Business Context and Reporting Period
This Form 6-K filing covers the Second Quarter 2023 report for UBS Group AG, with a reporting period ending June 30, 2023. The quarter was defined by the acquisition of Credit Suisse Group AG on June 12, 2023, following a request from Swiss authorities to ensure financial stability. The acquisition was accounted for as a business combination under IFRS 3, resulting in the recognition of significant negative goodwill. UBS now operates with a combined structure, reporting Credit Suisse business divisions as separate segments for this period, with plans to integrate into five unified divisions starting in Q3 2023.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Total Revenues (USD m) | 9,540 | 8,917 | 18,284 | 18,299 |
| Negative Goodwill (USD m) | 28,925 | - | 28,925 | - |
| Operating Profit Before Tax (USD m) | 29,239 | 2,615 | 30,735 | 5,344 |
| Net Profit Attributable to Shareholders (USD m) | 28,875 | 2,108 | 29,904 | 4,244 |
| Diluted EPS (USD) | 8.99 | 0.61 | 9.30 | 1.22 |
| Return on Equity (%) | 160.7 | 14.6 | 92.9 | 14.4 |
| Cost/Income Ratio (%) | 88.9 | 70.6 | 85.8 | 70.7 |
| Total Assets (USD bn) | 1,678.8 | 1,113.2 | 1,678.8 | 1,113.2 |
| Common Equity Tier 1 (CET1) Ratio (%) | 14.4 | 14.2 | 14.4 | 14.2 |
| Liquidity Coverage Ratio (%) | 175.2 | 160.8 | 175.2 | 160.8 |
Material Changes vs. Prior Period
- Acquisition Impact: The primary driver of financial results was the acquisition of Credit Suisse. This resulted in a one-time negative goodwill gain of USD 28.9 billion, inflating operating profit and net profit significantly. Excluding negative goodwill, integration expenses, and acquisition costs, the underlying operating profit before tax was USD 1.1 billion.
- Revenue Growth: Total revenues increased by 7% year-over-year to USD 9.5 billion, largely due to the consolidation of Credit Suisse revenues (USD 1.2 billion) and higher net interest income driven by rising interest rates.
- Expense Increase: Operating expenses rose 35% to USD 8.5 billion, primarily due to the consolidation of Credit Suisse expenses (USD 1.6 billion) and integration-related costs of USD 724 million.
- Balance Sheet Expansion: Total assets increased by USD 625.7 billion to USD 1.68 trillion, and Risk-Weighted Assets (RWA) increased by USD 234.9 billion to USD 556.6 billion, predominantly due to the acquisition.
- Capital Position: CET1 capital increased by USD 35.7 billion to USD 80.3 billion. The CET1 ratio improved to 14.4% from 13.9% in Q1 2023.
Guidance, Outlook, and Risks
- Integration Targets: UBS aims to substantially complete integration by the end of 2026, targeting gross cost reductions of over USD 10 billion. The goal is an exit-rate cost/income ratio of less than 70% and a return on CET1 capital of around 15% by 2026.
- Short-Term Outlook: Management expects underlying profit before tax to be at or around break-even in Q3 2023, with positive underlying profit expected in the second half of the year, supported by revenue stabilization and cost savings.
- Non-Core and Legacy (NCL): A new NCL division has been created to ringfence Credit Suisse positions not aligned with UBS strategy, representing approximately USD 55 billion in RWA. About half of these assets are expected to run off by the end of 2026.
- Regulatory and Legal Risks:
- Internal Controls: UBS is reviewing material weaknesses in Credit Suisse's internal controls over financial reporting identified prior to the acquisition.
- Litigation: Significant provisions exist for litigation, regulatory, and similar matters, including USD 2.8 billion recognized upon acquisition for Credit Suisse matters. Specific ongoing matters include cross-border wealth management inquiries (France), RMBS litigation, and benchmark rate manipulation cases.
- Regulatory Changes: UBS faces new regulatory requirements including Basel III implementation in the US, EU physical presence requirements for cross-border banking, and Swiss climate and innovation acts.
Key Facts for Investor Verification
- Underlying Profitability: Verify the "underlying" performance metrics (excluding negative goodwill and integration costs) to assess the true operational health of the combined entity, as reported figures are heavily skewed by the acquisition accounting.
- Integration Cost Trajectory: Monitor the realization of the targeted USD 10 billion in gross cost reductions and the timing of integration-related expenses, which are expected to be offset by accretion-to-par effects over time.
- Capital Requirements: Confirm the impact of the "too-big-to-fail" capital add-ons and the phase-in of increased capital requirements (commencing end of 2025) on future capital ratios and dividend capacity.
- Non-Core Asset Run-off: Track the progress of the USD 55 billion RWA run-off in the Non-core and Legacy division and the associated credit loss provisions.
- Legal Provisions: Review the specific litigation provisions, particularly the USD 3 billion contingent liability adjustment made during the purchase price allocation for Credit Suisse, and monitor developments in the French tax fraud case and US RMBS litigation.