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Rating Action:

Moody's upgrades UBS AG's long-term ratings (senior debt to A1), outlook stable

11 Jan 2016

New York, January 11, 2016 -- Moody's Investors Service has upgraded -- by one notch -- the long-term ratings of UBS AG and affiliates, including the bank's long-term deposit rating to Aa3 from A1, its senior unsecured debt rating to A1 from A2, its standalone baseline credit assessment (BCA) to baa1 from baa2, its counterparty risk assessment of Aa3(cr) from A1(cr) and the rating on the senior unsecured debt of UBS Group Funding (Jersey) Limited guaranteed by the bank's parent holding company, UBS Group AG, to Baa2 from Baa3. The bank's short term ratings and counterparty risk assessment of Prime-1 and Prime-1(cr), respectively, were affirmed.

The rating action concludes a review for upgrade which began on 12 October 2015. The rating outlook is stable.

RATINGS RATIONALE

The rating action reflects UBS's improved leverage ratio and Moody's expectations that UBS's profitability and earnings stability will improve as the bank benefits from lower restructuring charges, a reduced drag on earnings from its Non-core and Legacy Portfolio as well as the realization of cost savings from initiatives begun several years ago. Based on Moody's adjustments, the rating agency expects the bank's pre-tax return on tangible assets will likely average 0.9% (0.7% after-tax) over the next two years -- a considerable improvement over the last four years (January 2012 through the first nine months of 2015), when this metric averaged 0.5% (0.6% after-tax).

Moody's noted that profitability at UBS has been a weakness over the last several years, as the bank has borne considerable costs related to litigation, restructuring charges, regulatory compliance initiatives, and the wind-down of its Non-core and Legacy Portfolio. At the same time the bank has also faced significant revenue pressure from the low interest rate environment. After-tax results were aided by several revaluations of deferred tax assets; however, these revaluations are expected to be considerably smaller going forward. Nonetheless, Moody's expects that UBS's pre-tax earnings on a Moody's adjusted basis will improve significantly over the next two years as the restructuring and re-engineering initiatives the bank began in 2011 start to bear fruit in the form of realized cost savings, lower restructuring charges, accompanied by a further reduction in losses in the Non-core and Legacy Portfolio.

Moody's also expects that in addition to a strengthened earnings profile UBS will exhibit greater earnings stability going forward. During the financial crisis UBS suffered from significant earnings volatility and the bank has continued to grapple with elevated earnings volatility compared to many of its peers in the years since (2010 to present). However, Moody's expects that with the bank's restructuring efforts largely completed, including a reduction in reliance on the more volatile investment banking business -- and with the significant and continuing focus on improving risk management, risk controls, and risk culture which the bank has implemented in the past few years -- the bank's earnings stability should improve.

UBS's strengthened credit profile is also supported by continued improvements in the bank's leverage ratio. While UBS's risk-based capital ratios have been the strongest amongst its peers for some time, the bank's leverage ratio has until recently been a relative ratings weakness, the rating agency said. However, increased retained earnings and the recent issuance of high-trigger contingent capital, together with reductions in the bank's balance sheet and leverage exposure, have boosted the bank's leverage ratio to a level more consistent with peers. Moody's believes that the bank's higher leverage ratios are likely to be sustained or increased in light of the higher regulatory capital requirements recently announced by the Swiss government.

The risk of additional litigation charges remains a threat to the bank's improved profitability. While the bank has resolved a considerable number of legacy legal matters over the past several years, Moody's believes the bank remains exposed to legal charges related, most notably, to its US residential mortgage-backed securities (RMBS) activities prior to the financial crisis. While such charges are difficult to estimate, the rating agency believes they could be sizeable given the bank's significant market share in US RMBS underwriting during that time. However, UBS has already established significant legal reserves for its US RMBS activities, which reduces the potential risk that such charges could have a significant negative impact on earnings or capital.

Moody's rating action also considered the potential benefit for senior creditors at both the bank and the holding company of UBS's planned issuance of additional holding company debt in response to recent regulatory changes. This includes, most notably, the Swiss "gone concern" Too Big To Fail (TBTF) capital requirements and the Financial Stability Board's Total Loss Absorbing Capital (TLAC) rules. UBS recently began, and is expected to continue, to issue a significant volume of long-term holding company debt which will provide a larger buffer to absorb losses in resolution. However, under Moody's Advanced Loss Given Failure (LGF) analysis the rating agency does not expect this buffer to be of sufficient magnitude over the next year to significantly further reduce the likely loss-given-failure for bank and holding company senior creditors. As a result, Moody's has concluded not to increase the amount of ratings uplift incorporated into the bank's senior debt ratings to reflect a lower loss-given-failure. Thus, all of UBS's long-term debt ratings were upgraded by one notch -- consistent with the one notch upgrade of its BCA.

The outlook for UBS's ratings is stable, reflecting the bank's strong capital and improved leverage position, improved risk management and controls and strong liquidity position as well as the challenges posed by the bank's still sizeable (albeit restructured and better risk-controlled) capital markets activities.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the bank's ratings could arise if the bank were to significantly and sustainably reduce its reliance on earnings from capital markets businesses. In addition, a significant and permanent increase in the amount of holding company long-term debt outstanding, providing a significant buffer to absorb losses in resolution and reducing the loss-given-failure for both holding company and bank-level senior creditors, could put upward pressure on the senior debt ratings.

The rating could face downward pressure if the bank were to suffer from any control or risk management failure, if there were a significant decline in the Swiss economy, if the bank were to increase in its risk appetite (evidence of which would be a rebuilding of the investment banking franchise) or if there were a deterioration in the bank's capital or liquidity profile.

The principal methodology used in these ratings was Banks published in January 2016. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The following ratings were affected by the rating action:

Upgrades:

UBS AG

.... LT Issuer Rating, Upgraded to A1 from A2

....LT Bank Deposits, Upgraded to Aa3 from A1

....Senior Unsecured Regular Bond/Debenture, Upgraded to A1 from A2

....LT Deposit Note/CD Program, Upgraded to (P)Aa3 from (P)A1

....Subordinate Deposit Program, Upgraded to (P)Baa2 from (P)Baa3

....Senior Unsecured MTN, Upgraded to (P)A1 from (P)A2

....Subordinate MTN, Upgraded to (P)Baa2 from (P)Baa3

....Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

....Senior Unsecured Shelf, Upgraded to (P)A1 from (P)A2

.... Adjusted Baseline Credit Assessment, Upgraded to baa1 from baa2

.... Baseline Credit Assessment, Upgraded to baa1 from baa2

.... Counterparty Risk Assessment, Upgraded to Aa3(cr) from A1(cr)

UBS AG, Australian Branch

....Senior Unsecured Regular Bond/Debenture, Upgraded to A1 from A2

....Senior Unsecured MTN, Upgraded to (P)A1 from (P)A2

....Subordinate MTN, Upgraded to (P)Baa2 from (P)Baa3

....Counterparty Risk Assessment, Upgraded to Aa3(cr) from A1(cr)

UBS AG, Jersey Branch

....Senior Unsecured Regular Bond/Debenture, Upgraded to A1 from A2

....Senior Unsecured MTN, Upgraded to (P)A1 from (P)A2

....Subordinate MTN, Upgraded to (P)Baa2 from (P)Baa3

....Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

....Senior Unsecured Shelf, Upgraded to (P)A1 from (P)A2

....Counterparty Risk Assessment, Upgraded to Aa3(cr) from A1(cr)

UBS AG, London Branch

....Senior Unsecured Regular Bond/Debenture, Upgraded to A1 from A2

....Senior Unsecured MTN, Upgraded to (P)A1 from (P)A2

....Subordinate MTN, Upgraded to (P)Baa2 from (P)Baa3

....Counterparty Risk Assessment, Upgraded to Aa3(cr) from A1(cr)

UBS AG, New York Branch

....LT Deposit Note/CD Program, Upgraded to (P)Aa3 from (P)A1

....Subordinate Deposit Program, Upgraded to (P)Baa2 from (P)Baa3

....Senior Unsecured MTN, Upgraded to (P)A1 from (P)A2

....Subordinate MTN, Upgraded to (P)Baa2 from (P)Baa3

....Counterparty Risk Assessment, Upgraded to Aa3(cr) from A1(cr)

UBS AG, Stamford Branch

....Senior Unsecured Regular Bond/Debenture, Upgraded to A1 from A2

....LT Deposit Note/CD Program, Upgraded to (P)Aa3 from (P)A1

....Subordinate MTN, Upgraded to (P)Baa2 from (P)Baa3

....Senior Unsecured MTN, Upgraded to (P)A1 from (P)A2

....Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

....Counterparty Risk Assessment, Upgraded to Aa3(cr) from A1(cr)

Swiss Bank Corporation

....BACKED Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

Swiss Bank Corporation, New York Branch

....BACKED Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

UBS Americas, Inc.

....BACKED LT Issuer Rating, Upgraded to A1 from A2

....BACKED Senior Unsecured Regular Bond/Debenture, Upgraded to A1 from A2

....BACKED Senior Unsecured Shelf, Upgraded to (P)A1 from (P)A2

UBS Capital Securities (Jersey) LTD

....BACKED Pref. Stock Non-cumulative Preferred Stock, Upgraded to Ba1 (hyb) from Ba2 (hyb)

UBS Finance (Curacao) N.V.

....BACKED Senior Unsecured Regular Bond/Debenture, Upgraded to A1 from A2

UBS Group Funding (Jersey) Limited

....BACKED Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

UBS Limited

....LT Issuer Rating, Upgraded to A1 from A2

UBS Preferred Funding Company LLC IV

....BACKED Pref. Stock Non-cumulative Shelf, Upgraded to (P)Ba1 from (P)Ba2

UBS Preferred Funding Company LLC V

....BACKED Pref. Stock Non-cumulative Shelf, Upgraded to (P)Ba1 from (P)Ba2

UBS Preferred Funding Trust IV

....BACKED Pref. Stock Non-cumulative Preferred Stock, Upgraded to Ba1 (hyb) from Ba2 (hyb)

....BACKED Pref. Stock Non-cumulative Shelf, Upgraded to (P)Ba1 from (P)Ba2

UBS Preferred Funding Trust V

....BACKED Pref. Stock Non-cumulative Preferred Stock, Upgraded to Ba1 (hyb) from Ba2 (hyb)

....BACKED Pref. Stock Non-cumulative Shelf, Upgraded to (P)Ba1 from (P)Ba2

Affirmations:

UBS AG

....ST Bank Deposits, Affirmed P-1

....Other Short Term, Affirmed (P)P-1

.... Counterparty Risk Assessment, Affirmed P-1(cr)

UBS AG, Australian Branch

....BACKED Commercial Paper, Affirmed P-1

....Counterparty Risk Assessment, Affirmed P-1(cr)

UBS AG, Jersey Branch

....Other Short Term, Affirmed (P)P-1

....Counterparty Risk Assessment, Affirmed P-1(cr)

UBS AG, London Branch

....ST Deposit Note/CD Program, Affirmed P-1

.Commercial Paper, Affirmed P-1

....Other Short Term ,Affirmed (P)P-1

.... Counterparty Risk Assessment, Affirmed P-1(cr)

UBS AG, New York Branch

....Other Short Term, Affirmed (P)P-1

....Counterparty Risk Assessment, Affirmed P-1(cr)

UBS AG, Stamford Branch

....Other Short Term, Affirmed (P)P-1

.... Counterparty Risk Assessment, Affirmed P-1(cr)

UBS Americas, Inc.

....BACKED Commercial Paper, Affirmed P-1

UBS Finance (Delaware), LLC.

....BACKED Commercial Paper, Affirmed P-1

UBS Limited

....ST Issuer Rating, Affirmed P-1

Outlook Actions:

UBS AG

....Outlook, Changed To Stable From Rating Under Review

UBS AG, Australian Branch

....Outlook, Changed To Stable From Rating Under Review

UBS AG, Jersey Branch

....Outlook, Changed To Stable From Rating Under Review

UBS AG, London Branch

....Outlook, Changed To Stable From Rating Under Review

UBS AG, Stamford Branch

....Outlook, Changed To Stable From Rating Under Review

UBS Americas, Inc.

....Outlook, Changed To Stable From Rating Under Review

UBS Finance (Curacao) N.V.

....Outlook, Changed To Stable From Rating Under Review

UBS Group Funding (Jersey) Limited

....Outlook, Changed To Stable From Rating Under Review

UBS Limited

....Outlook, Changed To Stable From Rating Under Review

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Fanger
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades UBS AG's long-term ratings (senior debt to A1), outlook stable
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