UBS Group AG Second Quarter 2018 Filing Summary
Business Context and Reporting Period
This Form 6-K reports the unaudited interim consolidated financial results for UBS Group AG for the quarter and six months ended June 30, 2018. The filing details the Group's performance across its four main business divisions: Global Wealth Management, Personal & Corporate Banking, Asset Management, and the Investment Bank, alongside the Corporate Center. The reporting period reflects the full adoption of IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) effective January 1, 2018.
Key Financial Metrics
| Metric (CHF million) | Q2 2018 | Q2 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Operating Income | 7,554 | 7,269 | 15,252 | 14,801 |
| Operating Expenses | 5,875 | 5,767 | 11,600 | 11,609 |
| Operating Profit Before Tax | 1,679 | 1,502 | 3,652 | 3,192 |
| Net Profit Attributable to Shareholders | 1,284 | 1,174 | 2,798 | 2,443 |
| Diluted EPS (CHF) | 0.33 | 0.31 | 0.73 | 0.64 |
| Return on Tangible Equity (RoTE) | 11.6% | 10.3% | 12.6% | 10.6% |
| Cost/Income Ratio | 77.5% | 78.8% | 75.8% | 78.2% |
| Common Equity Tier 1 (CET1) Ratio | 13.4% | 13.5% | 13.4% | 13.5% |
| Liquidity Coverage Ratio (LCR) | 144% | 131% | 144% | 131% |
Material Changes vs. Prior Period
- Profitability: Operating profit before tax increased by 12% (CHF 177 million) in Q2 2018 compared to Q2 2017, driven by a 4% increase in operating income. Net profit attributable to shareholders rose 9%.
- Revenue Drivers: The increase in operating income was primarily due to CHF 299 million higher net interest income and fair value changes, and CHF 82 million higher net fee and commission income. The Investment Bank saw significant revenue growth in Investor Client Services (Foreign Exchange, Rates, and Credit) due to higher client activity and improved trading performance.
- Expense Management: Operating expenses rose 2% (CHF 108 million), largely due to higher personnel expenses (CHF 45 million) and amortization. Adjusted operating expenses increased 5%.
- Capital and Liquidity: The CET1 capital ratio increased to 13.4% (from 13.1% in Q1 2018) due to a CHF 0.7 billion increase in capital and a decrease in risk-weighted assets (RWA). The LCR improved to 144%, well above the 110% minimum requirement.
- Accounting Changes: The adoption of IFRS 9 resulted in a reduction to equity of CHF 577 million at transition. IFRS 15 adoption led to gross presentation of fee and commission income and expenses.
Guidance, Outlook, and Risks
- Outlook: Management expects global economic growth to remain supportive, though geopolitical tensions and protectionism pose risks. US dollar interest rates are expected to rise gradually, supporting net interest income in Wealth Management. Funding costs for long-term debt are expected to be higher than the prior year but stable compared to Q2 2018.
- Regulatory Developments:
- Switzerland: The Swiss Parliament adopted the Financial Services Act (FinSA) and Financial Institutions Act (FinIA), expected to enter force in January 2020.
- UK/EU: UBS is proceeding with the merger of UBS Limited (UK) into UBS Europe SE (Germany) to mitigate risks associated with the UK's withdrawal from the EU.
- US: The Federal Reserve did not object to UBS Americas Holding LLC's capital plan in the 2018 CCAR. A new bank-specific stress capital buffer (SCB) is proposed for 2019.
- Risks and Contingencies:
- Litigation: The Group faces significant litigation and regulatory risks. Estimated potential capital loss from these matters over a 12-month horizon is CHF 4.8 billion (based on a 99.9% confidence level), excluding recognized provisions.
- Operational Resilience: Cyber security and conduct risk remain high priorities. The Group is investing in detection capabilities and remediation programs.
- IBOR Transition: Ongoing efforts to transition from IBOR benchmarks to alternative rates may require adjustments to systems and contracts.
Key Facts for Investor Verification
- Adjusted vs. Reported Results: Verify the impact of "adjusting items" (restructuring, litigation, foreign currency translation) on reported profit. Adjusted operating profit before tax was CHF 1,808 million in Q2 2018, compared to CHF 1,679 million reported.
- Investment Bank Performance: Confirm the sustainability of the revenue surge in the Investment Bank, particularly the CHF 100 million release of deferred day-1 profits in Foreign Exchange, Rates, and Credit.
- Cost Reduction Program: Monitor the execution of the CHF 0.5 billion residual restructuring expense guidance for the full year 2018 following the completion of the legacy cost program.
- Capital Adequacy: Verify the impact of the new US stress capital buffer (SCB) and the Basel Committee's Fundamental Review of the Trading Book (FRTB) on future capital requirements, which are expected to increase risk-weighted assets.
- Share Repurchases: Note the repurchase of 34.76 million shares (CHF 550 million) under the CHF 2 billion program announced in January 2018.