UBS

UBS AG Second Quarter 2024 Filing Summary

Business Context and Reporting Period

This Form 6-K filing covers the Second Quarter 2024 (ended June 30, 2024) for UBS Group AG and UBS AG. The period marks a significant milestone in the integration of Credit Suisse, with the merger of UBS AG and Credit Suisse AG completed on May 31, 2024, and the merger of UBS Switzerland AG and Credit Suisse (Schweiz) AG completed on July 1, 2024. The accounting for the acquisition of the Credit Suisse Group was finalized in this quarter, resulting in a final negative goodwill of USD 27.3 billion.

Key Financial Metrics

Note: Q2 2023 and YTD 2023 figures include the one-time recognition of negative goodwill of USD 27.3 billion related to the Credit Suisse acquisition, which significantly inflated reported profits in the prior period. Underlying results exclude this and other integration-related items.

Material Changes vs. Prior Period

• Profitability: Reported net profit decreased by 96% year-over-year due to the absence of the negative goodwill gain in the current quarter. However, on an underlying basis, operating profit before tax increased by 131% (USD 1.17 billion) driven by higher revenues and lower credit loss expenses.
• Revenues: Total revenues increased by 25% to USD 11.9 billion, driven by the consolidation of Credit Suisse for a full quarter, higher net fee and commission income, and increased net interest income.
• Expenses: Operating expenses rose 22% to USD 10.3 billion, primarily due to the consolidation of Credit Suisse expenses and USD 1.3 billion in integration-related costs.
• Credit Losses: Net credit loss expenses dropped significantly to USD 95 million from USD 623 million in the prior year, as the initial recognition of expected credit loss allowances for purchased portfolios in 2023 is no longer present.
• Capital: CET1 capital decreased by USD 1.6 billion to USD 76.1 billion, offset by a decrease in risk-weighted assets (RWA) of USD 15.1 billion to USD 511.4 billion.

Guidance, Outlook, and Risks

• Integration Progress: UBS expects to achieve around USD 7 billion in gross cost savings by the end of 2024 (55% of the USD 13 billion 2026 ambition). Integration-related expenses are expected to be around USD 1.1 billion in Q3 2024.
• Non-Core and Legacy: Management estimates an underlying pre-tax loss of around USD 1 billion for this division in the second half of 2024.
• Tax Outlook: The effective tax rate for the second half of 2024 is expected to be around 35%, higher than the structural rate of 23%, due to operating losses in certain entities that do not generate tax benefits.
• Regulatory Risks:
  • Basel III: Final Basel III standards are expected to increase RWA by approximately 5% upon implementation in January 2025.
  • Swiss TBTF: The Swiss Federal Council is proposing measures to strengthen the "too-big-to-fail" regime, with implementation expected in 2025.
  • EU Banking Rules: New EU rules requiring a physical presence for cross-border banking services will take effect in January 2027.
• Legal Contingencies: UBS estimates future losses from litigation and regulatory matters not covered by existing provisions to be in the range of USD 0 billion to USD 1.7 billion. Significant matters include the Credit Suisse supply chain finance funds (SCFFs) redemption offer and ongoing investigations into cross-border wealth management and benchmark rates.

Key Facts for Investor Verification

• Finalization of Negative Goodwill: Verify the final negative goodwill amount of USD 27.3 billion and the completion of the IFRS 3 measurement period adjustments.
• Underlying Performance: Focus on underlying metrics (e.g., underlying operating profit of USD 2.06 billion) rather than reported figures to assess organic growth, as reported figures are distorted by the prior year's negative goodwill.
• Cost Savings Trajectory: Monitor the realization of the USD 7 billion cost savings target for 2024 and the pace of integration-related expenses in upcoming quarters.
• Capital Ratios: Confirm the CET1 ratio of 14.9% and the impact of the upcoming Basel III implementation on future capital requirements.
• Non-Core and Legacy Run-off: Track the reduction in risk-weighted assets (RWA) and leverage ratio denominator (LRD) within the Non-core and Legacy division as assets are unwound.