Business Context and Reporting Period
This Form 6-K filing contains the Second Quarter 2016 Report for UBS Group AG, covering the period ended June 30, 2016. The report details the Group's financial performance, risk management, and capital position under the Swiss Systemically Relevant Bank (SRB) framework. Notable regulatory developments include the implementation of revised Swiss SRB capital requirements effective July 1, 2016, and the impact of the UK referendum on EU membership on market volatility and operations.
Key Financial Metrics
| Metric (CHF million) | Q2 2016 | Q2 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Operating Income | 7,404 | 7,818 | 14,237 | 16,659 |
| Operating Expenses | 5,915 | 6,059 | 11,770 | 12,193 |
| Operating Profit Before Tax | 1,489 | 1,759 | 2,467 | 4,467 |
| Net Profit Attributable to Shareholders | 1,034 | 1,209 | 1,741 | 3,186 |
| Diluted EPS (CHF) | 0.27 | 0.32 | 0.45 | 0.85 |
| Return on Tangible Equity (%) | 8.9 | 11.0 | 7.4 | 14.4 |
| Cost/Income Ratio (%) | 79.8 | 77.4 | 82.6 | 73.1 |
| CET1 Capital Ratio (Fully Applied, %) | 14.2 | 14.4 | 14.2 | 14.4 |
| Liquidity Coverage Ratio (%) | 133 | 114 | 133 | 114 |
Material Changes vs. Prior Period
- Profit Decline: Net profit attributable to shareholders decreased by 14.5% year-over-year in Q2 2016, driven by a 5.3% decline in operating income and a 15% drop in operating profit before tax. Year-to-date net profit fell 45.4%.
- Revenue Drivers: Operating income decreased primarily due to a CHF 322 million drop in net fee and commission income (driven by lower investment fund fees, underwriting fees, and brokerage fees) and a CHF 82 million decrease in combined net interest and trading income.
- Expense Reduction: Operating expenses decreased by CHF 144 million year-over-year, largely due to CHF 139 million lower personnel expenses. Adjusted operating expenses (excluding restructuring) decreased by CHF 319 million.
- One-Time Items: Q2 2016 included a CHF 123 million gain on the sale of the Visa Europe investment and CHF 120 million in gains on real estate sales. Q2 2015 included a CHF 259 million own credit gain.
- Capital Position: The fully applied CET1 capital ratio increased slightly to 14.2% from 14.0% in Q1 2016, supported by operating profit and foreign currency translation effects.
Guidance, Outlook, and Risks
- Outlook: Management expects sustained market volatility, macroeconomic uncertainty, and geopolitical tensions (exacerbated by the UK referendum) to lead to continued client risk aversion and low transaction volumes. Headwinds include negative interest rates and a strong Swiss franc.
- Guidance Withdrawal: UBS is no longer providing expectations for annual adjusted return on tangible equity or adjusted cost/income ratio in the near term due to market conditions. The long-term target remains an adjusted RoTE of greater than 15% in a normalized environment.
- Regulatory Risks: The revised Swiss SRB framework (effective July 1, 2016) introduces higher capital requirements and Total Loss-Absorbing Capacity (TLAC) rules. UBS expects to meet the new CET1 leverage ratio requirement of 3.5% by retaining earnings while maintaining capital returns of at least 50% of net profit.
- Legal and Litigation: The Group faces significant ongoing litigation and regulatory matters, including cross-border wealth management inquiries, RMBS-related claims, and foreign exchange/LIBOR investigations. Provisions for litigation, regulatory, and similar matters were CHF 72 million in Q2 2016.
- Foreign Currency: UBS anticipates potential foreign currency translation losses of around CHF 150 million in Q4 2016 related to the disposal of foreign branches, though timing is uncertain.
Key Facts for Investor Verification
- Adjusted Performance: Verify adjusted operating profit before tax of CHF 1,672 million (up from CHF 1,635 million in Q2 2015) to understand underlying business performance excluding one-time gains/losses and restructuring costs.
- Regulatory Capital Impact: Confirm the impact of the new Swiss SRB rules on the CET1 capital ratio and leverage ratio, specifically the transition to fully applied requirements and TLAC eligibility.
- UK Referendum Exposure: Assess the specific exposure to the UK market and potential operational restructuring costs arising from the UK's exit from the EU.
- Restructuring Costs: Monitor net restructuring expenses, which were CHF 377 million in Q2 2016, driven by near- and offshoring initiatives and IT platform optimization.
- Asset Management Flows: Review net new money outflows in Asset Management (CHF 7.7 billion in Q2 2016 excluding money market flows) as a leading indicator of fee income pressure.