UBS Group AG current report, Q2 FY2023

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UBS Group AG Form 6-K Summary: Second Quarter 2023 Results

Business Context and Reporting Period

This Form 6-K, filed on September 1, 2023, contains the transcript of UBS Group AG's presentation of its Second Quarter 2023 results. The reporting period covers the quarter ended June 30, 2023. The results include one month of Credit Suisse AG's operating performance following the acquisition's closing in June. The filing details the strategic integration of Credit Suisse, the decision to fully integrate the Swiss business, and the financial impact of the transaction.

Key Financial Metrics

  • Profitability: Reported pre-tax and post-tax profit was $29 billion, driven primarily by $28.9 billion in negative goodwill. Excluding acquisition-related items, the Group reported a pre-tax profit of $1.1 billion ($2.0 billion from UBS sub-group; -$0.8 billion from Credit Suisse sub-group).
  • Capital Position: CET1 capital ratio stands at 14.4% with a CET1 leverage ratio of 4.8%. Total loss-absorbing capacity is approximately $200 billion.
  • Liquidity: Average Liquidity Coverage Ratio (LCR) was 175%; Net Stable Funding Ratio (NSFR) was 118%.
  • Assets: The combined firm manages over $5.5 trillion in invested assets. Risk-Weighted Assets (RWA) total approximately $557 billion.
  • Non-Core and Legacy (NCL): The NCL unit comprises $224 billion in Leverage Ratio Denominator (LRD) and $55 billion in RWA (excluding operational risk).
  • Deposits: The quarter saw $23 billion in deposit inflows, with $18 billion attributed to Credit Suisse's Wealth Management and Swiss Bank franchises.

Material Changes vs. Prior Period

  • Acquisition Impact: The most significant change is the inclusion of Credit Suisse. The reported profit is heavily skewed by the $28.9 billion negative goodwill gain and Purchase Price Allocation (PPA) adjustments totaling -$25 billion.
  • UBS Sub-Group Performance: Excluding Credit Suisse, UBS pre-tax profit rose 12% year-over-year to $2.0 billion. Global Wealth Management delivered $16 billion in net new money, the strongest Q2 in over a decade.
  • Credit Suisse Performance: Credit Suisse AG reported a pre-tax loss of CHF 8.9 billion. Adjusted for one-off items (fair value marks, software write-downs, litigation provisions), the adjusted operating loss was CHF 2.1 billion.
  • Cost Structure: UBS aims to achieve over $10 billion in gross cost reductions by year-end 2026 based on the 2022 cost base. Approximately half of these savings will come from restructuring the Investment Bank and running down non-core assets.

Guidance, Outlook, and Management Commentary

  • Integration Strategy: Management confirmed the decision to fully integrate Credit Suisse (Schweiz) rather than spin it off. Legal integration of parent entities is planned for 2024, with full operational integration expected by 2025. The Group aims to substantially complete the overall integration program by year-end 2026.
  • Profitability Outlook: Management expects to approach break-even on an underlying basis in Q3 2023 and return to positive underlying profitability before the end of 2023. The target is an underlying Return on CET1 (RoCET1) of approximately 15% by 2026.
  • Capital Allocation: Share repurchases are suspended. The Group targets a medium-term CET1 ratio of around 14% and aims to grow dividends and return excess capital via buybacks once integration stabilizes.
  • Non-Core Wind-down: The NCL unit is expected to see a 50% reduction in non-op-risk RWA by 2026. Management anticipates taking out significant operating costs associated with this unit.
  • Risks and Contingencies: Key risks include the complexity of integrating 3,000+ IT applications (only ~300 will be retained), potential further litigation provisions, and the execution of cost savings. The filing notes that the Russia-Ukraine war and geopolitical tensions remain significant macroeconomic risks.

Investor Verification Checklist

  • Verify the timeline and regulatory approvals for the 2024 legal merger of UBS AG and Credit Suisse AG.
  • Monitor the actual execution of the $10 billion gross cost reduction target against the 2022 baseline.
  • Track the quarterly progress of the Non-Core and Legacy (NCL) asset wind-down and associated PPA pull-to-par effects.
  • Assess the stability of deposit flows in the Credit Suisse Wealth Management franchise to ensure the "win-back" strategy is sustainable.
  • Review future filings for updates on the operational risk RWA modeling and the finalization of the 2026 three-year strategic plan.