UBS AG Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: UBS Group (UBS)


Q3 2012 Earnings Call

October 30, 2012 4:30 am ET


Caroline Stewart

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

Thomas Naratil - Chief Financial Officer and Member of Executive Board


Huw Van Steenis - Morgan Stanley, Research Division

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

Kinner R. Lakhani - Citigroup Inc, Research Division

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Derek De Vries - BofA Merrill Lynch, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Daniel Davies - Exane BNP Paribas, Research Division

Caroline Stewart

Good morning, and welcome to our third quarter results presentation. This morning, we also announced an update on our strategy. Today, we'd like to provide you with more details on both of these announcements, and so the format for today is slightly different to usual.

This is the agenda we'll be working through this morning. We expect our presentations to take about 40 minutes, and after that, we'll be very happy to take your questions. Before I hand over to Sergio, I'd like to draw your attention to this slide, which contains our cautionary statement with regard to forward-looking statements.

And with that, I'd like to hand over to Sergio.

Sergio P. Ermotti

Good morning. Thank you, Caroline. This morning, we have announced an acceleration of our strategy to transform UBS. Implementing the next phase of our strategy comes on the back of a journey that we started 1 year ago and of considerable progress we have made so far. We are ahead of our schedule in our plans to build additional capital strength and reduce both costs and risk-weighted assets.

This gives us the ability to take these decisive actions from a position of strength to cement UBS's long-term competitive advantage. The business model we are creating will be unique in the banking industry. UBS will be less capital and less balance sheet intensive, highly cash-flow generative, more focused on serving our clients and capable of maximizing value for our employees and shareholders.

We are reshaping our Investment Bank, and we'll achieve this by exiting or significantly reducing lines of business, predominantly in our fixed income businesses that have been made uneconomic by changes in regulation and in the markets.

Therefore, we will further reduce risk-weighted assets and our balance sheet. And by further reducing costs and improving efficiency and effectiveness across the group, we will free up resources to invest in the businesses where we already excel and where we have chosen to compete. And so we are even more confident about our future. We have proven we can execute restructuring on a large scales, which give us the confidence and expertise to do more.

Our capital position is second to none, which eases the pressure to conserve future earnings as our powerful franchises generate significant amounts of cash. We will deliver strong and sustainable returns, while maintaining the capacity to invest. This will allow us to focus on serving our clients in the best possible way and make us even stronger and more competitive. Tom and I will provide more details after we run through the quarterly results.

For the third quarter, we reported an adjusted pretax profit of CHF 1.4 billion. Our board's approval of the new business plan for the Investment Bank has triggered a goodwill impairment of about CHF 3.1 billion, which takes the reported results to a net loss of CHF 2.2 billion. To be clear, this does not affect our capital position. In fact, despite ongoing challenging markets, we continue to reduce risk-weighted assets and improve our industry-leading capital position, achieving a Basel III, fully applied common equity tier 1 ratio of 9.3%. This is already close to the 10% Swiss requirement for 2019.

Wealth Management, Wealth Management Americas and Retail & Corporate all had strong results and recorded their best performance of 2012. In fact, Wealth Management Americas has already generated more profit in 2012 than it has in any full year in its history. The Investment Bank's adjusted performance improved to CHF 178 million, and Global Asset Management also saw improved profitability, as performance fees more than doubled.

Our clients continue to demonstrate their trust in UBS, as we recorded net new money inflows of CHF 14 billion, with both Wealth Management and Wealth Management Americas posting their strongest third quarter Swiss franc inflows in 5 years. In our own markets, we also did well, with Retail & Corporate recording very high net new business growth of 7.2%.

Now Tom will give you further detail on the third quarter, then I will resume to give you more details on the changes we announced today. Tom?

Thomas Naratil

Thank you, Sergio. Good morning, everyone. Our adjusted pretax profit of CHF 1.4 billion is a solid performance in a quarter that is typically seasonally weak. This result excludes a goodwill and other asset impairment charge of CHF 3.1 billion, resulting from our transformation of the Investment Bank and own credit losses of CHF 863 million as our credit spreads tightened significantly over the quarter. I'll refer to adjusted performance figures in the remainder of my remarks.

We recorded a net tax benefit of CHF 345 million. This includes the effect of a loss for the quarter, as well as the impact of a projected taxable loss for the year for Swiss tax purposes. Additionally, as in prior years, we remeasured our deferred tax assets as part of the business planning process. This remeasurement had no impact on the U.S. DTAs, while the net impact on Swiss DTAs contributed to the tax benefit recorded this quarter. In addition to the tax effects of the goodwill impairment, our decision to adopt the IAS 19R accounting standard in the fourth quarter on a retrospective basis has benefited our Swiss DTA position.

As we look to the fourth quarter, we believe market conditions will only improve if progress is made to address the pressing economic, fiscal and geopolitical issues that have concerned investors for the past year. Despite this, we remain confident our asset gathering businesses, as a whole, will continue to attract net new money. As a result of the acceleration of our strategy, we expect to recognize restructuring charges of about CHF 500 million in the fourth quarter. This, combined with reduced Investment Bank revenues as we exit certain businesses and an expected own credit loss on tightening credit spreads, will likely cause us to report a net loss for the quarter. We expect to record a modest tax effect on this projected loss, as well as an expense of approximately CHF 130 million relating to the U.K. bank levy. Despite the projected loss in the fourth quarter, we believe our capital ratios will be steady or slightly improved as we continue with our RWA reduction program.

The actions we're announcing today to accelerate the transformation of the bank will result in further industry-leading reductions in our RWAs and balance sheet and significant improvements in the bank's long-term efficiency. Consistent with IFRS, we've completed a review of the carrying value of the goodwill and intangibles corresponding to the Investment Bank businesses we're exiting, as their revenues and cash flows will be impacted.

As a result, we concluded that these assets, which include the goodwill and intangibles associated with businesses we acquired over a decade ago, are impaired. With the significant changes in both the industry and our Investment Bank, this is not surprising. Therefore, we've written down their value by approximately CHF 3.1 billion, reducing the Investment Bank's goodwill to 0. Our tangible book value per share increased CHF 0.23 to CHF 12.23 in the quarter.

Importantly, our Basel 2.5 tier 1 and Basel III fully applied and phase-in common equity tier 1 ratios were not affected by the goodwill write-down. As you can see, our Basel 2.5 tier 1 ratio grew 100 basis points to 20.2%.

Our preeminent Wealth Management businesses continue to perform well, delivering pretax profits of over CHF 800 million and combined net new money of over CHF 12 billion.

Invested assets in Wealth Management stood at CHF 816 billion; while in Wealth Management Americas, invested assets rose to their highest level ever in U.S. dollars for a combined total of CHF 1.6 trillion in assets.

Wealth Management delivered a strong 18% improvement in pretax profit, as well as the highest third quarter net new money result in the past 5 years. The pretax profit of CHF 600 million reflected both higher revenues and reduced expenses and was well balanced across regions. A modest improvement in client activity, mostly towards the end of the quarter, and higher invested assets led to increased revenues, while strong growth in mortgages and Lombard lending partially offset the pressures on net interest income.

Expenses benefited from lower litigation costs, as well as several nonrecurring personnel-related credits. Net new money was positive in all regions, with strong contributions from APAC, emerging markets and ultrahigh net worth globally. Annualized net new money growth at 3.9% remained within its target range. Our client advisor headcount increased slightly with improvements in our strategic growth regions and our home market of Switzerland.

Despite a 4.2% increase in invested assets, gross margin remained steady at 89 basis points and remained roughly flat throughout the quarter. While there's been some improvement in client activity, we haven't yet seen a significant move back into riskier assets.

Wealth Management Americas set a number of records this quarter, including a pretax profit of $231 million, which is the third consecutive quarter of record earnings in this business. Year-to-date, Wealth Management Americas' $650 million profit already exceeds the highest annual earnings we've reported since UBS acquired Paine Webber.

Revenues were also a record, mainly driven by strong transactional income reflecting higher new issuance activity in fixed income closed-end funds where our Investment Bank in the U.S. was either a lead or a co-manager. Gains on the AFS portfolio remained stable.

Net new money inflows improved to $4.8 billion or $9.8 billion including dividends and interest, driven primarily by stronger flows from financial advisors employed with the firm for at least 1 year. Advisory headcount remained broadly stable, around the upper end of our target of 7,000. We continue to focus on improving the quality, productivity and profitability of our advisor base, and any fluctuations from our current advisory levels will be driven by these strategic goals. Our key advisor productivity metrics, revenue per advisor and invested assets per advisor, were both record setting and compare favorably to our peers.

The Investment Bank recorded an adjusted pretax profit of CHF 178 million, an improvement from a loss last quarter. Operating income increased in an uncertain market, driven by solid performance in all business areas, with a notable performance in equities. We continued to execute our RWA reduction efforts, reducing Basel III RWAs to CHF 162 billion. Average VaR fell to a historical low of CHF 26 million, demonstrating that we haven't strayed from our goal to reduce risk, while improving the profitability of the Investment Bank.

IBD results improved as advisory gained market share despite a decline in the fee pool, and Debt Capital Markets gains outpaced overall fee pool growth. Within Equity Capital Markets, this quarter, we saw fewer private and structured transactions, such as our successful placement of Formula 1 in the prior quarter. Our strategy of focusing on specific sectors within our regions is bearing fruit. As an example, our energy team in the Americas had another strong quarter, providing our Wealth Management Americas' clients with enhanced access to highly attractive energy Master Limited Partnerships. Globally, our media and telecom sector saw an increase in market share in both EMEA and the Americas, including advisory transactions for Yahoo! in the U.S. and Vodafone in the U.K. Our financial institutions group improved revenues in both the Americas and EMEA with our lead left role in the Santander Mexico IPO and success in Wealth Management-driven products, like closed-end funds and bank-preferred stock offerings.

Equities performed well during the quarter, although market turnover declined to the lowest level in 7 years. Cash equities delivered strong results on improved client trading. Client flows remained solid in equity derivatives despite low volatility levels. FICC delivered solid results in mixed conditions with the credit market's rally following key central bank decisions, offset by subdued foreign exchange and interest rate markets.

Credit results significantly improved, particularly in flow trading across regions; and rates revenues also increased, driven by improved results in long end and nonlinear interest rates. FX volumes were slightly down in the quarter due to low volatility in subdued markets. However, year-on-year, we've seen an almost 50% growth in average daily spot volumes, led by a strong performance in each rating compared to an approximately 20% decline in the overall market.

Global Asset Management's pretax profit improved to CHF 124 million as performance fees more than doubled, driven by our alternative and quantitative investments business. Global AM's investment performance was above benchmark for most of our traditional strategies and was particularly strong in A&Q, especially for single-manager funds.

Retail & Corporate delivered yet another strong performance, as continued growth in loan and deposit volumes helped mitigate continued pressure on net interest income. Net new business volume was substantially above target at 7.2%, driven primarily by growth in deposits and custody assets from our corporate and institutional clients. Growth in private client assets and loans was also strong.

Corporate-centric core functions reported a loss of CHF 74 million, excluding an own credit loss of CHF 863 million, while the Legacy Portfolios' result was a loss of CHF 62 million. This result reflects losses of CHF 125 million related to the sale and expected sale in the fourth quarter of low-rated student loan auction rate securities, which should reduce Basel III RWAs by approximately CHF 5 billion in the fourth quarter. We also recognized a CHF 263 million gain on the revaluation of our option to acquire the SNB StabFund's equity.

This quarter, we've enhanced our disclosure on the components of the Basel III liquidity coverage ratio and net stable funding ratio to provide greater transparency into these important metrics. When taken together, these 2 ratios represent a snapshot of the bank's liquidity position on its reliance on short-term versus long-term funding. Both of these ratios are already in excess of the Basel III 100% minimum and are compelling evidence that we're more than adequately addressing liquidity requirements and expectations.

The bank is resilient against both short-term liquidity shocks, as well as longer-term structural imbalances that could arise in the funding market. Our regulatory LCRs stood at 113%, while our management LCR, which incorporates additional readily accessible funding sources, stood at 160%. We believe this is a prudent position, given our outlook on the environment.

We continue to execute on our strategy of reducing Basel III RWAs in the Investment Bank and the Legacy Portfolio. Sales and reduced exposures led to a total RWA reduction of approximately CHF 4 billion in the Investment Bank and Legacy combined. This quarter, we introduced improvements to several models, most notably, our probability of default models. The net impact of these changes was minimal, with increases in Wealth Management and Retail & Corporate mostly offset by decreases in the Investment Bank and Legacy.

At Investor Day, we estimated that approximately 20% of our total RWA reduction would be model related. Over the past year, model-related reductions were actually 15%. Over the last year, we've reduced RWAs by nearly CHF 100 billion.

Our Basel III common equity tier 1 ratio increased to 13.6% on a phase-in basis, while on a fully applied basis, it also grew by 50 basis points to 9.3%. We also issued an additional 70 basis points of Basel III compliant, low-trigger, loss-absorbing capital in the quarter.

As I mentioned earlier, we've decided to adopt the IAS 19R accounting standard in the fourth quarter. We estimate that the incremental impact on our Basel III fully applied CET 1 ratio will be limited at approximately 40 basis points. Over the past year, we've added over 300 basis points to both our phase-in and fully applied Basel III CET 1 ratios and over 440 basis points to our total Basel III tier 1 ratios. Our industry-leading capital position gives us a firm foundation to accelerate our strategic transformation.

Thank you, and Sergio will now take you through our strategy update.

Sergio P. Ermotti

Thank you, Tom. UBS has a unique franchise, with compelling growth prospects. And over the past 12 months, we have built a strong financial foundation, demonstrated by our industry-leading capital position. The actions we are -- we announced today will allow us to unlock the full potential of UBS. We are creating a business model which will be unique in the banking industry.

Let me explain the changes we are making in more detail. The strategy we outlined last November has not changed. For sure, however, there is a change of pace. UBS is a bank with a leading franchises in each of its businesses. We have the world's preeminent Wealth Management businesses, managing CHF 1.6 trillion of invested assets, and we are well positioned in the largest and fastest-growth markets.

Our Swiss universal bank is a leader in its home market. These businesses are complemented by our diversified global asset manager and our Investment Bank. In the future, our Investment Bank will be built on its traditional strengths: our long-term success in advisory; our world-leading research franchise and leading positions in equities, FX and precious metals. It already excels in all of these areas. Therefore, we will invest in and grow our capabilities to create a simpler, more focused and profitable business that is a source of competitive advantage to UBS. The long-term trends supporting growth for all our businesses are compelling and remain intact. Our goal is to continue to invest and grow in all our businesses and maintain our leading positions in each division.

As I said, we are in a position of strength today as we have executed successfully over the past year. We have built our capital strengths, and our fully applied Basel III common equity tier 1 ratio is up over 300 basis points in a year. We have also improved efficiency and reduced costs. Despite substantial strategic investment and a higher cost of regulation, we have reduced our annualized cost run rate by CHF 1.4 billion so far, so excluding, of course, currency effects. So we are well on track to deliver the CHF 2 billion cost savings synergies planned for the end of 2013, as we announced last summer.

Having implemented the initial stage of our strategy successfully, we believe we have reached a critical inflection point. Long term, we remain bullish on the prospects for the global economy, and we see this as the fundamental -- as a fundamental driver of growth for all our businesses. However, we believe that any return to sustained global economic growth may be further away than we anticipated 1 year ago.

On interest rates in the short term and medium term, we believe they will remain lower. But over time, we do expect a recovery as inflation rates rise in response to unprecedented quantitative easing.

On the regulatory front, our view is clearer today than it was 1 year ago. The trend towards increased regulation for banks is not going away, although the rules are unlikely to be applied consistently around the world. Higher capital and tighter leverage requirement will put pressure on banks' returns for years to come and reduce the long-term profitability of investment banks as they are currently structured. Our commitment to improve returns to shareholders has not changed. So faced with these new realities and the experience we have made in the last 12 months, we concluded that the time for UBS to accelerate its transformation is now.

As part of our planning and strategic review process, we completed a careful analysis of the business lines in the Investment Bank, considering all factors I just mentioned, in addition, of course, of the needs of our clients. We concluded that we will no longer operate businesses where risk-adjusted returns will not meet their cost of capital based on the requirements under Basel III.

We have also identified and will exit businesses with high operational complexity and long-tail risks where we believe their risk profile could damage returns in the future. This review gave us a clear view of the future shape of our Investment Bank.

The Investment Bank has and will continue to have a critical role in the growth of all our businesses. In order to do so, it must do 2 things: First, it must be strong and successful in meeting the needs of its corporate, sovereign, institutional and financial sponsor clients; second, it must be a strong partner to all our businesses. It does this by offering unique and privileged services to our Wealth Management clients, particularly our ultrahigh net worth and family office clients, helping to originate and retain assets for the Wealth Management business, supporting the corporate clients of our universal bank in Switzerland and acting as a best-in-class execution and origination partner for Global Asset Management.

I never believed that in order to be successful in these businesses, you need to be all things to all people. You must, however, excel in what you do. That is why we are creating a compelling business for our clients, our employees and our shareholders, based on the areas where, in fact, we already excel.

When we think about the new Investment Bank, we think in terms of our clients. Our new IB will consist of 2 groups that serves 2 core client segments. First is Corporate Client Solutions. This includes all our advisory and solution businesses, our origination and structuring businesses and execution involving corporate, financial institution and sponsored clients, where we will continue to add value through advice and creation and delivery of bespoke solutions. We believe it will generate around 1/3 of the IB's revenues.

The second is Investor Client Services. This includes execution, distribution and trading for institutional investors. This group will also provide support to our Wealth Management businesses. Investor Client Service will comprise of our leading equities businesses, FX, precious metal facilitation. Inflow rates and credit, we will maintain risk facilitation capabilities aligned to our Debt Capital Markets and Wealth Management franchises. This segment will generate about 2/3 of the Investment Bank's revenues.

We are investing in a new Investment Bank with a singular focus on our clients and a culture that foster teamwork and integrity in a rewarding and intellectually rich environment. In return, we expect clear accountability for results.

Let me highlight one very important point. Our Investment Bank is the only capital-light, Basel III-compliant bank that exists today, and this new model will deliver returns well in excess of its cost of capital. We believe it is the only investment bank in its league that is already prepared for the new banking world. I'm very serious about this. The Investment Bank will continue to be a significant global player in its core businesses, and we intend to forcefully compete to increase our market share in this area.

As a result of our decisions, we will reduce FICC risk-weighted assets by 70%. To be clear, the assets we are exiting are of high quality and diversified, but they are capital and balance sheet-intensive and just don't fit in our new business model.

These assets will be transferred to our Corporate Center from the beginning of next year. We already have rigorous control and governance procedures in place in our existing Legacy Portfolio, and the newly exited businesses will be managed under similar strict discipline. Our strong capital position allow us to effectively balance speed of execution and exit costs, enabling us to optimize risk and returns over time in the interest of our shareholders.

On costs, our primary aim is to improve efficiency, while we also improve our effectiveness. This will enable us to service our clients with greater agility, improve product quality and speed to market and reduce operational risks. However, there is an even more critical benefit. By improving efficiency, we are freeing up resources to capitalize on even greater opportunities for future investment and growth. In the next 2 years, we plan to invest about CHF 1.5 billion to support growth across all UBS, and this clearly also includes the Investment Bank.

On cost savings, taking into account the CHF 2 billion cost-reduction program we announced last year, in total, we intend to make gross savings of CHF 5.4 billion by 2015. It will take 3 years and restructuring costs of around CHF 3.3 billion to make the changes necessary to substantially lower operating costs. We have identified a number of critical initiatives to reduce costs, which Tom will present in more detail.

Unfortunately, the actions we announced today have painful consequences. In 3 years, UBS is more likely to employ around 54,000 people compared with around 64,000 today. This decision has been a difficult one, particularly in a business like ours that is all about people. We will take whatever measures we can to mitigate the overall effect, and some reductions will result from natural attrition. As we work through this process, we will ensure that every affected employee will be supported and treated with care. This decision has been hard, but they are necessary to create a UBS that is fit for the future.

Now moving to our targets. It is our -- the metrics which we will use to measure our progress in implementing the plans we have outlined today. We would reduce our funded balance sheet by about CHF 300 billion or 1/3 over the next 3 years. We will reduce the group risk-weighted assets by a further CHF 100 billion over the next 5 years, with the IB and Legacy businesses exiting CHF 120 billion of risk-weighted assets, partly offset by future growth in other parts of the group.

Our actions will improve our cost income ratio, down from 80% today to 60%, 70% from 2015. Also, as a consequence of the goodwill impairment we announced beginning of 2015, we expect to achieve a return on equity of at least 15%.

Let me repeat it again. The business model we are creating will be unique in the banking industry. It will be less capital and less balance-sheet intensive, more focused, highly cash flow generative and capable of delivering even more attractive returns for our shareholders.

By exiting positions assigned to the Legacy Portfolio, we are reducing capital needs, while strengthening the business mix of the group and improving the quality and consistency of our earnings. The equity attributed to our business divisions will fall substantially overall and a greater proportion will be allocated to our asset-gathering business and Retail & Corporate around 65% from the start of 2013.

Wealth Management, Wealth Management Americas, Global Asset Management, Retail & Corporate generate revenues primarily from more stable fees and commissions and have very consistent earnings, which are high valued by the market. Together, they have contributed an average of almost CHF 5 billion per annum for the past 3 years, and we expect this client-facing businesses to contribute around 80% of pretax profits. This means we will deliver higher quality earnings that will be less volatile, allowing us to generate sustainable financial performance over the years.

Here is our thinking on capital returns. We began our program with a dividend of CHF 0.10 per share for the financial year 2011. Our dividend payouts are predicated on the need for us to meet our capital targets. From this point onwards, we will implement an attractive capital return program. We will determine a baseline dividend set at sustainable level, regardless of normal economic fluctuations. In addition, we intend to add supplementary returns, which will take into account our need for investment and any countercyclical buffer we chose to maintain for a more challenging economic environment.

We believe we can sustain and grow our future business organically, with a total payout ratio of over 50%, taking into account the baseline dividend and any supplementary payments we may make.

In closing, let me recap where we are and where we are going. UBS will be a bank with a leading franchise in all our clients-facing businesses and strong growth prospects with high barriers to entry; a bank that is leaner and more efficient, with capacity to invest and grow; a better place to work, as success breeds success; a bank that generates attractive and sustainable returns; and last but not least, UBS will be a bank that relentlessly focuses its energies and resources on serving its clients even better, our clients in our preeminent Wealth Management businesses, in our leading Retail & Corporate business, in our diversified asset manager and in an Investment Bank that is strong, profitable, relevant and a leader in the businesses it operates in.

Now, please let me hand over to Tom, who will take you through some of the financial implication of these changes.

Thomas Naratil

Thanks, Sergio. Over the last 12 months, we've built a strong financial foundation from which we're taking significant steps to better position the group. Based on the actions we're taking, our future capital requirements will be lower than our expectations at our Investor Day last year, reflecting our smaller balance sheet and lower RWAs. As Sergio said, we plan to reach our Basel III CET 1 ratio target of 13% on a fully applied basis in 2014. We'll reduce our RWA needs to less than CHF 200 billion by 2017, which is a 50% reduction from 1 year ago.

As a result of a smaller balance sheet, our FINMA total capital requirement should fall from 19% to 17.5%, as the volume of loss-absorbing capital we'll need to carry is expected to represent 4.5% of RWAs.

Our liquidity and funding positions are best in class and will be further enhanced as we work to improve our leverage ratio. Our funding requirement will also fall with our reduced balance sheet, which will allow us to consider debt buybacks in the future. As Sergio said, we'll also take far-reaching action to reduce our cost base and add to the CHF 2 billion in cost savings we've already announced. Over the next 3 to 4 years, we'll reduce our cost base by an incremental CHF 3.5 billion.

We believe we'll maintain our current leadership position, and we're targeting a fully applied Basel III common equity tier 1 ratio of 11.5% in 2013 and plan to reach our target of 13% in 2014. We also believe we'll be the first bank in our peer group to achieve these ratios.

In the future, over 1/2 of our funding will come from customer deposits, which are more stable and typically less expensive than most other funding sources. As a consequence of our lower funding needs, our debt issuance activity will be markedly reduced. We've also built selective repurchases of our debt into our planning assumptions, which will reduce our costs even further.

Our current FINMA leverage ratio stands at 6.1% and is well above minimum requirements. However, as we move to Basel III, the leverage ratio will become more of a constraining factor in determining the size of our balance sheet. Details of the calculation can be found in the Appendix. In brief, the numerator includes our Basel III CET 1 capital, plus our loss-absorbing capital. The denominator, otherwise known as total exposure, is a combination of balance sheet and off balance sheet items. The denominator stood at approximately CHF 1.3 trillion at the end of September, resulting in a leverage ratio of 3.4%. With our actions to reduce our balance sheet, our total exposure will decline to approximately CHF 900 billion, which will substantially improve our future leverage ratio.

The size of our total exposure is also important in determining our total capital requirements, or more specifically, in determining the size of the required loss-absorbing capital buffer. Our previous assumption of 6% of low-trigger, loss-absorbing capital was comprised of 3% based on our total exposure, plus 3% based on our market share in Switzerland. The reduction in our total exposure means that this first factor could drop to 1.5%. As a result, our total low-trigger, loss-absorbing capital requirement could fall from 6% to 4.5%. And therefore, our total capital requirement could fall from 19% to 17.5%. It's also possible that we could receive a capital rebate if FINMA determines we've implemented measures to improve Swiss and global resolvability beyond the required emergency plan.

Based on our updated targets, we'll reduce group RWAs by approximately 50% from the third quarter of 2011 to less than CHF 200 billion in 2017. The majority of the additional reductions will come from the businesses and positions we're transferring to the Corporate Center. While at the same time, RWAs in both our Wealth Management businesses and Retail & Corporate business will continue to grow as we deliver attractive lending and mortgage opportunities to our clients.

Positions from discontinued businesses will be reported in the Corporate Center starting with the first quarter of 2013. This transfer will allow us to manage the sale or exit of these positions within the robust oversight structure that has successfully supported our RWA reduction so far. The legacy asset oversight committee, whose members are the group's CEO, CRO and CFO, has established restrictions on the size of trades, lost parameters and litigation, which have allowed us to manage the exit of these positions successfully so far.

We've had great success in reducing the positions in our original legacy portfolio ahead of schedule in a cost-efficient manner. As of today, we've either sold or negotiated to sell the largest RWA positions in the portfolio. As a result, we expect the rate of reductions on the original legacy to slow to around CHF 10 billion a year as we work through the remaining items.

The funded balance sheet associated with the businesses to be discontinued stood at approximately CHF 260 billion at the end of the third quarter, and this balance will be run down to 0 as these assets are run off or sold. We've considered and built associated exit costs into our business plan. Our strong capital position allows us to let OTC derivatives roll off naturally, and we've established a prudent reduction schedule for the cash positions.

While this portfolio is large, it is comprised almost entirely of high-quality, appropriately marked, and on the whole, highly liquid assets that are no longer relevant to our strategy. For example, less than 3% of the total CHF 560 billion in balance sheet are Level 3 assets. In the future, virtually all of our Level 3 assets will be contained in this and the legacy portfolio.

Our exit of these businesses is greatly reducing the complexity of our Investment Bank. By exiting over 380 desks and nearly 6,800 trading books, we're reducing our RWA allocations to FICC by CHF 90 billion to CHF 30 billion, including operational risk. As we wind down these businesses, we'll maintain the appropriate level of support and expertise in order to execute successfully. We'll manage this reduction, balancing speed and costs in order to create the most value for shareholders.

We've recently conducted a review of our multifactor equity attribution model, and while it continues to be broadly in line with the framework we described at our last Investor Day, we've made some adjustments to reflect the growing importance of the leverage ratio as a constraint on the business in the future. In addition, from January of 2013, the attributed equity associated with the goodwill from the Paine Webber acquisition will be held in the Corporate Center, which will allow business division performance to be measured more accurately with regard to the resources under their control.

Due to its reduced capital intensity, the Investment Bank will have significantly lowered attributed equity in 2015, while the other business divisions will see their attributed equity grow modestly as they execute on their strategies.

Our acceleration is not limited to the Investment Bank. Today, we're also announcing far-reaching measures to improve the long-term efficiency of the group as a whole while continuing to invest and support the growth of our strategic initiatives. We've identified a number of critical initiatives. The rundown of our legacy portfolio and exits of lines of business from the Investment Bank will enable us to eliminate the front-to-back costs associated with these businesses. The reduced size and complexity of our Investment Bank will also enable us to simplify our organization, including the Corporate Center, by removing excess management layers and increasing spans of control. Our hubbing initiative will establish a network of global and regional hubs to optimize costs, resourcing and colocation efficiency. We'll implement lean front-to-back processes across the bank and simplify our product portfolio and our production processes. Our reduced real estate footprint and more focused technology requirements will also lower costs. This will be supported by the launch of an independent buying entity, which will create efficiencies in our purchasing process and drive cost savings through volume discounts. As Sergio said, we believe we can achieve incremental savings of CHF 3.4 billion by 2015.

We're reconfirming our targets for our Wealth Management businesses, Global Asset Management and Retail & Corporate. We're setting targets for our new Investment Bank, and we're also providing RWA targets for the legacy portfolio, including businesses to be exited. As Sergio said, we believe the Investment Bank will be able to deliver a return on attributed equity of greater than 15%. We'll also deliver a cost income ratio of 65% to 85% over the cycle, operating with RWAs of less than CHF 70 billion. As we work our way through the transformation of our business over the course of the next 2 years, our group ROE will average in the mid-single digits. Thereafter, we'll deliver more predictable, higher quality earnings than before, and we'll target a group return on equity of at least 15% in 2015.

We believe UBS provides a unique and attractive investment proposition to shareholders. Our financial strength has provided us with the foundation to take the decisive actions we've announced today. Our clear strategic direction will build on our proven track record of execution to continue to best position UBS for the future. We've already achieved industry-leading capital ratios and we'll continue to work to meet our 13% Basel III fully applied CET1 ratio, which is the highest target in the industry. Our liquidity and funding positions are sound, and the bank is resilient against both short-term liquidity shocks, as well as longer-term structural imbalances that could arise in the funding markets. Our reduction in balance sheet will lower our funding needs, and over half of our funding will come from customer deposits. As a result, we'll issue less and selectively repurchase our debt and lower our funding costs even further.

As we execute on our plans, we'll deliver more sustainable, higher-quality earnings, which will further improve our financial foundation and reinforce our ability to provide attractive returns to our shareholders. With the actions we've taken today, we're even more confident in our future.

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

Question-and-Answer Session


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

Huw Van Steenis - Morgan Stanley, Research Division

Two questions from me. First, as -- Sergio, as you and the Board think about the decision on dividends, would it be fair to summarize that this is really a 2015 debate? Or is there already a possibility to start the dividend program in 2014? And then secondly, in terms of the RWA rundowns on Page 44, I understand why the OTC positions going to be naturally run off. But in terms of the cash positions, I was wondering if these are relatively conservative targets and you'd try to actually make much more progress because still having CHF 20 billion by the end of '14, I thought as surprising if these are fairly liquid credit positions that you should be able to sell down. And then lastly, in terms of the haircuts to the risk budget facility positions, would it be fair to say you're assuming a 2 to 5 percentage point haircuts to sell the assets? Or is there any thoughts you could share on that?

Sergio P. Ermotti

Well, in terms of dividend policy, I think that's -- as I mentioned in my remarks, we are basically targeting a 13% Basel III core equity ratio of 13%. Once we achieve this target, we will immediately implement a capital return policy. So it's not necessarily going to be 2015. Our target is to achieve this target in '14. Therefore, if we reach those target before, we will start to implement our strategy. We are currently accruing for a dividend. We started a dividend return policy already last year with a CHF 0.10 dividend. And so we are on our journey to deliver on what we promised. In terms of Page 44, I think that, yes, when we look at this cash position, we have been expecting -- we do expect some exit costs that are factored into our top-line models and our capital assumptions and our return on equity assumptions. The decision is pretty straightforward. If we -- if by accelerating we create economic profit, i.e. we can't execute and trigger any disposal -- any loss triggered by the disposals is lower than the cost of equity to support this business, we will do it. Otherwise, we will just wait for the best opportunity. We are not under pressure. We don't have any necessity to act right now. We can manage, as we did with the legacy portfolio, in the most efficient way for our shareholders. And the last question, sorry, I...

Huw Van Steenis - Morgan Stanley, Research Division

I think that already answered it. So it's just that will this -- what are you modeling in terms of haircuts [indiscernible]?

Sergio P. Ermotti

Yes, I guess you can probably try to figure out yourself by reverse engineering all the numbers. But we have enough conservative buffers. We have an assumption that may not be for free. But as I said, it's totally driven by doing what is right for shareholders from an economic profit standpoint of view. That's the luxury we are in today. We have a strong capital position that allow us to look at the most efficient way to manage down those risks in a strategic way.


Next question from Mr. Jon Peace, Nomura.

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

I have 2 questions, please. So the first one was on costs. On Slide 46, so you've broken out the cost by area where it's to be achieved. If you were to recut that by business line, I just wonder if you could sort of allocate that CHF 5.4 billion between Investment Banking, Wealth Management, et cetera? And then the second question is just on the absolute amount of capital you expect to run with in the future. So on Slide 45, you show us that by 2015, you expect to be running with CHF 42.5 billion of average attributed equity. Today, you've got a little over CHF 50 billion even including the IAS 19R impact. So should we imagine that CHF 7 billion could come back to us by way of special dividends in the future?

Thomas Naratil

Okay. Thanks, Sergio. So thank you, Jon, for those questions. On the cost by business line, I think if you look at the restructuring costs that we've laid out in the slide, the assumptions that you can make are roughly the fourth quarter of 2012 are very targeted and focused on the IB, on that very particular business division. If you look out at the restructuring costs that occur over the remaining years, it's more part of the broader cost program that we have, which will have benefits across the group as a whole. Largely, those will come via the changes in the allocations that come to the different business divisions from the Corporate Center. As some of those have, as you can imagine, by looking at some of the programs that we have, some of those will have a bit of a J-curve effect, too, where you'll have an investment in the first 2 years before you return -- before you start realizing the savings in Year 3. One of the things that will help us is the fact that we started the CHF 2 billion program prior to this last year. And so we have those benefits coming through, they're helping to fund the investments that we're making in the second cost program. But I don't think you should believe that outside of the fourth quarter that those would be distributed in any way that's other than proportional to the allocated costs that the business divisions receive today. Your second question was on the amount of attributed equity that we have, and should you automatically draw the assumption that, that reflects the amount of capital return that we would have. I think you could draw a conclusion that it could reflect the potential amount that we could return. And I'd refer you to the slide that Sergio had in his presentation, which walked through a number of different categories, both the baseline dividend, the supplementary returns that we would consider, investments in our businesses, as well as any management countercyclical buffer that we might choose to apply given the environment that we're in.


Next question, Mr. Kinner Lakhani, Citi.

Kinner R. Lakhani - Citigroup Inc, Research Division

So I've got 2 or 3 questions. Firstly, I just wanted to understand what's your sense of the one bank revenues that were achieved between the kind of wind down products and the rest of the business in the past and how much cost did the wind down products kind of share with the rest of the group. Secondly, in terms of your capital return plans, I just wanted to get your sense on other regulatory considerations that you might have in mind, such as the ongoing kind of risk-weight reviews, the fundamental review of the trading book and also the views of FINMA and S&P?

Sergio P. Ermotti

Thanks, Kinner, for -- well, look, I think that what we have right now are -- we never really disclosed these numbers in details. But clearly, we are talking about multibillion synergies between our businesses on the top line. I would describe those synergies so far as a mix of what I would call passive revenue synergies, so the fact that we executed -- the fact that we distribute each of the products and that we leverage in the interest of clients the best possible solutions. But in my point of view, we -- the new business model more focus, more align to the one integrated bank will unlock further potential for us to work together as a truly integrated bank. So I'm really confident that over time, there is an additional value that we can create both in our client services proposition and also for shareholders. The costs are also quite important. I think that having all these businesses under one umbrella in a -- as Tom just mentioned, more and more, as we try to look horizontally, the way we manage the bank in certain terms of costs rather than vertically, we will also be able to generate significant added value. So I do expect the interaction between Wealth Management, the Investment Bank and asset management to provide more growth in the future as we focus on our client needs. On capital return?

Thomas Naratil

Sure. I'll take that, Sergio. Thanks, Kinner. So on the second one, have we considered other regulatory considerations, I think the growing importance that we're placing on the leverage ratio denominator in that we actually really emphasized in our business planning process this year, I think shows a growing recognition on whether or not it's strict application of standardized methodologies or whether it's a proxy for that like a leverage ratio. We clearly believe that it's something we had to anticipate, build into the way that we ask the businesses to build their plans and that clearly factored into our decision-making process around the acceleration of the strategy.

Sergio P. Ermotti

So also, I would add that clearly, as we outlined, we have a clear capital return policy. We have also countercyclical buffers that allow us to manage this process. And last but not least, I think that it's clear that if the water levels goes up, it will go up for everybody. So I think that from a competitive standpoint of view, we are still extremely well positioned to tackle this potential further enhanced requirements.

Kinner R. Lakhani - Citigroup Inc, Research Division

That's great. If I could just follow up, I just wanted to ask you on the funding side. Clearly, you'll be able to buy back some of your debt, whether you've tried to quantify what kind of funding benefits you might get going forward?

Thomas Naratil

Kinner, we factor those into our plans, obviously, in terms of the targets that we have going forward. So we won't quantify them specifically. That will be one of the things that we'll be working through with the treasury team over the coming quarters. But clearly, the combination of what we're able to do to accelerate the schedule that we have on Page 44 in terms of the reductions in the businesses to be exited, that will affect our plans on the liability side and how we'll manage that versus our target structures.


Next question from Mr. Kian Abouhossein from JPMorgan.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Could we go through some questions? And I have quite a few, if I may. First of all, revenues. Can -- you mentioned CHF 20 billion of cost. Can you give me an indication of what you assume for revenues, assuming CHF 20 billion of cost base? The second question is relating to legacy assets. Could you give us an idea of the P&L of the newly created legacy assets in the Corporate Center at the first quarter 2013? What's revenues? What are costs? The third question is related to staff numbers. Could you give us an idea of front office? I saw 2,000 somewhere on Bloomberg. Just to make sure that this is correct, 2,000 front office, and how much of that is in the IB? And I assume the rest is Corporate Center, but could you please clarify that? The fourth question is on Page 45. You mentioned CHF 70 billion of risk-weighted assets, CHF 7 billion of equity, which looks quite low to me from CHF 22 billion. Even if I strip out goodwill, et cetera, still the numbers have material change. So I just want to understand why allocated equity is so different from the Tier 1 of 10 [ph] under Basel III? I have a few more, but maybe if I can stop here considering the other people on the line.

Sergio P. Ermotti

I guess, it's all yours.

Thomas Naratil

Thanks, Kian. I think on the revenue side, I think if you look at -- if you look overall at the way we've laid out the targets, the percentage of revenues that we expect from different businesses, I think you'll be able to back into the revenue assumptions that we have. In particular, I'd focus you on the return on equity of greater than 15% for the group from 2015 forward, as well as the cost income ratio numbers at 60% to 70%. On the legacy P&L, if I understood your question correctly, it's what are we modeling in going forward. And I think again, I would refer you to the comments that we made on the group ROE with the combined severance cost, which we've given you, as well as with the exit costs on the portfolio, producing an average of a mid-single-digit ROE over the years 2013 to '14 versus the target in '15 of greater than 15%. I think that should give you some guidance there. The staff numbers on the front office, reductions in Investment Bank, the 2,000 number is an accurate number. And you should assume similar staffing ratios to the ones that we have today to assume the back office reductions as well. Finally, on the allocation of equity...

Kian Abouhossein - JP Morgan Chase & Co, Research Division

2,000 -- so from the 2,000, how much is IB related?

Thomas Naratil

That's 100% IB. On the change in the attributed equity, remember, in our existing attribution of equity model, we attribute goodwill. So by the write-off of the goodwill in the Investment Bank, there's a CHF 3 billion reduction right off the top. And then the remaining amount of the adjustment is -- again, it's 50% weighted by RWAs and 25% of leverage ratio, denominator 25% on the risk-based capital model. So the risk-based capital model has an operational risk component associated with it. There are several businesses that are being exited that have high operational risk weights, one. And then two, if you think about the dramatic decline in the leverage ratio denominator, that's also reducing the equity attribution to the IB as well. And we can -- I mean, we can walk you through it after the call, if you'd like. But it's -- if you think through what we're doing in the strategy, we essentially felt the leverage ratio denominator was becoming a constraint. We've now taken the new IB and slimmed it down quite a bit on the leverage ratio denominator. So you've taken away that piece, you've taken away the goodwill, and then risk-based capital also has an effect.

Kian Abouhossein - JP Morgan Chase & Co, Research Division

Yes, maybe we can discuss it offline. Just one more question, coming back to dividends, my understanding is you want to pay 50% once you reach '13. On my numbers, your expectations for 2013 -- sorry, 2014 when you reach 13%, first of all, is that correct? And is 50% payout kind of a base case scenario? And then you have numbers on top. Just to understand, you mentioned something about a base level of dividend payout, I assume, an absolute level. Can you give an idea of what you're thinking there? And secondly, your Tier 1 ratios are actually not improving as much as I would have expected. And just wondering is there any change in deferred tax assets or any other additional changes that you might have made? Or is the number just very conservative because I get to a much quicker 13% achievement than what you have.

Sergio P. Ermotti

Well, Kian, I think that our targets to reach the 13% ratio for 2014 are credible targets in respect of the overall macroeconomic picture, the challenges that we are facing today. Once we achieve this target, you are correct, we will have a minimum of 50% capital return policy in a form of a baseline dividend. This is a dividend that we expect to basically be fairly regular, that will be not subject to many movements due to economic macroeconomic conditions or volatility in the profitability levels. In addition to that, we may have supplementary return -- capital returns initiatives, which can take form of special dividend or share buyback. And -- but all this will be balanced, considering, as we mentioned before, our needs for reinvestment. Because as we develop and execute on this strategy, we then want also to be able to grow and leverage fully the potential of the franchise. And also, last but not the least, we have to consider countercyclical initiatives that we may take in terms of capital requirements depending on the macroeconomic conditions. But the 50% is a baseline that you should expect to be very stable. And in addition to that, we will take other initiatives.


Next question is from Mrs. Fiona Swaffield from RBC.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Just a couple of things. The 11.5% core Tier 1, you've obviously given us the RWA. So that looks like it's an absolute number of pretty close to CHF 29 billion. Can I compare that with what you gave in your illustrative example in Q2? And within that, are there any -- would there be lower -- is there any change in deductions? Or is that basically the way to look at what you're receiving on exit losses? Is the first question. The second question is the disclosure on DTA. I'm sorry if I've missed this, but could you talk us through -- I think you mentioned that you've done something on the DTA in the U.S., but I can't quite follow what it is or whether it's been offset by something else because I don't think I've got the moving parts. I wondered if you could talk about that a bit more. And the last thing is on the gross margin in Q3, which obviously relatively solid and transactions going up. I was just somewhat surprised by the trends there and whether there's anything one-off or you think that's a sustainable base.

Thomas Naratil

Okay, all right. Thanks for these questions, Fiona. So first, starting with your first question on the CET1 and also to start by following up to the portion of Kian's question that we didn't get to on Tier 1 ratios. What I would say in our Tier 1 ratio is, as Sergio described all of our targets, we believe they are credible and appropriate. On your question, Fiona, about the 11.5% CET1 target for 2013, that's the first time we've given a target. In previous quarters, we've shown -- or at our Investor Day, we've shown an illustration based on certain components of consensus, for example, and other assumptions. So there's been no change in our set of assumptions in terms of the way we've thought about it. There is nothing missing. That's just the target that we've set for 2013 based on the performance that we expect in that year. And that obviously includes the restructuring costs that we've shown you, as well as any exit costs associated with the businesses to be discontinued. On your question on DTA, in terms of looking at the Slide 53 in the appendix, it gives you a good outlay of the unrecognized, as well as recognized DTAs. In my remarks, what I was covering was the fact that the U.S. DTA was unaffected in our total evaluation that we had this year, which is based on a number of factors. Only one factor is the IB business. We also have the Wealth Management Americas business, our asset management business in the U.S. as well. And so the prospects for Wealth Management Americas have certainly improved based on their performance, and that was somewhat of an offset on any assumptions we had on the Investment Bank in the U.S. And we also believe we've been quite prudent in our assessment of the U.S. DTAs as we think you can see from that chart on 53. Regarding the Swiss DTAs, we did have a write-down on Swiss DTAs that were related to the holdings of the subsidiaries that were affected by the goodwill write-down. However, at the same time, as I noted in my remarks, we will -- we anticipate having a Swiss tax loss in 2012 and that allows for a writing-up of new DTAs, which essentially was what caused us to have a zeroed-out effect. Gross margin, sorry. Your comment -- your question on the gross margin, can you just repeat that one, Fiona?

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

I just wondered if you could comment on the sustainability just because the transaction was particularly strong versus my expectations and whether that you think that's a good base going forward?

Thomas Naratil

I think in terms of the gross margin overall, we were steady throughout the quarter. But I would still continue that to be, and I think you see that in our outlook statement, something that can be impacted by developments on the fiscal front, on the political front, on the economic front, and it could be volatile either upwards or downwards. I would -- I think it's one of these cases where assuming a run rate has to be done in the context of what you see in the ongoing environment.


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

Derek De Vries - BofA Merrill Lynch, Research Division

I have 3 pretty straightforward questions. The first one, just -- I was a little bit surprised, I guess, you had a 15% headcount reduction and you're guiding for an 11% cost reduction. And given your business mix, I would have thought headcount reduction and cost reductions were somewhat synonymous. So maybe you can just talk about the differences there. Why is the headcount reduction greater than your total cost reduction? The second question is just a real simple one. On Slide 28, where you kind of show the new Investment Bank, in terms of the ongoing businesses, you mentioned distribution there and then you mentioned sales and trading on the equity side. But I'm just trying to get my head around the new model and what it involves from a credit business, right? I guess when you're talking about distribution, you're talking about distributing both equities and credit, but then you don't mention any sort of credit trading afterwards. So maybe just a clarification on what the new business model looks like for credit? And then just I guess, I'll try the third time to kind of ask the question in terms of the losses assumed on the rundown portfolio and you say we can kind of back into them and that is true. I mean, if we take a mid-single digit ROE for the next 2 years to be 5%, if we take a consensus for the divisions to kind of add up, I mean, that's going to suggest some very big losses, I mean, billions of losses on the rundown portfolios in the next 2 years. And I just want to make sure that's correct, I mean, we should be coming to an assumption that the rundown of these legacy assets is going to lead to billions of losses in each of the next 2 years. I know it's been asked a few quite times, but maybe some more clarity there would be helpful.

Sergio P. Ermotti

Okay. Thanks, Derek. I'll tackle the questions on Slide 28, and then I'll pass the rest to Tom. Well, I think that's -- as we outlined, I think that's clearly -- the part of the credit business you are referring to will still be there. Our focus in respect of credit is very simple. We will do everything that is necessary to support our activity in the origination front and debt capital markets and to facilitate client flows being institutional or Wealth Management. We will not be a participant in making markets in complex products or products that are not efficient from a Basel III standpoint of view. So we will limit our activity to facilitate clients to commit capital in a focused way to the people and the clients who are relevant for our franchise. So anything that is uneconomic from a Basel III standpoint of view will be discontinued. And I think that by doing that, we can still be a relevant player in our debt capital market businesses and serve our clients.

Thomas Naratil

And Derek, on your first question, I think some of the things that are complicating the 15% headcount translating into identical cost reduction, one, I think it depends on the mix of the different functions and the compensation per head. Two, it's also the geographic mix of the individuals that are involved. Three, also, in some of our programs, there may be certain outsourcing arrangements that we have where the headcount is reduced. Maybe there's a center -- maybe we're not a center of excellence for a particular function but another provider is, where we're still paying for services but we've taken headcount off our rolls. So I think all of those factors contribute to some of that disconnect that you see. On the losses, I don't think it would be an accurate statement to say that there are billions of losses in each of the next years. I think that -- you may -- I don't know if you're capturing the charges that we have for the cost savings program as well in that calculation.

Derek De Vries - BofA Merrill Lynch, Research Division

Yes, no, I was. Okay, that's clear.


Next question from Mr. Christopher Wheeler from Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

A couple of questions. First of all, Tom, thank you so much for the rundown of the cost savings and the restructuring charges, but I wondered if you could just overlay on that whether we should be looking at the headcount reductions as broadly going in line with your cost-reduction schedule. That's the first question at Slide 46. The second one is, just what are you going to now do with the StabFund option? Do you have any views on that? Because clearly, that is something that to a degree is linked to what is now your non-core business. And I'm just interested as to whether you can share anything with us about what your preferred treatment of exercising of that might be? And then thirdly, really, I mean, obviously, given the very, very positive reaction your strategy has received, can you perhaps just talk a little bit about -- when you talked to us last November, I think, as you know, the market was perhaps thinking you might be this phlegmatic in what you were going to do. You've now moved on and actually taken a much more aggressive stance. How much of that really is down to the new management team, including the Chairman, further refining and reviewing the business? How much is down to perhaps regulation and the regulator in Switzerland, in particular? And how much is down to what you see in the market? And then just finally, can you share with us -- and I think I asked this question last year of Carsten. What are you putting in place? What kind of team are you putting in place? How are you incentivizing the team who are going into that non-core business? How long are you sort of, if you want, incentivizing those people, including Carsten, to stay with you? Because clearly, reducing the losses in that business is going to be a big factor in making sure you get to your various targets much more quickly.

Sergio P. Ermotti

Thank you, Christopher. I will take the last 2 questions, and then I'll pass the rest to Tom. Well, as you mentioned, this journey started a year ago in November. We outlined very clearly back then and in every quarterly review we had with you and also on media statements. I made it very clear what the strategy of UBS will be in the future. So what you see today is simply an acceleration of the strategy. We have been working with my team and the management board to discuss our progress to review basically the driver of that decision back then, so basically create value for shareholders, the changes in the regulatory framework. And today, we have much more visibility about the fact that those changes are years to stay. But as I mentioned, maybe they are not going to be applied on a homogeneous basis and in the same time frame as we do in Switzerland, but they are here to stay. And also, the experience we gather in the last 12 months in executing the first phase of the strategy together with the macroeconomic environment basically made it quite clear for us that having built up 300 basis points of additional core equity ratio on a Basel III basis put us in a position to take the decisive steps now and accelerate that strategy. So the Executive Board went through this process, and I made a recommendation to the Board that we should move forward. And we are all united to move in this direction, and there is -- this is the way we're going to go. And the second point you are raising in terms of motivating the staff that will help us to manage this transition, I think that there, the situation is very simple. They will motivated by the fact that they are supposed to create value that goes beyond what the natural decay of this position will indicate. As we mentioned to you before, there is nothing wrong with the quality of those assets and any concentration risk that makes this job something that is very -- is an important step. We are not underestimating, but we have a governance and a structure in place that will help us to manage this process. So rewarding and keeping people for something that is a journey of 2 or 3 years is something that has to be related to creating value. And by the way, many of those people will continue to have a job in our group going forward. As things changes, there is a turnover in the industry, so there is -- it's not like we'll have to separate from everybody. So I don't want to create a too special kind of people in the organization. Everybody has to go in one direction: create shareholder value. And that's the way people will be compensated across the group.

Thomas Naratil

And Chris, on your other 2. Before I start that, I would just add to Sergio's remarks on your third question. We've always said that having a premier capital position would be something that would be a strategic advantage for us. And I think you see from the announcements we made today, it's created a lot of strategic optionality for us. Your first question was on the headcount pattern relative to the cost savings pattern on Slide 46, and you can assume that, that's correlated. Second, your question was on the StabFund option. We continue to have -- as our base assumption and to be quite happy with that assumption that we'll continue along the path of letting the portfolio and the loan naturally amortize in the way that the StabFund is run, and we do not intend to accelerate our exercise of the option.

Sergio P. Ermotti

I think we have 1 more question. I'm sorry about the people that are on hold, but I'm sure Caroline Stewart and her team will help you through -- go through some of the other questions so we have a chance to address them one on one. So let's go through the next one. Daniel?


Next question from Mr. Daniel Davies from Exane.

Daniel Davies - Exane BNP Paribas, Research Division

It's Dan Davies from Exane. Just a very quick question about dividend accrual. Are we to take the dividend accrual as informative for this year? In other words, should we expect that until the 13% common equity Tier 1 target is reached, the CHF 0.10 dividend is all that's going to be there? Or is there some scope for increasing that and having a progressive dividend policy in the interim?

Sergio P. Ermotti

The only assumptions you can make is that we are accruing a dividend as we speak, and we will make a decision at year end based on our position. And we will make a recommendation to the Board at that time. Many thanks. And I hope to -- we'll see you soon. Thank you.

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