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Fitch Rates UBS Group AG 'A'/Stable; Assigns AT1 Notes Expected Ratings
February 12, 2015 / 4:52 PM / 3 years ago

Fitch Rates UBS Group AG 'A'/Stable; Assigns AT1 Notes Expected Ratings

(The following statement was released by the rating agency) LONDON, February 12 (Fitch) Fitch Ratings has assigned UBS Group AG a Long-term Issuer Default Rating (IDR) of 'A' with a Stable Outlook, Short-term IDR of 'F1' and Viability Rating (VR) of 'a'. At the same time Fitch has assigned UBS Group AG's potential issue of Tier 1 subordinated notes an expected rating of 'BB+(EXP)'. The notes' final rating is contingent on the receipt of final documents conforming to information already received. A full list of rating actions is at the end of this commentary. UBS Group AG acts as the holding company of UBS AG (A/Stable/F1/a), and its ratings are equalised with UBS AG's ratings. UBS Group AG was established in 2014 and has been the group's listed holding company since November 2014. As of 6 February 2015, UBS Group AG held 97.12% in UBS AG, and the group intends to gain full ownership of the operating company. The establishment of UBS Group AG as a holding company is part of a reorganisation that is aimed at improving the group's resolvability. As part of this reorganisation, UBS is also establishing a domestic banking subsidiary, UBS Switzerland AG, which will house its Swiss retail and corporate business and wealth management activities booked in Switzerland. The group is also required to establish an intermediate holding company in the US. In our opinion, setting up a holding company would facilitate a resolution under the Swiss regulator's preferred 'single-point-of-entry' strategy once there is sufficient debt issued by the holding company. It should allow for a bail-in of holding company debt without causing a default of the main operating subsidiaries. KEY RATING DRIVERS - VR AND IDRS UBS Group AG's VR and IDRs are equalised with those of its operating subsidiary, UBS AG, and reflect UBS Group AG's role as the group's holding company. UBS Group AG's end-2014 reported consolidated total assets were essentially equal to those reported by UBS AG. We expect the holding company to issue an increasing proportion of debt, including additional Tier 1 (AT1) and other hybrid instruments and senior debt. This will result in a debt buffer building up at the holding company over time. However, we do not expect double leverage at the holding company to exceed 120%, a level at which we would consider notching the holding company's VR and Long-term IDR below the bank's ratings. We expect the holding company to maintain a prudent liquidity policy, which should be helped by existing policies in place to manage liquidity across a large number of legal entities globally. The equalisation of UBS Group AG's VR and IDRs with UBS AG's also reflects our view that the Swiss regulator considers the group as a consolidated entity, the fact that the holding company is incorporated in the same jurisdiction as its main banking subsidiary and the very large majority stake UBS Group AG holds in UBS AG. RATING SENSITIVITIES - VR AND IDRS As UBS Group AG's VR and IDRs are equalised with UBS AG's, they are sensitive to the same factors as UBS AG's. UBS AG's VR and IDRs are primarily based on the bank's leading global wealth management and dominant domestic retail and corporate franchise, which should enable the bank to generate robust risk-adjusted returns. They also reflect adequate underlying profitability, solid funding and liquidity, strong capitalisation and improving balance sheet leverage. UBS AG's ratings also factor in the bank's sizeable non-core and legacy portfolio and its exposure to litigation risk, both of which, in our view, could lead to some earnings volatility in the short to medium term. The Stable Outlook on UBS AG's Long-term IDR reflects our view that UBS's profitability and its capital buffer will be sufficiently strong to absorb expected further litigation-related charges. UBS Group AG's VR and IDRs could be notched down from UBS AG's ratings if double leverage at the holding company increases above 120% or if the role of the holding company changes. Together with the creation of separately capitalised subsidiaries, over time further expected debt issuance by UBS Group AG could change the relative position of creditors of different group entities, which would be reflected in different entity ratings, including the holding company's VR and IDRs. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR UBS Group AG's Support Rating and Support Rating Floor (SRF) reflect Fitch's view that support from the Swiss authorities for the holding company is possible, but cannot be relied on, primarily because of the holding company's low systemic importance and our expectation that the holding company's funding will predominantly be composed of liabilities that can be bailed in. The SRF is at 'No Floor', and we do not expect any changes given regulatory developments aimed at reducing government support for even large and complex banking groups. KEY RATING DRIVERS -HYBRID SECURITIES The Tier 1 subordinated notes are AT1 instruments with fully discretionary interest payments and are subject to a full and permanent write-off on breach of a consolidated 5.125% (for the 'low-trigger' notes) or 7% (for the 'high-trigger notes') common equity Tier 1 (CET1) ratio, which is calculated on a 'phase-in' basis. Fitch has assigned the same expected rating to the 'high-trigger' and the 'low-trigger' notes. The rating of the securities, under Fitch's 'Assessing and Rating Bank Subordinated and Hybrid Securities' criteria, is five notches below UBS Group AG's 'a' VR, in line with Fitch's criteria for assigning ratings to hybrid instruments. The securities are notched twice for loss severity to reflect the full and permanent write-off of the notes on a breach of the CET1 ratio trigger, and three times for non-performance risk. The notching for non-performance risk reflects the instruments' fully discretionary coupon payment, which Fitch considers as the most easily activated form of loss absorption. We expect that any coupon omission on the 'high-trigger' and 'low-trigger' instruments would occur at the same time. Under the terms of the securities, the issuer will be prohibited from making interest payments if the amount of distributable items at UBS Group AG is insufficient, if UBS Group AG is not in compliance with minimum capital adequacy requirements, or if the regulator requires the group not to make payments. We expect a heightened risk of non-payment of interest should UBS Group AG's consolidated CET1 ratio fall below 10%, the level that the group will be required to meet from 1 January 2019. At end-2014, UBS Group AG reported a 13.4% fully loaded CET1 ratio, which is the strongest in its peer group. At the same date, its phase-in CET1 ratio, which is relevant for triggering a write-down, stood at 19.5%, providing a buffer of about CHF22bn before the group would breach a 10% CET1 ratio. The group targets a 13% full loaded CET1 ratio and a 10% stressed CET1 ratio (using an internal stress test). Fitch expects to assign 50% equity credit to the AT1 notes with a 5.125% CET1 ratio trigger and 100% equity credit to the notes with a 7% CET1 ratio trigger. The equity credit reflects their full coupon flexibility, their permanent nature and their subordination to all senior creditors. The higher equity credit assigned to the notes with a 7% CET1 ratio trigger reflects Fitch's view that they can be converted into common equity well before the bank would become non-viable. RATING SENSITIVITIES -HYBRID SECURITIES As the securities are notched down from UBS Group AG's VR, their rating is primarily sensitive to any change to the VR. The securities' rating is also sensitive to changes in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in UBS Group AG's VR. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. UBS AG's ratings are not affected by today's rating actions (for more information on the bank's key rating drivers and sensitivities see "Fitch Affirms UBS AG at 'A'; Outlook Stable" dated 25 November 2014 at www.fitchratings.com). The rating actions are as follows: UBS Group AG Long-term IDR: assigned 'A'; Outlook Stable Short-term IDR assigned 'F1' Viability Rating: assigned 'a' Support Rating: assigned '5' Support Rating Floor: assigned 'No Floor' Tier 1 Subordinated Notes ('High-Trigger'): assigned 'BB+(EXP)' Tier 1 Subordinated Notes ('Low-Trigger'): assigned 'BB+(EXP)' Contact: Primary Analyst Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Francois-Xavier Marchand Associate Director +33 1 44 29 91 46 Committee Chairperson Christopher Wolfe Managing Director +1 212 908 0771 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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