Business Context and Reporting Period
Company: UBS Group AG and UBS AG
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter 2020 (ended March 31, 2020)
Filing Date: April 28, 2020
This filing presents the Q1 2020 results and management commentary regarding the impact of the COVID-19 pandemic. UBS emphasized its operational resilience, with 90,000 employees working remotely, and its role in supporting the Swiss and global economies through increased lending and liquidity provision.
Key Financial Metrics
| Metric | Q1 2020 Value | Notes |
|---|---|---|
| Net Profit | USD 1.6 billion | Up 40% year-over-year |
| Return on CET1 | 17.7% | Return on Common Equity Tier 1 |
| Operating Income | Not explicitly stated as total | Improved 10% year-over-year despite credit losses |
| Cost/Income Ratio | 72% | 6% positive operating leverage |
| CET1 Capital Ratio | 12.8% | Excludes temporary regulatory relief |
| Leverage Ratio | 3.8% | Excludes temporary FINMA exemption for sight deposits |
| Credit Loss Expense | USD 268 million | Includes Stage 1/2 (USD 89m) and Stage 3 (USD 179m) |
| Loans to Customers | USD 338 billion | On-balance sheet; +USD 15 billion increase in quarter |
Material Changes vs. Prior Period
- Profitability Surge: Net profit rose 40% to USD 1.6 billion, driven by strong performance across all business lines without special items in revenue or costs.
- Divisional Performance:
- Global Wealth Management (GWM): Operating income reached a new high since the financial crisis; Pre-tax profit (PBT) up 41%.
- Investment Bank (IB): Recorded its best PBT since 2015 (USD 709 million), with operating income up 39%.
- Asset Management: PBT up over 50% to USD 157 million.
- Personal & Corporate Banking (P&C): PBT down 16% due to credit loss expenses of CHF 74 million, though returns remained above 15%.
- Capital Deployment: CET1 capital increased by USD 1.1 billion after accruing for a 2020 dividend and repurchasing USD 350 million of shares.
- Risk-Weighted Assets (RWA): Rose 10% (USD 27 billion) due to increased credit risk from client support and market risk from volatility.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Q2 Expectations: Management expects recurring fee income in GWM to be down USD 200–300 million sequentially in Q2 due to lower invested asset bases. Transaction-based income is also expected to decrease as trading volumes normalize.
- Capital Ratios: The CET1 ratio may fall slightly below the lower end of guidance (12.7%) in Q2 due to higher market risk RWA and balance sheet deployment, but will remain well above regulatory requirements (9.7% with buffer removal).
- Dividends: UBS is prudently accruing for a 2020 dividend but declined to provide specific levels, citing the need to balance capital solidity with crisis response.
- Net Interest Income (NII): Headwinds expected in Q2 from US rate cuts and low rates in CHF/EUR, partially mitigated by credit deployment.
Risks and Contingencies
- Credit Risk: Elevated credit loss expenses are expected to continue in Q2. Under a "kitchen sink" scenario (100% severe downside + lifetime expected losses), total allowances could exceed USD 1 billion.
- Oil & Gas Exposure: Net lending exposure is USD 1.5 billion. In a scenario where WTI oil prices drop to USD 10, UBS expects losses of approximately USD 250 million over two years.
- Operational Risk: Increased risk of cyberattacks and system failures due to remote working arrangements.
- Legal/Tax: The French tax appeal trial was postponed; a new date is expected to be announced on June 2, 2020.
Investor Verification Checklist
- Capital Buffer Utilization: Verify the trajectory of the CET1 ratio in Q2 to confirm if it dips below the 12.7% guidance floor and assess the impact on future capital returns.
- Credit Loss Trajectory: Monitor Q2 credit loss expenses to see if they exceed the Q1 level of USD 268 million, particularly in the Investment Bank and P&C segments.
- Dividend Policy: Confirm the final 2020 dividend amount and timing once management provides clarity post-summer.
- Asset Quality: Review the drawdown rates on the USD 15 billion of new loans and the utilization of credit lines to assess actual credit stress versus provisioning assumptions.
- Fee Income Pressure: Validate the sequential decline in GWM recurring fees against the projected USD 200–300 million headwind.