UBS Group AG Form 6-K Summary: Investor Update 2018
Business Context and Reporting Period
This Form 6-K, filed on October 25, 2018, by UBS Group AG and UBS AG, contains the "UBS Investor Update 2018." The filing outlines the firm's strategic direction, capital allocation plans, and financial targets for the period extending from 2019 through 2021. The update reaffirms UBS's strategy of capital and cost-efficient growth, leveraging secular trends in global wealth creation and Asia Pacific economic expansion.
Key Financial Metrics and Targets
The filing provides forward-looking targets and ambitions rather than historical financial results for the period ending September 30, 2018. Key metrics include:
- Return on CET1 Capital: Targeting ~15% for 2019 and an ambition of ~17% for 2021.
- Cost/Income Ratio: Targeting ~77% for 2019, with a path to ~72% by 2021.
- Capital Ratios: Ambition for a CET1 capital ratio of ~13% and a CET1 leverage ratio of ~3.7%.
- Shareholder Returns: Targeting mid-to-high single-digit annual growth in ordinary dividends per share. The firm exceeded its 2018 share repurchase target, buying back CHF 650 million against a target of CHF 550 million.
- Global Wealth Management (GWM): Targeting 10-15% pre-tax profit (PBT) growth over the cycle, with net new money growth of 2-4% per annum.
- Investment Bank: Targeting an adjusted return on attributed equity of ~15%.
Material Changes and Strategic Initiatives
UBS announced significant changes to its internal cost and equity allocation framework effective January 1, 2019:
- Cost Allocations: Approximately CHF 675 million of P&L currently retained in the Corporate Center will be allocated to business divisions. Corporate Center costs are expected to reduce by CHF 800 million over the next three years.
- Equity and Risk Allocations: Approximately CHF 7 billion of additional attributed equity will be allocated to business divisions (CHF 3 billion to the Investment Bank). Additionally, CHF 90 billion of leverage ratio denominator (LRD) and associated risk-weighted assets (RWA) will be moved from Corporate Center to business divisions.
- Impact on Ratios: These changes will result in an approximately two percentage point increase in business division adjusted cost/income ratios while improving the Corporate Center's retained profit.
Guidance, Outlook, and Risks
Management expects to grow revenues at least as fast as real GDP growth while delivering positive operating leverage. The firm plans to keep costs broadly flat, excluding performance-driven variable compensation, while funding growth investments. Global Wealth Management aims to deliver PBT growth at the higher end of its 10-15% target range over the 2019-2021 period.
Risks and Contingencies: The filing includes a comprehensive cautionary statement regarding forward-looking statements. Key risks include:
- Macroeconomic conditions, including low/negative interest rates and geopolitical tensions.
- Regulatory changes in Switzerland, the US, and the UK, including capital, TLAC, and leverage requirements.
- Uncertainty regarding the UK exit from the EU (Brexit).
- Operational risks such as cyberattacks, fraud, and systems failures.
- Changes in tax standards, including the US Tax Cuts and Jobs Act.
Investor Verification Checklist
- Verify the impact of the January 1, 2019, accounting changes on business division profitability and cost/income ratios in future reports.
- Monitor the execution of the CHF 800 million Corporate Center cost reduction plan over the next three years.
- Track progress on the Global Wealth Management net new money growth target of 2-4% annually.
- Assess the firm's ability to maintain the ~15% return on CET1 capital target amidst increasing capital requirements.
- Review regulatory developments regarding the UK-EU exit and their potential impact on UBS's legal structure and operations.