UBS Group AG

ladies and gentlemen good morning welcome to the first quarter 2021 results presentation the conference must not be recorded for publication or broadcast you can register for questions at any time by pressing star and one on your telephone should you need operator assistance please press star and zero at this time it's my pleasure to hand over to mr martin ozinga ubs investor relations please go ahead sir

Good morning and welcome, everyone. As usual, I will draw your attention to our cautionary statement slide at the back of today's results presentation. Please also refer to our SEC filings, including the risk factors in our 2020 annual report. On slide two, you can see our agenda for today. It's now my pleasure to hand over to Ralph Hammers, Group CEO.

Thank you, Martin. Good morning, everyone. Welcome to the first quarter results. I hope you and your families remain safe and healthy. When we had our last update call three months ago, we said that our first priority coming into 2021 would be to build on our momentum by remaining laser focused on our clients. And as you can see by our results in the first quarter, we did just that. Client activity was high across the businesses. They continue to draw, the clients really continue to draw on us for trusted advice and relevant solutions. This resulted in record assets in wealth and asset management, record loan balances and transaction-based revenues in wealth management. But before I go into the results for the quarter, I'd like to first to cover a idiosyncratic situation that took place in the second half of March. The default of a prime brokerage client led us to incurring a $774 million trading loss. And the net profit impact for the quarter was $434 million. We subsequently risk-managed the tail of the exposure and closed all remaining positions in April, which has led to a $87 million trading loss in the second quarter. We're clearly disappointed by this, and we're taking this very seriously. One of the reasons that UBS has a balance sheet for all seasons is to handle unforeseen events, although this is not the kind of event we ever want to have. This buffer served us, our clients also, because we were able to continue with our plan and with our program and our growth. and providing credit and execution well through the pandemic, but also through this event. And in the first quarter of this year, despite this loss, we further increased our CT1 capital ratio to 14%. And that's a true testimony to the strength of our franchise and the results in the first quarter. The earnings power in the regional and business diversification further adds to that resilience In the first quarter, we made a return on CT1 capital of 18%. Also, the investment bank produced a double-digit return on attributed equity even after this loss. Speaking for the management team and myself, while we can't say there will ever be an unexpected loss, as risk is part of our business, we can assure you that will be transparent about mistakes. We'll fix them. We'll learn from them. The organization came together quickly to risk manage this challenging situation in a very constructive way. But equally, there are lessons to learn from this. We're reviewing our prime brokerage relationships, have already improved some of our risk controls. At the same time, prime brokerage remains strategically important for UBS. for our clients, and there's also for the investment bank. We're also open to dialogues with regulators on potential changes that could improve the market transparency around some of these businesses. So lessons being drawn, lessons learned being implemented as we speak. Now with that, let's continue our review of what we do best, which is serving our clients around the world. I'm now turning to the next slide. The backdrop of this first quarter was one of great investor optimism, improved economic indicators, constructive market sentiment. With long-term dollar interest rates off their historical lows, momentum shifted from growth to value stocks, and fixed income assets came under pressure, as you've all seen. We advise our clients how best to position their portfolio for that environment. through investment solutions, financing, underwriting, execution with strong results, which you can all see on this slide right here. We saw strong net assets flows across our businesses. In the institutional segment, low or negative rates continue to drive demand for alternative and emerging markets. We also continue to capitalize on our position as a leader across the global frontier of sustainable investing. wealth management clients remain active with record transaction revenues fee generating assets and loan balances in the quarter as you can see here as well on the swiss side the swiss economy is holding up quite well in the face of the continued covet measures with robust loan and deposit growth in our swiss business the persistent negative rate environment means personal clients are increasingly using our investment platform to invest access deposits for a return and meanwhile corporate institutions are taking advantage of the positive funding environment and we're helping them to do so. Equity capital markets had one of its best quarters on record. Turning to the next slide, here you can see that investments are truly at the core of our DNA. Our investment ecosystem is a cornerstone of our strategy and I will explain you more when I give you our strategy update You see the invested assets growing year-on-year by 33% here. The separate managed accounts initiative that we launched between wealth and asset management last year continued also this quarter to attract assets. I think it is a textbook example of what we can achieve for our clients and shareholders when we work together to deliver the best of UBS to our clients. It's a great springboard to build out our customized offerings as well. Demand for sustainable products continues to be high. That trend continues. Our flagship, as I mentioned, attracting another 5 billion of inflows in a quarter. Some of this is driven by MyWay. That's our easy-to-use, modular, and personalized discretionary mandate offering. This quarter, we successfully launched this product outside of Switzerland as well. and we aim to scale it quickly. In asset management, sustainable strategies were once again a driving force behind a very strong net new money quarter, attracting 8 billion of net inflows just in that category. Now, this continued momentum with clients combined with a positive market backdrop, as I said, resulted in the financial results, as you can see on slide six. Operating income growth of 10% broad-based across regions, across divisions, and that drove an 18% return on CT1 capital. We strengthened our balance sheet, increased our capital ratios, and repurchased $1.1 billion of shares. And these results, again, demonstrate the strength of our franchise as we're refreshing our strategy to unlock UBS full potential. But before I go to my strategy, let me over to Kurt, who will give you some more details on our performance in this quarter.

Kurt, over to you. Thank you, Ralph. And good morning, everyone. Net profit for the quarter was one point eight billion, translating into a eighteen point two percent return on one capital and 14 percent return on tangible equity. PBT of $2.3 billion was up 14%, driven by two percentage points of operating leverage. Our cost-to-income ratio was 74%. Updated macroeconomic factors would have informed an incremental $92 million stage one and two release in credit loss expenses, or an aggregate $208 million over the last three quarters. We deemed any release premature and applied a management overlay. Both revenues and costs saw FX-related increases of around $150 to $200 million compared with a year ago, although on a net basis, the positive effect was small at below $30 million for PVT. Turning to expenses, as we've said many times before, under operating income growth scenarios, we aim to manage to flat costs, excluding variable compensation and larger one-time items. in order to drive positive operating leverage. Year over year, first quarter operating expenses excluding variable compensation and FX were flat. Looking out over 2021, we expect to see our full year costs excluding variable and FA compensation, restructuring and litigation up around 1% adjusted for currency movements and excluding any potential investments related to our strategy refresh. We entered 2021 with a higher run rate cost base than we had originally planned due to the pandemic. As economies continue to open, we expect to book restructuring expenses of around 300 million in the second quarter of 2021. I would also like to flag that for this year, we would expect our retained loss in group functions to reduce to around 150 million per quarter, and absent any accounting and one-time items, will further decline in future years. Moving to our businesses, GWM recorded pre-tax profit growth in every region, with APAC and the Americas reaching new highs and both nearing half a billion PVT. The diligent execution on the plans Tom and Iqbal set out earlier last year are an important driver of these results. PBT increased 16% to $1.4 billion, driven by transaction activity and loan growth, and as fee-generating assets, a new metric I'll explain in a moment, grew with market performance and on strong net new volumes. Revenues grew 7% year-on-year. Expenses were up 3%, mainly related to top-line growth. and GWM's cost-to-income ratio decreased by 1.4 percentage points. We had another quarter of high net new loan volume at over $10 billion, mainly in Lombard loans, with most of the growth in the Americas and APAC reflecting continued client demand. We have achieved substantial loan growth over the last year while maintaining the quality of our portfolio. As Jeff mentioned, we have introduced new net new fee generating assets, a new performance measure for GWM this quarter. We see this as a better indicator of future profitability than net new money, as it captures changes in assets with more of a direct impact on GWM's recurring revenues, as well as contributing to transaction revenues. We are no longer reporting net new money for global wealth management on a quarterly review but you will still be able to find the full year flows in our annual report. Compared with net new money, net new fee generating assets exclude flows related to assets that from trading or new issuance predominantly generate transaction based fees in the form of commissions and transaction spreads. Also, unlike net new money, net new fee generating assets exclude deposit flows that generate net interest income. This new KPI captures net flows related to mandates, investment funds, hedge funds and private markets of investments and include dividend and interest payments into mandates. The underlying assets and products generate 90 percent of global wealth management's recurring fees and 30 percent of its transaction based income. Moving to income. Net interest income was down slightly, in line with the guidance of around $1 billion we gave back in January, as the impact of lower U.S. dollar rates continued to taper and we benefited from ongoing loan growth. Sequentially, it would have been roughly flat, excluding the lower day count effect. For the second quarter, we anticipate a slight increase in net interest income sequentially, with positive lending net interest income combined with the absence of further interest rate headwinds quarter on quarter. Recurring fees grew 8% driven by higher average fee generating assets. Sequentially recurring fees were up 7% supported by 36 billion in net new fee generating assets. Transaction based income rose 6% even against the strong first quarter 2020. The Americas delivered higher transaction revenues and APAC reached a new record as clients engaged with our advisors on new and existing content, solutions, and CIO offerings in markets that provided a constructive backdrop. Our gross margin from fee generating assets was 86 basis points, decreasing by four basis points compared with the first quarter of 2020, primarily driven by flows into mandates in funds with lower fees, including single share class funds in the U.S., without 12b1 fees and sustainable investment mandates with less exposure to hedge funds. Sequentially, the fee generating asset margin increased by four basis points, primarily reflecting higher transaction activity in mandates. PBT for PNC increased by 11% to 358 million Swiss francs. Operating income was up 9% reflecting a credit loss release versus a credit loss expense a year ago, along with a revaluation in our investment in six group. NII came down on lower deposit revenues related to dollar interest rate headwinds on our corporate and institutional clients, but also reflecting continued drag from negative Swiss franc and euro rates. Sequentially, we have now largely absorbed the impact of lower U.S. dollar rates. Transaction-based income was down, mainly on around $20 million lower income from credit card and foreign exchange transactions as a result of reduced travel and leisure spent abroad by clients due to COVID. Partly offsetting these two, recurring net fees reached a new high this quarter, primarily on higher custody mandate and fund fees. It's part of our continued focus to digitize our Swiss Universal Bank in recognizing accelerated preferences of our clients to access our services through digital channels. We announced that we would close 44 smaller branches in the first quarter after having already closed around 30 branches last year. Real estate costs therefore elevated in Q1 due to accelerated depreciation. This combined contributed to the 8% rise in operating expenses, as did higher investments in technology. We will ensure that our clients remain well-served with continued enhancements and broader access to our leading digital channels and other improvements in our remote services. Asset management delivered its eighth consecutive quarter of year-on-year PBT growth. First quarter PBT was up 45% to $227 million, the highest Q1 level since 2008. AM delivered 9% positive operating leverage, driving our cost-to-income ratio down 5 percentage points to 64%. Performance fees increased $56 million to $92 million, mainly driven by our hedge fund businesses, partly offset by a reduction in equities. Net management fees were 14 percent as we benefited from the combination of higher market levels in continued strong net new run rate fees, which are in excess of 200 million over last year. We had inflows of 26 billion driven by positive contribution across all regions, channels and asset classes and invested assets rose to over one point one trillion. Asset management separately managed accounts initiative with global wealth management saw inflows of $8 billion in a quarter, or a total of $70 billion since the start of our program. And our SMA ranking rose from number 11 two years ago to number four in the U.S. at year-end 2020. The IB delivered PBT of $412 million, down 42%. As Ralph mentioned, this includes a $774 million loss relating to a US-based prime brokerage client, which the IB was able to fully absorb and still report a 13% return on attributed equity. It would have been a record PBT quarter without this event with returns above 30%. Global markets revenues decreased by 27%. The main driver was the prime brokerage loss. Excluding that, we would have posted an 11% increase year on year driven by higher equity derivatives and cash equities revenues. This was partly offset by lower revenues from rates in foreign exchange products in the more normalized market conditions compared with the prior year where we saw substantial volatility related to the COVID pandemic. Global banking was up 48% with a significant increase in equity capital markets and to a lesser extent in advisory. The 174% increase in ECM was helped by record SPAC IPO issuance in the U.S. market and an increase in follow-on issuance in APAC. Operating expenses increased by 7%. Largely driven by higher personnel expenses mainly reflected increased headcount in foreign currency translation effects. On an FX neutral basis, operating expenses for the IB were up 3%. Our capital requirements remain unchanged at 9.66% and 3.375% for our CET1 capital and leverage ratios, respectively. During the quarter, we increased our CET1 capital ratio to 14% and our CET1 leverage ratio to 3.89%. We completed 1.1 billion buybacks year-to-date and will resume repurchases shortly. On that note, I would like to hand back to Ralph.

Yeah, thank you, Kurt. So you just heard about our first quarter results, which continue our strong momentum from 2020. It speaks to the solid position that we're in as we start on the next phase of our journey. When I first joined UBS, I said that the first thing that we should do is to articulate our purpose and map out our strategic journey and in general we walk you through some of that and some of the initial focus areas that i then kind of detected it's clear that we are in a unique position our global scope and business model mean that we can take advantage of current trends and opportunities and it all starts with purpose our purpose Our purpose will unite all of UBS behind a common goal. Our purpose will give us direction to our path forward. It will help us build on our current strength. It will support our momentum for growth. I also think that purpose can help us guide in difficult and volatile situations. When teams are united and aligned under one purpose and strategy, there's so much more that we can achieve. So what is our purpose that will guide us going forward? Reimagining the power of investing, connecting people for a better world. Now, and I'm sure you've heard it from other players, a purpose is and will never be a slogan. It's not something we're saying to make ourselves feel good, but it is something that will help us develop our business. It's been designed to allow us to capture the opportunity that we see to grow our already strong position. It will guide us. And if we do it well, it will guide people to us. We'll reimagine by the development of solutions that change how people look at finance and investing. We'll show that the power of investing can support one's life. whether it is by buying a house or growing a company, acquiring a company, seeking capital, supporting future financial goals. That's the power of investing. And we'll connect people both internally and externally to convene an ecosystem, and we're truly unique at that, I think, at UBS, to bring ideas and opportunities together to make a difference, to create value. for our clients but also for society at large and that's where helping to build a better world comes in by thinking sustainably and creating opportunities that reduce rather than contribute to inequalities and we have an ability to make real impact here now sustainability is at the core of our purpose we have been of one of the pioneering institutions in our industry when it comes to standardizing the topic of sustainability. And we're not slowing down. Quite the opposite. Our clients want their investments to deliver both financial returns and have positive impact. It's why our portfolio of sustainable finance products is one of the fastest growing areas of this firm. Our strategy is to focus on planet, people, and partnership. And last week we announced our net zero ambitions for the group, as well as our commitment to address wealth inequality by sharpening our philanthropy and employee engagement around topics like health and education that are going at the root of fighting inequality. We're also setting tougher environmental standards for ourselves, also for the parties that want to deal with us. We're promising to deliver a detailed roadmap to net zero with science-based targets, setting ambitious targets for sustainability and helping clients transition to a low-carbon world. And Suni Harford, head of asset management, will be the group executive board member, sponsoring the lead firm-wide in sustainability. Sustainability targets are also now part of each and every GAP member's KPI set. And all this together with the things we're already doing means that we'll be better positioned to grow our strong leads. Now, as I said, our purpose will guide us. It will guide us in how we serve clients, for example. And we've built a strategy around that because our clients' expectations are changing. They're used to being part of a global network, being able to connect with others whenever, from wherever. They're used to being offered solutions before they even know they need them. And they expect that from us too. And that's why we're also making a promise to our clients. Today, we excel at delivering unique insights and analysis that informs how our clients invest for the future. Our thought leadership is the core of what we do. It's what we're known for. It's why clients come to us. However, we need to improve on how we deliver our ideas and content to our clients. And we will consistently deliver a client experience where our products and services are as personalized as our client needs. And they're as relevant, which basically means we don't offer solutions that don't suit their needs. And they have to come on time, not too early and not too late. And when they elect to go for the solution, we should be able to execute on that one intuitively and seamlessly. That's what makes our client promise, and I am convinced that we can differentiate ourselves from our peers on this one as well, just like our thought leadership. We will show that we are a firm that adapts to clients' lives rather than that we expect clients to adapt to how we organize. So we have the purpose and we have the promise. And the question is, what is the big picture? What are we going for? What is our vision? We want to convene the global ecosystem for investing where it's easy for our clients to get connected with the people and ideas that can make their goals happen. And right now, we're good at managing client relationships and providing solutions, but we're much bigger than one person or one solution. When clients are able to access all of UBS through a single client interface, get a differentiated, personalized experience, are connected to other areas of the firm as well as other people who have similar goals, that's when we are at our best. That's what we can deliver. And UBS has this unique opportunity to bring these people together in an ecosystem. And we've already done that from our own organization perspective. You know, we have already kind of worked on our global capital markets activities for all. We have created one global lending unit so that all of our clients can now have access to institutional services, that they have a broader and deeper expertise available to them. And on the back of that, we saw the lending volume growing by 26 billion and transaction revenue increased by 20%. So basically, through this, clients discover opportunities and realize these opportunities they didn't even know they existed. We can build that network even if the solution does not come from us, but from a contributor to our network, a third party. That's what we're trying to build. Now, if we want to be successful at that, we need to be clear as to how we're doing this and how it connects to our purpose and vision and the virtuous circle they create and therefore we have identified five strategic imperatives that will actually help us to take advantage of the client trends the growth dynamics that we see build in our strengths and overcome challenges and create space for us to grow and they are the following the first one is all around being focused on clients contributors to the ecosystem and connections within the ecosystem. The second one is about focusing where we can win. Where can we truly make a difference? Where are we so strong that we can benefit from the growth in that area and be a really good competitor? The third one is about technology and moving from technology as an enabler to technology as a differentiator. The fourth one is all about Can we be more simple? Can we be more efficient? And how can we use the resources that come available through this efficiency and simplification drive to support the growth in the areas that we can see if they make the returns that we want to make? And the fifth one, very important in any strategic program, is culture. Because as we know, culture eats strategy for breakfast. Now, I'll take you through all of these. So the first one, clients, connections, and contributors, and you see the slide here. And here you see basically the virtuous circle that I'm talking about. This is the flywheel that we already have in motion, but that we can actually stir up in speed. So we excel in our thought leadership and advice, and through our client promise, we will continue to be the leading customized investment and financing solution provider to our wealth clients. And you see that they're very satisfied with that, but we can do better. And the more clients we get, the more liquidity comes through our system. And the more scale can we build in the execution of all of that. And that's where the investment bank benefits. They have the liquidity. They can create the scale. And you know that liquidity attracts liquidity. That in itself is already a virtuous circle. And more liquidity and scale and execution attracts new players to the same ecosystem who want to have access to those services and to our clients. So with that, we can actually attract contributors to the system, but we have to ensure that we curate those contributors in a way to protect and guard the integrity and the quality of what we offer to our clients. And all of that will generate profit that we can use to invest, to grow, and build on thought leadership and advice and grow our client base And that's how the flywheel goes. That's the idea. That's what we want to keep putting in motion. The second one is around focus. And from a focus perspective, we have looked very closely at the underlying trends in wealth accumulation in the world. And if you take that and you take a step back, you see basically the following trends. You see the trend in the biggest wealth pools that are already there, which is the US and the Asia Pacific. They're already the biggest wealth pools. And they will grow the fastest as well. And we are uniquely positioned to benefit from it. So we'll have to focus on those. But within those, there is some underlying trends that grow faster than others as well. For example, entrepreneurial wealth is growing faster than any other wealth. Or women-controlled wealth is growing one and a half times faster than man-controlled wealth as a trend. that we see and that we should work on. ESG is a trend underlying as well that we should work on as well. Private clients, basically the client base that has up to $5 million with us is a trend where we expect further growth and fast growth. Those are the unique opportunities that we will focus on. That's where you can expect our resources to go. The third one is about technology, and I'm sure you had expected this one to be part of our strategy going forward because technology is ever so important. What we've done really well here at UBS over the last couple of years is building a real sound base for technology, a real foundation. But in that way, technology is still an enabler for us to do the business that we need to do. But we see that our clients, just like yourself, in day-to-day lives, they see their client experience, their experience, improve through technology as well. Not just the predictability of it, not the stability of it, not the availability of it, but the true experience of it. Think about how you interact with Netflix. Think about how you interact with Spotify, services you use every day. And you do it without even thinking about it. And you get a recommendation that you actually think is relevant to you and personalized. And you click on it, and it's right there. You can listen to the music, or you can watch the series. Now, if we can make our content available in that way, we can differentiate ourselves. And clearly, the content has to be good. So in our plan, we'll actually make technology the first step in how we deliver and improve client experience. We'll digitalize what we can. We have to become more agile in the way we work. We'll have to deliver faster speed to market, and we'll enable better maintenance of resources and manage resources more efficiently as well. Now, today we announced two things. The first one is that as part of all of this, in order to create a joint capability of products and operations, we are moving the corporate center operations into the business divisions. That's step one. That's a prerequisite to build capabilities that as a whole can be available to our client base. It is also a prerequisite to start working agile front to back, which is how we will look at our client journeys going forward. I'll come back to that. The second announcement that we made today in this field is that if we truly want to see technology as a differentiator, we need to have a person on the board that knows technology very well. And with that, you know, we're happy that Mike Dargan will be the head of Chief Digital and Information Office and he will basically, he will come to the board and support the board making this work that gets me to the next imperative which is all about simplification and efficiency as I said you know by bringing the operations closer to our client facing teams and the products will break down the barriers to collaborate and and be more effective there will simplify decision-making will allow budgets to be planned in an integrated manner with the business areas Now, in that way, it's very much in alignment with our fourth imperative here, which is simplification, but also efficiency. This is where we'll streamline and standardize so that we can reinvest in our future with about $1 billion of cost savings per year by 2023. How we will do that? First, we'll take a closer look at the way our business is being set up. We need to rethink our governance, the organizational structure to see how we best support some of the plans for the future. How can we ensure that our employees can spend more time with our clients and less time internally with some of the processes that we have in place? Second, we'll have to optimize our processes and everything we do aiming to deliver a seamless client experience. so that we can truly fulfill the promise that I was just talking about. And we'll have to do this front to back, starting with the client understanding, into the product area, into the operational area, into technology, and creating these agile teams to improve continuously with small steps. Now, the third area of this imperative is all about the discipline that we need in order to ensure that if we have too many policies that we can join policies and that we can reduce some of the bureaucracy that comes with having many policies or legal entities. If we don't use legal entities anymore or we can actually do the same activity from another legal entity, can we reduce the legal entities? It's also about the discipline about cleaning up the product shelf. If products are not in use anymore or we don't have scale in a specific product anymore or It is a product that is subject to new compliance requirements. Then we better migrate clients to a next best offering, reducing the number of products and actually with that also reducing our legacy and with that reducing compliance risk as well. It's all about the discipline of that as well. Now the last one, as I said, is all about culture. And we have a very strong culture here at UBS that is very, very omnipresent. But we can build on that strong culture. As I said, we are moving the business-aligned operations to the divisions so that we can actually build these product capabilities. But these product capabilities should be available for each and every client segment. So we have to be more client-centric, independent of the divisional structures. And we're also looking at the KPIs in order to support that. We have to be faster to adapt. As I said, I was already talking about agile, so I covered most of that. Be more idea oriented and embrace disruption. And although we already have a strong, experienced, diligent and committed risk team, risk in the end has to come from all employees as risk managers. And therefore, we have to be vigilant about the risks, the risks that are at the horizon, that can be spotted in societal trends, that can be spotted in regulatory trends, but making sure that we're ahead of these trends and that we already adapt and adjust in order to reflect some of that coming at us. Another area where we have to be more risk-aware is in changing things, making sure that we do realize that with every change, there is a bit of an increase in risk. Make the analysis and accept the mitigants before you actually make the change. Making sure that we guard our control environment while we change. And as a third one, and it has proven us really well again in this first quarter, is that part of our risk focus is and will be maintaining a balance sheet for all seasons. So that our service to our clients is not interrupted. by events. That's important. Now, to close all of this, I'll remind you, you know, the purpose, that's our true North Star. It will drive future deliverables and you can see and you will see that we'll manage consistently after that purpose. We're deepening our client relationships. We'll grow them. We're investing in attractive growth markets and focusing on those pools of wealth that are already large. for skill, but there are also growing to facets in the market, in the world, and also the underlying trends. We'll focus on leveling up technology. We'll focus on becoming more efficient, improving operating leverage, and we'll enhance our strong culture as well as our accountability. And we remain committed to deliver to you. Now, I do realize that, you know, This is a strategic framework with a purpose, a vision, a client promise, and five imperatives. And you may still have questions as to what do you do about this and do about that. And I can tell you that with the strong momentum that we have and with the focus that we want to keep on our clients, we are not changing everything at the same time. But we are developing plans for other areas as well. And if and when these plans are finalized, we will come to you to update you on it. And with our 2021 full year results, we'll provide a strategic update, including the financial targets. Thank you for this. And let's open the floor for questions.

We will now begin the question and answer session for analysts and investors. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Jeremy Sigi from Exxon. Please go ahead.

Morning. Thank you. Two questions, please. One is about Archegos and prime brokerage and kind of what it means going forward, and the other is about the corporate center. So the first one, I just wondered how you think about prime brokerage after this incident. On the one hand, you could have an opportunity to take market share as Credit Suisse withdraws. You could say this is our moment. But on the other hand, I'm sensing that you're also viewing this with a bit more caution than before. So I just wondered if you could sort of talk about how you balance those thoughts post Archegos for prime brokerage. And then the second question was to just ask for a bit more detail on your plans for the corporate center, which sounds very promising. What is allowing you to reduce the drag to 150 million a quarter this year? Where do you see that drag next year? And will you allocate all of it to the division so that in future you'll be a sort of zero corporate center?

Okay. I'll take the first question and Kurt the second one. So, Jeremy, yeah, thanks. As I said, we're disappointed by what happened and we are seriously reviewing the relationships both on the prime broker side as well as on the GFO side and the way we go about this business. Having said that, we do see and do think that this was an unusual case, pretty idiosyncratic. and one that provided for a high risk given concentrated positions that the market was not fully aware of. So to come from this one and then kind of come to a general conclusion around this business, I don't think it's wise for two reasons. First, the prime brokerage business is strategic to us. It has been a good business to us. It's important for our franchise. And the prime brokerage capabilities are also crucial to build the relationships with some of the family offices. But again, you know, you'll have to look at it client relationship by client relationship, situation by situation, transaction by transaction. And that's the way we'll go about it.

Kurt? Yes, thank you, Ralph. Jeremy, just to address group functions in terms of where we are. So I guided that I expect us to be below 150 million and then continue to see that come down over the next couple of years and clearly have line aside to get that nicely below 100 million in a couple of years. And then we'll see where we go beyond that. Now, what is allowing us to actually achieve that reduction? Firstly, NCL is shrinking and it's coming down considerably. Secondly, if you look within the service side, we've largely built out most of our reg entities from a regulatory perspective. We were holding those costs. Thirdly, our DTA asset and its funding costs is lower than it was. And then finally, we are finding ways just to improve our treasury efficiency. And those will all be the drivers going forward to continue to bring that down.

And do you plan to fully allocate it to the division? So like some of the U.S. banks, you'll have a zero corporate center?

Yeah, I think our intent is over time to get that as close to zero as possible when we fully sunset NCL. I think there will always be some pluses and minuses. And then just as a reminder, there is some accounting noise and asymmetry that is always going to be absorbed that we want to keep away from the business divisions.

Okay. Thank you very much.

The next question is from Alastair Ryan from Bank of America. Please go ahead.

Yeah, thank you. Good morning. So a little bit on Archegos, please. You say it's idiosyncratic, but, you know, UBS has been here before. IB revenue is down 12, costs up 7. Zurich writes the check when New York blows up. You know, it's not clear from any of the risk disclosures that I've had 50 pages in the annual report, where I could have found this risk. So UBS talks a lot about being low-risk. It hopes to get a multiple for being a low-risk institution. $900 million is an extraordinary figure. I mean, it's higher than your credit losses for the whole of a very severe year. Now, if I take page 98 of the annual report, the risk management and control principles, five principles, protection of financial strength, fine, but it looks like this report is on the wrong side of four of the others, all four of the others. Protection of reputation, business management accountability, no mention of that. Independent controls, no evidence, and risk disclosure, clearly not there. So can you give us a sense of how serious this is, what the consequences have been, why the market should look through $900 million from a single name? And it's only idiosyncratic because he's the only one that that blew up in the quarter. I mean, it's intrinsic to the business, and the risk management has been found wanting relative to some peers, although clearly not as bad as Credit Suisse. Thank you.

Well, thank you, Alastair. As I said, you know, I can hear the disappointment in your speech before the question was asked. And, you know, I understand you're disappointed. we are disappointed as well. And that's why we are doing a detailed review of the relationships, of the individual relationships, specifically on both sides, prime brokers or GFO relationships, as well as the processes, the risk management processes surrounding all of this. And that's what we're currently doing. So we are taking it seriously, and you can expect it from us. Having said that, if you look at the situation and look at the buildup of a highly concentrated position across many different players, it was idiosyncratic from the perspective that this was not a market event. It was an event to a specific case with highly concentrated positions. Now, again, you know, it should have been detected. I understand that. It's not the point that I'm trying to make. But that's also why we're just as disappointed as you sound as well. So thank you.

The next question is from Magdalena Stoklosa from Morgan Stanley. Please go ahead.

Thank you very much, and good morning. I've got two questions. One is still about Archegos, but from a slightly different perspective, and another one on costs. As the reviews start and the industry looks back at what went wrong on the regulatory side, particularly in the U.S., when you're having this conversation, what comes up from the perspective of the potential changes to the regulations, to the disclosures that may, you know, that may come through post this event? And also, you know, how has your conversation with a kind of Swiss regulator about it kind of gone? So that's my first question. And my second question is really about the costs. You know, and of course, costs also within the kind of strategic was kind of firm update, well update, strategic kind of framework that you have just communicated. And I'm going to kind of use slide eight as a, you know, as a little bit of a framework, because you know what, it kind of explains to us what happened in one queue and that's fine, you know, I never have an issue with the kind of variable costs when they come with revenues. But when you look at the fixed cost base, so your cost base excluding the variable side, And when you think about kind of potential changes, particularly from a perspective of technology, from the perspective of automation, simplification, do you think that medium-term that cost base can actually be attacked in absolute terms? I.e., you know, is there an argument to be made that that cost base could actually go down, but also within the context, of course, of your revenue ambitions? Thanks very much.

So the first one, you know that we don't comment on our interactions with regulators, but clearly we are in daily contact with our regulators across the globe on these matters, big or small. And so also on this one, I think if I may summarize it in one word, it is the call for transparency. on this one. That is the big learning and that we are basically looking at to either increase with our clients in a bilateral way or where regulatory requirements could or should come in. On your second point, I actually do think that if you would keep all things equal, there would be scope to reduce your cost. if you keep all things equal. Having said that, as you know, we have a brand out there that can grow to an exclusive brand for wealth and asset management that is already known for it, specifically in the markets that I mentioned. And these markets provide for growth opportunities. So if we were not to go after growth and we would only look at cost, then the programs that we have started to get to that one billion on an annual basis would actually be programs that would decrease that cost base. Again, if we wouldn't go after the opportunities that we see in the areas where we see the growth the fastest. And again, you know, this is not about, okay, we have the one billion, if we can generate it as a savings and let's spend it. It is not about that. also where we want to spend it and where we want to support the business we will be really focused and that's why they come together in this presentation it is about we do see the opportunity to save cost and we do see the opportunity in a very focused way to grow and again if we feel that that growth does not make the returns that we demand we will not spend it and we will not support that business. So that is what you can rely on.

Thanks very much. The next question is from from JP Morgan. Please go ahead.

Yes, first of all, thanks for taking my questions. Two questions. The first one, coming back to strategy, It sounds like, Ralph, you're quite happy with the businesses and geographies that you operate in. And I'm just wondering, can you talk a little bit, first of all, is there anything that you're unhappy with in terms of business geographies mix? And in that context, any areas that you feel are subscale? either on geography or on business that you need to review in the future more strategically. And the second question is related to Archegos again. I cannot understand fully that you're losing roughly the same amount as Morgan Stanley, which is claiming to be one of the top prime broker. Actually, I think they said They believe they were the number one player. And you must be relatively small in terms of underlying exposure. And it takes you into the second quarter to take all the hits. And you have the same amount of losses against a smaller underlying exposure. So can you explain that to me? Because you're probably making the analysis against your peers. And secondly, can you explain to me How much of PD business you have overall in terms of exposure? How much of that is family office? And lastly, why there was not the decision to unwind the positions by Friday? As for example, one of the PSS done, Goldman and Morgan Stanley, more or less were done on Friday or Sunday.

Thanks again. We're not disclosing the specific exposures on these sub-segments. And I can't go into the event itself. I can, though, tell you that we are a top five player in the prime broker business. So it is not like we have come from a different position than some of our peers. So that is not the kind of the comparison you can make. Back to your first question. I think there is always places where you are not sufficiently happy regardless, by the way, of the geography or the business line or the capability that we are managing. For starters, it may be very clear that also from this presentation that the wealth and asset management business are really important businesses to us. Having said that, there are certainly areas where we feel that we can't generate the scale, and that will lead to decisions like we took on Austria. And some of the businesses that need more local scale, we will find difficult to really scale up and improve in profitability, certainly if they are in geographies where the growth is also not coming through. So that should give you a hint. Then the other one is around, for example, the investment bank, where we actually think that in terms of the capabilities that we need for that in order to build our wealth business, we're kind of right-sized. Clearly, we can always improve, but it is certainly a business that we want to manage in a very capital-efficient way, as you know, and needs improvement all the time, needs alignment all the time. But that goes for all businesses as well. So again, there will always be areas where we're not happy and where we need to improve. And we see scope for improvement across. And scale will be a factor in all of our businesses, whether it is wealth, in which we are globally the number one, and we still have scale challenges in some of the areas that we feel we can improve on. And if not, then the asset is not strategic. So it's all over the place. And I really think you should never rest on your laurels, even if the business is strategic.

And may I just ask on regulatory impact on Archegos, should we think, as some of your peer has done, that there could be counterparty and risk-rated asset add-ons or capital add-ons in any form in relation to Archegos. And just coming back, one more question on Archegos. Why would you lose the same amount of money as the player that claims to be number one to Archegos in terms of underlying exposure?

I can't comment. I won't comment. You have exposure and you have collateral and you have positions that may be different. You may have margins that may have been different going into the situation. So I can't really draw a comparison there on your first one regarding capital. Clearly, you know, we are discussing with regulators as I said, you know, I can't give you anything more. I can just tell you that even in this quarter, we have further improved our capital situation to a CT1 of 14% and that shows the strength and with that also kind of the confidence that we have in being able to build and also to add some of the challenges if they may come along.

I would just add that there's been no such add-on at present, but as Ralph said, we don't know what's to come. And I would reemphasize that our current capital requirement is 9.66%.

Thank you very much.

The next question is from Nicolas Payen from Kepler Chevrolet. Please go ahead.

Yes, good morning. Thanks for taking my question. I have three questions. The first one, a quick follow-up on capital requirements. Beyond the heart, can you update us perhaps on the risk-weighted assets regulatory inflation that you expect for the next couple of years? The second one is really on your IT budget. With insights of the COVID-19 crisis and in light of your new strategic framework, do you expect your IT budget to be And the last question is on sustainability, which seems to be a big focus now. In your discussion with clients, are they willing and ready to accept lower profitability for better sustainability in their mandate? Thank you very much.

Could you repeat the last question, please?

Yeah, on sustainability, when you discuss with clients about sustainable mandates, are they ready to accept a lower return on their investments for a better fitted sustainable mandate, for instance?

Okay, so to the extent, it really depends what they're looking for. So some really go for impact in specific areas, and then they may actually accept a lower return. Others want to have a real good combination, and we see that sustainable investing does not necessarily mean lower returns. So from that perspective, it really depends on the client and the client wishes and the impact he or she wants to have through the investment portfolio. Now, on your second question on IT, Nicola, honestly, there may be a bit of uptick, Generally, we'll go with the 10%-ish rule of revenue that we look for on the IT side. And I think that with that budget in dollars, there's a lot we can do. And you should realize that we're going to manage our IT investments much more strict at the top level on a quarterly basis. So what we're going to put in place here is that each and every project that needs a change budget, whether it is IT change or business change, as we call it, that we review that at the top level, that we crowd the ones out that don't make the right returns, not in comparison or in competition with somebody else or with some of the other ones. And clearly, the compliance and the regulatory ones always go first. You know, often you can't really look at a return there. But beyond that, everything that has to do with the business, will have to meet return hurdles and with that we will crowd out some of the projects that would otherwise receive purchase because we take it, we manage this beyond the business divisions. That's also why Mike joins the gap. Then thirdly on that one, we actually think that we can further improve in the productivity of our technology professionals. and really leveling them up, as we say it, and use that and bank the improvement of that productivity in order to do more. So we're not planning a big budget increase in order to support some of this. It is really about being very strict as to how you manage it. managing it across the business divisions rather than within the business divisions in terms of the allocation, doing it on a quarterly basis, and leveling up the technology from a professional perspective so that we can improve the productivity.

Maybe, Nicolas, in terms of your first question, We have around a residual six to seven billion of increases due to reg model updates that we're making to the rest of this year before we absorb the full impact of Basel three finalization. We've got it before that that estimated impact is somewhere between 20 to 30 billion. We continue to refine that. And that is, of course, given there's still some uncertainty around our TV rules. In addition to a couple of areas where FEMA has discretion, we expect that discretion to be clarified as we go through the rest of this year. And then finally, we still believe we have an opportunity to look to optimize so that we bring that impact down and we'll update you as we have clarification on all of those points. Thank you very much.

The next question is from Tom Hallett from KBW. Please go ahead.

Morning, guys. Just a couple from me, really. But could you just elaborate on the restructuring expenses to be taken in the second quarter and what that specifically relates to? Because it sounds like you're reinvesting all those gross benefits there. So there's no obvious benefit from the outlay on investing in the restructuring plan. And then secondly, on strategy, I'm just curious as to why there was no financial targets disclosed or they won't be until the end of the year. Thank you.

Well, I will answer the first one. Clearly, you know, we're doing well. We have financial targets out there. We are reviewing some of the activities still for which we need to update you. And therefore, we have not concluded on everything. And therefore, I don't think this is the moment to come out with new financial targets. But we are... working to comply and address and fulfill the targets as we have given. And we do expect to perform this year towards the more positive end of these ranges that we have given. So that's what I can say.

Tom, just on your first one, the restructuring of around 300 million, it's broad-based across the group and across geographies. Also, just to clarify, and you heard this from Ralph very importantly, the $1 billion we indicated, we will only reinvest that if we actually see growth opportunities that more than hurdle. Otherwise, that would be an opportunity to reduce our costs. So just to be very, very clear about that. And as we've guided before, the real intent is to maintain our costs around Flattish, grow the top line, and deliver positive operating leverage.

The next question is from John Pease from Credit Suisse. Please go ahead.

Yes, thank you. So just to follow on firstly on the comment on financial targets. I mean, should we expect a reform of some of the big group targets like return on CET1, which maybe are not looking ambitious enough at the moment? Or will it be a roll forward of some of the more divisional targets for pre-tax profit growth and buybacks, et cetera, or a combination? And then my second question, please, is on the new measure of net new fee earning assets. And how would that compare to net new assets over the last year or two when prospectively would you expect it to be slightly higher because you're now including some of the dividend flows? Thanks.

Yes, just in terms of the financial targets overall. it would be inappropriate for us to comment what they might be because we still have to go through the work. And so meanwhile, as we've said, we keep our current targets intact for this year and we tend to operate at the positive end of those targets. In terms of fee generating assets overall, just mathematically what is excluded there are deposit flows and also other client inflows that really don't have an impact on our recurring revenue. And principally, that includes large stock inflows. And so in general, on most quarters, you'd actually see a higher net new money number than you would fee generating asset number. But having said that, the composition is different. And I'll just point out a fact, for example. on a fee-generating asset basis, net new fee-generating assets. The Americas would have been positive over the last five quarters, but that would not have been the case on a net new money basis. And so you do see that there are some differences overall in terms of regional patterns and also the composition overall.

Great. Thank you.

The next question is from Andrew Combs from CD. Please go ahead.

Good morning. A couple of follow-ups on Archegos and the investment bank. Firstly, I haven't seen anything, but perhaps you can confirm whether FINMA has opened enforcement proceedings. Obviously, I have for Credit Suisse. I haven't seen anything against yourselves, but perhaps you can confirm that. Secondly, when you talk about risk management on the prime brokerage business in future, can you just elaborate a bit more there about the steps you're taking. Is that focused on the initial and variation margin? Is it on the leverage amount on equity swaps? Perhaps you should clarify a bit more there. And then finally, you've retained your guidance of RWA and leverage exposure within the investment bank being around 33% of the group. Obviously, Credit Suisse has gone from an absolute target to a proportion of group target and now back to an absolute cap target. What are your expectations there? Do you expect to maintain that 33% figure? And if so, given that you are expecting the broader group to grow, where do you see the asset growth coming from in investment banking? Thank you.

So in terms of your first question, there is no current enforcement proceedings from FINMA. As we've already said, though, we can't judge what they might likely do in the future. In terms of your second questions overall, clearly the key lessons learned from this particular event is all around concentration and specific overall exposures, synthetic concentration. combined with the lack of transparency. So, the changes overall in the learnings and what we will incorporate into and already are incorporating into some changes overall in our RIC processes is specifically to address those topics. In terms of our RWA and LRD guidance, the one-third of group doesn't change. And purposely, I won't indicate exactly where I would expect the investment bank to deploy that because they are very dynamic. They will continue to deploy that in terms of where they see the opportunities in the market and where they can generate the best returns overall. And importantly, where they can best support our wealth management business.

The next question is from from Goldman Sachs. Please go ahead.

Yeah, good morning from my side as well. Thank you for this comprehensive call. I guess that what gets lost on calls like this is the bottom line result. And I just want to say well done on a 14% stated return on tangible equity after all the various hits from your businesses. Now, this said, even I can't deviate from what seems to be the theme of this call. Can I just ask one last question on the FINMA response? You have confirmed that FINMA hasn't ordered any enforcement action so far. Can I just ask, has FINMA requested any risk-reducing measures at this point? So it's a simple yes or no. Then the second question I have, when it comes to these archegos, was it carried within UBS as an institutional client in your equities operation, or was it carried as part of your PWM operation as a family office? And then the last question I have is on U.S. rates, which I suspect would have featured more prominently in normal times. You've commented that the effect of lower U.S. rates has been absorbed. Can you just confirm what you think the sensitivity to higher U.S. dollar bond yields is, and what is the time lag between bond yields moving higher and a higher reported revenue number? Thank you very much.

So, first of all, thank you for the first comment, and I agree that often You lose context here, and the fact is we did deliver a very strong quarter after absorbing the event that we're talking about. Just in terms of FIDMA's overall response, there's been nothing that they've added on at all, nor any requests as of yet in terms of reducing our exposure, our positions across the group. In terms of the client itself, importantly, it was a prime brokerage client. It was, and I think you are aware, it was classified as a GFO, which also leads to some of the disclosure issue that all of us are struggling with. And then finally, in terms of your U.S. rates question, what we mentioned is we fully absorb the impact quarter on quarter. So there's no residual overall drag due to deposit margins related to U.S. rates. from the first into the second quarter. Now, I didn't quite get the final part of the question, the fact that we've seen the longer end, we've seen the 10-year rise a little bit.

If the curve shifts higher, what do you think is the revenue sensitivity broadly? And then what's the time lag when you expect to see the impact in your numbers?

You know, naturally, we see a median effect in the lower end of the curve. And anything that's longer out to 10 year, it takes longer for us to kind of work that through our overall replication portfolio, both the synthetic as well as the cash replication. And so we certainly wouldn't see it. And of course, I think while the long end is actually spiked up a bit, there's still a lot of uncertainty around inflation expectations and how rates will behave going forward. But if we were to see an improvement and an increase in the shorter end, then that would immediately flow through. And you've seen our guidance overall, 100 basis points parallel shift across the businesses would contribute $1.6 billion overall of net interest income. Perfect.

Thank you very much. And well done again on the 14% ROE.

The next question is from Adam Terlak from Mediobanca. Please go ahead.

Morning, thank you for the questions. I wanted to follow up on capital return and the buyback. Last quarter, you set a target or indicative target for how much you wanted to buy back during the quarter, but we've got no such repeat today. I noticed in your AGM documents that the 2 billion accrual actually relates to the 2020 distribution. So I was wondering whether you have to run through that full 2 billion before you're really thinking about it being a 2021 distribution on the buyback. And if so, why we're not discussing an extension of that billion a quarter run rate. And then second, I wanted to go further into NII you've mentioned that the loan spreads were good again in the quarter. Just on a sudden, how much lending revenues are you adding queue on queue and how far could we extrapolate that through the rest of the year? You said NI clearly up into 2Q, but would you expect that again 3Q, 4Q and beyond? And as such, is this now a time to think about NI growth from this billion a quarter run rate? Thank you.

The next question is from Andrew Lim from Societe Generale. Please go ahead.

Hi. Good morning. Can you hear me? Hello?

Ms. Lim, we can hear you.

All right. Okay. I'll proceed with my questions. I actually wanted to talk about the French tax evasion case. That hasn't yet concluded in the sense that we haven't had a fine, if any, determined. We have to wait until September. And it seems like we have to wait for the courts to decide on the application of law. And I guess that encompasses how we view any fine in relation to whether it's dependent on the tax assets shielded or the tax revenue is not paid. I was just wondering on whether you could give your view on how the The courts are viewing this and if there's any more specific timing in advance of September when we might get more information on their decision here. So that's the first question. And then the second question is relating to your strategy, I realize you spent a lot of a lot of time trying to outline your thinking here. And, you know, we should spend some time thinking about your views. On this matter, you talked about being more agile and spending more time on risk management. In some sense, there's something that we can analyze here numerically, but it seems important in terms of, like, potential cultural shift for the bank. And I'm just wondering, Ralph, from your point of view, how big a cultural shift that entails for UBS in terms of, like, different businesses, the number of people involved, and how they think about how they interact with clients.

You first with the answer. Adam. Of Adam, yeah, the questions of Adam, and then I will take Andrew's questions that he just raised. So, Kurt, you finish Adam's questions, and then I will take Andrew's.

Adam, are you back? He's in listening mode. We didn't cut you off because we didn't like your questions. In terms of capital returns, as we highlighted, we actually expect to be back repurchasing shares tomorrow. You can track us weekly. We will modulate the volumes just based on what we see in the market as we progress. I would just note if you look at our 14% current CT1 ratio, that would imply about a $3 billion buffer above the around 13% that we guide, plus there is a residual $900 million still in the reserve that we built up last year. In terms of your question on NII, Indeed, specifically what you've been seeing is our lending NII growth has been helping to offset the overall headwinds from U.S. dollar rates specifically. I'll just mention year-on-year, if you look at the increase in lending-related NII from a combination of volumes as well as margin, we saw $108 million in the quarter year-on-year increase. The quarter-on-quarter impact was $21 million. How that progresses going forward, of course, will continue to depend on the overall net new lending volume, but certainly the around $11 billion of net new loans in the first quarter will help us in the second quarter.

Okay. Then to Andrew's questions, the first one on the French case. Andrew, yeah, so the way we read this, also in terms of the evidence that was provided, we have not seen any kind of argument there to change the provisioning and the level of which you know it is. And we don't expect any further information before the court actually comes out with their decision. So that's one. On the second one, on the cultural one and how to support Agile, I think that people sometimes think that Agile is some kind of a way to work in some kind of an anarchy or create a bit of chaos, but Agile is quite the opposite. Agile is a very disciplined way of working in which you keep things very clear, very disciplined with a multidisciplinary team that works on two-week sprints, small teams, two-week sprints, and every two weeks you come to the decision as to whether progress has been made Progress has not been made. Whether you want to continue, whether you don't want to continue, it is a very strict way of management. But within those, within a framework like that, there's a lot of empowerment to those teams as to doing the continuous improvement. Now, as with, you know, with the experience I've had before and what the experience that we have here as well, you know, agile can work everywhere, also here. But you have to introduce it over time. And we have been working agile here in some areas already. And with a lot of success, we have been working agile in what we call hybrid pods in the investment bank. And they're doing a really good job in developing new business opportunities, in disrupting some of the activities, but also in the continuous improvement of some of our electronic platforms and UBS Neo. So there is quite some experience with this, but very specifically and more so within the investment bank than anywhere else. And what we're doing is we're drawing on that experience and rolling it out and first piloting it in new areas, two or three areas specifically now in the Swiss business and some more areas, one in the finance function, and we have one in the risk function as well. And we'll draw on those experiences to see how we can further develop what we call then the UBS way of working before we introduce it to all and everyone. So we'll take it step by step.

That's great. Thanks a lot.

The next question is from Anke Rengen from RBC. Please go ahead.

Thank you very much for my question. It says two follow-up questions. The first is on costs. Thank you very much for your guidance on the longer-term cost control. Just for 2021, did I understand you correctly? You're expecting an underlying increase pre-available compensation and so on by 1%. I just wonder what would be driving this. And then, secondly, on your slides on strategy, I understand that's premature given you're giving us the update with 21. But I just wanted to confirm when you talk about committed to delivering higher returns, do you refer to industry standards or higher than you currently deliver, which, I mean, would be surprising, or higher than the target? Thank you very much.

Yes, in terms of your question on cost, you did indeed hear us correctly. We do expect around a 1% full year-on-year increase, excluding variable comp, one-time items, and also foreign currency translation effects. And the reason for that versus the flattish that you've seen from us over the last couple of years is that we did come into the year with slightly higher run rate costs overall because we have now postpone any layoffs for several quarters just in response, and also just to ensure that we were considerate of the pandemic. On the strategy side, in terms of our overall return targets, I think what we're referring to is we do expect to deliver consistently high in sustainable returns, and that's really our area of focus, above our overall cost of capital, clearly. Right now, that's captured within our 12 to 15% overall return on CET1 range, and we said we intend to operate at the upper end of that. And then we'll have any further update on targets, as we highlighted, as we go through the rest of our build-out of our overall strategy plans.

Okay, thank you. The next question is from Stefan Stahlmann from Autonomous Research. Please go ahead.

Good morning, gentlemen. Thanks for taking my questions. I wanted to quickly follow up on Archie's goals with two aspects, please. You have a $774 million pre-tax loss or revenue loss, sorry, and you have a $434 million net loss. Is it fair to assume that you have actually made around $200 million variable compensation reduction in regards to Archegos to bridge this distance between the revenue hit and the net loss. And also regarding Archegos, do you look at this more as a market risk event or a credit risk or counterparty credit risk failure or is it more of an operational issue in your point of view? I also wanted to quickly follow up on the restructuring expenses to come in the second quarter. Do I understand this correctly that this is essentially a legacy item related to measures that you wanted to take already for a couple of quarters? Or has it anything to do with the $1 billion gross savings that you're targeting for 2023? And if not, is there a restructuring or cost-to-achieve budget for these $1 billion additional cost savings, please? Thank you.

Yeah. In terms of ARCACOs, you are correct. That's accounted for overall as a trading loss. Well, actually, your first question first. If you look at the 774 versus the 434, we're going to ask you to do a little bit of work, and you can reach your own conclusions.

You know our tax rates.

There is a tax rate there as well, of course. And just in terms of overall, it is accounted for as a trading loss. We do view this as a market risk event, not an operating risk event and not a credit risk event overall. In terms of your restructuring question, you can look at the $300 million as a an initial start on the overall $1 billion. There's a little bit of legacy there that we've incorporated into that, but it's really been packaged, and it also reflects some of the work that we've already done to make an advance towards the $1 billion. And naturally, the full $1 billion will have a cost to achieve, and as we progress through the delivery of the $1 billion, we'll give you transparency on what those costs are.

Okay. Thank you very much.

The next question is from Amit Goel from Barclays. Please go ahead.

Hi, thank you. Yes, I've got a couple of follow-ups. So one was just a clarification. In terms of the alignments of corporate center costs to the business divisions, just on that, is that going to be a kind of a change in how you present the results with the reallocation? Or is this something that will be done kind of internally, but from an external reporting basis, there wouldn't be a change? And then secondly, just on the broader strategy, so I guess as I understand it, you know, the commentary that the business is doing well, the IB is the right size, you know, clearly there's some time until the full year 21 results. So I just want to try and understand the other areas that you're focused on and how significant is the review that you're undertaking? So just to get a sense of how much change or how much action we could anticipate at that point beyond some updated targets. Thank you.

I'll start with the second question. So the areas that we Clearly, everything we review, and you should expect us to continue to review areas, but we have indicated first that we see growth opportunities in the U.S. and in China and Asia. Plans for those are also under review and under discussion. It's about a further alignment of other activities in order to support the wealth business, so also if it comes to what is it that we exactly do across the firm, also in investment banking as to how can we further align some of these activities in order to support our way forward. So that's where you can also kind of expect us to review. And clearly also here in Switzerland, we know that the performance, commercial performance is good, but the financial performance continues to be under pressure. because of the negative rate environment, we will have to invest on one side in digital and digital services. The other side, it will have to reduce our cost also further. So those are a couple of areas. I mean, there will be more, but I mean, we're literally, and you should expect from us to review each and every area continuously anyway. even if it is top strategic. It has to make the returns. It has to make the scale. It has to make a difference. As I said, you know, the second strategic imperative is a very important one, which is that we should focus on where we have as what I call sustainable share, which basically means is, is the market attractive? Is the market large enough? And can we differentiate ourselves in that market to make a, can we basically really make a difference in that market? That's what we apply to every market and every capability.

Yes, Simon, in terms of your first question, you will see no difference in the presentation from our disclosures. I mean, right now we're only disclosing one operating expense line. And, of course, those costs were already fully allocated to the business divisions.

Okay, got it. Just to be clear then on that point, the $150 million per quarter, so it wouldn't be a case that in the future or that number going down to $100 million, that $100 million would then be reported within the divisions. That would still be reported as a corporate center item?

Yeah, that's correct. In terms of the group functions, overall retained costs, there is no operations cost per se that sits in that below negative $150 million range. the operations costs related to all the business division activities are already fully allocated to the business divisions and are not retained.

Okay. So there wouldn't be any changes, for example, within internal rewards, metrics, et cetera, to employee staff, et cetera, for, you know, to reflect any change in alignment of corporate center costs.

The shift is already the, The 7,000 or so operational headcount, they were aligned with the business divisions, but now they will report directly into the business. And so, therefore, as Ralph outlined, it just gives the businesses a much better ability to look at the integrated overall solutions and capabilities they provide to their clients and to continue to optimize those. That's really what's behind the intent.

Okay, got it. So it's more a revenue opportunity as opposed to a further cost-saving opportunity.

Well, I would say both a revenue and as well as a front-to-back efficiency opportunity. So we think that they're both opportunities. Both. It's pretty both, I mean.

Okay, thank you.

The next question is from Patrick Lee from Santander. Please go ahead.

Hi, good morning. Thanks for taking my questions. I have one clarification, one on the prime brokerage, sorry, and one on the new KPI disclosure in wealth management. And firstly, related to the prime brokerage losses, I wonder if you can help me, Mike, with the understanding on this. Because if I, let's say, take the 774 million losses disclosed, is there some sort of a notion of exposure to put that loss in perspective? You know, for example, to get a sense of loss as a percentage of exposure, or is that not the right way to look at it? And then also, how do we think about the risk-reward of this product? Because, like, hypothetically, if there wasn't a market dislocation, what would have been the fee generated from this product or trade? I guess I'm just trying to get a sense of the nature of the product that seems to have not very big upside in the good days, certainly a very substantial loss on the downside. Secondly, relating to wealth management, thanks for the extra disclosure on the invested asset. Interesting to see how it splits, you know, between fee generating versus others. Is there some sort of interactions between the solution direct investment and then the fee generating assets? You know, could the non-fee generating be seen as a parking space for clients before you upsell other fee generating products, effectively converting it from no fee to fee generating sometime to the future? Or should we think of the direct investment by nature, a very different type of business? And is there any geographical bias, you know, whether I think you alluded to earlier, whether the U.S., for example, is the vast majority of this non-degenerating portion.

Thanks. Yes, Patrick, in terms of your first question, the $774 million, as we mentioned, was overall an operating loss, and it includes two components. One, it's just the overall net residual position from the default decline, and then it's the overall loss related to the de-risking process. In terms of your comment on KPI, you're exactly right. If you look at the current overall client positions that we have in solutions and direct investments, that includes, for example, large overall single stock positions from wealthy entrepreneurs that would initially be booked as within the solutions and direct investments, but then subsequently We might provide some leverage to that client, some advice. They might diversify and invest. Part of those investments might include investments into mandates or alternatives, which would then sit in fee-generating assets. So it's not to, and this is really critical, it's not to at all diminish the value of solutions and direct investments. They on their own generate attractive transaction revenue, but they also result and they provide opportunity for us to provide the the full benefit of our solutions to our clients. And you do see quite a bit of interplay between solutions and direct investments and fee-generating assets.

But if I go back to the prime brokerage bit, I guess from the outside, you're just saying that we can't really get a notional amount or just to size the risk. It's impossible for us to ascertain from the outside then.

That's correct. And let me also just comment on one of the points that you mentioned is this has been a highly attractive business for us. We have not seen a loss in this business since before the crisis, as we highlighted. It is a very, very good returning business. It's also one that's extremely strategic to serving our institutions as well as our global finance GFO clients. And so it is part of our franchise. It's also a valuable part of our franchise. It has been and it will be going forward. Thank you.

The next question is from Pierce Brown from HSBC. Please go ahead.

Yeah, good morning, James. Most of my questions have been answered, actually, but maybe just a couple of small clarifications. On the... The expense guide for this year, I think you said the 1% was pre any potential investment spend for the strategy refresh. So I wonder if you could just quantify what sort of margin above the 1% we should be thinking about for investment this year. And secondly, sorry, just going back to Archegos, but you said you're reviewing relationships in prime broking, but it sounds like the overall strategy there you're sort of happy with. Are there any relationships outside of Prime Broking, outside of the investment bank, which might be impacted by this review? And I'm thinking particularly family offices within the wealth business. You've obviously had very strong loan growth in wealth. Is there anything in terms of risk review which might be impacted by what's happened in Prime this quarter? Thanks.

Yeah, Piers, on the second one, I can be very clear. Yes, we are also reviewing. the the global family offices that we have exposure to just to be sure and that you know the lessons learned that we have on this one that we also apply those and that we on a relationship by relationship basis we we get a better sense for for where we are the first one I'll give that to Kurt

Yeah, in terms of what I highlighted just regarding the possible investments and the execution of our strategy overall, the reason why I call that out is our intention, as Ralph said, is actually the saves we generate from the $1 billion will certainly cover and offset the investments we intend to make. But there could be some timing differences. We might see a very, very attractive opportunity as we finalize all the diligence that we're currently doing. in the different areas highlighted by Ralph, we might decide that we actually think there's an investment that's really, really attractive that we want to make now. And the saves that we generate from the billion to cover that may not materialize for a couple of quarters. So it's really just to highlight those timing differences. And, again, we'll provide that transparency as we disclose that going forward.

That's very clear. Thanks very much.

There are no further questions. Ladies and gentlemen, the webcast and Q&A session for analysts and investors is over. You may disconnect your lines. We will shortly start the media Q&A session.