UBS Group AG: Basel III Pillar 3 Report Summary (Year Ended Dec 31, 2017)
Business Context and Reporting Period
This Form 6-K filing, dated March 9, 2018, contains the Basel III Pillar 3 Report for UBS Group AG for the period ended December 31, 2017. UBS is classified as a Systemically Relevant Bank (SRB) under Swiss banking law and a Global Systemically Important Bank (G-SIB). The report details regulatory capital, risk-weighted assets (RWA), leverage ratios, and liquidity coverage in accordance with FINMA and Basel Committee on Banking Supervision (BCBS) standards.
Key Financial Metrics
- Risk-Weighted Assets (RWA): Total RWA decreased by CHF 0.8 billion to CHF 238.4 billion (phase-in basis).
- Credit Risk RWA: CHF 97.7 billion (increased CHF 1.3 billion).
- Counterparty Credit Risk RWA: CHF 33.4 billion.
- Market Risk RWA: CHF 12.3 billion (decreased CHF 1.8 billion).
- Operational Risk RWA: CHF 79.4 billion.
- Capital Ratios (Phase-in):
- Common Equity Tier 1 (CET1): 14.9% (Requirement: 6.5%).
- Tier 1 Capital: 18.2%.
- Total Capital: 21.9%.
- Leverage Ratio: 4.9% (phase-in) and 4.7% (fully applied). The Leverage Ratio Denominator (LRD) was CHF 887.6 billion (phase-in).
- Liquidity Coverage Ratio (LCR): Averaged 143% in Q4 2017, well above the 110% minimum requirement. High-quality liquid assets (HQLA) totaled CHF 183 billion.
- Loss-Absorbing Capacity: Total loss-absorbing capacity (going and gone concern) was CHF 80.0 billion (33.6% of RWA).
Material Changes vs. Prior Period
- RWA Movements: The decrease in total RWA was primarily driven by a reduction in Market Risk RWA due to lower average Stressed VaR (SVaR) levels in the Investment Bank's Equities and Foreign Exchange businesses. This was partially offset by an increase in Credit Risk RWA driven by model updates (revised credit conversion factors) and foreign exchange movements.
- Capital Composition: CET1 capital stood at CHF 35.5 billion. Regulatory adjustments included deductions for goodwill (CHF 5.2 billion) and deferred tax assets (CHF 5.1 billion).
- Defaulted Assets: Total defaulted loans and debt securities increased to CHF 2.7 billion, driven by loans secured by securities and residential property.
- Securitizations: Total securitization exposures in the banking book decreased to CHF 2.3 billion, with the bank acting primarily as an originator or sponsor.
Outlook, Risks, and Regulatory Developments
- Basel III Finalization: UBS estimates the introduction of the revised Basel III framework on January 1, 2022, will likely lead to a net increase in RWA of approximately CHF 35 billion before mitigation actions.
- 2018 Regulatory Changes: The bank anticipates RWA increases in 2018 due to methodology changes, model updates (PD/LGD factors), and scheduled increases in the FINMA-required multiplier for Investment Bank exposures to corporates.
- Accounting Standards: Adoption of IFRS 16 (Leases) in 2019 is expected to increase assets and liabilities, with lease assets included in the leverage ratio denominator and RWA at a 100% risk weight.
- Interest Rate Risk: Sensitivity to rising rates in the banking book was approximately nil, a significant improvement from the prior year's negative sensitivity, largely due to adjustments in Group Asset and Liability Management.
Investor Verification Checklist
- Verify the impact of the revised Basel III framework (effective 2022) on future capital requirements and RWA.
- Monitor the phasing-in of the FINMA multiplier for Investment Bank corporate exposures in 2018.
- Review the composition of defaulted assets, specifically the exposure to residential property and securities-backed loans.
- Confirm the stability of the Liquidity Coverage Ratio (LCR) against potential deposit outflows.
- Assess the impact of IFRS 16 adoption on the leverage ratio denominator in 2019.