UBS Group AG current report, Q4 FY2018

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UBS Group AG: Fourth Quarter 2018 Results Summary

Business Context and Reporting Period

This Form 6-K reports the Fourth Quarter 2018 results for UBS Group AG and UBS AG, released on January 23, 2019. The reporting period covers the full year ended December 31, 2018. Notably, this is the first quarter where UBS reported results in US dollars following a change in functional currency. The quarter was characterized by severe market volatility, described by management as one of the worst Q4 performances since the Great Depression, driven by macro-economic, geopolitical, and geo-economic concerns.

Key Financial Metrics

  • Net Profit: Q4 net profit increased 33% to USD 696 million (approx. USD 700 million adjusted for prior year tax impairments). Full-year 2018 net profit rose 25% to USD 4.9 billion.
  • Pre-Tax Profit (PBT): Q4 PBT increased slightly to USD 862 million. Full-year PBT was supported by strong performance across all divisions.
  • Revenue and Expenses: Q4 expenses decreased by 4% (USD 432 million reduction for the full year) despite higher technology and regulatory costs. The reported cost/income ratio improved by 3 percentage points to 79% for the full year.
  • Capital and Liquidity: Total Loss-Absorbing Capacity (TLAC) increased to over USD 84 billion. The balance sheet totaled USD 958 billion, with 24% held in cash and high-quality liquid assets. CET1 return for the full year was 14.2%.
  • Dividends and Buybacks: A dividend of CHF 0.70 per share (an 8% increase) was proposed. Total payout ratio reached 70% including a CHF 750 million share buyback in 2018. A new buyback program of up to USD 1 billion is planned for 2019.
  • Net New Money: Full-year net new money was USD 32 billion (4% growth). Q4 saw outflows of USD 7.9 billion, driven by deleveraging and market conditions.

Material Changes vs. Prior Period

  • Global Wealth Management (GWM): Q4 PBT declined 22% (14% excluding litigation) due to a 23% drop in transaction-based income, the lowest in a decade. However, recurring net fee income remained resilient. Full-year PBT reached a decade-high of USD 4 billion.
  • Investment Bank (IB): Q4 PBT fell sharply to USD 26 million, with revenues down 29% driven by a decrease in Equity Capital Markets (ECM) and Advisory. Full-year PBT was up 29%, supported by higher Equities and Fixed Income, Rates, and Commodities (FRC) results.
  • Personal & Corporate Banking: Q4 PBT decreased 13% to CHF 373 million. Full-year performance was aided by a USD 460 million valuation gain from the sale of SIX's Payment Services business to Worldline.
  • Asset Management: Q4 PBT increased 15% to USD 134 million. Invested assets decreased 2% year-over-year to USD 781 billion.
  • Restructuring: Full-year restructuring expenses were USD 561 million, a reduction of approximately USD 630 million compared to 2017.

Guidance, Outlook, and Risks

Management maintains its long-term targets despite a "steeper" path due to lower market beta contributions. They plan to operate in a "fuel saving" mode, adjusting the pace of investments and hiring without halting long-term strategy. Specific actions include optimizing capital and balance sheet utilization and leveraging natural hedges where lower revenues correlate with lower variable pay.

Key Risks and Contingencies:

  • Market Volatility: Continued geopolitical tensions, trade disputes, and Brexit uncertainty pose risks to client sentiment and activity levels.
  • Regulatory Capital: Market Risk-Weighted Assets (RWA) increased significantly in Q4 due to higher volatility and regulatory VaR multipliers, though management expects normalization.
  • Litigation: While progress was made on legacy issues (RMBS, Libor), two prominent cases are being defended in court, creating ongoing uncertainty.
  • Tax Methodology: Changes to deferred tax asset (DTA) methodology in the US eliminated the 7-year remeasurement period, resulting in a USD 275 million tax benefit in Q4. The expected corporate tax rate is around 25%.

Investor Verification Checklist

  • Verify the reconciliation of adjusted results to IFRS reported results, specifically regarding the USD 460 million gain on the SIX/Worldline transaction and the USD 275 million tax benefit.
  • Monitor the trajectory of Net New Money in the Americas, where outflows were driven by net recruiting issues, despite invested asset growth outpacing peers.
  • Track the normalization of Market Risk-Weighted Assets (RWA) in Q1 2019 following the Q4 spike driven by stressed VaR.
  • Assess the impact of the new USD 1 billion share buyback program on capital ratios and liquidity in 2019.
  • Review the status of the two prominent open litigation cases being defended in court and their potential financial impact.