UBS Group AG current report, Q1 FY2017

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG and UBS AG, dated April 28, 2017, presents the First Quarter 2017 results. The report covers the period ended March 31, 2017, and includes presentation materials and speaker notes from Group CEO Sergio P. Ermotti and Group CFO Kirt Gardner. The results are adjusted for 244 million Swiss francs (CHF) in net restructuring expenses.

Key Financial Metrics

  • Net Profit: 1.3 billion CHF, representing a 79% increase year-over-year.
  • Adjusted Return on Tangible Equity (ROTE): Approximately 13%.
  • Global Wealth Management (WM): Pre-tax profit (PBT) of 1.1 billion CHF (up 19% YoY); Revenues of nearly 4 billion CHF (up 5%); Net margin of 20% (up 2 basis points); Cost/income ratio improved to 74%.
  • Personal & Corporate Banking (P&C): PBT of 437 million CHF (up 4% YoY); Operating expenses decreased 4% to 521 million CHF.
  • Asset Management (AM): PBT of 123 million CHF (up 12% YoY); Operating expenses down 9%.
  • Investment Bank (IB): PBT of 558 million CHF (up 51% YoY); Return on attributed equity of 24%; Top line revenue of 2.1 billion CHF (up 12% YoY).
  • Corporate Center: Loss before tax of 234 million CHF.
  • Capital Ratios: Fully applied CET1 capital ratio of 14.1%; CET1 leverage ratio of 3.55%; TLAC leverage ratio of 8.4%.
  • Liquidity: Total loss-absorbing capacity increased to 74 billion CHF.

Material Changes Versus Prior Period

  • Profitability Surge: Net profit nearly doubled compared to Q1 2016, driven by strong performance across all business divisions.
  • Wealth Management Growth: Invested assets increased by 13% (244 billion CHF) year-over-year. Transaction-based revenues rose 15%, with a 32% increase in Asia and 10% in the US.
  • Investment Bank Recovery: The IB delivered a 51% PBT increase, with Credit revenues up over 60% and Prime Brokerage posting its best Q1 in five years, despite lower volatility in FX and Rates.
  • Cost Reduction: The net cost reduction run-rate increased to 1.7 billion CHF. Operating expenses in P&C and AM decreased year-over-year.
  • Equity Attribution Changes: A modified equity attribution framework resulted in a 55% increase in total equity attributed to business divisions, impacting funding cost allocations.

Guidance, Outlook, and Risks

  • Outlook: Management expects improved investor sentiment to support sustainable profit growth, though global activity levels may not sustain a sharp increase due to macro and geopolitical uncertainties.
  • Net Interest Income (NII): NII faces headwinds from low/negative rates in Europe and rising funding costs. A full-year drag of roughly 160 million CHF is anticipated for P&C due to negative forward rates and TLAC costs.
  • P&C Guidance: Average quarterly PBT for P&C is expected to be in the region of 350 million CHF in the short to medium term.
  • Cost Program: UBS expects to achieve a full 2.1 billion CHF cost reduction by year-end. Restructuring costs are projected to be around 1 billion CHF for the remainder of 2017.
  • Risks: Key risks include the UK exit from the EU (Brexit), regulatory changes regarding capital and TLAC requirements, litigation and regulatory investigations, and the impact of low interest rates on profitability.
  • Unusual Items: Corporate Center reported a positive 42 million CHF in total risk management net income due to 80 million CHF in mark-to-market gains on hedged government bonds, which are expected to unwind in coming quarters.

Investor Verification Checklist

  • Verify the sustainability of the 79% net profit increase given the one-time mark-to-market gains in Group ALM.
  • Monitor the impact of the new equity attribution framework and TLAC funding costs on future Net Interest Income, particularly in P&C and Wealth Management.
  • Assess the trajectory of cross-border outflows, which are expected to remain roughly in line with 2016 levels with a peak in Q4.
  • Review the progress of the 2.1 billion CHF cost reduction program and the tapering of restructuring costs in 2018.
  • Track the execution of the Wealth Management strategy regarding fee changes for euro deposit concentrations and their effect on asset outflows.