UBS Group AG current report, Q2 FY2019

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UBS Group AG: Second Quarter 2019 Results Summary

Business Context and Reporting Period

This Form 6-K filing, dated July 23, 2019, presents the Second Quarter 2019 results for UBS Group AG and UBS AG. The reporting period covers the three months ended June 30, 2019. The results were presented by Group CEO Sergio Ermotti and Group CFO Kirt Gardner, highlighting a challenging macroeconomic environment characterized by low volatility, geopolitical uncertainty, and declining interest rates.

Key Financial Metrics

  • Net Profit: USD 1.4 billion for Q2 2019 (highest Q2 net profit since 2010); USD 2.5 billion for the first half (1H) 2019.
  • Return on CET1 Capital: 16.0% for Q2 2019; 14.6% for 1H 2019.
  • Capital Generation: USD 2.5 billion generated in 1H 2019. This included USD 300 million in share buybacks and USD 800 million in CET1 capital buildup.
  • Tangible Book Value: Increased 9% year-over-year to USD 12.72 per share.
  • Cost/Income Ratio: In line with full-year targets; Group operating expenses down 7% in 1H 2019.
  • Invested Assets (Global Wealth Management): Reached an all-time high of USD 2.5 trillion.
  • Effective Tax Rate: 21% for Q2 2019 (benefited by deferred tax asset realizations); expected to be lower in 2H 2019 than the 23.4% seen in 1H.

Material Changes vs. Prior Period

  • Global Wealth Management (GWM): Operating income down 3% year-over-year due to a 7% decline in Net Interest Income (NII) and lower recurring fees, partially offset by a 3% increase in transaction income. Americas region posted record pre-tax profit (USD 367 million), while Asia saw income decreases due to deleveraging and lower loan margins.
  • Personal & Corporate Banking (P&C): Pre-tax profit up 11% to CHF 391 million. Operating income up 4% driven by record transaction revenues and lower credit loss expenses.
  • Asset Management: Pre-tax profit up 10% to USD 135 million. Net management fees increased 2% despite USD 14 billion in net outflows (excluding money markets) driven by client de-risking.
  • Investment Bank (IB): Profit nearly doubled from Q1 2019. Corporate & Client Solutions (CCS) revenues increased 18%, with M&A revenues up 67% (best quarter since 2012). Equities revenues declined 9% due to low volatility.
  • Corporate Center: Reported a USD 114 million gain in Q2 2019 compared to a USD 127 million loss in Q2 2018, largely due to accounting asymmetries and litigation outcomes.

Guidance, Outlook, and Risks

  • Outlook: Management expects to achieve a return on CET1 capital in line with 2018 levels for the full year. Adjusted operating expenses excluding litigation are expected to be slightly higher in 2H 2019 than 1H 2019 due to seasonality and regulatory investments.
  • Interest Rate Sensitivity: A 25 basis point cut by the Federal Reserve is expected to result in a slight sequential decline in GWM NII in Q3. Long-term rate declines will impact NII over time as hedges roll over.
  • Strategic Initiatives: Continued focus on cost discipline, including insourcing technology and reducing third-party costs. Strategic partnerships include a joint venture with Sumitomo Mitsui Trust Bank in Japan.
  • Risks and Contingencies:
    • Market Conditions: Persisting low volatility and trade volumes in Equities and FX.
    • Geopolitics: Ongoing trade tensions and macroeconomic uncertainty affecting investor sentiment.
    • Regulatory: Potential for further regulatory cost pressures and changes in capital/liquidity requirements.
    • China Operations: Recent media backlash regarding operations in China has normalized with no impact on business commitment.

Investor Verification Checklist

  • Verify the sustainability of the 16% RoCET1 given the headwinds in Net Interest Income and the expectation of slightly higher operating expenses in the second half.
  • Monitor the trajectory of Net Interest Income in the US and Asia, specifically the impact of aggressive competitor pricing on loan margins and the shift of client deposits to money market funds.
  • Assess the progress of the USD 70 billion ultra-high net worth asset target in the Americas, noting that momentum is expected to build in the second half of the year.
  • Review the reconciliation of non-GAAP adjusted results to IFRS reported results, particularly regarding the USD 114 million gain in the Corporate Center driven by accounting asymmetries.
  • Track the execution of the share buyback program (up to USD 1 billion remaining for the year) and the impact of the UK banking levy on Q4 expenses.