When: Today, Wednesday, June 5th
Where: CNBC's "Closing Bell with Maria Bartiromo"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with UBS Group CEO Sergio Ermotti today on CNBC's "Closing Bell with Maria Bartiromo."
All reference must be sourced to CNBC.
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SERGIO ERMOTTI: What we have been seeing in the last two years and also in the first quarter of this year very, very strong-- flows, positive flows. But-- clients' risk appetite remains-- absolutely-- you know, I would describe it almost paralyzed, very high-- level of cash balances. And this has been the case for the last seven quarters.
MARIA BARTIROMO: What do you think it's going to take to get m-- people to move money out of cash and put it into higher yielding securities like stocks among other things? It's been along time where people, even though we're seeing this market hit record after record, they're still nervous and they're sitting on cash.
SERGIO ERMOTTI: Well, it's--the higher it goes, the more nervous people get-- and frustrated at not being in the market. But I would say that, to answer your question, the resolution of-- the problems of Europe-- in a sustainable way and not through short-term tactical-- remediations. Also an understanding that U.S. economy is growing and is stable—and there is a clear path-- out of the Q.E.'s. And the impact of such-- a potential move of the fed in the future, how would that affect the economy, so how sustainable is the recovery that we have seen in the last-- few quarters, that's going to be the test that investors will want to see.
MARIA BARTIROMO: Are you seeing-- a large number of folks having money and cash? I was talking, for example, to one of your competitors, Credit Suisse, and they told me that 30% of the accounts are in cash. Is it about the same?
SERGIO ERMOTTI: Very similar.Yes, exactly. And as I mentioned before, that is exceptionally high, not only in the last few months, in the last seven quarters. And this is basically ten to 15 points higher than what I would call a conservative-- risk appetite environment in the last 30 years. So we are really at levels of-- risk aversion ever seen in the industry.
MARIA BARTIROMO: You have gone down a different path than some of your competitors. Emphasizing wealth management, deemphasizing in some ways the capital markets type businesses, the large, you know, layoffs last year. Talk to us about why you believe this path is the right path.
SERGIO ERMOTTI: In the investment banking businesses, what we wanted to pursue is a strategy that focuses on areas where U.B.S. is traditionally very strong, where we can add value to our corporate and in-- institutional clients. But also, most importantly, contribute to the creation of-- a value—and capabilities in our wealth management businesses. So there is-- there is an you know-- an affiliation of what we do in investment banking with what our clients want in order to be successful.
MARIA BARTIROMO: So how can you balance-- both businesses going forward when you have pressure from outside, an activist investor trying to get you to sell the investment bank,sell it to the employees, how do you balance, knowing the need for the investment bank to be on the other side of the wealth management so that they can coexist?
SERGIO ERMOTTI: Oh, by continuing to deliver on our strategy, we announce a strategy. We have been very successful in-- in-- in-- in implementing our strategy. We were very pleased to see also-- the very strong backing of our shareholders—at the E.G.M.only a few weeks ago, which is fully supporting-- the strategy of the group.So-- of course we're never going to be able to-- make all shareholders happy.But the vast majority of our shareholders is very keen for us to continue to pursue our strategy.
MARIA BARTIROMO: You've raise capital-- approaching the Basel III requirements, are you ready for those?
SERGIO ERMOTTI: We have an—we generated capital through a reduction of risk, risk-rated asset reduction. And 80% of that was done by selling assets, by taking down risks. We achieved our fully-applied Basel-- III-- equity capital ratio of 10.1 at the end of the first quarter, which is six years in advance of our regulators' requirement. So we feel very comfortable. Now we are tackling the 13% target, which is our ultimate target.
MARIA BARTIROMO: Are you expecting to come back to the market and raise capital?
SERGIO ERMOTTI: No. I think that we have a clear path on how we're going to generate through-- return earnings. And further disposals on known core assets we will, you know, get to the 13%.
MARIA BARTIROMO: So how muchmore in terms of deleveraging is there ahead? What-- you will be selling assetsfurther then?
SERGIO ERMOTTI: The vast majority of our-- disposal will be on-- derivatives. And it's not really asset disposals-- in that sense. So there is still a little bit of deleverage, but it's not meaningful.
MARIA BARTIROMO: In terms of selling assets to meet some requirements, would the retail bank be on the block?
SERGIO ERMOTTI: No, no. Our core businesses are the one we define—back in November, 2011 when we announced our new strategy. In-- in October last year, we announced nation acceleration of the same strategy. And wealth management, universal bank, and a very focused asset management and investment bank businesses-- our core businesses.
MARIA BARTIROMO: There are proposals happening on compensation as well. In Switzerland, there's one that'stalking about you can't have the highest-paid person any more than 12 times more than the lowest-paid person. What are you going to do about compensation in terms of retaining talent?
SERGIO ERMOTTI: I mean, first of all, that would be only applicable to Swiss-based employees and not - to the global franchise. Of course, but that would make-- Switzerland-- very uncompetitive. Long run-- would be very difficult to retain-- across any industries, not just-- the banking industry. It's, this is applicable to the entire economy. And not necessarily just for lists of companies or banks. Therefore, it's a quite--intrusive-- piece of legislation if it comes. Goes through a popular vote. I hope and I think that it's not going to-- come through, but, you know, that would be very bad for Switzerland.
MARIA BARTIROMO: How much will the litigation- issues around you and-- around the industry eat up intoprofits this year and going into the next several years?
SERGIO ERMOTTI: I think that's a constant-- you know, it's-- that's real-- the biggest the challenge is becoming a very litigious, unpredictable-- you know
MARIA BARTIROMO: But how much are you reserving? I mean, you've got to have a plan for this. For example, you know, we know that you've already settled with U.S. lawmakers over tax evasion issues. Now France is saying that they would like to-- go deeper into this and perhaps--are you-- are you planning on doing a settlement with France over the same issue?
SERGIO ERMOTTI: It's the early stage. We don't even know exactly what's the allegation are all about.Are-- they are referring to 2004, 2007-- we do things that, you know, we are collaborating, trying to find out what's going on, but it's difficult to understand--
MARIA BARTIROMO: You-- it's difficult to know—
MARIA BARTIROMO: From an investment standpoint, investors want to own your stock, and yet they've got unanswered questions. So given the capital concerns, the litigation, regulatory concerns, when would you expect to be paying a dividend?
SERGIO ERMOTTI: We have been paying-- a nominal dividend-- already last year and this year again and we do expect to basically pay at least 60% of the profit attributable to shareholders-- in the early part of 2015 when we achieve our capital target,which are already best in class-- worldwide. But, you know, we think that we want to have more, we want to g-- really give more solidity to our balance sheet and our equity story.
MARIA BARTIROMO: How much of a priority is this for you to pay a higher dividend?
SERGIO ERMOTTI: Is the priority.
MARIA BARTIROMO: Yeah.
SERGIO ERMOTTI: Is the priority. Capital return, the dividend or any other form of capital return is the goal-- the ultimate goal we are working on.
MARIA BARTIROMO: And what kind of growth might investors expect? Not over the short term, but if you lookout five years, what kind of a sustained growth level might we expect from U.B.S.?
SERGIO ERMOTTI: Look Maria,you go back into the last two years, we have, on average, the last two years,more than $5 billion of profits before tax coming from the non investment bank business. We do expect the investment bank to contribute-- you know-- with a 15% return on allocated equities in the next-- in the next-- from this year onward. If interest rates goes up 100 business points, we expect the effect to be of $1 billion to our pre-tax profits. So you can see how we very quickly after achieving our capital target, we're going to have very high level of cash at disposals to give back to shareholders.
MARIA BARTIROMO: Is it even feasible in your mind to sell part of the investment bank to its employees?
SERGIO ERMOTTI: Everything is always feasible if you run a corporate finance exercise, you can always try to come out with a justification on how things could work. But the real issue is to say how do you translate that into practice. How do you make sure that-- by doing that, you don't lose the client proposition of the value added to clients in doing that? So and if you create the wrong dynamics within one organization with partial ownership and you don't get the right service to clients, you will destroy any benefit that you may get short term as a shareholder.
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