UBS Group AG Third Quarter 2018 Filing Summary
Business Context and Reporting Period
This Form 6-K reports the Third Quarter 2018 results for UBS Group AG, covering the period ended September 30, 2018. The filing highlights a strategic shift in functional and presentation currencies from Swiss francs (CHF) to US dollars (USD), effective October 1, 2018. The Group continues to navigate the transition from IBOR benchmarks, the UK withdrawal from the EU (Brexit), and the adoption of new accounting standards including IFRS 9 and the upcoming IFRS 16.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Operating Income (CHF million) | 7,279 | 7,145 | 22,531 | 21,946 |
| Operating Profit Before Tax (CHF million) | 1,668 | 1,221 | 5,320 | 4,412 |
| Net Profit Attributable to Shareholders (CHF million) | 1,246 | 946 | 4,044 | 3,389 |
| Diluted EPS (CHF) | 0.32 | 0.25 | 1.05 | 0.88 |
| Return on Tangible Equity (%) | 11.3% | 8.3% | 12.2% | 9.8% |
| Cost/Income Ratio (%) | 77.0% | 83.0% | 76.2% | 79.8% |
| CET1 Capital Ratio (%) | 13.5% | 13.7% | 13.5% | 13.7% |
| Liquidity Coverage Ratio (%) | 135% | 142% | 135% | 142% |
Material Changes vs. Prior Period
- Profitability: Operating profit before tax increased by 37% (CHF 447 million) compared to Q3 2017, driven by a 5% decrease in operating expenses and a 2% increase in operating income. Net profit attributable to shareholders rose 32%.
- Revenue Drivers: Net fee and commission income increased by CHF 134 million, primarily due to higher investment fund fees and M&A fees. Net interest income decreased slightly by 4% due to lower allocated treasury income, though this was offset by higher loan volumes in Wealth Management.
- Expense Management: Operating expenses decreased by 5% (CHF 313 million), largely due to a CHF 194 million reduction in net expenses for litigation, regulatory, and similar matters compared to the prior year.
- Capital and Liquidity: The CET1 capital ratio increased to 13.5%. The Liquidity Coverage Ratio (LCR) decreased to 135% but remains well above the 110% minimum requirement.
Guidance, Outlook, and Risks
- Currency Transition: Effective October 1, 2018, the functional currency for UBS Group AG and UBS AG Head Office changed to USD. This is expected to increase reported Group net interest income by approximately USD 0.3 billion annually.
- Performance Targets: Updated targets for FY2019 include a reported return on CET1 capital of ~15% and an adjusted cost/income ratio of ~77%.
- Regulatory and Legal Risks:
- Brexit: UBS is proceeding with the merger of UBS Limited (UK) into UBS Europe SE (Germany) to ensure continuity of services, expected to be effective in Q1 2019.
- IBOR Transition: The Group is managing the transition from IBOR benchmarks to alternative rates (e.g., SOFR, SONIA) with a governance structure in place through 2021.
- Swiss Tax Reform: Adoption of new Swiss corporate tax measures is expected to have a modest impact on tax liability, largely offset by cantonal rate reductions.
- Outlook: Management expects global economic growth to remain supportive, though geopolitical tensions and trade disputes may dampen investor sentiment. Funding costs are expected to be higher than the previous year but stable compared to Q3 2018.
Key Facts for Investor Verification
- Currency Impact: Verify the impact of the CHF to USD functional currency change on future reported earnings and capital ratios, as historical data will be restated.
- Deferred Tax Assets (DTAs): Monitor the ongoing review of US DTAs and the timing of their amortization, which is expected to begin in 2019 and impact the effective tax rate.
- Legal Provisions: Review Note 15 for details on litigation and regulatory provisions, noting the significant reduction in net expenses compared to Q3 2017.
- Capital Adequacy: Confirm that the CET1 ratio of 13.5% and Total Loss-Absorbing Capacity (TLAC) ratio of 31.8% remain sufficient under the Swiss SRB framework as requirements phase in through 2020.
- Segment Performance: Note the divergence between reported and adjusted results, particularly in the Investment Bank where adjusted profit growth was 44% versus 75% reported growth.