OREANDA-NEWS. Fitch Ratings has assigned UBS Switzerland AG, the newly established domestic subsidiary of UBS AG, a 'A' Long-Term Issuer Default Rating (IDR), 'F1' Short-Term IDR and 'a' Viability Rating (VR). At the same time, the agency has affirmed the ratings of UBS AG, UBS Switzerland AG's direct parent, and of UBS Group AG, the holding company, including their Long-Term IDRs at 'A' and VRs at 'a'. The Outlooks on all Long-Term IDRs are Stable. A full list of rating actions is at the end of this rating action commentary.

UBS AG transferred the businesses booked in its Retail & Corporate division and the Switzerland-booked business in its Wealth Management division to a new subsidiary, UBS Switzerland AG, on 14 June 2015, since when the new subsidiary has become operational.

KEY RATING DRIVERS
IDRS, VRS AND SENIOR DEBT
Fitch has assigned common VRs to UBS AG and UBS Switzerland AG to reflect our expectation that the credit profiles of the two entities will remain closely connected, at least for as long as UBS Switzerland AG remains a subsidiary of UBS AG. UBS Switzerland AG's large size, with about CHF300bn total assets under Swiss GAAP, also drives the common VR as we believe that it would be difficult for UBS AG to provide support to this large subsidiary.

Fitch expects that UBS Switzerland AG will remain closely integrated within UBS as the group's strategy remains unchanged. UBS Switzerland AG contains businesses that are key to the group. Although we expect that the direct exposure of UBS Switzerland AG to UBS AG will be limited to ensure improved resolvability of the group, we expect that UBS Switzerland AG will make material dividend payments to UBS AG.

A joint and several liability arrangement has been put in place, under which UBS Switzerland AG assumes a contractual joint and several liability for all contractual obligations of UBS AG outstanding at the time of the asset and liability transfer. UBS Switzerland AG's liabilities that were in place at the time of the asset transfer are also covered by statutory joint and several liability from UBS AG under Swiss law. In Fitch's opinion, these arrangements underpin the close integration of the two entities and provide additional incentives to the UBS group to provide ordinary support to its main operating companies.

UBS AG's and UBS Switzerland AG's VR and IDRs are based on our expectation that the group's leading global wealth management and strong domestic retail and corporate franchise should enable it to generate sound profitability. The ratings also reflect adequate underlying profitability, solid funding and liquidity, strong capitalisation measured in relation to risk-weighted assets (RWA) and our expectation that the group will improve its leverage ratio further. The ratings also factor in remaining material exposure to conduct and litigation risk and exposure to assets in the group's Non-core and Legacy Portfolio.

The Stable Outlooks on the Long-term IDRs are based on our expectation that UBS AG and UBS Switzerland AG will be able to generate sufficient earnings to maintain sound capitalisation.

UBS maintains a world-leading wealth management franchise with CHF2trn invested assets at end-1Q15, and we expected a continued solid performance of wealth and asset management businesses.

The group's capitalisation and funding and liquidity are rating strengths. Capital ratios based on RWA are the strongest in its peer group, with UBS Group reporting a consolidated 13.7% fully-applied Basel III common equity Tier 1 (CET1) ratio at end-1Q15. The group's capitalisation based on unweighted leverage, with a 3.4% fully-applied Basel III leverage ratio at end-March 2015, is more in line with its European peers and weaker than US banks' leverage ratios. However, we expect the bank to improve its leverage ratio further as it reduces leverage exposure and issues further loss-absorbing capital, including additional Tier 1 (AT1) instruments.

Funding and liquidity benefit from the bank's global wealth management operations. The group's regulatory liquidity coverage averaged 122% in 1Q15, and the group estimates a stable 106% net stable funding ratio at end-1Q15. We expect the group to continue to manage capital and funding on a group-wide basis, but regulatory requirements for individual legal entities are, in our opinion, likely to result in an increasing focus on local capital and liquidity requirements. The group's solid capital and funding profiles should enable it to comfortably meet local regulatory requirements.

Despite having resolved various regulatory and legal issues, in our opinion the UBS group remains exposed to material conduct and litigation risk. In May 2015, the group announced that it would pay a USD545m fine and was required to enter a guilty plea following investigations into foreign exchange markets by the US authorities. The bank remains subject to various legal disputes and proceedings including its cross-border wealth management businesses and the sale of US residential mortgage-backed securities. Total reserves for litigation, regulatory and other matters, prior to the announced USD545m fine, amounted to CHF2.7bn at end-1Q15, of which CHF1.1bn related to UBS's Investment Bank business division. While the extent of further litigation costs is hard to predict, UBS's ratings factor in our assumptions that the bank's litigation reserves and capitalisation, if required, could absorb sizeable further conduct costs.

SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Ratings and Support Rating Floors reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that UBS AG or UBS Switzerland AG become non-viable. In Fitch's view, Swiss legislation and regulation to address the 'too big to fail' problem for the two big Swiss banks are now sufficiently progressed to provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other junior and hybrid capital issued by UBS Group AG, UBS AG and its affiliates are all notched down from UBS AG's or UBS Group AG's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.

HOLDING COMPANY
UBS Group AG's VR and IDRs are equalised with those of UBS AG and UBS Switzerland AG, and reflect UBS Group AG's role as the group's holding company.

We expect the holding company to issue an increasing proportion of debt, including AT1 and other hybrid instruments and senior debt. This will result in a debt buffer building up at the holding company over time. 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'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 large majority stake it holds in UBS AG.

SUBSIDIARY COMPANY
London-based UBS Limited is a wholly owned subsidiary of UBS AG. Its issuer and debt ratings are aligned with UBS AG's because Fitch views UBS Limited as a key part of the UBS group and integrated into its investment banking activities. UBS Limited's contractual counterparties continue to benefit from an irrevocable and unconditional guarantee by UBS, which underpins our view that it is an integral part of the group's business.

RATING SENSITIVITIES
IDRS, VRS AND SENIOR DEBT
As we have assigned common VRs, UBS Switzerland AG's VR and IDRs would move in line with UBS AG's.

UBS Switzerland AG's ratings are sensitive to a change in the subsidiary's integration in the group. Should it become less integrated, UBS Switzerland AG's VR would become based on its standalone profile. For instance, this could be the result if Fitch concluded that higher than expected amounts of regulatory capital are trapped in UBS Switzerland AG, which could occur as the result of a change in regulatory capital requirements, or if UBS Switzerland AG was unable to upstream a large proportion of its profit to UBS AG, resulting in a weakening of UBS AG's ability to generate capital. We expect capital in excess of regulatory requirements above a management buffer to be upstreamed to UBS AG, at least for as long as the group entities remain strongly investment grade.

Changes to UBS's group structure, including changing UBS Switzerland AG's ownership structure could also result in ratings differentiation if Fitch concludes that this reduces UBS Switzerland AG's, UBS AG's and other group entities' integration with each other. The group announced that it is considering further changes to its legal structure, which could include the transfer of operating subsidiaries of UBS AG to become direct subsidiaries of UBS Group AG.

UBS AG's and UBS Switzerland AG's VRs and IDRs are principally sensitive to the group continuing the execution of its strategy, which concentrates on further improving profitability, aided by strong earnings momentum in its wealth management businesses. Together with a successful reduction in tail risks, including conduct and litigation risks, this would result in a stronger company profile, which could result in upward momentum for the ratings. Any rating upgrade would be contingent on a further reduction in non-core and legacy portfolio risk exposures and in improving performance further without any material increase in risk appetite.

Should Non-core and Legacy Portfolio exit costs or conduct and litigation costs be higher than our expectations and affect the group's capital ratios with no credible plan for restoring these over a reasonably short period, this could lead to pressure on UBS AG's and UBS Switzerland AG's ratings. Any material restrictions on the group's ability to conduct businesses, which could be the result of penalties by authorities, would put the ratings under pressure.

We expect the UBS group to target strong capitalisation, to maintain strong RWA-based capital ratios and its stressed capital ratio target, and to strengthen its regulatory leverage ratio. The bank's ratings could see upward momentum if the bank manages to increase its capitalisation further, while failure to maintain its sound targets, which we do not expect given the bank's clear strategy, would put ratings under pressure.

Fitch equalises UBS's VR and Long-term IDR despite significant layers of subordinated debt, which in our opinion is not sufficient to warrant an uplift of UBS's Long-term IDR relative to its VR. Fitch also has insufficient visibility on UBS's final capital and liability structure until global regulatory requirements regarding debt and legal entity structures have been finalised.

UBS AG's and UBS Switzerland AG's Long-term IDR could be rated above their VRs and UBS Group AG's Long-Term IDR if Fitch concludes that junior debt buffers and pre-positioned total loss-absorbing capacity buffers are sufficiently large to result in the risk of default on senior obligations of UBS AG and UBS Switzerland AG being lower than the risk of UBS Switzerland AG needing to impose losses on junior debt and pre-positioned TLAC to restore UBS AG's and UBS Switzerland AG's viability. This IDR uplift would be limited to one notch.

SUPPORT RATING AND SUPPORT RATING FLOOR
Any upgrade of the Support Rating and upward revision of the Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of UBS AG's and UBS Group AG's subordinated and hybrid debt issues are primarily sensitive to a change in the respective VRs. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example.

HOLDING COMPANIES
UBS Group AG's VR and IDRs are sensitive to the same factors as UBS's. Its 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.

SUBSIDIARY COMPANY
The ratings of UBS Limited are primarily sensitive to a change in UBS AG's VR and IDRs. In addition, should regulatory developments lead to UBS Limited becoming less integrated within the UBS group, e.g. through restrictions on intragroup funding flows, then this could lead to UBS Limited's IDRs no longer being equalised with the parent bank's IDRs.

The rating actions are as follows:

UBS Switzerland AG
Long-term IDR: assigned at 'A'; Outlook Stable
Short term IDR: assigned at 'F1'
Viability Rating: assigned at 'a'
Support Rating: assigned at '5'
Support Rating Floor: assigned at 'No Floor'

UBS AG
Long-term IDR: affirmed at 'A'; Outlook Stable
Short term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'a'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: affirmed at 'A'/'F1'
Senior unsecured market linked securities: affirmed at 'Aemr'
Subordinated debt: affirmed at 'A-'
Tier 2 subordinated notes (low-trigger loss-absorbing notes): affirmed at 'BBB+'
Commercial paper: affirmed at 'A'/'F1'

UBS Group AG
Long-term IDR: affirmed at 'A'; Outlook Stable
Short-term IDR affirmed at 'F1'
Viability Rating: affirmed at 'a'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Tier 1 subordinated notes ('high-trigger'): affirmed at 'BB+'
Tier 1 subordinated notes ('low-trigger'): affirmed at 'BB+'

UBS Limited
Long-term IDR: affirmed at 'A'; Outlook Stable
Short-term IDR: affirmed at 'F1'
Support Rating: affirmed at '1'

UBS Preferred Funding Trust V Preferred Securities: affirmed at 'BBB-'
UBS Capital Securities (Jersey Ltd) Preferred Securities: affirmed at 'BBB-'