Business Context and Reporting Period
This Form 6-K filing, dated March 21, 2019, contains the presentation and speech by Sergio Ermotti, CEO of UBS Group AG, delivered at the Morgan Stanley European Financials Conference on March 20, 2019. The filing provides an update on the company's performance following the strong fiscal year 2018 and outlines the challenging market conditions impacting the first quarter of 2019.
Key Financial Metrics
- FY2018 Net Profit: $4.5 billion, representing a 16% increase year-over-year.
- FY2018 Return on CET1 Capital: 13.1%.
- Five-Year Net Profit (2014-2018): $19 billion.
- FY2018 Capital Generation: $4 billion.
- Q1 2019 Global Wealth Management (GWM) Revenue: Down approximately 9% year-over-year.
- Q1 2019 GWM Transaction-Based Income: Down approximately 25%, primarily driven by the Asia-Pacific region.
- Q1 2019 Investment Bank (IB) Revenue: Down approximately one-third compared to the strong first quarter of 2018.
- Q1 2019 IB Adjusted Return on Attributed Equity: Expected to be in the mid-single digits.
- Q1 2019 P&C and Asset Management Profit: Approximately $0.5 billion combined.
Material Changes Versus Prior Period
While FY2018 delivered record profitability and capital generation, Q1 2019 has faced a significantly tougher environment. The filing highlights a sharp contrast in market beta factors compared to the prior year:
- Market Conditions: Volatility and trading volumes are muted, with investors adopting a "wait and see" approach due to geopolitical tensions and trade disputes.
- Revenue Pressure: Both Global Wealth Management and the Investment Bank are experiencing revenue declines due to lower transaction activity and fee pools. The Investment Bank faces particularly demanding comparatives against the exceptionally strong Q1 2018.
- Cost Management: Management expects to offset some revenue declines with a cost reduction of close to 5% in GWM and additional tactical cost savings of at least $300 million across the group.
Guidance, Outlook, and Risks
Outlook and Capital Policy: Management maintains that capital ratios at the end of Q1 will be in line with guidance. While the size and pace of future share buybacks remain open to assessment, the intention to pay cash dividends is clear. Management believes returns can still be achieved at least in line with last year's performance despite the difficult start to the year.
Strategic Initiatives:
- Cost Reduction: Tactical actions include slowing hiring and pausing some IT projects, while maintaining investment in growth-oriented initiatives. Benefits are expected to materialize in the second half of 2019.
- Capital Efficiency: Initiatives to optimize the Leverage Ratio Denominator (LRD) are expected to reduce LRD consumption by approximately $20 billion, with benefits also expected in the second half of the year.
Risks and Contingencies:
- Regulatory and Legal: The filing references the "French matter" regarding provisions and notes ongoing regulatory investigations and litigation risks.
- Macroeconomic: Risks include the UK exit from the EU (Brexit), low interest rate environments, and geopolitical tensions affecting client sentiment.
- Operational: Risks related to money laundering detection, sanctions compliance, and cyberattacks are highlighted.
Investor Verification Checklist
- Verify the specific financial impact and status of the "French matter" provisions mentioned in the capital generation discussion.
- Confirm the reconciliation of non-GAAP adjusted results to IFRS reported results in the official Q1 2019 earnings release.
- Monitor the execution of the $300 million tactical cost savings and the $20 billion LRD optimization in the second half of 2019.
- Assess the sustainability of the Investment Bank's mid-single-digit returns given the 30% increase in capital carried by the division.
- Review the detailed risk factors regarding regulatory changes in Switzerland, the US, and the EU as outlined in the cautionary statement.