Oct 10 - Fitch Ratings has affirmed UBS AG's
(UBS) Long- andShort-term Issuer Default Ratings (IDR) at 'A' and 'F1' respectively. TheOutlook on the Long-Term IDR is Stable. At the same time, the agency hasaffirmed UBS's Viability Rating (VR) at 'a-'. The rating actions have no impacton the ratings of the outstanding covered bonds issued by UBS. A full list ofrating actions is at the end of this rating action commentary.
The rating affirmations were taken in conjunction with Fitch's Global Tradingand Universal Bank (GTUB) periodic review. Fitch's outlook for the industry isstable on balance. The positive rating drivers include improved liquidity,funding, capitalisation and more streamlined businesses, all partly driven byregulation. Offsetting these positive drivers are substantial earnings pressure,regulatory uncertainty and heightened legal and operational risk.
RATING ACTION RATIONALEUBS's IDRs are on the bank's Support Rating Floor (SRF) of 'A' and areunderpinned by Fitch's view that the probability of support from the Swissauthorities for UBS, if required, remains extremely likely due to the bank'ssystemic importance for the Swiss financial sector and the Swiss economy as awhole. UBS is Switzerland's largest domestic bank by most measures, one of thelargest global wealth managers and one of the ten largest globally-activeinvestment banks.
The affirmation of UBS's VR is underpinned by the earnings stability provided byUBS's dominant wealth management and leading Swiss domestic banking franchises.Fitch views positively the bank's progress in improving its core capitalisationwhich compares well with its GTUB peers. The VR also reflects the challengingoperating environment for UBS's still sizeable investment banking operationswhich continue to expose the bank to a degree of earnings volatility.
Fitch believes that the earnings capacity and franchise in some of UBS'sinvestment banking activities, particularly in the US, may not be sufficient tocover the additional costs of funding, higher capital charges, increasingregulatory expenses and on-going infrastructure investments. While Fitchrecognises that UBS is restructuring its investment banking franchise to focusmore on its areas of strength, further progress in the restructuring processwould be needed before Fitch would consider upgrading UBS's VR.
RATING DRIVERS AND SENSITIVITIES - VRUBS's VR is primarily sensitive to changes in UBS's capitalisation and riskappetite in its investment bank. The progress made in both these areas couldlead to an upgrade of the VR if the bank continues its progress as planned.
Improvements in UBS's capitalisation have largely been driven by a significantrisk-weighted assets (RWA) reduction in its investment bank, including itslegacy portfolio. Basel III RWA in its investment bank, estimated at CHF300bn or75% of total Basel III RWA at end-Q311, have been reduced to CHF223bn (CHF53bnrelating to the bank's legacy portfolio and CHF170bn relating to the investmentbank) at end-H112 and management targets Basel III RWA of around CHF135bn in itsinvestment bank by end-2013. While some of the RWA reduction has related tomodel improvements and has not directly resulted in lower economic capitalconsumption, Fitch believes that UBS's resized investment bank will be morealigned in size and risk appetite to the overall group.
As a result of the RWA reduction, the bank's fully-loaded Basel III commonequity Tier 1 ratio improved to around 8.8% at end-H112 from 6.2% at end-Q311,which compares well with the capitalisation of the bank's global peers. UBS hasstated that it will continue to strengthen its capital base with the aim ofcomplying with its high 13% common equity Tier 1 ratio target early in the2013-2018 phase-in period.
In late 2011, UBS decided to base its investment banking offering on core clientneeds, capital efficiency and areas where it already has a meaningful franchise.Successful execution of its investment banking strategy as well as furtherprogress towards its investment banking RWA target while building up a trackrecord of resilient and well-balanced earnings, including in its resizedinvestment bank, could lead to an upgrade of UBS's VR.
A significant delay in its capital build-up plan or higher risk appetite in itsinvestment banking operations, both currently considered unlikely by Fitch,could lead to a downgrade of UBS's VR. Inability to adjust the bank's cost baseto the still challenging operating environment in investment banking would alsoput the bank's VR under pressure.
UBS's VR is also supported by positive trends in UBS's remaining businesses,notably in its dominant wealth management franchise. Despite continued pressureon European off-shore banking and a depressed gross margin in H112, UBS's wealthmanagement businesses have since mid-2010 reversed previous net new moneyoutflows and given its leading franchise, UBS is in Fitch's view well-placed toimprove wealth management earnings once market conditions improve.
Overall, UBS's risk and funding profile benefits from its dominant wealthmanagement and to a lesser extent from its leading domestic franchises whichprovide stable and predictable earnings to mitigate earnings volatility inherentin its investment bank.
RATING DRIVERS AND SENSITIVITIES - IDRS, SUPPORT RATING, SRF AND SENIOR DEBTThe Stable Outlook on UBS's Long-term IDR reflects Fitch's view that sovereignsupport for UBS will continue to be available in the medium-term.
UBS's IDRs, Support Rating, SRF and senior debt ratings are sensitive to achange in Fitch's assumptions around the availability of sovereign support forthe bank. An upgrade of UBS's IDRs is unlikely given Fitch's expectation ofdiminishing sovereign support for GTUBs.
Switzerland has made significant progress in implementing specific legislationfor the country's two largest banks (UBS and Credit Suisse AG) which shouldultimately facilitate pre-insolvency bank resolution and will eventually lead toless sovereign support being factored into UBS's IDRs. However, this is agradual and lengthy process and Fitch will take corresponding rating actionswhen and if deemed appropriate.
As long as the bank's 'a-' VR is maintained, any downgrade of UBS's SupportRating and SRF would lead to a maximum one notch downgrade of its Long-term IDR.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIESSubordinated debt and other junior and hybrid capital issued by UBS and itsaffiliates are all notched down from UBS's VR in accordance with Fitch'sassessment of each instrument's respective non-performance and relative lossseverity risk profiles, which vary considerably. Their ratings are primarilysensitive to any change in UBS's VR.
SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIESLondon-based UBS Limited is a wholly owned subsidiary of UBS whose issuer anddebt ratings are aligned with UBS's because Fitch views UBS Limited as core toUBS, notably its investment banking franchise. UBS Limited's contractualcounterparties are irrevocably and unconditionally guaranteed by UBS AG.
UBS Bank USA (UBSB) is a direct subsidiary of UBS Americas Inc., which in turnis wholly owned by UBS. Fitch views UBSB as core to UBS's overall operations;thus its short-term IDR is equalised with the ultimate parent. Further, whilethere is no financial support agreement or guarantee from UBS, Fitch's '1'Support Rating reflects the extremely high probability that UBS would providesupport to UBSB should the need arise. UBS Limited's ratings and UBSB's ratingsare sensitive to the same factors that might drive a change in UBS's IDR.
The rating actions are as follows:
UBS AGLong-term IDR: affirmed at 'A'; Outlook StableShort Term IDR: affirmed at 'F1'Viability Rating: affirmed at 'a-'Support Rating: affirmed at '1'Support Rating Floor: affirmed at 'A'Senior unsecured debt: affirmed at 'A'/'F1'Senior unsecured market linked securities: affirmed at 'Aemr'Subordinated debt: affirmed at 'BBB+'Tier 2 subordinated notes (low-trigger loss-absorbing buffer capital notes):affirmed at 'BBB-'Commercial paper: affirmed at 'F1'UBS LimitedLong-term IDR: affirmed at 'A'; Outlook StableShort-term IDR: affirmed at 'F1'Support Rating: affirmed at '1'UBS Bank USAShort term IDR: affirmed at 'F1'Support Rating: affirmed at '1'
UBS Preferred Funding Trust V Preferred Securities: affirmed at 'BB+'UBS Preferred Funding (Jersey Ltd) Preferred Securities: affirmed at 'BB+'UBS Capital Securities (Jersey Ltd) Preferred Securities: affirmed at 'BB+'
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The ratings above were solicited by, or on behalf of, the issuer, and therefore,Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:Global Financial Institutions Rating CriteriaRating Bank Regulatory Capital and Similar Securities(New York Ratings Team)