Good morning, everyone, it's Martin Osinga from Investor Relations; welcome to our second quarter results presentation. This morning, our CEO, Sergio Ermotti, will provide you with an overview of results, and our CFO, Kirt Gardner, will take you through the rest of the presentation. Before I hand over to Sergio, I'd like to remind you that today's call may include forward-looking statements. These statements represent the Firm's belief regarding future events that, by their very nature, may be uncertain and outside of the Firm's control, and our actual results and financial condition may vary materially from this belief. Please see the cautionary statement, included in today's presentation, on the discussion of risk factors in our annual report 2015, for a description of some of the factors that may affect our future results and financial condition. Now, I'll hand over to Sergio.

Thank you, Martin, and good morning everyone. For those who follow us regularly, Caroline Stewart is currently on maternity leave, looking after her new baby girl. I'm sure you will all join me in congratulating Caroline and her husband on this great news. In the second quarter, the slowdown in economic growth, the challenging interest rate environment and the geopolitical turmoil, including Brexit, intensified the storm of uncertainty in the industry. On a global basis, this translated into increased cash holdings for our wealth management clients, from already high levels and very low transaction volumes. Despite these conditions, we delivered an adjusted pre-tax profit of CHF1.7 billion, slightly up from the second quarter of 2015, which benefited from a more favorable environment. The Group generated over CHF1 billion in net profit attributable to shareholders, with an adjusted return on tangible equity of 10.1%. And, we maintained our strong capital ratios which are well above current requirements. These strong results highlight our consistent disciplined execution, and demonstrate the ability of our diversified business model to deliver, even in very difficult market conditions. It is this strength and resilience that contributed to recent upgrades in our credit ratings. The Group achieved CHF1.4 billion of net cost savings, as of the June exit rate, a CHF200 million improvement in the quarter, making progress towards the CHF2.1 billion 2017 yearend target, while absorbing substantially higher regulatory costs. We continue to take responsible measures to save costs across the Firm, in light of the current challenging environment. At the same time, however, the Firm is ensuring that its control framework, quality of client service, and strategic growth priorities are not compromised by taking overly aggressive steps to show short-term cost reduction. Having said that, it is clear to me that in the medium to long…

Thank you, Sergio. Good morning, everyone. As usual, my commentary will reference adjusted results unless otherwise stated. This quarter, our results have been adjusted for CHF377 million in net restructuring expenses; CHF120 million in gains on sales of real estate; CHF100 million in net gains on sales of subsidiaries, businesses and investments; as well as CHF26 million in net foreign currency translation losses. Consistent with the change in our earnings materials published today, comparatives will be made with the second quarter of 2015 unless otherwise stated. In wealth management, we delivered resilient result in very challenging market conditions, that have now persisted for four quarters, with CHF606 million in profit before tax, down 21% versus a very strong second quarter of 2015. As already mentioned by Sergio, clients continue to express concerns and fears over escalating geopolitical and macroeconomic risks. Transaction revenue was CHF347 million, the lowest quarter we have seen. As a reminder, Asia Pacific is the largest contributor to our transaction revenue and we saw a significant drop from the prior year. Apart from low activity, clients' concerns and fears continue to drive de-risking, with cash levels at 28% of non-contracted advisory assets, the highest we've seen since first quarter 2014. We've also seen movement into lower margin products, including that of active into passive funds. These trends, combined with lower average invested assets, contributed to a reduction in recurring net fee income, which was down 10%. To offset these recurring revenue headwinds, that are not expected to abate soon, we're redoubling our focus on pricing discipline and discount management, accelerating the rollout of our alternative solutions where we are underweight, enhancing our CIO line asset allocation offerings, and continuing to improve mandate penetration. Net interest income increased due to the higher deposit revenues, partially offset by lower…

We will now begin the Q&A session for analysts and investors. [Operator Instructions] The first question comes from Kinner Lakhani, Deutsche Bank. Please go ahead.

I had a couple questions on wealth management and then a few other questions. Just on wealth management, it's clear that fee margin is under pressure. I think you mentioned asset allocation changes in wealth management and lower mutual fund fees in WMA. So just wanted to get a better sense, are clients becoming more defensive, more cash and in which regions? And in the US, do you see the Department of Labor provisions driving a further shift from active to passive? Then the other side of the coin on this question is typically the mitigating factors have been growing loan balances and relationship managers and, clearly, both are declining. I think WM RMs are down 2% Q on Q and the loan balances are down 7% year on year. So I just wanted to get a sense on are how you're thinking about these sources of mitigating factors. And then finally just on Brexit, I wanted to get a sense on how Brexit impacted the results in Q2 across your divisions. And what your thoughts are -- your preliminary thoughts are, in terms of more limited passporting, and how you would operate in Europe going forward?

Thank you, Kinner. I'll take the Brexit question first and then I'll let Kirt take the one on wealth management. In terms of Brexit, if you look at the second quarter, you could basically say that out of 12 weeks or so, or 13 weeks, for at least 10 weeks the Brexit signal [ph] was a negative factor. It was an additional factor, together with other macroeconomic and geopolitical considerations that was, basically, putting a pressure on clients and creating more risk aversion. If you look at one or two days before the vote and the following days, of course, we had a pickup of activity. Clearly, we were well prepared for any outcome. But our first priority was not really to take any financial advantage out of the Brexit outcome, but rather to make sure that we will be able to serve clients in an environment with high volume. But, in general, I would say that the Brexit had only a positive impact in the last few days of the month of June; and in general, during the quarter, not positive. In respect of passport, it's way too early to speculate on what we're going to do. I think it's clearly -- is a clear issue. We have a high degree of strategic flexibility in respect of what to do should the UK have no passport access to the EU. We have a significant lot of presence in Continental Europe. And we will be able to respond in a reasonable amount of time in redeploying resources should that be necessary. Of course, we do believe, at the end of the day, that notwithstanding that, London will continue to be a very important center for our activity. But it's way too early to come to any conclusion.

Thank you, Sergio. Kinner, I'd be happy to take your first two questions. Just as you highlighted and as I highlighted in my speech, clearly our fees are under pressure and we're seeing, of course, not only clients through their risk aversion reducing their overall transaction volumes. But we're also seeing some of their actions that are impacting our recurring fees. Our transaction volumes have been down quite significantly now really for four quarters, and we see more recently the reduction in recurring revenue. As you say, if we look at recurring revenue, I think your comments pertain to recurring revenue. The movement in the cash is something we've seen progressively over the last three quarters. We started to see deleveraging actually dating back to the third quarter of last year. That deleveraging has continued and we really have not seen a pickup in loan activity. That is primarily because we use leverage, not for cash or lending purposes, but we use leverage with our clients to help enhance investment opportunities. When the investment opportunities aren't there, logically, the Lombard loan part of our lending business will also similarly not likely increase. Now, in terms of the mitigating actions, I should also mention, of course, the other pressure that we naturally see is the cross-border effects in the segment mix, as we continue to build our ultra-high net-worth business, and as that business grows more strongly than our high net-worth business. From a mitigation standpoint, we are growing loan balances in WMA. So I think we need to separate out WMA and WM. We expect, as I highlighted, we've grown our loan balances 22 consecutive quarters. We've seen net interest margin at a record level. We expect to see continued growth in banking product volumes in the WMA market. Although,…

Great, thanks a lot. Do you expect the EM outflows to continue? Is this part of the regularization trend and tax amnesties?

We do expect those outflows to continue through the rest of the year and into next year really in advance of the full implementation of automated exchange of information. Naturally also, as the emerging market countries implement their own amnesty programs, we will help manage our clients through those programs. Just one other point, you also asked about the impact of DoL. We really haven't seen any current impact of the DoL influencing client trends, in terms of their investment preferences and their move out of mutual funds. That is really much more reflective of the environment, and not really yet the impact of DoL.

The next question comes from Kian Abouhossein, JPMorgan. Please go ahead.

The first question is if you could briefly discuss the trends in the top line margins in WM through the quarter, i.e., how has it developed, because your message seems to be very cautious and margins clearly are down but still holding up reasonably well? So I'm just wondering how the trend development is exiting the quarter. In that context, can you just talk a little bit around Asia Pacific margins, which clearly have declined quite a bit quarter on quarter and how we should think about this going forward. The second question is related to Asia revenues in the IB. I can see first half, year on year, is down 40%. I'm just wondering how you see that developing. Is it stabilizing? It is actually improving again around the run rate? The last question is on the costs side. I hear you on the CHF1.4 billion cost savings. What I would love to know is what have you actually realized of the annualized number? Last quarter you said it will go up by CHF200 million, i.e., CHF1.2 billion to CHF1.4 billion. I'm just wondering what is the net effect that you expect going forward for the third quarter or second half of the CHF2.1 billion. From my perspective, how do I see these cost savings, because they are annualized; they are not broken down by division. How do I actually know that you're saving costs from an outsider?

So your first question on our wealth management margin trend, I think, as you've seen, we saw a 3 basis point reduction. And that was reflecting the continued extremely low revenue from our transaction activities that was down 14 basis points for the quarter, which again has been trending at the lowest level that we've seen now for several quarters. It was a bit higher in the first quarter, and that was just reflecting seasonality more than anything else, where we saw the same sentiment trend that we've seen in the second quarter in the first quarter. However, that was slightly offset by just the general seasonality, when clients tend to make moves on their investments. That was further, of course, impacted by the recurring margin reduction that fell 3 basis points. The main reduction that you saw from the first to the second quarter really is recurring margin. I think going forward, as I highlighted when I answered the last question from Kinner, we don't really see anything from a trend perspective that's going to cause our margins to improve in the near term. I highlighted the mitigating actions that we're taking. But those mitigating actions will hopefully offset some of the continued downward pressure that we're going to see from the cross-border outflows and any further moves that we see from our clients out of risk into cash and into lower margin products. So that'll be the dynamic going forward until we see changes in the conditions -- the market conditions.

Just to follow up very briefly, so what you're seeing is more just the normal seasonal trend going forward? Or do you see, actually, accelerated margin decline, because of a more-tougher environment than what you would normally see from a seasonal perspective?

Well, I think our transaction revenues are probably as low as they're going to get. While I don't see improvement I don't necessarily think that our transactions margins are going to reduce further. In terms of our recurring margin, again, I think we've seen a lot of the trends present in those margins. As I mentioned, we don't necessarily, until we see some changes in the outlook and some clarity around some of the factors, that are --particularly the beta factors that are impacting our clients, and we probably, actually, have seen the moves that we've seen. You asked about Asia Pacific specifically, and in the large drop off from the first quarter to the second quarter, firstly, just, as I highlighted in my speech, to remind you that Asia Pacific is where we see the highest concentration of transaction revenue and the largest contribution to our transaction revenue overall. Clearly, with the degree of client risk aversion that is particularly pronounced in the Asia region that really drove the margin down considerably from the 78 basis points. We also saw the same trends that were impacting our recurring margin, that I highlighted very present in the Asia region, driving the reduction in margin from 78 basis points to 71 basis points. The 78 basis point margin in the first quarter reflected some of the seasonality benefit that I highlighted previously. Your second question then, in terms of the IB margin, as your rightly pointed out, of course, our investment banking performance is down considerably year on year in the second quarter; partly reflecting much stronger market trends that were more favorable for our investment bank in the second quarter last year, which includes better primary activity in particularly the northern part of the region, where we're particularly well positioned,…

Yes. Your revenues are down as well, if I may add. But I mean, it would be useful to have achieved numbers realized, and also by division, because this is a bit too much of a consultant slide, and we need more details, if you really want us to factor in the numbers.

Just one point, the revenue was down 4%; costs were down 5%, so.

Yes, 1% difference.

The next question comes from Chira Barua, Sanford C. Bernstein. Please go ahead.

Good morning, guys. Just three very quick questions. One is in terms of your APAC net inflows. You've had two very good quarters. Just want to understand, where are you picking up assets from, because there's not too much primary market activity, as you say? So, who are you taking share from? Or is it new assets, which are coming from family offices straight on to your platform? The second question was on your new innovative solutions. What kind of gross margins do you get in products like the system allocation product, or the endowment-style portfolio? Are they very different from the kind of overall gross margins that you have? And the third one was just want to get a sense on how the franchise react if the Fed will go ahead and raise 25 basis points in the US tomorrow, both on an earnings perspective, and what you think will be on a capital allocation perspective in wealth management? Those are the three, please. Thank you.

Thank you for your questions. Just in looking at the net new money inflows in Asia Pacific, where we saw almost CHF16 billion during the first half of the year, and that's despite, actually, seeing virtually no loan growth in the region, the inflows are -- the majority are from existing clients. And so it's clients that already have good long-term relationships with us that are increasing the share of the wealth that they're placing with us. And I think that just reflects the confidence in how they view UBS, particularly during a challenging market times. Although, there are inflows from new clients, I also highlighted that 25% of the inflows are from high net worth. And that is, in part, due we've been investing and we opened our Kowloon office in April this year. And over the last 1.5 years, we've been investing in building up a focus on high net-worth, smaller entrepreneurs, if you will. And that has been an extremely successful program. That's actually helped contribute to net new client money inflow over the course of the first half of the year, and that's something that we expect to continue. I'll also mention that we've talked a little bit about China, but we expect to get our retail license -- our full retail license in China in the second half of the year. And that will allow us a better position as to be able to build our wealth management business, domestically, in China.

That will be an onshore business, is it?

That's correct; that will be an onshore business. Your second question was about?

The margin for the new products.

Yes, margin. Given -- in considering that the new products actually have quite a bit of unique features in intellectual property and so, therefore, given the compelling value proposition, they actually tend to have higher margins than our more, you can call them, vanilla, but our more typical tailored mandate products. And so if you look at the systemic allocation portfolio, the intellectual property behind the modeling, and how we actually determine trigger points for when we take off risk and equities, is something that we build in to the margins for those products. The endowment style is just quite unique, with, particularly, the higher concentration of alternatives. That's priced in to the products, so the margins on those products are higher. The Fed was your final point. Clearly, I think a part of what you're seeing in terms of the improvement of our net interest income in our WMA business is the move that was made by the Fed. And if there were another move by the Fed, we would expect to see continued improvement in our net interest income, both in wealth management Americas, and also in wealth management, given we have a high concentration of dollar volume in that business. Of course, and this was highlighted by Sergio, our expectations going in to the year were that we were going to see six such moves. And that's one of the reasons why, of course, the overall levels of net interest income that we're seeing through the year is quite a bit below what we expected during our planning process. Now, in terms of how that would impact our equity allocation, I'm not sure it would necessarily impact our equity allocation at all.

Thanks.

Next question comes from Andrew Stimpson, Bank of America Merrill Lynch. Please go ahead.

Thank you. Hi, guys. Three questions from me. Firstly, on the collaboration theme that you touched on briefly there, you say that that's what the industry needs to do to reduce costs. Are you finding that that's happening already? How much progress are you making there? Is there more cooperation from US or Europeans? And maybe, if you could say whether is that necessary collaboration to get to your CHF2.1 billion cost saves, or is that -- would that potentially be on top? And then, on the ROE, and you say, you touched on it answering some of the other questions, on margins, saying when things are more normalized. Can you describe what you count as a more normalized or more positive environment, because, clearly, with the US equity markets, at least, are near or at all-time highs; global GDP growth has been getting better. So, if everyone is pretty risk-averse already, what are we really talking about here? Are we just saying, when short rates move higher? And then, lastly, on the LCR. It looks like you've stabilized at around about just over 130%. Is that where you'd expect that ratio to stay? Is there any reason why you can't bring that down, or wouldn't want to bring it down? Or is there any reason why it might have to move higher? Thank you.

Thanks. Specifically, on your question on the CHF2.1 billion on the cost savings. This collaboration in future, as I outlined in my remarks, is excluded. So I think that short term in the next 18 to 24 months, I think that a traditional way of looking at efficiencies internally will be sufficient to achieve our target. It's not easy work, because this is a net number, and this number does not include cost savings when we shut down businesses. So this is hard work that is also including offsetting headwinds coming from higher regulatory costs that we are experiencing almost on a weekly basis. So when you look beyond 2017, regardless of market conditions, I do think the industry needs to think about ways to get more efficient. And talks and conversations are going through between banks on how to move into the next level. It's slower than I would consider being necessary, considering market conditions and the low level of profitability in the industry. But, of course, just -- people have in many cases different priorities at this stage to address, and they are not probably yet at a position to think about 24, 36 months ahead, they need to focus on short-term problems. And I'm sure once those problems are resolved, they will get to the same conclusion. But there are discussions ongoing, and I’m positive that, like many other industries, telecom, the car industry, steel, and any manufacturing, will have to converge together to share economies of scale. And of course, then, M&A in some cases may help the industry to get that economy of scale, but not necessarily. In our case, clearly, we want to keep the purity of our business model. That's really also clear that we are keen to look at differentiating factors to…

Thank you.

Hi, Andrew. Regarding LCR, we've been operating in the mid-ish 130%s and, as you can imagine, we are bouncing around quite a bit. And the current level of LCR is certainly reflective of the build-out of our legal entity structure. We required additional liquidity to meet our IHC book requirements that was launched July 1, and that resulted in an increase in the level of liquidity that we were holding at a Group level. Then, part of the challenge, of course, is we established these legal entities, they're ring-fenced, and so we get less fungibility and flexibility to use that liquidity globally. And so, it is sub-optimal. We are moving towards a less optimal structure, of course, than we managed previously, and that's going to have implications ultimately for how we're going to have to run our liquidity and where our LCR ratio is going to end up. Now, having said that though, as we do build out our legal entity structure, we're also building out the treasury, the risk management capabilities, across that structure to give us a greater visibility, better agility, to be able to manage more effectively in that structure. And as we complete that build-out, my aspiration, my anticipation, is that that will allow us to lower our LCR ratio and to operate at a Group level that is certainly below where we're operating today with the mid 130%s. So I would expect, over time, for us to bring that down to a more optimal level within the structure that we have to operate for regulatory and resolvability reasons.

Brilliant, thank you.

The next question comes from Stefan Stalmann, Autonomous Research. Please go ahead.

Good morning, gentlemen. I have a couple of questions on the wealth management business again. The first one on the portfolio composition. I hear you on the rising cash allocation year-to-date, but 20% does not strike me as particularly different from what we have had in 2013 and 2014. In fact, it is actually a bit lower. So how important is this cash allocation really to your activity and to your revenue and wealth management? Also, you are clearly on a very different trajectory to some of your competitors in terms of advisor hiring. Your major competitors are talking about windows of opportunity and they are hiring like there is no tomorrow. Whereas you are basically flat, year on year, on your advisor count. Could you may be shed a little bit more light on how you think about the world, and where you may be different from your competitors? And the final, a little detail. Could you maybe hint at how many assets under management were actually deconsolidated, due to your exit from Australia and Belgium, please? Thank you very much.

Yes, Stefan, thank you, thank you for your question. In terms of portfolio composition, you're right. We did see these levels back earlier in 2014, and so in some ways what we saw is we've been experiencing a reduction in cash levels over the last couple of years. And those have rebounded recently as clients have taken risk off again. There is one very important difference, and this, obviously, impacts our margins overall. It's that back in 2014 we had a more attractive interest rate environment, and interest rates have continued to come down and, of course, have turned negative in Switzerland, and have turned negative in the euro environment. And obviously that is a -- on a comparative basis that results in additional reduction overall in our gross margin. In addition to that, in the US we've seen -- and I mentioned that our clients now declare a total cash level of 22% and that's come up from around 20-ish-%, but that's up again as well. There, in particular, of course, the cash -- the difference in interest rates has been quite substantial over the last two-plus years. So, we do expect these cash levels to be with us for a while, of course. We probably won't see any change until clients' risk appetites actually adjusts back towards a bit more risk-on. In terms of our hiring practices, yes, you've seen it and really we just have been reacting to the market and managing our business as we see appropriate. And given the current environment, where there are challenges we're a little bit more prudent on our hiring processes and I think that's appropriate. But, nevertheless, we will actually over time continue to increase and add to our CAs, particularly in the markets that we view as attractive and where we see growth opportunity, and that obviously includes Asia Pacific. We've previously announced that we plan on hiring or doubling our headcount in China and those plans are still very, very much part of our current investment portfolio. We also will -- when we think it's appropriate, we'll hire in other markets, like some of the emerging markets, when we think the growth opportunities are there and where we want to build out our platform in some of the, for example, domestic European markets. We made an acquisition of a portfolio in Italy recently, and we expect to continue to look for those opportunities from a hiring perspective.

Yes. Kirt, maybe what we could add is that like with net new money and like we do in the US, we are not focusing on size and growth per se. We need to focus on quality of what we look at in terms of intake of client advisors. I think it's very important. Also, because taking on people, that takes, let's say, two, three years or more to them to be justifiable from an economic standpoint of view can have a very severe J-curve effect on your results, particularly in this environment. I know you already asked the question, probably, on assets, but I can already, before I give it back to Kirt, to point out that our account has also been affected by the Australian exit.

Yes. In fact, that's a perfect point, Sergio. Without the Australian asset, our CA headcount would be up in Asia. Just on your point about the assets, the reduction in assets was CHF8.4 billion as a result of exiting Australia. That -- one of the things when -- it was essentially 100% mandate, and so that shows up in terms of our mandate penetration, which is why our mandate penetration ex-Australia is up 50 basis points. If you actually include Australia in the baseline, it's only up about 10 basis points.

Right. Thanks a lot; very helpful.

Next question comes from Amit Goel, Exane BNP Paribas. Please go ahead.

Hi, thank you. I've got two questions; one a bit more strategic, one a bit more detail. Basically, on the strategic question, it's more about the planning process and how you think about the next few years, because, clearly, as you say, this not-normal environment seems to go on for longer and longer, and the economic assumptions seem to continue to come under pressure. When you put out the existing cost reduction program, the revenue picture still looked -- or the expectation was still a bit better than where we're at. How do you think about this going into the second half of the year? And in terms of planning for the next few years, are you thinking about further cost reduction initiatives programs on top and when can we get some thoughts on that? And the more detailed second question relates to the deferred tax assets. As you mentioned, you’re expecting six further rate increases in your planning process, which is why net interest income is well below what you were expecting. How does that play into what we should expect on the DTAs for later this year? Thank you.

So, let me tackle the strategic part and then Kirt can address the DTA methodology and issues. On the planning process, like every year, we do really divide two items, what we call the beta factors and the alpha factors. The beta are clearly driven by rate effect forecasts, which are provided by our economists, but also with a look into consensus. So, when we come out with views on how rates will develop in the next 12 to 36 months, we take market view in consideration, so -- to neutralize any subjectivity factor. We look at volumes in the stock markets, in different asset classes category. We look at GDP growth as an indicator for wealth creation, which may translate into monetization and also of wealth and, therefore, net new money. So, we look at different factors that are, let's call it, as I mentioned before, beta factors that will drive our business. Then the alpha factors are mandate penetration, market share and repricing of services, and new product development and entering in a new market and so on. So when we look at the deviation between six rate hikes by the Fed, that's what we had in our plan at the end of the year, which is not necessarily a year-on-year comparison. It's a deviation versus internal plans, and that's clearly a headwind that we are facing. In terms of cost, I already answered the question. For the next 18 months, we are focused on executing CHF2.1 billion of net savings. Despite all the challenges that we are facing, I think this is the best way, really, to create value for shareholders without compromising on quality of services to clients; without compromising on control functions; and without compromising, most importantly as well, I would say, on our ability to invest in the future. Because, clearly, we are in an industry that is still facing a lot of challenges coming from the past and today's environment. But we are also in an industry that has to compete with the future and with people who have more agile situations to compete and, therefore, we cannot stop investing. That would be very dangerous for the franchise. So, really, balancing growth and cost savings will be, regardless of market conditions, a priority for us.

Yes, in terms of your question on DTAs, we have previously indicated, of course, and, as you pointed out, we will review our DTA during our three-year planning process. As we go through that planning process, just as Sergio outlined, we will look at the beta factors and we will look at a forward view on those beta factors. And that will be incorporated into our three-year trajectory for our revenue and our performance across each of our legal entities. Clearly, the most sensitive and what will drive any DTA action is our US entities and principally our intermediate holding company that just went live on July 1. And I won't speculate on what the impact will be, because we really actually have to get into the detail. And it is quite a technical and a detailed exercise before we come up with the implications for DTA overall. Also, I'll just remind you, as I indicated during my speech, there also is a smaller DTA bill that we have in the UK and also in Switzerland. And as I highlighted, we do expect to see an impairment in our UK DTA, as a consequence of the expectation of this law to reduce the percentage of profits available for NOLs to go into effect. So that would result in about CHF110 million impairment.

Okay. But should we no longer consider the CHF500 million DTA guidance as valid, or does that still hold? And in terms of the broader cost planning, at what point in terms of, say, margin or revenue assumption, do you start to think perhaps, even though you've obviously got various growth assumptions, that actually maybe it's still in the better interest to take a bit more cost out, or just to take a bit more action on that side? Thank you.

In terms of the DTA, I won't provide any guidance. Next quarter we will have updated guidance on our DTA, because it would just be speculative. In terms of our costs, I think if you look forward we have CHF700 million of net cost reductions to deliver between now and the end of next year, and I think that's a fairly aggressive, robust program. And also, as we've previously indicated, beyond that the businesses will take any tactical actions that are prudent and appropriate.

Okay. Thank you.

The next question comes from Jeremy Sigee from Barclays. Please go ahead.

Good morning. Thank you. Just two questions please, related ones. I notice that in your Group ALM segment, the assets are down and the leverage ratio denominator is down for the first time after several quarters of growth, which I think is a welcome thing. But it's still your biggest business. It's still your biggest segment and biggest user of balance sheet in the Group, certainly in nominal terms. I just wanted to see if that change, quarter on quarter, is the beginning of a bigger shift? Is this a change in strategy that you're trying to run that on a leaner basis? And if so, how much further could that come down? And my related question, really, is the same question on a Group level. You've had a lot of questions about cutting more costs in reaction to the weaker revenue outturn. And I just wondered, correspondingly, whether you were also looking at, or should be looking at balance sheet savings too, to mitigate that revenue weakness, including perhaps re-scoping your CHF250 billion/CHF950 billion RWA and leverage ratio-denominated targets for the medium term?

Yes, just on your first question, in terms of Group asset liability management, the primary activities in Group ALM are the risk management activities that they conduct on behalf of the Group and the business division. And what we guided during the last quarter was that we expect that the net result of those activities, that includes as well of course allocations back to the divisions reflecting the economics inherent in their ALM contributed balance sheet, to be negative CHF50 million a quarter. This quarter that line was negative CHF53 million, very much in line with what we guided last quarter. Beyond that, what you see is accounting asymmetry that tends to result from our hedging activities and how we account for those hedges. So the profit that is reflected this quarter in Group ALM really reflects accounting asymmetries and hedge ineffectiveness that more than offset the CHF53 million loss for risk management activities.

Sorry, if I could stop you. My question is really about the balance sheet in that segment, because it's just enormous; it's bigger than your investment bank. It's been growing like crazy for the last several quarters. And so given that you're leverage constrained as a Group, there's a huge slug of leverage denominator sitting in that Group ALM thing. As I say, it's been growing. It's just started shrinking for the first time, which I'm saying is I think is a very welcome development. And really, what I'm asking you is whether that shrinkage in the balance sheet and the capital usage, certainly in leverage terms, can come down further in Group ALM?

So the shrinkage that you saw in Group ALM during the quarter was actually just a reduction in our business division's structured finance activity. So they've raised less cash in the market during the quarter and that resulted in a reduction in ALM. And then there was some off balance sheet, some derivatives reductions. I don't think that that's an indication or a trend where you should expect to see the balance sheet in Group ALM go down over time. The question I answered before about LCR, obviously, our objective would be to manage the Group at a lower LCR level, once we're able to fully implement the infrastructure associated with our new legal entity structure. And as we move in that direction, that should result in some ability to bring down the overall level of liquidity that we have to hold at a Group level. But that will take time. That will take a couple of years before we've fully implemented everything that's required. It's reflected in the level of cash that we hold as a Group. It really is, our LCR ratio of 134% really just indicates what level of high-quality liquid assets and cash that we hold as a Group to meet our prudential and regulatory requirements. In terms of your balance sheet question, I think actually what you see currently is because of the market conditions, the lack of client volumes, the lack of primary market volumes, the lack of opportunity to put risk -- put balance sheet to work on behalf of our clients is exactly why you see our current balance sheet at low levels. Levels well below the CHF950 billion in LRD we guided at CHF898 billion. You also see our RWA well below the CHF250 billion that we guided at CHF214 billion. And I think what you would expect is that if market conditions don't change, if we continue to have environment where it's -- clients are not active and where there aren't risk opportunities that are sensible, that we will not deploy or increase our balance sheet. The expectations were really given under more normalized market conditions. Clearly, we are extremely active in optimizing both RWA as well as our LRD. In every quarter, we tend to deliver a very significant amount of optimization. Now, in the case of RWA that often gets offset with the regulatory multipliers that also I mentioned in my speech where we expect, for example, next year CHF5 billion to CHF6 billion of headwinds. In the second half of this year, we expect between multipliers and methodology change about CHF5 billion of headwind.

That's very helpful. Thank you.

The next question comes from Fiona Swaffield, RBC Capital Markets. Please go ahead.

I have three questions. The first was on equity derivatives, or just equities in general within the investment bank. How do you feel about your market share when you look at competitors' results? And also, in equity derivatives is there something going on that's one-off of nature, or is it just as you mentioned in Asia, the lack of demand for structural products? The second issue is on how Brexit could have affected transaction margins, or transaction revenues within wealth management? Was there any positive impact within your wealth management franchise towards the end of the quarter? And then the third question is on the credit conversion factor, the RWA add-on you mentioned to come in retail, CHF3 billion, what drives that? Is that a UBS change or is that coming from FINMA? Thanks.

Yes, just on equity derivatives, the equity derivatives result that you saw in the quarter is really just reflective of the mix of geographic and product mix, current mix, of our franchise and the fact that we have a much stronger position in Asia Pacific. And within Asia Pacific and Europe, we also have a very strong platform and position in structured and correlation derivative products. And there was really very, very, very, little activity in that product class in both of those regions that resulted, particularly the year-on-year comparison where we, actually, saw quite a bit of activity last year in second quarter in both of those regions around structured and correlated products and those volumes have come up substantially, which is very consistent with the risk environment. However, I will highlight we did see, during the first half of this year, a significant increase in our presence in the America region, where we have traditionally been underweight. And in fact, in the quarter, there was year-on-year increase in both our cash and our financing activities. Our equities business overall, year-to-date during the first half, is up quite nicely versus the first half of last year. And we have seen market surveys that indicate that we are taking share in that region in our equities business. In terms of Brexit, naturally, the majority of the activity we saw around Brexit is reflected in our investment banking franchise. And we highlighted that that did benefit our FRC franchise. Although, even with the absence of that revenue, we still would have been up year-on-year. There was, to a lesser extent, some impact in our wealth management business. But it was quite a bit smaller than it was for our investment bank. In terms of the credit conversion factor for RWA, that is compliments of our regulator.

Thanks very much.

Our last question comes from Andrew Coombs, Citigroup. Please go ahead.

Yes. Good morning. Thank you for taking my question. I have one follow-up, and two fresh questions, please. Actually, the follow-up, when you alluded to the cross-border outflows, you suggested that we should expect those to continue, but I just wanted to go a bit further and break it down between Europe and emerging markets. You've seen outflows from both. Some of your peers have suggested that the European cross-border outflows are largely complete. I just wanted to check if you concur with that statement. And also, how far you think you are through the process in EM as well, please. My second question would then be on P&C. There NII has actually been remarkable resilient. But you have again indicated the adverse effect of low rates on the replication portfolio. So perhaps you could comment on the outlook there and how much more you can do to support the NII base, given the tricky market conditions. And then my final question relates to your RMBS provision. You provide some helpful detail on page 113 of your report. First and foremost, your provision has actually fallen during the quarter. So I just wanted to check what drove that. Was it a civil settlement? And then on the GBP998 million that's left, does that relate to civil cases? Or is there something in there for the Department of Justice working group are investigating as well? Thank you.

Yes. Thank you, Andrew. So in terms of the cross-border outflows, we are substantially done with our VCP process for European countries. And so what you saw in terms of outflows for the quarter were much more weighted towards emerging markets. However, we would highlight that if there's still is a tale related to that activity, once we complete the process with our clients, it takes them some time to pay their taxes and to completely settle. So we'll see that at a very, very, tapered level. The majority of what we saw in the quarter, what we expect going forward, is likely to be -- continue to be emerging markets as we highlighted as we move towards the full implementation of automated exchange of information and as those markets pursue their amnesty programs. And we also indicated there that we expect to absorb that within our 3% to 5% growth rate. But those cross-border outflows will certainly be with us over the next couple of quarters and into next year. In terms of your second question regarding our personal and corporate net interest income, and net interest margin, we concur that the business has done remarkably well to manage the negative interest rate environment. And clearly, there will be some continued headwinds on our deposit portfolio as we move towards the replication process in that. Unless magically interest rates turn positive there will be a headwind for that business. Part of our ability to maintain that margin will really depend on our ability to maintain our mortgage pricing and our loan pricing in the market that we've been very successful in maintaining to date, although there is some market pressure on those rates. And that market pressure, depending on how it evolves over the next couple of quarters, could also have some impact on our overall net interest margin.

Kirt, maybe I would add only the fact that these very strong results in NII are coming from the work done in the last few years. It's not just a short-term dynamic since the introduction of negative rates. And it's very important to point out that it's not just a repricing, because of negative rates. New regulation and much higher capital requirements have been driving up prices for credit in our case. And we have been very disciplined in taking both factors into consideration.

Yes, that's right. The same amount of multipliers that we've referred to, a good portion of that is focused on our mortgage business in Switzerland. We're actually going to continue -- absent any other changes potentially from Basel IV, we're going to continue to see an increase in the RWA, the capital requirements, for our mortgage book as we go through the next couple of years. In terms of the RMBS, where you saw, I think it was a CHF250 million reduction in provisions, was used to resolve previously announced matters for that part of our overall litigation portfolio. The existing provisions really are distributed across all of our RMBS matters.

And can you just provide an update of where you are in discussion? A couple of your peers had suggested they're further along the track. I'd just be interested in your thoughts there.

Yes. No, that's not something that we would comment on.

Okay, very good. Thank you.

With that, we have run out of time. The Q&A session for analysts and investors is over. Analysts and investors may now disconnect their lines. In a few moments, we will start the media Q&A session.