The ratings reflect the strengthened financial condition of UBS, which was able to reduce its overall size by more than half since the crisis began while increasing tangible equity by more than 85%. The ratings also take account of the earnings resiliency stemming from the private banking franchise of the group. The ratings are also based on Scope’s view that high-profile litigation cases and operational incidents occurring in recent years are postponing UBS’s capacity to fully close the book on the crisis years. The agency added that the group de-risking occurring so far, although very necessary and positive for the credit, has lacked clarity and has led to the formation of a very large and complex corporate centre.

In line with Scope’s bank rating methodology, the ratings of UBS do not incorporate any additional notches for government support. While the two large Swiss banks – UBS and Credit Suisse – are visibly “too-big-to-fail” for the country’s financial system, Scope considers a potential state-bailout scenario to be unlikely as a resolution and recovery framework which includes creditor bailins has been adopted by the Swiss regulators and the banks are asked to organize their structure and activities accordingly.

The marked improvement in UBS’s prudential metrics, underpinned by de-risking, deleveraging and business restructuring, is a key positive rating driver. In six years UBS had managed to reduce its assets by 56%, to CHF1 tn. Over the same period cash balances have increased by 330%. Scope also highlighted the fact that despite numerous restructurings UBS’s profitability has in fact improved since the crisis. To assess this trend the rating agency made light restatements and compared the restated revenues with the group’s total assets under IFRS and assets under management, namely the sum of revenue-yielding assets. The analysis shows UBS’s gross profitability over all assets to be a strong 108 bps. Further improvements in UBS’s gross margin for wealth management, which is likely to have bottomed out, could translate into a positive rating-change driver if sustained over time.

On the negative side, Scope noted that despite substantial cost savings in recent years the cost-income ratio remains stubbornly elevated at 79% or higher. The agency attributes this to litigation costs and expects them to decline once litigation cases are sorted out.

Another positive rating driver cited by Scope is the rapid and proactive steps taken by Swiss public authorities to shore up and restructure the country’s two large banking groups.

As rating-change drivers, Scope cited the probable bottoming out of private banking gross margins following what should be riskier asset allocations from clients and potentially more favourable market conditions (positive). Scope also noted that a reduction in the turnover of UBS’s management and a stabilisation of the current leadership team would also be a positive rating driver.

Both the rating drivers and the rating-change drivers are detailed in Scope’s research on UBS which supports the ratings.

The following ratings were assigned:
- Issuer Credit-Strength Rating (ICSR) at A, with a stable outlook. The ICSR represents a credit opinion on a bank’s ability to meet its contractual financial commitments on a timely basis and in full while remaining a going concern.
- Senior unsecured debt rating at A, with a stable outlook.

In the near future Scope will rate UBS’s short-term debt, as well as the subordinated securities and capital instruments issued by the bank.

Scope said that the ratings assigned today to UBS, as well as to 17 other large European banks, represent the first step in its rating coverage of the banking industry. The ratings assigned to UBS are (i) based on public information, (ii) not solicited by the issuer and (iii) with issuer participation in the process.

The methodology used for the rating assessment is “Bank Rating Methodology” published in February 2014. The methodology used for the financial-forecast part of the rating analysis is “Forecasting Bank Financials” published in February 2014. These methodologies are available on www.scoperatings.com.