Business Context and Reporting Period
This Form 6-K filing by UBS Group AG and UBS AG, dated April 9, 2020, reports a significant change to the 2019 dividend policy following a request from the Swiss Financial Market Supervisory Authority (FINMA). The filing addresses the bank's response to the COVID-19 pandemic, its capital position, and its support for the economy during the first quarter of 2020.
Key Financial Metrics and Capital Position
- Dividend Proposal: The previously announced 2019 dividend of USD 0.73 per share is revised. Shareholders are asked to approve an immediate distribution of USD 0.365 per share (payable May 7, 2020) and the establishment of a special dividend reserve of USD 0.365 per share.
- Q1 2020 Outlook: UBS expects to report a net profit of approximately USD 1.5 billion for the first quarter of 2020.
- Capital Ratios: The firm expects its Common Equity Tier 1 (CET1) capital and CET1 leverage ratios at the end of Q1 2020 to be in line with targets and well above regulatory requirements, despite increased risk-weighted assets (RWAs).
- Liquidity Support: UBS has provided CHF 2.1 billion in liquidity to over 16,000 small and medium-sized enterprises (SMEs) under a Swiss government-backed program since March 26, 2020.
- Charitable Commitment: UBS committed to donating USD 30 million to COVID-19 aid projects.
Material Changes and Strategic Actions
The primary material change is the deferral of half of the 2019 dividend. The Board intends to propose the distribution of the remaining USD 0.365 per share as a special dividend after the publication of third-quarter 2020 results, subject to shareholder approval at an extraordinary general meeting on November 19, 2020. This adjustment was made to preserve capital amidst unprecedented uncertainty, despite the bank's strong liquidity position.
Additionally, UBS has committed to eliminating all cash payments of the 2020 Group Executive Board (GEB) incentive award if the second dividend installment is not paid, reallocating these amounts to deferred equity-based and contingent capital compensation plans.
Guidance, Risks, and Management Commentary
Management, including Chairman Axel A. Weber and CEO Sergio P. Ermotti, emphasized that the bank's financial strength allows it to support clients and the economy while maintaining a prudent capital return policy. The firm expects strong operating performance across all divisions in Q1 2020, even after accounting for credit loss expenses and own credit valuation adjustments.
Key Risks and Contingencies:
- COVID-19 Impact: Significant uncertainty regarding global economic activity, credit profiles of clients, and potential increases in expected credit loss expenses.
- Market Volatility: Increased market volatility and changes in risk-weighted assets (RWA) and leverage ratio denominators.
- Regulatory Environment: Potential for more stringent capital, liquidity, and funding requirements in Switzerland, the US, the UK, and the EU.
- Operational Risks: Increased risk of operational failures, cyberattacks, and fraud due to remote working arrangements necessitated by pandemic control measures.
Investor Verification Checklist
- Verify the outcome of the Annual General Meeting on April 29, 2020, regarding the approval of the split dividend proposal.
- Monitor the actual Q1 2020 results to be published on April 28, 2020, specifically the net profit figure against the USD 1.5 billion guidance.
- Track the status of the special dividend reserve and the likelihood of its payout following the Q3 2020 results.
- Review the impact of the CHF 2.1 billion SME lending program on future credit loss provisions.
- Assess the execution of the 2020 GEB incentive award reallocation if the second dividend installment is withheld.