UBS AG Second Quarter 2016 Filing Summary
Business Context and Reporting Period
This Form 6-K reports the unaudited interim consolidated financial statements for UBS AG for the quarter ended June 30, 2016. UBS AG serves as the primary operating subsidiary of UBS Group AG. The filing includes consolidated results under IFRS and standalone regulatory information under Swiss GAAP. Notable structural changes include the derecognition of certain client cash balances and a shift in the settlement model for London Clearing House interest rate swaps, which reduced gross derivative balances by CHF 93 billion without affecting net exposure.
Key Financial Metrics
| Metric (CHF Million) | Q2 2016 | Q2 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Operating Income | 7,399 | 7,784 | 14,254 | 16,644 |
| Operating Expenses | 5,942 | 6,087 | 11,818 | 12,254 |
| Operating Profit Before Tax | 1,457 | 1,698 | 2,436 | 4,391 |
| Net Profit (Attributable to Shareholders) | 1,009 | 1,178 | 1,723 | 3,201 |
| Return on Tangible Equity (%) | 8.6 | 10.4 | 7.3 | 14.1 |
| Cost/Income Ratio (%) | 80.2 | 78.1 | 82.9 | 73.5 |
| Total Assets | 990,135 | 951,528 | 990,135 | 951,528 |
| Common Equity Tier 1 Ratio (Fully Applied) | 15.0% | 15.6% | 15.0% | 15.6% |
| Leverage Ratio (Fully Applied) | 5.0% | 4.5% | 5.0% | 4.5% |
Material Changes vs. Prior Period
- Profit Decline: Net profit attributable to shareholders decreased 14% year-over-year in Q2 and 46% year-over-year on a YTD basis, primarily driven by lower trading income and higher tax expenses.
- Trading Income: Net trading income rose 17% quarter-over-quarter to CHF 1.9 billion but remained down 22% year-over-year. The Investment Bank contributed significantly to the quarterly recovery.
- Expense Management: Operating expenses decreased 2% year-over-year in Q2, reflecting ongoing restructuring efforts. Total restructuring expenses for the quarter were CHF 373 million.
- Capital Position: The Common Equity Tier 1 (CET1) capital ratio (fully applied) decreased slightly to 15.0% from 15.6% in the prior year, while the leverage ratio improved to 5.0% from 4.5%.
- Balance Sheet: Total assets increased by approximately CHF 38 billion compared to the prior year, driven by higher derivative replacement values and securities financing transactions.
Outlook, Risks, and Contingencies
Regulatory and Litigation Risks: UBS faces significant ongoing litigation and regulatory investigations. Key areas include:
- Foreign Exchange and LIBOR: UBS pleaded guilty to wire fraud regarding LIBOR manipulation, agreeing to a USD 203 million fine and probation. Investigations into FX manipulation continue globally, with a USD 141 million settlement reached for US federal class actions.
- RMBS and Mortgages: Provisions for residential mortgage-backed securities claims stood at USD 988 million. Litigation regarding loan repurchase demands continues.
- Cross-Border Wealth Management: Investigations persist in France, Belgium, and the US regarding tax evasion and bearer bonds. A EUR 1.1 billion bail was upheld in France.
- UK Tax Dispute: HMRC may challenge the transfer of net operating loss carryforwards to UBS Limited, potentially resulting in a reduction of deferred tax assets of approximately CHF 113 million.
Forward-Looking Risks: Management highlights risks related to the UK's exit from the EU, the low interest rate environment, and the execution of strategic cost reduction plans. The filing notes that future outflows for litigation and regulatory matters may exceed current provisions.
Investor Verification Checklist
- Verify the impact of the USD 203 million LIBOR fine and the USD 141 million FX settlement on future cash flows and provisions.
- Monitor the status of the UK tax dispute regarding UBS Limited's deferred tax assets (potential CHF 113 million impact).
- Review the progress of the RMBS litigation and the adequacy of the USD 988 million provision.
- Assess the effectiveness of cost-cutting initiatives given the rising cost/income ratio (82.9% YTD vs 73.5% prior year).
- Confirm the stability of the CET1 capital ratio (15.0%) against evolving Swiss SRB regulatory requirements.