Feb 9, 2010
Executives
Caroline Stewart – Head, IR Oswald Grubel – Group CEO John Cryan – Group CFO
Analysts
Haig Simonian – Financial Times Jacques-Henri Gaulard – Autonomous Research Kilian Meier – NZB Neue Zurcher Bank Teresa Nielsen – Bank Vontobel Linda Bourget [ph] – La Liberte Fiona Swaffield – Execution Jeremy Sigee – Barclays Capital Jon Peace – Nomura Kinner Lakhani – Citi Derek De Vries – Bank of America-Merrill Lynch Huw van Steenis – Morgan Stanley Jernej Omahen – Goldman Sachs Matthew Clark – KBW
Caroline Stewart
Good morning and welcome to UBS' fourth quarter results presentation. My name is Caroline Stewart and I'm the Head of Investor Relations for UBS.
During today's meeting, we'll have two presenters. First of all, our CEO Ossie Grubel will present to you briefly on the highlights of the fourth quarter results and also on our achievements over the course of 2009.
After Ossie, our CFO John Cryan will present the results to you in detail. Then, we would like to take your questions in the normal format, first of all, analysts and investors and then journalists.
Following a short break, we'll resume with Q&A for journalists in German. Before I get started – before we get started today, I'd like to draw your attention to this slide.
This slide is a disclaimer with respect to forward-looking statements. The presentation today will include forward-looking statements.
I'd recommend that you read this slide in detail at your leisure. And with that, I'd like to hand over to Ossie.
Oswald Grubel
Thank you, Caroline. Good morning, ladies and gentlemen and good morning, everybody on the web.
A year ago, nearly in April at the General Meeting of UBS, we set out some goals and we told our shareholders that our priorities are increase our capital ratios, to reduce our risk positions, to bring the bank back to profitability as soon as possible because we know profits are essential for winning back the trust of clients and I think that was a main – had been the main tasks we had during last year. And we are pleased to say that, at least in the fourth quarter of last year which was not a very exciting quarter from trading point of view, we were able to be profitable in all our divisions.
Now, that is only a first step. We – cut cost last year by 3 billion Swiss francs and which was necessary, not only because of this contraction in banking, but also because of our special situation.
Also, what is satisfying for me – doesn't get repeated so much in the paper, is that we were able actually to produce operating profit for 2009 of 1.4 billion Swiss francs and that is after we also paid a bonus of 3 billion Swiss francs for 2009 to the more than 65,000 people we have all over the world. We also restructured our fixed income department and – which will enable us to – or is the first step actually into be profitable in investment banking going forward.
So in general, let me tell you, things are going according to plan as I have told you in the previous quarters as well. Naturally, we had to find out that nearly 12 months is a very long time for anybody to keep his patience and to trust us that we actually can deliver on what we said before.
One of the sore points is, and which everybody pointed out so far this morning, clearly is that we still are losing assets partly due to competition and partly to market changes. We do know that we have to stop that and that we have to – as a first goal, cannot be worse than our peers and we are working very hard on that.
One of the first steps is clearly to return to profitability, which we have done now, but certainly it's not only the quarter we have to be profitable in, all following quarters as well to get the trust and the reputation to trust in UBS and the reputation of UBS bank with our clients. We have done some measures in regard to that.
So we are integrating the bank to have a better client offer. We are becoming more efficient in execution, what we can offer our clients, and that's combined with profitability should in time bring us back to trusted bank and also to stop the asset outflows.
Part of the outflows, and we will see that when we see the results from other banks, is clearly the present situation of the Swiss financial center or financial marketplace and – which is changing and changing more than in the last 50 years – at anytime in the last 50 years and we will what will develop there. UBS has, I think, a big competitive advantage because we are not only in still in Switzerland the biggest wealth manager, we are also in many countries in Europe, onshore, one of the biggest foreign wealth managers there and which we have built up over the last 10 years and that will be of more value going forward as things develop now.
Now, for the detailed figures, I will give over to our Chief Financial Officer John Cryan, and looking forward to your questions later after the presentation. John?
John Cryan
Thanks, Ossie and good morning, everyone. It's my pleasure to take you through some of the details of our results for the fourth quarter of 2009.
As Ossie just mentioned, we are delighted to be reporting a net profit attributable to shareholders of 1.2 billion Swiss francs for the fourth quarter. It's equivalent to diluted earnings of 0.31 Swiss francs per share.
Equally pleasing, as he mentioned, is the fact that during the quarter all of our business divisions reported pretax profits, and it's the first time we've seen an overall group reported pretax profit since before the crisis hit. Our profits were driven by operating results that, although somewhat weak, held up comparatively well considering market conditions, whereas you saw costs come down fairly significantly.
We continue to build our financial strength, increasing our capital through profit retention and further reduction of our legacy risks in the Investment Bank. Our tier 1 capital at the end of the quarter was 15.4%.
One area where we do need to do more work is on the clients' invested asset flows in all three of our asset-gathering divisions. Each one saw continued outflows in the quarter and this will remain a key focus for management into 2010.
This chart shows the fourth quarter performance by division. All of our business divisions reported significantly improved quarter-on-quarter results.
And the IB has reported a pretax IFRS profit for the first time since Q2 2007. We'll go through the detailed results for each division as usual.
But at this point, let me make some remarks on the results overall. In all of the divisions, the results were boosted by the accounting impact of our decision to bring staff compensation into line with current industry practice and regulatory guidance by increasing the proportion of variable compensation to be distributed in the form of deferred share grants.
This has had the effect of deferring into future periods the recognition of a greater proportion of the overall cost to variable compensation for the 2009 performance year. The own credit charge for the fourth quarter was just 24 million Swiss francs versus 1.4 billion Swiss francs in Q3.
We've reallocated around 700 million Swiss francs of negative revenues from prior period own credit and DVA in Investment Bank to the corporate center where it's reflected as negative trading income. The reallocation resulted from a number of adjustments we've made to the way that we calculate and book the impact of own credit effects on our derivative positions and on the medium-term notes we measure at fair value.
The overall impact of the change on the group's results was immaterial, a net charge for the quarter of just 6 million Swiss francs. And we revalued our deferred tax assets at the end of the year in light of our latest internal profit forecasts and we were able to write up the asset related to tax losses in the U.S.
by 467 million Swiss francs and this was the principal driver in the overall tax credit of 480 million Swiss francs. This slide shows the pretax result for the whole of 2009.
In the first three quarters, we adjusted our numbers for a handful of significant items so as to better underlying performance. And to give you an overall view, I've now adjusted for these items on a consistent basis for the full year.
We finished the year with a reported pretax loss of just over 2.5 billion Swiss francs. Adjusting for the own credit changes in the fair value of our liabilities, the net charge is related to the sale of Pactual, the restructuring charges, and the net gain on the MCNs, we show an underlying pretax profit for the year of 1.4 billion Swiss francs.
To the right of the chart you can see that the asset-gathering divisions all contributed positively to the results whereas it was not until the third quarter that the Investment Bank started to make a positive contribution. This slide shows a quarter-by-quarter summary of our revenues.
You'll see that income from interest margin businesses and fee and commission income continue to be stable into the fourth quarter. The improvement in overall revenues was driven by a reversal of fortunes in trading income over the course of the year.
Costs fell 18% quarter-on-quarter, though this was attributable to the deferral of variable compensation costs to future periods. Non-personnel expenses increased, mostly on the back of increased legal provisions and professional fees and some further restructuring costs.
This slide shows the breakdown of our annual costs by type and shows you the split between the fixed, variable, and non-recurring elements. We set ourselves a target of lowering our fixed cost base to an annual run rate of 20 billion Swiss francs by the end of 2010 and you can see that we've essentially achieved that goal in 2009.
Non-personnel expenses fell by over 2 billion Swiss francs across all major categories and we would expect to see costs continue to reduce on an underlying basis into 2010. Variable compensation accruals in 2009 totaled just less than 3 billion Swiss francs.
This number includes the IFRS accrual for the variable compensation we proposed to pay in respect of the 2009 performance year, plus the amortization of other effects related to the previous years. The overall amount of deferred compensation for 2009 and for prior years that under IFRS requirements is carried forward into 2010 and later years is 3.2 billion Swiss francs.
Staff numbers fell by over 5% in Q4. Just under half of that reduction was the result of the sale of our Indian service center in Hyderabad.
Over the course of 2009, headcount fell by over 12,500 and ended the year a little higher than the target of 65,000 we set ourselves for achievement in 2010. Now, turning to the divisions.
Wealth Management & Swiss Bank produced a solid performance in the fourth quarter despite weaknesses in client activity levels. Headline profits are up 40% quarter-on-quarter, principally reflecting the changes to variable compensation.
Even excluding this effect, we saw a slight improvement in performance, reflecting management's actions to offset continuing pressure on operating margins with efficiency gains. Revenues basically held up; recurring fees were flat on Q3; interest income on client deposits and on the credit books continued to decline, but this largely offset by lower internal funding charges; brokerage and sales commissions fell, largely as a result of a very quite December.
Invested asset balances at the end of December stood at 960 billion Swiss francs, down 2% in the quarter. Net new money was disappointing.
We saw net outflows from Swiss clients of 5.9 billion Swiss francs, notwithstanding the positive contribution from corporate and institutional clients. Net outflows from international clients increased to over 27 billion Swiss francs from around 13 billion Swiss francs in the prior quarter.
This segment seems to have been particularly affected by the current discussions regarding banking secrecy in Switzerland and the impact of further proposed tax treaties between Switzerland and other countries. More positively, the Asia-Pacific region, as a whole, saw net new money inflows in the quarter and outperformed our other international wealth management businesses.
On this slide, I've shown the picture on net new money over the past four years. Now, although the net outflows in 2009 were lower than those you saw in 2008, the situation with client flows remains a primary focus of management.
The conditions at the end of 2009 reflect a number of special factors. Invested assets amounting to 22.8 billion Swiss francs were affected by the Italian tax amnesty.
We retained 63% of this balance within the bank, but suffered margin erosion on the overall amount. We also lost invested assets of over 5 billion Swiss francs as a result of the sale of Pactual.
And in 2009, we saw outflows of around 6.3 billion Swiss francs as a direct consequence of our decision to exit certain businesses, most notably the offshore business with East U.S. [ph] clients.
Approximately a quarter of the 90 billion Swiss francs of outflows we suffered in 2009 seem to have been the direct result of client advisor attrition. Invested assets of international clients remained stable throughout the year as market performance offset net outflows.
Average invested asset balances in 2009 were 22% lower than those of 2008. The number of client advisors fell by 25%, impacted by management's action to resize the business.
We've now launched initiatives to hire additional new client advisors. So in Q1 we would expect the overall number of advisors to be slightly lower than it was at year-end.
We have seen efficiency gains in client coverage. The average balance of invested assets managed by client advisor has increased to just under 200 million Swiss francs.
For Wealth Management Americas, the fourth quarter was the best of the year with the division reporting a pretax profit of 178 million Swiss francs. Revenues increased and expenses other than direct financial advisor compensation fell.
Revenues did include a non-recurring gain of 35 million Swiss francs from the closeout of a portfolio of replication, swaps, and matched funding transactions as a result of our decision to transfer into this division an investment portfolio from the IB. Invested assets fell by 4 billion Swiss francs in the quarter to 690 billion Swiss francs, largely due to 12 billion Swiss francs of net outflows.
Invested assets were also negatively impacted by around 4 billion Swiss francs due to the sale of branches. Personnel decreased by 750 or 4%.
Of these, 200 or so were financial advisors and a little over a third of whom left the bank as a result of the branch sales. Despite the improvement in profitability, FA recruiting and the net new money generation remained challenging.
However, Bob McCann has put a new leadership team in place and we are optimistic for the longer-term prospects of the business. Global Asset Management's pretax profit more than doubled quarter-on-quarter to 284 million Swiss francs.
The improvement was cost-driven as revenues were impacted by lower performance fees and by the sale of Pactual. The expense reduction was driven by lower personnel costs following the group-wide decision to increase significantly the proportion of deferred compensation.
Here, net new money was disappointing with outflows of 11 billion Swiss francs, some 7.2 billion Swiss francs of which were originated through the wealth management channels. There were, however, some encouraging signs of increased gross inflows across a number of asset classes and investment performance across a wide range of strategies remains very impressive with a large proportion of our core funds outperforming their benchmarks.
We would expect the outperformance that we saw in Global Asset Management in 2009 to have a positive impact on net new money in 2010. The Investment Bank reported a profit for the fourth quarter of just under 300 million Swiss francs compared to the loss of just under 1.4 billion Swiss francs in the prior quarter.
The biggest factor in the improvement was the reduction in the own credit charge from over 1.4 billion Swiss francs in Q3 to just 24 million Swiss francs in Q4. Expenses for the quarter were 1.8 billion Swiss francs, down from the previous run rate of around 2.5 billion Swiss francs and again, as a consequence of the decision to defer variable compensation to a greater extent as has been previously assumed in the year-to-date accruals.
The IB continued to de-risk. The division's risk-rated assets finished the year 37% lower than they have been at the beginning of the year.
The IB reported revenues of over 2 billion Swiss francs in the quarter. On an operating basis, increased revenues in IBD were offset by lower trading income in both equities and FICC.
Also, as I mentioned earlier, the fourth quarter charge for own credit was impacted by the reallocation of own credit effects amongst the DVA impact on trading income, treasury income, and own credit. The impact of the tightening of our senior debt curve on the 24 million Swiss francs of reported own credit for Q4 was 544 million Swiss francs.
The difference of 520 million Swiss francs was the volume effect and over 37 million Swiss francs of that was the result of the reallocation to the corporate center. And it's a bit complicating.
I'd be happy to take details – questions later. But there are details of the changes set out in Note 11B in the fourth quarter report.
Consistent with previous years, the fourth quarter 2009 advisory revenues were up on a seasonal basis, recording a 17% increase. Capital markets were down – capital markets revenues were down 12% to 590 million Swiss francs despite an overall improvement in the debt capital markets.
Risk management charges against the franchised lending portfolio more than halved quarter-on-quarter, in line with stabilizing credit market conditions. Total sales and trading revenues in the fourth quarter were just short of 1.5 billion Swiss francs compared with over 2.1 billion Swiss francs in Q3.
In equities, revenues declined 18% to just under 950 million Swiss francs as the business was affected by subdued volumes and a general slowdown in client flows, especially towards the end of the quarter. In FICC, revenues declined 50% to just under 500 million Swiss francs.
Credit revenues held up and were in line with the previous quarter. The macro revenues, particularly in rates, saw a significant drop in client-driven volumes.
We saw fewer trading opportunities and a tightening of bid/offer spreads. Emerging markets' revenues were flat in Asia, but declined elsewhere.
The FICC revenues continued to be impacted by some of our legacy risks. We saw net negative revenues of approximately 300 million Swiss francs from those positions, notwithstanding a positive contribution of around 200 million Swiss francs from our remaining monoline insured negative basis trades.
The underlying run rate of revenues from what we might term our core FICC operations was therefore 800 million Swiss francs for the quarter and so it's still someway short of our medium-term target of around 2 billion Swiss francs. I won't dwell on the final two slides for too long.
Our capital position remains extremely strong. Our core tier 1 capital ratio is 11.9% and our overall BIS tier 1 ratio is 15.4%.
And on the FINMA's calculation basis, our leverage ratio is now just short of 4%. And turning just to the balance sheet, footings in the quarter fell by 135 billion Swiss francs or around 9%.
In the year as whole, we brought the balance sheet down by a third. And we now run a funded balance sheet, excluding the IFRS replacement values of a little over 900 billion Swiss francs.
And so to wrap up, we finished the year with a return to profit and in an optimistic frame of mind for 2010. Clients now have every reason to place full confidence in UBS.
We look forward to serving their needs, whilst delivering improving returns to our shareholders. And with that, I think we have some time for some questions.
Oswald Grubel
We'll take the questions first in the room in English and later, we will take them in German, and after the room we go to the web. Over there.
Haig Simonian – Financial Times
Thanks. Sorry to be a bore.
Haig Simonian, Financial Times. I'd just like to clarify, please, a small procedural point.
A couple of years ago, the bank foolishly decided to split the audience into two groups at questioning and take questions from investors first and then from media. That's of course entirely your decision.
You then wisely reversed that and allowed us all to be treated on the same basis. Ms.
Stewart, in your introduction, you implied we had reverted to the first and second-class citizen basis. I'd be most grateful if you could clarify that, because certainly now that you webcast these events, there is no point whatsoever for local journalists to attend at this early time if you are going to spend two hours speaking to another group first.
We can just turn up when it suits us. Please be so kind as to explain what you’d like to do.
Thank you.
Oswald Grubel
I think –
Caroline Stewart
It's just a procedural issue.
Oswald Grubel
It's a procedural issue and we would like to take questions, be it from journalists or be it from analysts in English first and then we'll take them in German. And first, we start with the room here.
So you can ask, as you just did, in English and then we go on the web and afterwards, we take them in German. Is that satisfactory?
And we would never class a society in Switzerland. We are not one of those countries.
Jacques-Henri?
Jacques-Henri Gaulard – Autonomous Research
Good morning. Jacques-Henri Gaulard, I'm an analyst and I work for Autonomous Research.
John, a question about the own credits and what is the overall rationale for effectively the change and the transfer? I had a look at Note 11B.
And maybe does it mean you are going to change a little bit the guidance? I mean, until now it was fairly easy on own credit.
It was depending on where the spread of UBS was and you were aligning the forecast. Accordingly, is this now changing on the back of what you've done?
The other two questions would be on private banking. In light of the outflows at the – I would say, at the end of the year, does it mean you are going to have to change somehow your targets for private banking or does it mean you are starting from obviously a lower point?
Is it disappointing versus what you were expecting internally? And I would say, on the Administrative Tribunal court, can we easily make the link between the 10,000 accounts that have to be given to the IRS and of which 4,400 having to come from UBS basically and again, maybe your confidence as to when this thing is going to be sorted because I think it's a very big drag on the stock price at the moment?
Thank you.
Oswald Grubel
Let me answer first the private banking questions, the wealth management questions and – but the deliveries in the case between the UBS and the Swiss government at the time when the understanding was reached between the U.S. and Switzerland, it clearly – all that was talked about that the courts could stop this whole thing and that's why we and – have a responsibility to deliver the data to the Swiss courts and who then will decide what is happening afterwards.
And we, as UBS, had certain responsibilities, very well defined responsibilities what we had to deliver to the Swiss courts and that we did. And that's all we can do at UBS and nothing else.
Now, in the DPA there is a law and which says that everything is cooperative. 10,000 cases from UBS accounted at the Internal Revenue Service and that is, to best of our knowledge, not yet the case and – but still, I cannot see what it changes provided the whole case stays open.
But we did whatever we had to do. There is – we are not at fault at anything and we will see how the negotiations now between the U.S.
and the Swiss will conclude. On general – the asset outflows, we see – certainly as disappointing to us as they are to you as analysts, so the – to the public.
And now we had years before very strong growth and stronger growth than most of our competitors and that might be a reason that we attracted assets, which we are using at the moment again. But we should not – and I said that also a year ago, not underestimate the reputational damage we engineered for ourselves and it takes some time to get over that.
And we have the delay effect of the client advisors which left the bank. So that will go on for a few months more.
And then you have the market trends here in Switzerland. I think that's probably the best way to express what is going on all over the place.
And I think all along, we are, as I said before, in a good position because we are the biggest bank and strongest bank in any onshore business outside Switzerland and that is a strategy we will continue to develop and to become – grow stronger there with the exception in Asia where we actually are not losing any assets every quarter, we are actually winning there and – which is satisfying, but so does everybody else as well, I presume. So we think with a few more quarters of profitability and by doing what we are – what we said we will be doing in the bank by integrating certain services, by offering an integrated advice to our clients, by having an investment banking which is working much closer together with the other divisions and by being also much better going forward because we had to rebuild huge parts of investment banking as you know.
That will help to get across the picture of more competence and a picture of reliability of UBS and we will bring back, with the profits, also the trust. It needs patience, unfortunately.
And I know neither you, nor I have it. So – but never mind, we have to wait a bit longer there.
John Cryan
Do you want me to do the own credit question?
Oswald Grubel
I would think that is more likely as – if I do it, so – because he doesn't want to be confused anymore.
John Cryan
Well, Jacques-Henri, the first thing about own credit – if I give you a 10-second refresher, we fair value these liabilities, they are mostly MTNs and they are issued out of Jersey. And the money is used in the Investment Bank, by and large, used within the group, but the money goes back into the Investment Bank.
And Jersey hedges itself with a swap, with the relevant desk in equities of fixed income so that it's not exposed to whatever exotic return is paid on the MTN, so standard stuff. Now, before own credit existed, before IFRS 7 came in, you just have to bifurcate those MTNs into a debt host and the derivative contract and value them separately.
In Q4 2007, we – own credit was introduced and we applied it. And that value is to MTN as a whole and you fair value it through the P&L, and you adjust it for the UBS credit spread.
Now, we've been doing that consistently for several quarters. This quarter, we've made some adjustments, which are prior-period adjustments, which we pushed through this quarter, the net effect of which are immaterial, 6 million Swiss francs debit to P&L.
But within the quarter, in the disclosures, there is an own credit. So if you go back to Q3, to give you a comparable number for Q4, remember, own credit is two-dimensional, it's the credit spread and then it’s the volume effect as we call it.
The MTN changes fair value for reasons other than our credit spread. The impact in the quarter for our credit spread was 544 million Swiss francs negative, debit, which you would imagine is about the right number, it was 1.436 billion Swiss francs in Q3 and our credit spreads tightened by about a third as much in fourth quarter.
And the volume effect was a credit, happened to be just 37 million Swiss francs. So the number would have been minus 507 million Swiss francs and it's in the accounts, it's there.
It's just masked by the fact that an adjustment of 483 million Swiss francs as a credit, which comes in from the treasury, which is the net number 24 million Swiss francs. And the reason the 483 million Swiss francs, the net number comes in from the treasury, is this.
When you break up these MTNs, there was a little bit of a calculation error to be honest in the way that the treasury and the IB were interfacing. And the way the treasury held itself harmless from the exotic return on the MTN is that it entered into a swap and the treasury was supposed to pay a funding spread to the IB on that swap, on the pay lag.
And it hadn't been factored in. So actually, we were not crediting the IB with enough in the past and we were taking too much treasury income.
And so we just reallocated it. Now, it's quite a conservative reallocation because we are actually taking treasury income, which counts for example as capital and converted 483 million Swiss francs of it into own credit, which doesn't count as capital.
And so that's 20-odd basis points of capital that – or 15.4, would have been 15.6 plus, 15.7 even. So it's a relatively conservative change.
The net impact 6 million Swiss francs, so the other 201 million Swiss francs, if you are looking for the difference, is a transfer into the DVA, into the derivatives in the IB and that's a sort of nil other effect. But the own credit isn’t then – the number you should probably use is a comparable number to the 1.4 billion Swiss francs of Q3 is 507 million Swiss francs, which is the net of the credit spread effect, plus the volume effect.
Oswald Grubel
Can we have the next question please?
Kilian Meier – NZB Neue Zurcher Bank
Kilian Meier, NZB Neue Zurcher Bank. Two questions.
In your outlook, you mentioned some margin pressure going forward potentially. Could you probably elaborate on the reasons for that?
And the second question is a regulatory one. Here in Switzerland, the potential introduction of automatic data exchange is very much in the news.
Maybe you can give us the UBS view on that and also tell us how such an introduction or regulatory change would impact your business?
Oswald Grubel
The margin pressure is occurring from the yield curve that short-term rates are very low and the yield curve is flattening probably going out and therefore, margins, especially in the mortgage market, will clearly contract. And that was mainly what our corporate and retail business was referring to.
Now, with automatic information exchange, I think we are still a long way from that and regardless what was that in the last two weeks on the heated comments and either from certain government ministers or in the public and I think what has to happen and it looks like going that way that Switzerland will talk to the EU or to the main states within the EU to find an agreement how to go forward because the – even inside the EU, Luxembourg and Austria have to find a way of going forward because they are not yet on the information – on the automatic information exchange. So we have to see how that is playing out.
How does it affect us? I think it affects us less than many other banks in Switzerland, mainly because we are a global bank, mainly because we have hundreds of billions of assets in wealth management outside Switzerland and our onshore in many European countries and that will be clearly, from today's point of view, a market which will grow stronger looking forward than it probably was in the past and what we have built up in the last decade there, I think, will become quite profitable looking forward.
Oswald Grubel
Next question please?
Teresa Nielsen – Bank Vontobel
Teresa Nielsen, Bank Vontobel. Could you give us some insight into UBS' exposure to government debt in Greece and in Spain?
My second question is on the gross margin in wealth management international clients, fourth quarter was down to 82 basis points. What are the initiatives that you are going to take or that you have taken in order to increase it to mid-term target of 100 basis points?
And the last question is regarding the Investment Bank business. Have you continued to hire high-quality people, senior people in the investment banking trading businesses in the fourth quarter?
And then generally in order to improve the profitability, I know that you did it in the summer, and are you hiring mainly for emerging market business or is it also for developing market business? Can you give some insight into the possibility of increasing your profit through hiring in the Investment Bank?
Thanks.
Oswald Grubel
In investment banking, we are hiring selectively in the areas which we have to build out. And there, emerging markets is clearly one of the areas, but we concentrated very much on the fixed income area and hopefully, going forward in the next few months, you will see result that has.
In wealth management, we did say in our Investor Day that we want to improve our gross margin there. And you are correctly saying it's going the other way at the moment, which is why they are like interest rate movements and have an influence there.
But that turnaround of increasing the margin, which I strongly believe can be done regardless of what the market environment is and we should be able to over time get to a large enough – 100 basis points as we said. Unfortunately, we can't tell you how long it will take us to get there, but we are working in wealth management and within the bank on that integration of better client offering.
Better execution is part of that. And so we will discuss it obviously in the coming quarters.
Can you take the rest?
John Cryan
Yes. The exposures to European countries are subject to our normal country credit limit caps and they are in line with the size of the relevant economies.
We have no particularly large exposures to any of the European economies in the emerging economies.
Oswald Grubel
Next question please?
Unidentified Analyst
(inaudible)?
Oswald Grubel
Is that mike switched on actually or?
Caroline Stewart
Yes.
Oswald Grubel
That's better.
Unidentified Analyst
(inaudible) 2009 was 3 billion Swiss francs. Could you indicate roughly what it would have been had you had the same portion of fixed and variable in the fourth quarter as you had in the first part of the year?
John Cryan
Well, the answer to that is we obviously only pay bonuses once a year. So the accruals that we made during the course of the year are essentially estimates of where we might end up.
When we set the bonus structures at the end of the year, we essentially looked back to see how much you've accrued year-to-date and then true it up for what you need for that annual bonus round. We were accruing at a higher rate than we needed to accrue in Q4, obviously because the approval has been done.
But it's hard to say what we would have paid, because we didn’t. We only set up the structure that we finally agreed as a management team.
It would have been higher, but it's impossible to say how high it would have been, because we didn’t actually have different bonuses, we only have these ones. But it obviously would have been higher, because the effect of deferring pushes forward the accounting recognition of that expense into future periods.
Oswald Grubel
Next question please? Are there any questions in here, anymore in English?
Unidentified Analyst
(inaudible). Concerning the planned reform for the banking sector, specifically the requirements on capital and liquidity, how we – will these reforms affect your mid-term goals return to growth?
Oswald Grubel
It is clearly depending on what will be introduced. There had been some suggestions by the Basel Committee going forward, but there is not yet any agreement, certainly not on the banking side and also not on the governmental side who, which countries will participate, will the rules be changed or the proposals be changed and in what direction.
So there we really have to wait what finally is coming out. Can we – yes, sorry, here is a question.
Linda Bourget – La Liberte
Good morning. Linda Bourget [ph] from the newspaper La Liberte.
Regarding the two data client lists that are being offered to Germany, could you please tell us whether there is any UBS client that might be concerned by these two lists? Second question, all that has been going recently with Germany, so with these lists, and additionally the so-called (inaudible) case, do you feel any impact of these discussions on your business there?
And then thirdly about the stolen data problems, what can a bank such as UBS do to protect oneself from these kinds of effects?
Oswald Grubel
We do not know if any UBS clients are on any disk which is apparently offered or allegedly offered to anybody, and especially to German – or the government because this – we have no knowledge that we have reason to believe that any of our employees delivered any data to anybody outside the bank. Generally, it is a problem.
I think we have to realize if governments are in the market, and it seems it certainly is the case with Germany, of buying illegal data that changes the world and if that is going on. And we will see how – what the outcome of that is in the months to come.
That is a general comment, I think, because if you induce people to high payments to steal data, whatever data, and – yes, it changes an environment, which is very clear, which you know as well. And we would see how it will be developing.
But as I said before, the big banks in Switzerland are probably, because they are much more international in their business and not only Swiss-centered, are less affected than some others. Can we take some questions now from the web and can we please start with the first question?
Operator
The first question from the telephone conference is from Ms. Fiona Swaffield, Execution.
Please go ahead, ma'am.
Fiona Swaffield – Execution
Hi. A question on slide 12.
The file [ph] on client advisor attrition, I think it's around 22 billion Swiss francs, which is a very helpful disclosure. I just – could you talk a bit about whether that was more in the second half than in the first half and then how much you are retaining when a client advisor leaves?
Are you retaining less than you normally do? I think my gut feeling is you often say you'll retain about 70%, 80%.
Is it lower? And so could I use that 22 billion Swiss francs to assume you could have similar kind of client advisor impact in 2010?
Thanks.
Oswald Grubel
No, we certainly do not hope that that trend is continuing and we have also so far no reason to believe that the normal rate – normal percentage rate client advisors when they leave for another bank are taking around 30% to 40% of the clients they had before with them. And so at the moment, we have no reason to believe that that has changed and we clearly hope and working on it to – that is changing for us to the better.
Fiona Swaffield – Execution
But to just check, Mr. Grubel, the 22.5 billion Swiss francs would have largely been second half this year?
John Cryan
Yes. It increased a little over the year, obviously, as the number of client advisors.
Fiona Swaffield – Execution
Just trying to understand the time lag.
Oswald Grubel
Yes, most client advisors were either fired or left the bank in the middle of the year and they are on three to six months depending on seniority – notice period. So that is one reason probably why we had in the first quarter the biggest impact so far.
Fiona Swaffield – Execution
Okay. Thanks very much.
Oswald Grubel
Next question please?
Operator
The next question from Mr. Jeremy Sigee, Barclays Capital.
Please go ahead, sir.
Jeremy Sigee – Barclays Capital
Hi there, good morning. Just three quick questions, please.
Firstly, continuing on that slide-12 disclosure, which again is very helpful, in the bottom orange segment that you highlight, concerns about banking secrecy and such, et cetera, could you talk about the geographic skew within that? I mean, is that – and in particular, do you see particular problems in, say, Germany and France where you had the governments actively seeking account data?
Second question, could you comment and hopefully quantify January flows from the private bank? And then last question, I think you said you deferred 3.2 billion Swiss francs of comp from '09 into future periods.
Could you give us the corresponding figure for the previous three years?
Oswald Grubel
The 3.2 billion Swiss francs for all our deferred number is not from '09. That would be nice if it were from '09.
But they are all –
Jeremy Sigee – Barclays Capital
So that's the – cumulative?
Oswald Grubel
That is cumulative of all the years in the past and going into the future, so including '09. Then on the outflows, there is no specific trend that we see that the outflows are to Germany or to France and there is no big repatriation trend to make out at the moment, but clearly the discussions, the media attention will have an effect on the clients – on some clients.
And so we will have to see what will happen in the next few months. What was the –?
John Cryan
The January number.
Jeremy Sigee – Barclays Capital
January outflows.
Oswald Grubel
The January number.
John Cryan
We don't like giving day-by-day updates on our net new money.
Jeremy Sigee – Barclays Capital
Could I then come back just on the deferral question?
John Cryan
Yes.
Jeremy Sigee – Barclays Capital
If the 3.2 billion Swiss francs is the cumulative, could you say how much out of the '09 comp is deferred and then also say what out of '08 and what out of '07?
John Cryan
No, we don't disclose that, Jeremy. But we do disclose in the Annual Report the amount of compensation each year that is deferred into the future.
Jeremy Sigee – Barclays Capital
Okay.
John Cryan
So the equivalent of the 3.2 billion Swiss francs in past three years, you'll be able to get in the Annual Report.
Jeremy Sigee – Barclays Capital
Okay. Thank you very much.
John Cryan
I think I know the numbers, but I'm not going to guess.
Oswald Grubel
Thank you, Jeremy. Next question please?
Operator
The next question from Mr. Jon Peace, Nomura.
Please go ahead, sir.
Jon Peace – Nomura
Yes, good morning. In the Investment Bank, you said that the January run rates of client activity have been very strong.
I just wonder if you could clarify that a little bit more, maybe in relation to, for example your 2 billion Swiss francs target run rate in fixed income. And secondly, could you have a go at quantifying the potential impact of the Volcker proposals to ban prop-trading, et cetera?
Thanks very much.
Oswald Grubel
Starting with the last one, the Volcker proposal has none or very negligible effect on UBS as far as we can see at the moment.
John Cryan
Yes, I think that's right. We've got a small segregated prop-trading business in Arizona, but it doesn't feature very heavily.
On the January run rate, again, we don't like giving up-to-the-minute updates on where the business is going. I think we've obviously been looking at what some other banks have been reporting.
And they all seem to be indicating that particularly in the fixed income markets, the operating environments have been fairly propitious, the word I used earlier. And therefore the amount of client flow business has been fairly attractive.
And the low credit spreads have moved around, they contracted and then widened and contracted again, and volatility has moved up and down. That's quite a good operating environment for a trading business.
So it's – so far, it's a lot better than Q4 is what we think.
Jon Peace – Nomura
Great. Thank you.
Oswald Grubel
That generally always is.
John Cryan
Yes.
Oswald Grubel
Next question please?
Operator
Next question from Mr. Kinner Lakhani, Citi.
Please go ahead, sir.
Kinner Lakhani – Citi
Yes, hi. I have got two questions actually.
First on wealth management, where we've talked about the net flows. Could you talk to the gross inflows over the past eight quarters actually, how those have generally trended?
Second question on the Investment Bank. How far are you down the road of making the highest that you needed to rebuild the various businesses?
And what market share trends do you see across the key businesses such as cash equities, FX, and the primary side?
Oswald Grubel
On gross inflows, I think on Investor Day we only gave an inclination that they exceeded 20 billion Swiss francs each quarter. And all I can tell you is there is no change since then, but otherwise we do not say more about that.
Kinner Lakhani – Citi
Thanks.
John Cryan
On the IB, we once ran the IB to gain market share and it didn’t really work doing that. So we run the IB now to make a profit and as a consequence of that, we have been hiring people into areas where we think we can make a profit, where we've had gaps, which are important gaps for our clients.
We made some potent hires in the course of January and we can never say we stopped, but most of the major roles are now occupied by people.
Oswald Grubel
Okay. Thank you very much.
Next question please?
Operator
Next question from Mr. Derek De Vries, Bank of America-Merrill Lynch.
Please go ahead, sir.
Derek De Vries – Bank of America-Merrill Lynch
Thanks. This is Derek.
I had two questions, if I might. The first one, I think Mr.
Grubel said that delayed impact that private bankers leaving on net new money would continue for a few months more. Now, I was wondering if you – does that imply that the amount of private bankers leaving is kind of done and then you'll see the outflows continue?
Is that what is meant by that comment? And then my second question comes to liquidity.
I think throughout the crisis, you've maintained a very strong liquidity position. Now, I was wondering if you will be willing to quantify what your stable funding ratio looks like under the Basel II or Basel III proposals recognizing that a lot can change by the time they are implemented.
Oswald Grubel
Now, first on the outflows and the connection to the client advisors. So as I said before, most of the client advisors were either fired or moved in the middle of last year.
So if they found immediately new jobs – so if you assume that they would have found by the end of last year all new jobs and it's a reason probably or one of the reasons why we had stronger outflows in the fourth quarter. That can go on for quite a few months and now – and all we can do against that is to try to improve our offer to clients and try to increase our credibility and so on as I mentioned before.
When it exactly will stop? It will stop when no client advisors leave anymore and – but most of the adjustment is – had been done in the middle of last year.
So things, going forward, hopefully look better if there are no other reasons.
John Cryan
I think on liquidity, we haven't given any information on our stable funding ratios under the proposed BIS rules. Safe to say that the disclosure we do give on liquidity shows that we have at the moment on a funded balance sheet of 900 billion Swiss francs or so, about 200 billion Swiss francs within that of excess cash.
And that's a combination of our excess of deposits over loans and the cash collateral that we receive net from our securities lending business and from our repo business. In addition to that, we've now provided disclosure on our liquidity buffer because, you'll remember, we moved it to the corporate center and we hold it in a category on the balance sheet called financial assets available for sale and you'll see that it's – at the end of the year, it was a tad over 80 billion Swiss francs.
So liquidity is not something that concerns management anymore. We are awash with it.
It's the deployment of it for a decent margin that's the challenge.
Derek De Vries – Bank of America-Merrill Lynch
Just as a follow-up on that, I mean, I understand everything you just said and that sort of seems sensible. And I'm trying to reconcile that with a range of estimates that I see now in the marketplace on your stable funding ratio that don't necessarily – and they are not necessarily consistent with your comments on a very strong liquidity ratio.
And – so I was wondering if you could just maybe give us some guidance on that just to put to rest some of these concerns that people have.
John Cryan
Well, I mean, I'm at a slight loss as to how to emphasize that we have an excess of funding and liquidity. I mean, there are issues with our funding, we would like to increase the term of it, but there is no shortfall of liquidity and no liquidity constraint within the bank.
Derek De Vries – Bank of America-Merrill Lynch
Okay. So you are pretty comfortable you would be above 100% on the Basel III stable funding ratio?
John Cryan
If it comes in the guise [ph] in which it's being proposed at the time it's supposed to come in, yes.
Derek De Vries – Bank of America-Merrill Lynch
Good. That's perfect.
Thanks.
Oswald Grubel
Thank you, Derek. Next question please?
Operator
Next question from Mr. Huw van Steenis, Morgan Stanley.
Please go ahead, sir.
Huw van Steenis – Morgan Stanley
Good morning. Two questions.
First, if I could just return to the topic of client advisors, it appears that about just over 200 client advisors left in the fourth quarter. So what – I take the point that some of the people who left in Q2 and Q3 may have already been washed through.
If I assume that these private bankers have about 200 million Swiss francs of client assets under management, you may retain 60%. That's at least another 16 billion Swiss francs to go just from the Q4 outflows.
So is there any way you could dissuade from the possibility that there is still going to be quite heavy outflows in the first half? And then secondly, if I just come back to costs, would it be fair to say that your new target is the 20 billion Swiss francs of costs or below, there is 3 billion Swiss francs of bonuses at least, which we should add on?
And then it strikes me that the compensation just probably in the order of about 1 billion Swiss francs looking at the accounts today. Would that 1 billion Swiss francs probably be laid on in '10 or would it be more spread across '10 and '11 so we – actually, the – there is an extra half to 1 billion Swiss francs of cost we should think about per year going forward?
Thanks.
Oswald Grubel
The question of client advisors and you are correct, went down in the fourth quarter and third quarter and those 200 million Swiss francs, so that might have an effect in the months to come, but it is certainly slowing down and will hopefully even out in the next few quarters and probably even increase again.
John Cryan
Yes. Of that reduction, about half were people who left the bank involuntarily.
We wound up the coach program, the outplacement program in the fourth quarter and they obviously probably wouldn't manage as much as 200 million of client assets and they probably wouldn't take as much with them.
Huw van Steenis – Morgan Stanley
Thank you.
John Cryan
The bonus – on the deferred bonuses, well, the amount carried forward to future periods from all prior periods is 3.2 billion Swiss francs and the amortization of that is a bit front-loaded, but it is over quite a long period of time and it stretches out over five plus years. But it accretes every year.
Oswald Grubel
Okay. Thank you very much.
Can we have the next question please?
Operator
Next question from Mr. Jernej Omahen, Goldman Sachs.
Please go ahead, sir.
Jernej Omahen – Goldman Sachs
Yes, hi there. Jernej here from Goldman Sachs.
I'd like to ask you two relatively straightforward questions. The first one is on compensations.
If UBS pays its employees what UBS wanted to pay its employees initially. I – we were reading reports in the press which seemed suspiciously detailed that there was an intervention from the regulator at – in regard to UBS' bonus pool.
And I think the follow-on question to that one is, in case you answer that there has been intervention, is whether you believe UBS employees today are paid or compensated in line with, I guess, the best of its peer group and what the impact that has on the business potentially. And I guess the second question is – I'm just, I guess, struggling to let go of this margin development in your private bank, the target is 100 basis points, but the margin is down 10 basis points over the past four quarters.
Can you just explain in a bit more detail how UBS gets the margin up by 25% to a 100 basis points, how that happens over a reasonable time frame, and what you plan to do that you are clearly not doing now in order to get that margin higher? I guess that's it.
Thanks very much.
Oswald Grubel
I think generally, coming to the bonus, clearly we have to pay our people comparably to the industry and who do the same job and who are as successful as the industry. Overall, obviously, in the bank, and clearly visible as well in our results in Investment Banking, we were not yet as successful as most of our peers, but I'm confident that the top performers are paid to stay.
Clearly, we know that we have to do that and I think in general, it is – we will get very well along with our bonus pot there. And the reason is also that when you have not like your company, too much money when you have just enough – tailored enough money, you have to be much more careful that you actually deploy it correctly to the right people, which we are doing.
There was speculation in the press and – but I cannot remember a single day during the course of the last year when there wasn't any speculation in the press about us and normally, as you know, with speculation and you have your fair share as well above that. So half is right and half is fantasy or wishful thinking.
There was no interference as such from the outside or from the regulators. Regulators do want to know about bonus pots these days and clearly, they are informed and – but that is all.
On the margin, to get up to 100 basis points, I know that is – again, one of these things, since you can't do it from today to tomorrow or from one quarter to another, it is very difficult to believe and with all the areas where we have to improve, that clearly is one of the areas. How we want to do it?
We – I said at the Investor Day or hinted at the Investor Day, it has something to do with advising your clients better and because you are advising them better, they will turn over the portfolio more often and therefore you get more basis points on the assets. But it is not a scheme – so to force people to turn over their portfolio more.
We have to convince people and it depends also on the market that in certain markets that the instruments they use are the right ones and are probably slightly orientated within a year than going over a period of a year. So – also, the market, as I see it going forward, is more a trading market where the so-called long-term investors have probably more difficulties.
One has to take the advantages that market gives, which during the year and which I think with the right advice and with the right profitability for the client will enthuse also the client to trade more than in the past. But that you will see over many quarters and as we develop in the next 12 months or so.
Thank you very much. Can we have the next question please and the last one?
Operator
The last question from the telephone conference is from Mr. Matthew Clark, KBW.
Please go ahead.
Matthew Clark – KBW
Hi, it's Matt Clark at KBW. Just a question on the tax credits.
If you continue to make progress towards your three to five-year profit target, what kind of scope for further creation of deferred tax assets do you see? Or to put it another way, what do you expect your effective tax rate to be in 2010 and in the next couple of years?
Thanks.
John Cryan
Well, the effective tax rate in 2010, if we are in line with the targets that we gave at the Investor Day, should be around about 20%. If we outperform that, and in particular, if we outperform that in the U.S., then the tax rate – the effective tax rate will come down.
And if we underperform that, then the tax rate could go up a little.
Matthew Clark – KBW
Okay. In terms of the – when you say in terms of the guidance you gave in 2010, you are referring to three to five-year profits or –?
John Cryan
Yes, as long as we are on – in line roughly to meet our medium-term goals and if the tax rate ought to be 20% to low-20s percent.
Matthew Clark – KBW
Okay. Thank you.
Oswald Grubel
Thank you. And with that, we close the telephone lines and are back here in the room.
And please, we open to any question we have in the room. Yes.