UBS Group AG Third Quarter 2019 Filing Summary
Business Context and Reporting Period
This Form 6-K filing reports the unaudited consolidated financial results for UBS Group AG for the third quarter ended September 30, 2019. The Group operates four primary business divisions: Global Wealth Management, Personal & Corporate Banking, Asset Management, and the Investment Bank, supported by a Corporate Center. The reporting period reflects the adoption of IFRS 16 (Leases) effective January 1, 2019, and a change in presentation currency from Swiss Francs to US Dollars.
Key Financial Metrics
| Metric (USD Million) | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Operating Income | 7,088 | 7,428 | 21,838 | 23,240 |
| Operating Expenses | 5,743 | 5,724 | 17,188 | 17,730 |
| Operating Profit Before Tax | 1,345 | 1,704 | 4,650 | 5,510 |
| Net Profit Attributable to Shareholders | 1,049 | 1,253 | 3,582 | 4,201 |
| Diluted EPS (USD) | 0.28 | 0.33 | 0.95 | 1.09 |
| Return on Equity (Annualized) | 7.7% | 9.7% | 8.9% | 10.7% |
| Cost/Income Ratio (Adjusted) | 79.1% | 75.9% | 77.7% | 75.7% |
| Total Assets | 973,118 | 950,192 | 973,118 | 950,192 |
| Common Equity Tier 1 (CET1) Capital | 34,673 | 34,816 | 34,673 | 34,816 |
| CET1 Capital Ratio | 13.1% | 13.5% | 13.1% | 13.5% |
| Liquidity Coverage Ratio (LCR) | 138% | 135% | 138% | 135% |
Material Changes vs. Prior Period
- Profit Decline: Net profit attributable to shareholders decreased by 16% year-over-year (Q3 2019 vs. Q3 2018) and 15% year-to-date. This was primarily driven by a 5% decrease in operating income and a 21% decrease in operating profit before tax.
- Revenue Drivers: Operating income declined due to lower net interest income (down 8% YoY) and lower income from financial instruments measured at fair value (down 6% YoY). Fee and commission income remained relatively stable, down only 1%.
- Expense Dynamics: Operating expenses were broadly stable quarter-over-quarter. However, the adoption of IFRS 16 resulted in a significant reclassification: rent expenses decreased by $133 million, while depreciation and interest on lease liabilities increased by $117 million and $30 million, respectively.
- Investment Bank Performance: The Investment Bank saw a significant 62% drop in pre-tax profit compared to the prior year, driven by lower revenues in Corporate Client Solutions and Equities due to challenging market conditions and reduced client activity.
- Other Comprehensive Income (OCI): Total comprehensive income was significantly boosted by a $2.0 billion positive OCI gain related to the Swiss pension plan surplus, driven by a decrease in the discount rate.
Guidance, Outlook, and Risks
- Outlook: Management expects stimulus measures and monetary easing to mitigate slowing global growth. However, low and persistent negative interest rates are expected to adversely affect net interest income compared to the prior year.
- Restructuring: The Group expects to incur approximately $100 million in restructuring expenses in Q4 2019 related to structural changes in the Investment Bank (renaming Corporate Client Solutions to Global Banking and Investor Client Services to Global Markets).
- Regulatory Developments:
- Volcker Rule: US regulators adopted amendments effective January 1, 2020, which UBS expects to fall under the "Significant" category, eliminating certain reporting requirements.
- China: Accelerated removal of foreign ownership caps allows UBS to potentially increase its stake in UBS Securities China to 100% by 2020.
- Swiss Real Estate: New self-regulation on mortgage lending for income-producing real estate will take effect January 1, 2020, increasing minimum equity requirements.
- Risks: Significant litigation and regulatory risks remain, particularly regarding cross-border wealth management inquiries (France, Belgium, Italy), RMBS-related matters, and benchmark rate manipulations (LIBOR/FX). The Group has established provisions for these matters but notes that actual outflows could exceed current estimates.
Key Facts for Investor Verification
- Swiss Pension Plan Surplus: Verify the impact of the $2.6 billion pre-tax surplus recognized in OCI on the Swiss pension plan, which significantly boosted comprehensive income but is reversed as a CET1 capital deduction.
- Investment Bank Restructuring: Monitor the execution of the Investment Bank realignment and the associated $100 million restructuring cost expected in Q4 2019.
- Regulatory Provisions: Review Note 16 for details on provisions related to the French tax fraud case (provision of $516 million) and other cross-border wealth management inquiries, as outcomes remain uncertain.
- IFRS 16 Impact: Confirm the ongoing impact of IFRS 16 on the balance sheet (increased assets and liabilities) and the shift in expense recognition from rent to depreciation and interest.
- Capital Ratios: Verify the CET1 capital ratio of 13.1% against the Swiss SRB going concern requirement of 13.89% (including transitional arrangements) and the 14.61% requirement effective January 1, 2020.