UBS Europe SE Rated #A+/A-1#; Outlook Assigned #AA-/A-1+# Resolution Counterparty Ratings

Stocks and Financial Services Press Releases Tuesday June 26, 2018 12:46
FRANKFURT--26 Jun--S&P Global Ratings

FRANKFURT (S&P Global Ratings) June 26, 2018--S&P Global Ratings today assigned its 'A+/A-1' long- and short-term issuer credit ratings (ICRs) to Germany-based UBS Europe SE (UBS ESE). The outlook is stable.

We also assigned 'AA-/A-1+' long- and short-term resolution counterparty ratings (RCRs) to UBS ESE.

UBS ESE is the main hub for wealth management in the EU for its parent UBS AG, the lead operating bank of the UBS group. UBS ESE was established in December 2016 through the merger of various wealth management subsidiaries of UBS AG across EU countries into the former UBS Deutschland AG. Its main mission is to cater to a broad range of wealth management clients through 23 branches in eight countries. It also provides the group with access to third-party clients through relationships with financial intermediaries. As a result, we regard UBS ESE as a core strategic, fully integrated, and connected subsidiary of the group.

We align our ICRs on UBS ESE with the 'A+/A-1' ratings on UBS AG and other core operating bank subsidiaries of the UBS group, reflecting the 'a+' group credit profile (GCP) of UBS. This approach further reflects our view that UBS ESE is likely to benefit from capital and liquidity support from its parent in the remote scenario where Swiss regulators were to invoke a bail-in resolution of the group to restore its viability. We regard UBS ESE as integral to the group's franchise, and operationally connected with the parent. We do not determine a stand-alone credit profile for UBS ESE, given its integration into the group.

UBS set up UBS ESE to create one pan-European wealth management institution and strengthen the position of these businesses in Europe, where it has been operating for decades. UBS is predominantly a wealth manager, and European markets benefit from relatively high private-wealth levels. UBS has recently announced an agreement to acquire the Luxembourg-based private banking business of pan-Nordic bank Nordea Bank S.A., which has assets under management of about EUR13 billion. The acquisition underpins the group's commitment to expand its European business.

We also consider that a default of UBS ESE would likely cause major reputation damage to UBS, since it shares the group's name and brand. UBS ESE is also integrated into the group's risk management tools and processes, and it partly depends on group resources in other areas such as technology. An example of the parent's commitment is its decision to protect UBS ESE from risks related to certain long-standing litigations inherited from another UBS entity that it absorbed through a merger in 2016.

All these points underpin our assumption that a sale of UBS ESE is highly unlikely and that UBS would support UBS ESE under any foreseeable circumstances.

The assignment of our 'AA-/A-1+' RCRs to UBS ESE follows our RCR jurisdiction assessment on Germany, and our review of its impact on UBS ESE. We consider that there is an effective resolution regime in Germany and that UBS ESE would be covered by the group's single point-of-entry resolution strategy if it were to reach a point of nonviability. An RCR is a forward-looking opinion of the relative default risk of certain senior liabilities that may be protected from default through an effective bail-in resolution process for the issuing financial institution. RCRs apply to issuers in jurisdictions where we assess the resolution regime to be effective and the issuer is likely to be subject to a resolution that entails a bail-in if it reaches nonviability. We typically position the long-term RCR up to one notch above the long-term ICR when the ICR ranges from 'BBB-' to 'A+', and up to two notches when the ICR ranges from 'B-' to 'BB+'. RCR uplift does not apply to institutions with ICRs of 'AA-' or higher.

The stable outlook on UBS ESE reflects that on UBS AG and other core operating bank entities of the UBS group, and our view that the UBS group has both the capacity and willingness to provide full support to the bank if needed. Therefore, a rating action on UBS ESE over the next 12-24 months would most likely follow a revision, upward or downward, of the 'a+' GCP assessment.

We could lower our ratings on UBS ESE if we no longer considered it to be a core subsidiary of UBS group, for example because its strategic role for the group were weakening, or if we thought that UBS ESE would be unable to benefit from support in a bail-in resolution of the group. However, we consider such developments to be remote. The impending exit of the U.K. from the EU in March 2019 requires UBS to reorganize its activities servicing EU clients, particularly in investment banking, sales, and trading. This may require reallocating activities from the U.K. to EU countries. Therefore, we think it is unlikely that UBS ESE's role would weaken, since it is already the most prominent legal entity of UBS in the EU outside the U.K. In fact, UBS has already indicated that it currently expects to merge its U.K. subsidiary UBS Ltd. into UBS ESE before the U.K. leaves the EU. This would not include clients of UBS Ltd. that can be serviced by UBS AG, London Branch. UBS anticipates that these clients would generally be migrated to UBS AG, London Branch before the merger.

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