UBS

UBS AG 2Q24 Earnings Summary

Business Context and Reporting Period

This Form 6-K summarizes the transcript of UBS Group AG's second-quarter 2024 earnings call held on August 14, 2024. The report covers the period following the acquisition of Credit Suisse, focusing on integration progress, cost-saving initiatives, and financial performance in a challenging macroeconomic environment. Management highlighted the completion of parent and Swiss bank mergers and the transition to a single U.S. intermediate holding company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Underlying revenues decreased 2% sequentially to $11.1 billion, driven by net interest income (NII) headwinds, partially offset by higher recurring fee income and improved Investment Bank activity.
• Expenses: Underlying operating expenses decreased 3% sequentially to $9.0 billion. Reported expenses were $10.3 billion, including $1.4 billion in integration costs.
• Cost Savings: The firm achieved an additional $900 million in gross cost savings in Q2, bringing the cumulative total to $6 billion. Approximately 45% of the total gross cost save ambition has been realized.
• Balance Sheet: Risk-weighted assets (RWA) decreased by $15 billion, with $8 billion from the active run-down of Non-core and Legacy (NCL) positions. The leverage ratio denominator decreased by $35 billion.
• Capital: The firm executed $467 million of its planned $1 billion share repurchase program. Purchase price allocation (PPA) adjustments against Credit Suisse equity totaled negative $26.5 billion, with 70% reducing CET1 capital.

Guidance, Outlook, and Risks

• Integration Targets: Management remains committed to completing integration by the end of 2026. They expect to incur $2.3 billion in integration-related expenses in the second half of 2024.
• Net Interest Income (NII):
  • GWM: Full-year 2024 NII expected to be roughly flat versus 4Q23 annualized. A low-to-mid single-digit sequential drop is expected in Q3 due to volume decreases and rate cuts.
  • P&C: Full-year 2024 guidance reaffirmed for a mid-to-high single-digit percentage decline versus 4Q23 annualized (in CHF). NII expected to tick down in Q3 due to SNB rate cuts.
• Non-core and Legacy (NCL): Expected underlying pre-tax loss of around $1 billion for the second half of 2024. The firm aims to reduce NCL RWA to around 5% of Group RWA by 2026.
• Tax Rate: Effective tax rate expected to be around 35% in H2 2024, with a gradual return to a normalized rate of around 23% by 2026.
• Basel 3 Final: Expected Day 1 impact on RWA is around 5% (approx. $25 billion), driven mainly by FRTB, effective January 2025.
• Risks: Key risks include geopolitical tensions, U.S. election volatility, execution risks in the Credit Suisse integration, regulatory changes (Basel 3 Final), and the potential for higher litigation costs or legacy legal issues (e.g., Supply Chain Finance Funds, Mozambique matters).

Key Facts for Investor Verification

• Verify the timeline and cost implications of the upcoming client account and platform migration work in GWM and P&C, scheduled to begin in Q4 2024 and 2025.
• Monitor the actual impact of the $25 billion Basel 3 Final RWA increase in January 2025 and the firm's ability to mitigate this through NCL run-down.
• Track the execution of the $1 billion share buyback program and the firm's ability to maintain capital return plans amidst regulatory capital requirements.
• Assess the progress of the Non-core and Legacy (NCL) portfolio run-down, specifically the reduction of RWA and the realization of cost savings versus the $1 billion H2 loss guidance.
• Watch for the impact of U.S. sweep deposit repricing in Q4 2024, estimated to reduce pre-tax profits by approximately $50 million annually.