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Executives

Caroline Stewart -

Sergio P. Ermotti - Chief Executive Officer and Member of Group Executive Board

Tom Naratil - Chief Financial Officer and Member of Executive Board

Analysts

Huw Van Steenis - Morgan Stanley, Research Division

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

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Kinner Lakhani - Citigroup Inc, Research Division

Matt Spick - Deutsche Bank AG, Research Division

Derek De Vries - BofA Merrill Lynch, Research Division

Robert Murphy - HSBC, Research Division

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Antoine Burgard - Natixis S.A., Research Division

Kilian Maier - MainFirst Bank AG, Research Division

Andrew Lim - Espirito Santo Investment Bank, Research Division

UBS AG (UBS) Q1 2012 Earnings Call May 2, 2012 3:00 AM ET

Caroline Stewart

Good morning, and welcome to our first quarter results presentation. This morning, our CEO, Sergio Ermotti, will present the highlights of the results; and then our CFO, Tom Naratil, will take you through the numbers in detail. After that, we'll be happy to take your questions.

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

Sergio P. Ermotti

Thanks, Caroline. Good morning, everyone. I'd like to spend a few moments outlining the highlights of our performance for the first quarter of this year.

In order to show the true performance of our businesses, we have adjusted our results for a number of items which are unusual or nonrecurring, including owned credit, debit valuation adjustments, restructuring charges and the impact of the changes we made to our Swiss pension fund.

After these adjustments, we recorded a pretax profit of CHF 2.2 billion, and our net profit was CHF 1.7 billion. The group reported a net profit attributable to shareholders of CHF 827 million for the quarter and earnings per share of CHF 0.22. This quarter, we reported adjusted returns of 13% on an equity base of CHF 53 billion. In other words, we already achieved returns within the target range we had set to start in 2013 while building our capital base to comply with Swiss regulatory requirements, which are the highest in the world.

We have continued to successfully execute on the strategy outlined at Investor Day last November. We improved operational performance across all our businesses, strengthened our capital ratio further, reduced risk-weighted assets and remained vigilant on costs. We have also strengthened our risk management framework as we improve the integrity of our operational risk framework.

Also, I think it's important to underline the conditions under which we delivered our first quarter results. Equity and debt markets rallied as the signs of U.S. economic growth and actions taken by the ECB helped alleviate short-term liquidity concerns, resulting in lower volatility and tighter spreads, which encouraged some clients back into the market and pushed our volumes from the fourth quarter. However, equity trading volumes were mixed and materially lower than a year ago. Also, we saw significant decline in equity volatility levels. Major indices worldwide closed the quarter at higher levels than at the end of last year, which has a positive impact on our invested assets. In credit markets, there was a material improvement in credit spreads generally tightened -- which were generally tightening, and liquidity also improved.

Against this backdrop, we made visible progress across all our business divisions. Both our Wealth Management businesses delivered strong profits, which were up almost 32% compared to the fourth quarter and made new money of nearly CHF 11 billion. The strong net new money inflows in our Wealth Management businesses provide further clear evidence of the trust our clients place in UBS. Wealth Management profits was up 24%, and its net new money inflows rate of 3.6% is within its target performance range. The highlights in Wealth Management Americas was the record pretax profit of $209 million.

Our Investment Bank results showed that we have effectively balanced stronger revenue performance with risk reduction and improved efficiency. It delivered a high-quality pretax profit of almost CHF 850 million and improved its efficiency with a cost/income ratio of 72%.

Our retail and corporate business delivered a solid pretax profit of CHF 392 million. This business is at the heart of our universal bank in Switzerland, and it's an important source of growth in other businesses for the group. In Global Asset Management, adjusted profitability improved 8% to CHF 142 million as we delivered better returns to our clients with our alternative and quantitative investment funds generating stronger performance fees.

We continue to make significant progress in risk-weighted assets reductions and to build our capital position, which has put us in an even more favorable position compared to our peer group. We have already achieved more than 80% of our planned Basel III risk-weighted assets reduction for this year, and the Investment Bank has almost reached its RWA target of CHF 190 billion for the year.

Over the past 2 quarters, we had increased Basel 2.5 tier 1 capital ratio by over 500 basis points to 18.7%, which is the highest capital ratio within our peer group. Our Basel III tier 1 ratio improved 100 basis points in the quarter to approximately 11.8%, and we also maintained our strong liquidity and funding positions.

Given the challenging market condition, I am confident and proud of the results of the employees in achieving those results, delivering high-quality results, while deploying less risk and successfully executing on our strategy. I'm confident we can build on this strategic momentum to address the challenges to come, managing down cost, building capital, and further improving our operational risk framework while remaining focused on serving our clients well.

Now I'd like to pass over to Tom, that will go through all the details of the quarter.

Tom Naratil

Thanks, Sergio, and good morning, everyone. It's my pleasure to take you through the details of our results for the first quarter of 2012. As Sergio mentioned, equity and debt markets rallied in the quarter, resulting in lower volatility and tighter spreads, which encouraged some clients back into the markets and pushed up volumes from the fourth quarter. However, equity trading volumes were mixed and still materially lower than a year ago.

Greater market confidence and improved investor risk appetite resulted in increased bank debt issuance. We executed 5 transactions in the public bond markets amounting to roughly CHF 8.6 billion of long-term funding. This included $2 billion of Basel III compliant tier 2 loss-absorbing capital. The cost of these notes is allocated from group treasury to the business divisions in proportion to their attributed equity and results in a reduction in their net interest income.

We continuously monitor our liquidity positions and asset-liability profile in the context of the market environment. In particular, we continue to maintain a substantial multicurrency portfolio of high-quality short-term assets to preserve a prudent liquidity and funding profile. While this portfolio provides stability to our businesses, it also comes with costs that are partially allocated to the business divisions.

We reported an own credit loss of approximately CHF 1.2 billion for the group, mainly in the Investment Bank, primarily due to a tightening of our credit spreads. Starting with this quarter, we'll exclude debit valuation adjustments from our discussion of the adjusted IB results in order to provide greater transparency into its operational performance. DVAs this quarter were a loss of CHF 53 million, compared with a loss of CHF 189 million last quarter.

As we've previously announced, we made some changes to our Swiss pension plan that resulted in a one-off credit of CHF 485 million in the quarter. All business divisions with operations in Switzerland were affected by these changes, predominantly Wealth Management and Retail & Corporate. Net restructuring charges for the group were CHF 126 million. At the end of last year, we transferred legacy positions from the Investment Bank to the Corporate Center. Together with the option to buy the SNB StabFund's equity, these positions make up the legacy portfolio, a new reportable segment within the Corporate Center. The remainder of the Corporate Center is reported under Corporate Center core functions.

The group's results were strong. All of our divisions were profitable after adjusting for the items I mentioned, which serves as further evidence of the momentum we have in executing our strategy. These results also demonstrate the strength of our franchise, which is client-centric and based on diversified revenue and profitability sources with a predominance of fee-generating, asset-gathering businesses including our universal bank in Switzerland.

Our unrivaled Wealth Management businesses continued to perform well this quarter, reinforcing our strong position in the largest and fastest-growing markets as well as our leadership in the high-net-worth and "ultra high net worth" segments. Invested assets increased by over CHF 40 billion and stood at CHF 1.5 trillion at the end of the quarter. Net new money was nearly CHF 11 billion, reflecting continued client confidence in UBS. We're proud of our achievements in our Wealth Management businesses, particularly as they generate the highest profits of any wealth manager in the world.

Wealth Management delivered a strong 24% improvement in adjusted pretax profits from the fourth quarter. Revenues increased 6% to nearly CHF 1.8 billion, mainly due to higher net fee and commission income, as client activity picked up from low levels in the fourth quarter. Net interest income declined slightly as higher interest margins and lending volumes were more than offset by increased treasury-related expenses, including higher charges for the liquidity buffer, partly due to an increased allocation, and also higher interest charges related to recent long-term debt issuances.

Adjusted expenses remained stable despite improved revenues and increases in variable compensation. Our client advisor headcount decreased slightly in the quarter, partly due to consolidation in Europe and our efforts to trim underperforming advisor ranks. However, we hired and will continue to hire client advisors in our strategic growth areas of APAC and the emerging markets.

Net new money inflows more than doubled to CHF 6.7 billion, and our annualized net new money growth rate improved to 3.6%, which is within the target performance range. We've achieved this result while maintaining our discipline on deposit pricing and have thus avoided diluting our margins in order to attract assets to the firm.

Gross margins improved by 2 basis points to 93 basis points. Fee income added 5 basis points to the margin and more than offset declines in contribution from interest and trading income. Our activity levels improved from a slow start at the beginning of the quarter, and our monthly gross margin grew from 90 basis points in January to 96 basis points in March, providing some momentum going into the second quarter. Although the quarterly margin is 2 basis points shy of our target range of 95 to 105, we remain confident we'll reach this range if market conditions improve and our clients' risk appetite recovers.

We strive to be best in class with regards to transparency in our reporting. Therefore, we have decided to provide improved disclosure of key metrics for the business areas in Wealth Management. You'll note that we added gross margin and number of client advisors by region and segment in addition to invested assets and net new money. This disclosure is now based on our internal management view rather than the view by client domicile which we've shown in the past.

Invested assets stood at CHF 772 billion at the end of the quarter, more than 40% of which comes from our "ultra high net worth" clients. Our annualized net new money growth rate improved to 3.6%. Asia Pacific was the strongest contributor, with growth also coming from the emerging markets, "ultra high net worth" clients globally and Switzerland. The strongest contributors to net new money growth over the past 2 years have been APAC and ultra-high net worth, which are 2 segments of relatively low gross margins. We've seen outflows in high-margin locations like Europe. However, the success of our strategic initiatives has more than offset these effects as we've improved annual gross margins in each of the past 2 years.

Wealth Management Americas reported record profits and invested assets in a strong quarter. Its cost/income ratio improved to 87% and is within its target range of 80% to 90%, reflecting the effective execution of our strategy. Net new money inflows grew to $4.6 billion compared to $2.1 billion in the prior quarter. Including dividends and interest, net new money was consistent at over $9 billion. We continue to take pride in the integrity and consistency of our disclosures in this business. For 8 consecutive quarters, we've reported the highest net new money per advisor in our peer group and continue to believe our FA productivity is the highest in the industry.

Mortgage balances have more than doubled year-over-year. This together with improved pricing in our securities-based lending business has continued -- has contributed to improving our net interest income from client activities by 6% quarter-on-quarter. 2012 is a year of transition for the Investment Bank as its immediate objective is RWA reduction and the realignment of its businesses towards more -- a more client-centric model while leveraging our competitive strengths. During the quarter, we made notable progress towards our targets. We successfully balanced revenue generation with RWA reduction, delivering an adjusted pretax profit of CHF 846 million. We reduced estimated Basel III RWAs by approximately CHF 21 billion to CHF 191 billion, which is roughly at our year-end target of CHF 190 billion. Adjusted revenues increased 35% over the previous quarter with the improvement coming from all business areas. At the same time, adjusted operating expenses increased only 10%, reflecting our progress on cost control. Our adjusted cost/income ratio improved to 72%, which is within our target range of 70% to 80%.

Average value at risk for the Investment Bank declined 8% from already low levels in the prior quarter and declined 55% year-on-year to approximately CHF 33 million. Securities revenue per unit of VAR increased significantly to 76, one of the highest levels in the industry. While this level of VAR efficiency may not be repeatable each quarter, greater VAR efficiency is part of our client focus strategy and illustrates our progress towards a more focused, more capital-efficient and more consistently profitable Investment Bank.

In IBD, combined advisory and capital markets revenues improved 15% over last quarter. Regionally, we maintained our market-leading positions in Asia ex Japan and Australasia, and we made good progress in gaining market share in EMEA. We were at the forefront of the reopening of the European IPO market, having been bookrunners on the 2 largest IPOs, DKSH and Ziggo.

Capital markets revenues grew 60%, outpacing the global fee pools' 27% increase. Equity capital markets performed well, participating in 4 out of the top 5 transactions in the quarter. Fixed-income capital markets improved as we gained share in both global syndicated finance and debt capital markets. Notable transactions that closed in the quarter included the UniCredit rights issue, where we acted as a bookrunner and its EUR 5.6 billion liability management transaction.

In the Americas, we advised and jointly financed International Papers' $4.3 billion acquisition of Temple-Inland. In Asia, we acted as lead-left global coordinator and bookrunner in China [indiscernible] $1.4 billion follow-on offering. Advisory revenues declined 33% against the backdrop of lower activity.

We continued to strengthen our IBD franchise, recently attracting new talent to bolster client relationships. In particular, Andrea Orcel, who's been named co-head of the Investment Bank alongside Carsten Kengeter. We've continued to strengthen our U.S. health care business and our financial institutions group in EMEA. Additionally, we're pleased with the progress of the build-out of our global energy and real estate teams, and we'll leverage these strengths in the Americas to grow in other geographies. As we look ahead, we'll take opportunities to selectively improve our market position in key global sectors through the hiring of experienced professionals, particularly in the Americas.

Revenues in equities improved 41% quarter-on-quarter reflecting increased activity levels. In line with our outlook given last quarter, we didn't see as large an improvement in trading volumes as would be typically expected for our first quarter, and volumes were materially lower than a year ago. Compared to the prior quarter, cash saw higher volumes across the board, while derivatives and equity links saw improved trading conditions in all regions. Prime services had another good quarter with strong revenues, winning share in clearing and prime brokerage. Additionally, we were recently ranked the top 3 prime broker in Europe based on total assets under management and revenues. Other revenues declined by 88% on lower proprietary trading revenues as we reduced our exposure to this business and we're looking to add expertise to our alternatives offering within Global Asset Management.

Excluding DVAs, FICC revenues grew about 27% from the fourth quarter. The improvement was diversified across regions, and we're pleased with the quality of our client-focused revenues. In contrast to the first quarter of last year, when we had several hundred million francs of mark-to-market gains, we had de minimis gains this quarter as we had significantly reduced our positions and risk exposures before the start of the year.

Higher client activity drove flows in credit and structured credit. Credit revenues more than doubled in dollar terms as the flow business captured good bid-offer spreads, while structured credits saw good performance across our portfolio of businesses. In macro, FX delivered steady returns despite lower volatility, and commodity revenues doubled, mostly due to a strong performance in the index business. However, overall revenues declined due to a weaker performance in short-term interest rates and the inclusion of a CHF 93 million negative revenue adjustment, reflecting improvements made to the owned credit calculation methodology with an offsetting adjustment to owned credit.

Emerging markets revenues more than doubled as client flow improved across all regions. We reported negative revenues of CHF 89 million in other FICC after excluding CHF 53 million of DVA. We continue to report FICC management items in this category, including a portion of funding costs and counter-party exposure management charges.

In Global Asset Management, adjusted profitability improved 8% to CHF 142 million, driven by higher operating income and continued cost control. Revenues increased 3% to CHF 478 million, driven primarily by higher performance fees in our alternative and quantitative investments business, although partly offset by lower net management fees. During the quarter, we delivered better returns to our clients, and with over CHF 11 billion in A&Q funds surpassing their high-water marks, we generated CHF 20 million in additional performance fees. Further improvement in performance would create substantial incremental revenues for this business.

Net new money outflows from third parties excluding money markets were at CHF 2.9 billion, compared with an inflow of CHF 300 million last quarter as a number of large institutional clients realigned their portfolios. Also excluding money markets, net new money from our Wealth Management businesses turned positive and totaled CHF 300 million compared with outflows of CHF 800 million in the previous quarter.

Retail & Corporate's adjusted pretax profit of CHF 392 million was solid, and its adjusted cost/income ratio was within its target range at 59%. Revenues were stable, as lower credit loss expenses and higher fee income offset lower net interest income. We continue to be pleased with the performance of this business, as it delivered almost 20% of the group's pretax profit, a stable source of earnings and an important source of growth for other businesses in the group.

We continued to see deposit inflows in Retail & Corporate, totaling an additional CHF 3 billion in the quarter, bringing our customer deposit balances to CHF 121 billion. Loans remained stable at CHF 135 billion. We have a strong mortgage book in Switzerland which is backed by high-quality collateral. While our net interest margin remained within our target range of 140 to 180 basis points, it fell 8 basis points, mainly reflecting the division's increased share of treasury-related items, similar to what I described in the Wealth Management section.

In addition, deposit and loan margins continue to be impacted by low interest rates, although the pricing measures we implemented during the quarter helped partially offset these effects. Our annualized net new business volume growth rate stood at 4.2% in the quarter, which is above our 1% to 4% target range, driven by inflows in both the Retail & Corporate sides of the business as our multiple revenue initiatives helped bring in over 24,000 new clients in the retail segment. As an example, we've begun to refurbish our branch network in Switzerland. We've seen improved performance, reflecting our clients' appreciation of our newly renovated branches.

The Corporate Center reported a loss of CHF 47 million. The legacy portfolio contributed revenues of CHF 162 million, of which CHF 131 million are attributable to our option to acquire the SNB StabFund's equity. Continued disciplined execution of our RWA reduction plan led to a decrease in Basel III estimated RWAs of approximately CHF 3 billion. As we've mentioned before, the RWA reduction process is not entirely dependent on good markets, as a number of exits require negotiations or restructurings with long lead times.

During the quarter, we announced our agreement with a monoline regarding the commutation of certain credit default swap contracts. This settlement should allow the restructuring or sale of the underlying assets in the future, which currently carry aggregate Basel III RWAs of almost CHF 15 billion.

While our adjusted revenues increased 26% from the prior quarter, our adjusted personnel expenses increased only 14%. Non-personnel expenses decreased 15%, reflecting G&A reductions and no charge for the U.K. bank levy. Our annualized cost base is now CHF 1 billion lower than the first half of last year. This is a result of our disciplined cost control and mostly reflect savings related to the CHF 2 billion cost elimination program we started in the second half of last year. Our adjusted cost/income ratio improved to 72% and is well within our target range. We'll continue to be vigilant on costs as we execute on our cost reduction program and seek to align our compensation expenses with the reality of the new profitability environment without compromising on our ability to attract and retain the best talent in the industry.

We recognized a net income tax expense of CHF 476 million in the quarter. This includes CHF 447 million related to the amortization of previously recognized DTAs to offset taxable profits in Switzerland and the U.S. It also includes a net expense of CHF 80 million, mainly for locations with no tax loss coverage. The quarterly tax charge included a benefit of CHF 51 million related to the release of audit provisions from prior periods. The effective tax rate for the quarter looks unusual at 36.5%. However, exclusive of owned credit and other IFRS items that are treated differently for Swiss GAAP purposes, totaling CHF 811 million, the effective group tax rate would have been 22.5%. Next quarter, we expect to recognize charges of approximately CHF 270 million for dividend obligations for preferred securities.

We continued to strengthen our industry-leading capital position in the quarter. On a Basel 2.5 basis, our tier 1 ratio improved by approximately 280 basis points to 18.7%. This is the second consecutive quarter where we increased this ratio by over 250 basis points. This is a result of both increased capital and significantly reduced RWAs. The increase in capital of approximately CHF 1.2 billion came mainly from retained earnings.

Reduction of Basel III RWAs is one of our key strategic initiatives. We've executed swiftly over the last 6 months, and we're pleased with the progress we've made. Our estimated Basel III RWAs are now CHF 50 billion lower than 6 months ago at approximately CHF 350 billion. This is just CHF 10 billion short of our full year 2012 target, which puts us well ahead of our plan. We've also almost met our target of approximately CHF 190 billion for the Investment Bank.

While the IB has demonstrated its ability to operate nimbly with lower VAR, we could see an increase in RWAs, if necessary, to facilitate client flows in better market conditions. Nevertheless, we'll continue to manage our RWAs at least in line with our planned levels, with a desire to continue to improve our capital ratios. At the end of March, our estimated Basel III common equity tier 1 ratio stood at approximately 11.8%, and we're confident we'll continue to make progress towards our 13% target. On a fully applied basis, we improved our Basel III ratio by 80 basis points.

Our February issuance of Basel III-compliant loss-absorbing notes was an important step in addressing our 6% target for loss-absorbing capital, in line with the plans we've presented at Investor Day. We view this successful inaugural issue, which was open to investors in Europe and Asia, as the beginning of a program of steady issuance over the course of the next few years.

During the economic uncertainty of the past few years, our clients have increasingly sought safety in their investments, with wealth preservation their #1 priority. As a result, many of them still hold large amounts of cash and cash-like low-return investments. We believe, as in the past few quarters, that sustained progress on key macroeconomic and geopolitical issues will be necessary for clients to increase their risk appetite.

During these uncertain times, our advisors have been working harder than ever to deliver the right advice to our clients. While their dedication today may not translate immediately into revenues, it's also an investment in the future value of our Wealth Management franchise. As our clients entrust us to preserve and to build their wealth for generations to come, our efforts today should contribute to improved profitability in the future.

Our adjusted pretax profit of CHF 2.2 billion was a strong result for UBS as we successfully executed our strategy and made progress across all our divisions. Both our Wealth Management businesses performed well, and our Investment Bank continued to balance revenue performance with risk reduction and improved efficiency. We continue to make significant progress on RWA reduction, and we're ahead of our plan for this year.

As Sergio said, over the past 2 quarters, we've increased our Basel 2.5 tier 1 capital ratio by over 500 basis points to 18.7%, which is the highest capital ratio within our peer group. We've also maintained our strong liquidity and funding positions. Our adjusted return on equity of 13% for the quarter was solid as we continued to build our industry-leading capital position. We're pleased with our results and have the utmost confidence in our firm's future. Thank you, and we'll now take your questions.

Question-and-Answer Session

Operator

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

Huw Van Steenis - Morgan Stanley, Research Division

Just a quick question on your deleveraging. Two aspects. First, I was wondering what opportunity there is to pay an early dividend and sort of how you're thinking about accruing a dividend for this year or versus the [ph] future years? And then secondly, as you reflect on the current market opportunity and your business plan, do you think you'll want to go even further in reducing risk-weighted assets in the future? And how will you think about making that decision?

Sergio P. Ermotti

I will split your question in 2 parts. In terms of our plan in risk-weighted assets reductions, I think that's, as you know, these processes are quite lumpy, not predictable. We are very confident that we can achieve our targets. We will use any opportunity to accelerate our plans. We are in negotiations on different fronts. But at the end of the day, we will use the luxury of our very strong starting position to get the best out of this negotiation for our shareholders. In respect of the outcome about dividend accruals and the rest, I'll pass it to Tom.

Tom Naratil

Okay, thanks, Sergio. Huw, on the dividend, we did accrue for a dividend this quarter. However, our thoughts on what that should be really depend on how our results looked over the course of the remainder of this year. We won't make -- management won't make their recommendation to the board until after the year is complete. And at this point, I'd prefer not to speculate.

Operator

Next question, Mr. Jon Peace, Nomura.

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

Three quick questions, please. Firstly on the private bank, we see indication that the gross margin in March was 96 basis points, that you might be already in that 95 to 105 range on a sustainable basis. So do we really need to see improved markets, as you said, to stay in that range? The second question is just on the Investment Bank. Was there any significant revenue loss associated with your sharp risk-weighted asset reduction? And how has that informed your thinking about what revenues might be lost through to the target of 2013 as you continue to reduce risk-weighted assets? And finally, just a technical one, on the Basel III roll-forward on Slide 25, I just wondered if you could explain to me note 1, where you talked about the impact of IAS 19R?

Sergio P. Ermotti

Yes, I will take the first one, and Tom will take #2 and 3. When you look at -- basically, our March performance was within the range, I think the year started slower, very low. I think the level of cash with our clients is very high. In addition to that, they're not really using leverage at this point to the extent that we saw in the past. So we are making -- we are advising clients. We are very close to clients in terms of creating the foundation when market conditions get better, to get to the return of those investments. But I think that this quarter and the next foreseeable -- for the next foreseeable time, it's difficult to talk about the range without taking into consideration that we see those ranges as indication. We may be -- with the outside, on the lower end or the high end depending on market condition, and the visibility we have right now is not really ideal. But we are confident that we are creating the foundation to be in the range in the foreseeable future.

Tom Naratil

John, on your question about footnote 1 on Slide 25, what it says is that it does not take into account any effects of IAS 19R, because IAS 19R is not effective yet, and we're not showing you a simulation going forward. We're showing you our current ratios. We'll likely review a simulations as we begin our annual business planning process, which begins in the summer. Sorry, on some of the revenue loss, John, on your question there. De minimis losses on reducing the risk positions in the Investment Bank. We had previously given guidance of CHF 500 million in lost revenue at Investor Day, based on the restructuring of the businesses, and we wouldn't change that guidance.

Operator

Next question from Mr. Kian Abouhossein from JPMorgan.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

I've got 3 questions. First of all, good disclosure on Slide 8, which is new. And in that context, since you're growing mainly ultra-high net worth in Asia, which is clearly lower margins, I'm just trying to understand, even without any improvement in markets, how you can be confident that margins will even stay at this level considering you're growing net new money at lower margins? And in that context, if you could tell us what the latest cash position is, how much margins you're making on the cash position? And if you have certain amount of money-making negative margins as we're hearing that you've been offering higher rates to keep money in and at more difficult times for UBS, and if these are rolling over and helping your margins side? So just trying to understand the margin dynamic, basically. The second question on Page 15, the macro slides, 700 million and change. I'm just trying to understand how much was FX versus rates and in that context, the rates side looks a bit muted looking at the text, considering 2 peers who had a great quarter mainly in rates. So I'm just trying to understand if you could explain a little bit what you're doing on the rates side and how you're thinking about it going forward and sizing it? And the last question is more on the new appointment of Andrea Orcel and his team, clearly a very, very good name in the market. We're trying to just understand what is the thinking about the core head structure, his background more from the corporate financing side? What does it mean from a strategic perspective for the IB? Just putting him in context of what he's there to shape within the IB business.

Tom Naratil

I'll take the first -- okay, fine. On the disclosure, your first question was as we're growing ultra-high net worth and APAC more quickly in their lower-ROA, relatively lower-ROA segments, how do we feel confident that we're going to be able to improve our ratios from here? Well first, it's not new that we can grow...

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Sorry, particularly the top line, yes?

Tom Naratil

Yes, so it's not new that those have been the fastest-growing areas, and yet we've been able to improve our gross margins over the last couple of years. I think that a lot of the initiatives that we've put in place, for example, the global family office, is one of the ways that we believe that we're going to expand the overall revenue pool in that business. Second across the entire Wealth Management business, our research-based advice program, as well as the hiring of our CIO in Wealth Management and improved delivery of content and advice to our clients, we believe is going to add to -- we believe it's going to be add beyond what we'll see from a cyclical effect. And then finally, when we look at the huge potential of the cash balances that still exist, we think that that's, over the medium term, quite a good potential for ROA uplift, and that doesn't even include any change in the interest rate environment. Your question on how over the course of the quarter, cash balances, which were at about 26.8% on average in the fourth quarter, were down about 40 basis points on average in the first quarter. Your second question on...

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Sorry, and they make 0 basis points basically, top line, more or less?

Tom Naratil

Yes, there's -- I mean that's just a funding source for us, effectively. Then on the breakdown in terms of Slide 15 in terms of macro, FX was relatively consistent during the quarter. In rates, we did have a few effects that hit us including a -- including the adjustment on owned credit that we mentioned of CHF 93 million as well as some other FX related to some accounting mismatches in terms of hedges against other items that are accounted for in the banking book, where the hedges are carried in the trading book.

Sergio P. Ermotti

I guess I take the last question on Andrea Orcel's appointment. Clearly, as you pointed out, the core leading -- the core leadership structure is really designed to, first of all, fully exploit the natural leadership skills of Carsten and Andrea in their skills. As I mentioned, one will focus more day to day on the securities part of the business, and Andrea's -- Carsten and Andrea will focus more on the advisory and origination part of the business, which is fully in line with our strategy that we presented in November. I think that's clearly being strong on the advisory and origination side of the business. It's not only important to the securities part of the business, but it's very instrumental in also enhancing and differentiating ourselves when we talk with ultra-high net worth individuals about our Wealth Management business. So I think that the combination is very complementary. I'm absolutely convinced that this will help us to focus more and make progress. We -- Andrea will start on July 1, and we are looking forward to his arrival. And together with Carsten, as I said, I think we have a very strong team.

Operator

Next question from Mr. Kinner Lakhani, Citi.

Kinner Lakhani - Citigroup Inc, Research Division

I've got a few questions. Firstly, I just wanted to get a better feel for what the impact on earnings could be as we shift to kind of the target loss-absorbing kind of capital level of 6% I guess we're at 0.5% at the moment. Number two, just on the potential kind of Moody's downgrade, if you do lose your P1 short-term rating, what you see as the potential impact? Thirdly, just on the Investment Bank risk-weighted assets where there was a CHF 21 billion reduction, could you provide a bit more sort of line-by-line color on that? What's really driving the credit risk reduction or the risk reduction and so on? And just a final question, just coming back to this point on the Wealth Management revenue margin being better in March than in January, if it's not asset mix, because I guess the cash balances are roughly steady, is it really transaction activity that has picked up between January and...

Sergio P. Ermotti

I'll pick out the last one to start with. Yes, indeed, you remember in January, risk appetite by private investors were very low, and I think we had a lot of tensions in Europe. We also had, as you remember, Chinese New Year was in January this year, so we also had an impact out of that. So I think if you look at seasonality factor and market conditions were clearly affecting January. I think that we saw a more normalized situation going into the second half of February and definitely into March.

Tom Naratil

And Kinner, on your questions on the impact of moving to the 6% target on loss-absorbing capital, obviously, as we've said, we're beginning a program of issuance. You have the cost of issuance on deal one. We'd expect as we continue to improve our capital ratios and buffer that we have that our issuance costs would decrease. But as I noted in my remarks, that certainly will be a drag on our performance. Next, in terms of your question about what happens in the event of a Moody's downgrade, the loss of P1 rating, first, I would say unequivocally that I think the numbers that we've reported and the position of UBS is completely inconsistent with a firm that would be downgraded from P1, and we've obviously made our thoughts known in our discussions with Moody's. We've obviously done, nevertheless, we've done the appropriate contingency plan that you would expect us to do. And based on that, we feel comfortable that we have the plans in place to address that. We're still carrying substantial liquidity positions of 23% of the balance sheet. We've also, in terms of our commercial paper program, we've actually been very focused on ensuring that we're getting both the pricing and the tenor that we expect, and we've been refusing just to roll overnight money for the purpose of keeping the program larger. Then finally on IB RWAs, you asked for a little bit more detail, I'd refer you to Slide 24 and I'll try to walk you through, on the credit risk side, the reductions of 9 billion were, really, all risk-reduction related. On the market risk side, the other piece of it, we had a number of ins and outs, some risk reduction as well as some model changes in the aggregate in the IB core. It's about 60% of risk adjustments that led to the reduction and about 40% of model adjustments. And then finally, you didn't ask this, but I'll try to give a clarity on legacy -- sorry, on the Basel III uplift piece. So I'll explain the Basel 2.5 changes first. On the Basel III uplift, our net model adjustments on the uplift portion actually added 2 billion in RWAs for the quarter, and then we had ins and outs that roughly offset each other where the legacy sold off positions that cost 3 billion in reductions in RWAs during the quarter. So the way to think 21 billion in Basel III is 21 billion in Basel 2.5, neutral on the Basel III uplift.

Operator

Next question from Mr. Matt Spick from Deutsche Bank.

Matt Spick - Deutsche Bank AG, Research Division

I just had a couple of more strategic questions on the Investment Bank on market shares. I understand that given the capital pullback, it's not really sensible or relevant to compare your revenue share at an aggregate level. But if I pick out businesses that at the Investor Day, you said you were committed to maintaining, your capital presence in equities, you were committed to cash equities and prime services and equity derivatives, which is pretty much all of it. But your market share in Q1 has overall declined in aggregate equities your bank to fifth, almost sixth. But you still seem to be losing share even in the areas that you are committed to. And then in fixed income, coming back to the macro number, if I take out what I think is a reasonable estimate of commodities and FX, I make this point again that your rate number looks very thin. And yet structured rates was an area you said you were committed to maintaining your capital levels in and was an area that you thought was attractive. I'm just wondering how much pulling out of flow rates is hurting your structured rates business. And I guess there's also an underlying question here, which is that I can see why you're trying to focus in on a smaller number of areas and maintain your capital commitment in those. But it does look to me like you're still seeing market share losses, even in these narrow business lines that you're still trying to compete in.

Sergio P. Ermotti

Yes, thank you, Matt. I think this is a good observation that has to be also put in the context of the work Carsten and [indiscernible] are doing in terms of repositioning the businesses. Sometimes you need to do a little step backwards in order to position your term for the future. When I look at equities, clearly we are working very hard to reposition our business in the U.S., which will have a very big impact on our overall global market share. We had an exceptional first quarter last year in Asia, which should not be forgot when you look at year-on-year comparison. And last but not least, as you know, we are very well present and very highly weighted in Europe, which suffered disproportionately from the macro activities that we saw in the quarter. So overall in equities -- also if I consider the investments we are doing, prime brokerage and, last but not least, the fact that we took a strategic decision to exit prop businesses. Extrapolate out these prop business lines from our results, and you would see that the quality of our client business has increased dramatically, and that's what really counts. When I talk about the FICC business, once again, you're right. We are trying to focus. Market share may not be as important going forward as it is the underlying profitability measured on Basel III basis, and I look also the quality of our FICC businesses in the last 2 quarters, particularly this quarter, compared to the value at risk used is absolutely the top level, we are the top 3 player, and that's make us very confident. So we will look at market share, because obviously, you need to be a realistic in certain cases, but at the end of the day, we pay dividend to our shareholder not based on market share but based on bottom line.

Matt Spick - Deutsche Bank AG, Research Division

Sorry, can I ask again about the rates business? If you can't disclose anything, then you can't disclose anything. But it does look like it was a weak number in the first quarter. Is pulling out of flow rates hurting your structured rates business? Or is there another reason why the rates business didn't perform in Q1?

Tom Naratil

No, I don't think there's anything beyond what we've explained. One, we had the adjustment to the owned credit that I mentioned that was 93 million going the other way. And so I think that that's a large part of the effect, and we also saw reduced volumes.

Operator

Next question from Mr. Derek De Vries, Bank of America Merrill Lynch.

Derek De Vries - BofA Merrill Lynch, Research Division

Couple of detail questions and then one bigger question. Maybe starting with the detail questions. In Investment Banking, the -- I'm going to come back to this 93 million in rates again. Why didn't you strip that out when you showed the underlying FICC numbers? So you took the 1501 reported, you added back the 53. But then you didn't add back the 93 million from rates. And I just -- I guess just to help me understand what that 93 million is. I'm surprised that didn't get added back there and subtracted from fair value of owned debt? And then on the Investment Bank, still, a decent cost result there. And thinking about personnel costs, I think last year, your deferred comp was 28% of your variable comp. That was down from 37% the year before. So I'm just wondering how are you thinking about deferral this year? Are you kind of accruing at the deferral rate you did last year, the 28%? Or are you assuming it normalizes back to more like the 35% to 40%? And then on the risk-weighted assets, if you go through your Basel III numbers, your 350 falling to 340, I guess that implies growth outside of the legacy business. And I'm wondering are you guys just being conservative? Nobody wants to sort of change an annual target every quarter. So the 340 number, there's plenty of room to beat that? Or are you really seeing growth outside of the legacy assets because you ended the quarter with low VAR or whatever? And then related to that, I guess, finally, the big-picture question, I guess on JPMorgan's results, Jamie Dimon said that they were a buyer sized at tangible book value of their own shares. Obviously, he doesn't have the Swiss regulator to deal with. But how long before you can make comments like that, that your buyers size at tangible book value in terms of share buybacks? And just where are we in that process?

Sergio P. Ermotti

Okay, well, I guess, as you rightly point out, you answered it yourself, it's quite difficult to think about doing share buyback as we are seeing that we want to build up our capital position. I think that's -- we will think about what is the best way to return capital to shareholders when we achieve our targets. Until then, we will keep our announced program.

Derek De Vries - BofA Merrill Lynch, Research Division

So it's not enough to show a good live path, you actually have to get the number itself before you start talking about these sizable returns?

Sergio P. Ermotti

Right, and I think that when we talk also -- in connection to your question about risk-weighted assets, as I said before, the progress we are making is there. It's very clear, but we are also very cautious about the fact that it's a lumpy process. I mean, we will deliver on our targets. Maybe we can achieve them even faster. But we want to lose -- we want to use the luxury of the time we have right now to negotiate the best things for us and for our shareholders.

Tom Naratil

Thanks, Sergio. So, Derek, going back to your first question on the 93 million, why didn't we pull that out and adjust for it, as all of you can do on your own, our view was it's an improvement in our methodology of our own credit calculation. Essentially, we used to use the difference between the FTP curve and a LIBOR curve at trade inception, calculate an issuance adjustments and then amortize that over the life of the instrument as we made the revaluations during the course of each quarter. The new methodology, which is, we believe, much more accurate, uses a current FTP curve, #1, and then a current valuation where we use the FTP curve as of the date of issuance and take that difference and then get life to date disclosed on credit balance per instrument and then sum those up. So obviously, the enhanced method, we think, is more accurate, and as a result, we didn't strip that out from the results, although you're free to do so. On the deferral rates in terms of the estimates, we have not modeled in any changes to deferral rates in our current accruals. I would note, as you know, that there are breakpoints in our compensation program. So depending on levels of compensation for different individuals as they move into different breakpoints, that changes the deferral rates. There are also things like whether or not individuals are eligible for full career retirement, and if they are, we fully take that expense up front. So it's a pretty sophisticated assessment that we have to do, and we tune that up as we move through the course of the year.

Derek De Vries - BofA Merrill Lynch, Research Division

So -- but to summarize, you're accruing at a similar rate to last year, which would be a very low rate relative to, certainly, European peers? So if anything, we could see a positive surprise as we move into the second half of the year if you decide to change your deferral rate. Is that right?

Tom Naratil

Yes, I think that we've got ourselves, based on the lower deferral balance plus the structure of our plan, I think we're in a good position relative to competitors.

Operator

Next question from Mr. Robert Murphy HSBC.

Robert Murphy - HSBC, Research Division

I just wanted to come to the capital question. And I noticed on the reconciliation of equity to Basel III, on [ph] of the others jumped quite a bit in deductions, 1.2 billion. I'm just wondering if there's anything in particular in there? It's on page -- sorry, I'll give you the report number. It's on Page 64 -- no, sorry, 65.

Tom Naratil

On that, Rob, why don't we come back to you.

Robert Murphy - HSBC, Research Division

Yes, it's a simple question. If I sort of modeled in your earnings ex DVA and then the Basel III, the fall in Basel III RWA, you would have thought the capital might have been even stronger, although it was obviously very good...

Tom Naratil

I think there might have been a downgrade of one position in the legacy portfolio that might result in a deduction. But we'll follow up with you and get you the breakdown.

Robert Murphy - HSBC, Research Division

Okay. And I'll come back to the rates, I know a lot of people are asking about it. But I mean, as I understand it, rates has always been a relatively small part of your macro revenues, anyway. Is that a fair characterization? It's generally being dominated by the FX, which is obviously a very large global business, right?

Tom Naratil

Yes, that's fair, although, we've had some strong performances depending on the particular quarter in rates.

Robert Murphy - HSBC, Research Division

Yes, but if I took on average, what, the FX is, what, 70% of that line or something?

Tom Naratil

I think it's probably closer to 60%, and again, I think one thing about trying to look back at historicals and to try to model for the way the business is going to evolve under Basel III as it unfolds may be a little hazardous.

Robert Murphy - HSBC, Research Division

Maybe another question just on FX. I think Deutsche Bank mentioned some margin pressure. Have you seen that as well in FX?

Tom Naratil

The competition in FX as well as in equities is the Basel III-friendly business lines is certainly going up as leaders like us defend share and as entrants try to push up into the top ranks. And that's something that we'd expect to continue.

Operator

Next question from Fiona Swaffield, Royal Bank of Canada.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Just 2 things, coming back to Slide 8. Could you just -- on the ultra-high net worth of 53 basis points, could you give us an idea of where that's been over time and where we are in kind of the range of that? And then the other question is really on the cost/income in the Investment Bank and particularly on the comp ratio, which I think is just under 51%, and how you see that for the year? And whether the non-compensation, which I think was a pretty low number in Q1, is seasonally low or whether that's a sustainable level?

Sergio P. Ermotti

I'll take the second question on cost/income ratio for the Investment Bank. I think that we are clearly still working on how to optimize our cost base being personnel and non-personnel expenses. But again, one of the issue we made very clear back in November that, as we migrate to a different business model in the future, we will accept to have a higher cost/income ratio in our Investment Bank division that will be fully compensated by the quality of -- and the capital absorption of that business model. So we are not complacent. We will working in order to reduce that. But the most important point for us is an ability to keep the quality of what we do and being competitive in the marketplace by attracting and retaining the best talent. So, again, from a shareholder's standpoint of view overall, we will balance the 2 aspects, and cost/income ratio may not be the best indication of how efficient we are operating in the Investment Bank going forward.

Tom Naratil

Fiona, in terms of your question on the "ultra high net worth" gross margin, I think that there's very good potential for us to expand it from here. The cash balance comment that we made earlier is one of the reasons. Second, the initiatives that we have in the GFO area providing teams of people across the Investment Bank and Wealth Management to service the "ultra high net worth" space, I think it's certainly going to add -- certainly add to the revenues generated by that business and, thus, the gross margins. I don't think the performance of that segment at this point in time is any higher or lower than the other segments, but I do think the potential is quite good.

Operator

Next question from Mr. Antoine Burgard from Natixis.

Antoine Burgard - Natixis S.A., Research Division

Just to follow up on risk-weighted assets reduction, to make sure I rightly understand. The reduction is the same amount on the Basel 2.5 and Basel III. Did you experience the reduction of the CPA impact on your Basel III risk-weighted assets due to the tightening of credit spreads? And second question, in Wealth Management Americas, what would have been the revenue trend excluding the realized gains on the AFS [ph] portfolio?

Tom Naratil

So on the RWAs, you are correct, Antoine, that it was roughly the same number in Basel 2.5 as Basel III. On the CVA piece, we largely had a change in assumptions that led to a slight decrease in that charge during the quarter. But at the same time, there's another component on the ETD space where we took a model adjustment that actually was upwards. And as I said, the net of the model adjustments in the Basel III uplift category is actually a positive to -- added to the total for the quarter. Now your question on the WMA piece ex the AFS gains, we've disclosed the gains on the portfolio. I think it's important to note that we have -- we've run that investment portfolio in our bank in Utah, UBS Bank U.S.A. on a sub-advised -- on an advised basis. So Global Asset Management acts as the investment advisor on that portfolio. We have that portfolio set up also with a sub-advisor beneath Global Asset Management that also manages that. It's in line with target duration, target concentration in certain asset classes. And what we do is we run the portfolio on taking a look at our limits with regard to economic value of equity of the institution and our limits on that as well as the limits that we have on net interest income volatility. And so the changes in the portfolio when we have AFS gains, it's as a result of us adjusting the portfolio to stay within our limits overall.

Operator

Next question from Mr. Kilian Maier, MainFirst.

Kilian Maier - MainFirst Bank AG, Research Division

The first question would be on corporate and retail banking, you report asset under management of 56 billion. And if I look at the Q4 press release, it's mentioned 134 billion AUM. So question would be what's driving the difference? So is it an accounting change? Can you explain this? And the second question would be on client activities. You mentioned that you see a positive development on the gross margins from January to March. What about April? Do we see a continuation of this favorable trend?

Sergio P. Ermotti

On the second question, I think that there was very distinct behavior of clients first half of the quarter versus second half of the quarter. And in respect of April, I think that's nothing has really changed in terms of market conditions compared with the first quarter. We are not making comments about the quarter, as you know. But I think the situation, I would describe that very similar to what we presented last January, beginning of February.

Tom Naratil

And Kilian, on Retail & Corporate, in the Annual Report, we describe our change to the new KPI for net new business volume. And as a result, we changed our definition of invested assets. And so we've reclassified certain pension fund assets from invested assets to other client assets. So if you follow that trail from the annual to the quarterly, that should explain it. But again, if you need us to help you with that, we'll do that separately.

Operator

Next question from Mr. Andrew Lim from Espirito Santo.

Andrew Lim - Espirito Santo Investment Bank, Research Division

A few questions, please. Some banks have been guiding towards an increase in market risk-weighted assets within market recovery. Is that something that you'd similarly be guiding to on a Basel III basis, and how much would that be? And secondly, could you give more color on the money market outflows that you've seen and to what extent that might be considered one-off? And then a third question, technically on the application of IAS 19R, I know you're not going to give guidance on that, but perhaps some guidance on methodology. You said that in your full year 2012 results that the application of 19R would see a de-recognition of a gross pension assets of 3.3 billion and then also other liabilities increasing by 3.1 billion. My thinking for other banks is that those gross pension assets de-recognized might actually be able to be offset against the increase in liabilities. So they would net off against each other. But perhaps that's not the case in your instance, because your assets are actually deferred pension expenses. So maybe that's incrementally negative versus those other banks that can net them off. Could you give some color on that, please?

Tom Naratil

Sure, Andrew. I'll go through your 3 questions, starting with the first one. Market risk RWAs, as I mentioned, one, we could see an expansion in those RWAs to facilitate client demand on better trading conditions. However, I will manage that both in the context of our plan and, second, also with a view towards improving our capital ratios. So that, I think, should hopefully give you a little bit more guidance on that. Second money market outflows. Money market outflows are part of an industry trend out of money market funds and into bank deposits. And we see nothing that's any different about our flows than what we see in the industry as a whole in that space. Finally, on IAS 19R, I'd point you back to our Investor Day slide where we had our projections going forward, also the annual, as you've noted, and if you'd like us to walk you through the details, I think it's probably better for us to do that on a separate call.

Sergio P. Ermotti

Well, it doesn't look like we have any other questions. Many thanks for attending the Q1 results conference call, and looking forward to see you next quarter. Thank you.

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