isn't a lot of conviction, I think, but that's what happens when you have 28% cash levels and invested and clients have concerns about structural issues in the economy, banking system, fiscal situations globally, and then throw in a little bit of disturbance in the Mid East during the quarter as well. That most certainly would give clients pause and cause small changes in transactional activity and rebalances to have a pretty big swing on your transactional gross margin. The outlook statement has been very cautious for a number of quarters now pointing out the structural changes, but you did correctly point out that we identified that the fourth quarter did certainly begin with a debate focused on a possible default of the U.S.

Operator

The next question is from Mr. Jeremy (sic) [Jernej] Omahen from Goldman Sachs.

Jernej Omahen - Goldman Sachs Group Inc., Research Division

I just got 2 question left, 2 questions left. I mean, it's all a little bit of a clarification issue when they come so late in the call, but here they go. So firstly, on this FINMA intervention, to what extent do you feel that you've been singled-out here as an institution in Switzerland? And to what extent do you feel that this is rather a broader sector issue and that we might see some of your peers, I guess, or some of your competitors come up with a similar thing? So I guess, shortly, to what extent do you think this is UBS specific? To what extent do you feel it is the Swiss bank sector specific? And the second question I get, I'm sorry on this, and I must be slow, but I still don't understand how you end up with more risk-weighted assets because of this add-on, compared to what you are targeting? Did I understand your message currently, are you saying basically that the pace of reduction of risk-weighted assets would have slowed in '14 and '15 compared to what you were targeting to essentially end up at your '15 target? Or is the message something different?

Sergio P. Ermotti

Okay, thanks. I think it's just crystal clear that all these issues that are going on are not idiosyncratic to UBS but are industry-wide issues. And so -- and this is clearly something that I will describe both on an international basis and also on a domestic basis. I think that we have a strong capital position. I think that we have a very transparent methodology to reflect operational risks to our AMA model and the disclosures, as I mentioned, on our litigation risks. I think that I -- we do not go into comments about being singled-out, only to say that we are really confident that we are having a best-in-class disclosure standard and a substantial amount of risk-weighted assets in our computation to take care about those issues.

Thomas Naratil

And Jernej, your question on the RWA. I think it's a -- I think, one, we have to sort of put this in context on we haven't created a new form of alchemy where we're going to evaporate all the RWAs of the bank. We're at CHF 219 billion currently. That is below the December 2015 target of CHF 225 billion and only CHF 19 billion away from the ultimate target of CHF 200 million out into 2017. And if you look especially on these pages, that I think it's 62 and 63, in the quarterly report that show RWA and also PRV, more of the reductions we're going to be doing now is taking out the RWAs. More of our focus is really on PRV and not RWA. And the pace of our RWA reductions most certainly will slow. And at the same time, as we get experience, let's think about operational risk: If you think about that split between CHE 28 billion and CHF 55 billion, we're going to have some historical pressure kicking-in on the AMA model as we settle some of these. That will offset, to some extent, some of the reductions that we expect to see in the add-on. So clearly, we see that this most certainly is an impediment to achieving the ROE target in 2015, and that's why we flagged it.

Jernej Omahen - Goldman Sachs Group Inc., Research Division

All right. Can I ask maybe just a -- and this is going to be very short, just a follow-on question? The average risk weights of the Swiss banks have historically always been low, and I don't want to have a debate for the reasons why that's the case, but do you think that there is a possibility that FINMA, which has now taken action on the operational risk weights, weighs in on the market risk and the credit risk side of the equation as well? Or can you rule that out?

Thomas Naratil

So, one, on the credit risk side, they've already taken action through the FINMA mortgage multiplier, which as you know is a phased-in sort of a multiplier that's carrying over a period of time. So I think, one, that action has already been taken. On market risk, as you can see from our Slide 22, the UBS of today compared to the UBS of precrisis is very different. At 34% operational risk, RWA is now, with this add-on, 60% credit, which certainly isn't surprising for the largest bank in Switzerland, and only 6% coming from market risk. Our view in looking at -- we look at the PCBS studies because we actually think they're quite valuable in terms of the way the methodology is conducted. We've looked at that both on a credit risk and a market risk perspective. We're happy we don't stand out on any of those. We tend to fall dead center. And from that standpoint, we don't think we should have great exposure to some form of -- just to the extent there is any recalibration like that. We think that's a mistake. We think the combination -- what Basel III originally intended, the combination of both a risk-weighted methodology and a leverage ratio works in tandem. And if you move too far away from that, it seems like you're shifting to one methodology versus the other, and as you know, that can have some bizarre effects.

Caroline Stewart

Well, I think we've now come to the end of the questions from the investors and analysts. So thank you very much for joining us. And we're now going to switch the call over to journalists, if you'd like to pose questions to Sergio and Tom.

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