UBS. UBS Bank USA Annual Dodd-Frank Act Stress Test Results

Transcription

1 UBS UBS Bank USA Annual Dodd-Frank Act Stress Test Results UBS Bank USA Stress Test Results under a hypothetical Severely Adverse Economic Scenario provided by the Federal Reserve Board of Governors covering the time period December 31, 2016 through March 31, June 15, 2017

2 About UBS Bank USA UBS Bank USA ("the Bank" or "UBS Bank") is a Utah chartered industrial bank licensed to do business pursuant to the laws of the state of Utah. The Bank was capitalized on September 4, The Bank's primary regulators are the Utah Department of Financial Institutions (UDFI), the Federal Deposit Insurance Corporation (FDIC) and with respect to federal consumer financial laws, the Consumer Financial Protection Bureau. The Bank offers money market deposit accounts, negotiable order of withdrawal accounts, and certificates of deposits. The deposits are principally used to fund loans collateralized by securities, loans collateralized by residential real estate, credit card advances, and the Bank's portfolio of investment securities. The Bank s products and services are offered nationally. The Bank s deposits are insured by the FDIC up to FDIC limits. Background In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, UBS Bank is required to perform stress testing ("DFAST") using three hypothetical scenarios provided by the Federal Reserve Board of Governors (the "Federal Reserve"). The implementation of the DFAST requirement is further explained under 12 CFR, Part 325, Subpart C. Consistent with the DFAST requirements, the Bank submitted stress test results for various hypothetical scenarios, including Baseline, Adverse and Severely Adverse Scenarios, on April 5, Among other things, the Bank is required to make publicly available its stress test results for the Severely Adverse Scenario, including the Bank's revenue, loss and capital estimates under that scenario. This disclosure addresses that requirement. The results presented in this disclosure represent projections of financial results and capital ratios under hypothetical, highly adverse economic scenarios prescribed by the Federal Reserve. The projections do not represent UBS Bank's forecast of expected gains, loss, pre provision net revenue, net income before taxes, capital, risk-weighted assets, or capital ratios. The results of the stress tests are used by the Bank and the FDIC to evaluate the capital planning and capital adequacy assessment processes, risk profile and financial condition of the Bank under the stress scenarios. An electronic copy of this disclosure can be found on the Bank's website at Description of the Severely Adverse Economic Scenario For the 2017 annual stress testing cycle, the Supervisory Severely Adverse scenario is characterized by a severe global recession that is accompanied by a period of heightened stress in corporate loan markets and commercial real estate markets. The level of US real Gross Domestic Product ("GDP") begins to decline in the first quarter of 2017 and reaches a trough in the second quarter of 2018 that is approximately 6.5% below the pre-recession peak. The unemployment rate increases approximately 5.25%, to 10%, by the third quarter of Headline consumer price inflation falls to approximately 1.25% at an annual rate by the second quarter of 2017 and then rises to about 1.75% at an annual rate by the middle of

3 Asset prices drop sharply in this scenario. Equity prices fall by 50% through the end of 2017, accompanied by a surge in equity market volatility, which approaches the levels attained in House prices and commercial real estate prices also experience large declines, with house prices and commercial real estate prices falling by 25% and 35%, respectively, through the first quarter of As a result of the severe decline in real activity, short-term Treasury rates fall and remain near zero through the end of the scenario period. The 10-year Treasury yield drops to 0.75% in the first quarter of 2017, rising gradually after that time to approximately 1.5% by the first quarter of 2019 and to approximately 1.75% by the first quarter of Financial conditions in corporate and real estate lending markets are stressed severely. The spread between yields on investment-grade corporate bonds and yields on long-term Treasury securities widens to about 5.5 percentage points by the end of 2017, an increase of 3.5 percentage points relative to the fourth quarter of The spread between mortgage rates and 10-year Treasury yields widens to over 3.5 percentage points over the same time period. Further details on the hypothetical Supervisory Severely Adverse Scenario are available on the Federal Reserve s website at Material Risks When conducting the stress test under the Supervisory Severely Adverse Scenario, the Bank evaluates and incorporates the principal risks that could have a material impact on planned results and could change its capital position. The types of risks considered in the stress test include, but are not limited to the following: Credit Risk - the risk that a borrower or other obligor may default on a credit obligation to the Bank Market Risk - risk from market movements in interest rates, exchange rates, equity prices, credit spreads and other market factors Interest Rate Risk The vulnerability of an institution to changes in interest rates and the impact of this change on the value of its assets, the earnings of the institution, its actual capital position and/or the economic value of the institution's capital Operational Risk - The risk resulting from inadequate or failed internal processes, people and systems, or from external causes (deliberate, accidental or natural). Events may be direct financial losses or indirect in the form of revenue forgone as a result of business suspension. They may also result in damage to the Bank's reputation and to the franchise, which have longer term financial consequences. Subcategories of operational risk include legal risk, compliance risk, technology, cyber risk, conduct risk and model risk. 3

4 Stress Test Methodology The Bank employs both quantitative and qualitative estimation methodologies as part of its stress testing program. The primary businesses of the Bank include securities backed lending, mortgage lending, credit cards and deposits. The Bank also holds an available for sale securities portfolio. Balance sheet forecasts were developed by each of the business segments and were driven by multiple elements, including the prescribed macroeconomic and market variable paths, historical data, balance sheet limits and business expectations of customer behavior. Losses for all businesses are estimated using quantitative models. In addition to model outputs, the Bank's stress testing framework also considers qualitative components that are guided by management review and governance regarding the stress test results and processes. Management reviews involve subject matter experts from business units and risk areas across the firm. DFAST is subject to a robust governance framework involving the Bank's Board of Directors, designated Bank management committees, and senior management of the Bank. There are several stages of iterative review and challenge as part of the Bank s governance process leading to its DFAST submission. Models are independently reviewed and validated by the firm's Model Risk Management and Control function. The Bank's actual and projected RWA's are calculated using the Basel III Standardized approach for the Common Equity Tier 1, Tier 1 Capital and Total Risk Based Capital Ratios. The Bank chose to opt out of including Other Comprehensive Income in the capital ratios consistent with call reporting. Use of Stress Test Results The Bank s DFAST results are a component of the Bank s capital planning and capital adequacy assessment processes to ensure that the Bank holds an appropriate amount of capital relative to the risks of the Bank's businesses. DFAST results allow the Bank to determine whether any future actions to remediate projected risk-based capital or leverage ratio breaches will be required over a nine quarter planning horizon, under one or more scenarios. The Bank assesses its capital adequacy against multiple objectives, and therefore, the Bank's capital policy delineates a quantitative approach under which the Bank s capital adequacy assessment is based on a combination of different capital-related metrics. In addition to the quantitative process, the Bank also considers certain qualitative factors in its evaluation of capital adequacy. 4

5 Stress Test Results for the Severely Adverse Scenario The Bank s Tier 1 Leverage ratio decreases in the Severely Adverse Scenario, as deposit growth results in a balance sheet that peaks at $67.2 billion (BN) in Q4 2017, driven by a substantial weakening in global economic activity accompanied by large reductions in asset prices and increased volatility. Low interest rates and higher deposit growth result in a Tier 1 Leverage ratio that declines to its lowest point of 8.3% in Q4 2017, becoming the Bank's binding constraint in this scenario, before slowly increasing to 9.3% in Q The Bank s Total Risk-based Capital ratio decreases from 32.7% at December 31, 2016 to 29.2% by the end of the nine quarter projection horizon in this scenario, where securities backed loan interest income is significantly lower than the baseline scenario due to the low Libor rate in the Severely Adverse Scenario. The stress period is lessened in the last half of the Severely Adverse Scenario when economic factors, including the equity markets and U.S. GDP improve, resulting in the Bank's lending activities increasing and cash decreasing. Conclusion The Bank's DFAST 2017 results emphasize the Bank s prudent risk management standards, strong business model and creditworthy client base. Specifically, the deposit-driven nature of the Bank s balance sheet is pronounced in periods of stress, as clients liquidate some of their holdings in their UBS Financial Services Inc. investment accounts, in favor of the safety of FDIC insured deposits. The Bank s 2017 DFAST projections in the Severely Adverse Scenario demonstrate that the Bank expects to remain above the regulatory "well capitalized" capital and leverage ratio minimums, in each quarter of the projection horizon. 5

6 DFAST Results The following table presents the results of Bank USA's calculations under the Supervisor Severely Adverse Scenario over the nine quarter planning horizon. The results presented incorporate capital actions, assumed to be equal each quarter to the quarterly average dollar dividend amount paid in Table 1 - Actual Q and Projected Capital Ratios through Q under the Federal Reserve's Supervisory Severely Adverse Scenario Actual Stressed Capital Ratios Q Ending (Q1 2019) Lowest Common Equity Tier 1 Ratio (%) 32.5% 29.0% 24.4% Tier 1 Risk-based Capital Ratio (%) 32.5% 29.0% 24.4% Total Risk-based Capital Ratio (%) 32.7% 29.2% 24.8% Tier 1 Leverage Ratio (%) 9.2% 9.3% 8.3% Table 2 - Actual Q and Projected Q RWAs under the Federal Reserve's Supervisory Severely Adverse Scenario (in billions) Actual Q Projected Q RWAs Table 3 - Projected Cumulative Loan Losses by Type of Loan from Q through Q under the Federal Reserve's Supervisory Severely Adverse Scenario (in millions) Cumulative $ Losses (USD) Portfolio Loss Rates (%) 1 Securities-backed Lending % Mortgages % Other % Loan Losses % 1 Denominator of loss rate is based on the average of the nine quarters' balances. The losses in the numerator have been annualized. Table 4 - Projected PPNR, Provision and Net Income Before Taxes from Q through Q under the Federal Reserve's Supervisory Severely Adverse Scenario Cumulative $ Results (in millions) (USD) Pre-Provision Net Revenue 2,102 Provision for Loan and Lease Losses (382) Other Losses (3) Net Income Before Taxes 1,717 6