UBS Group AG Form 6-K Summary: Q1 2020 Basel III Pillar 3 Report
Business Context and Reporting Period
This Form 6-K, filed on April 28, 2020, contains the Basel III Pillar 3 Report for UBS Group AG and significant regulated subsidiaries for the period ended March 31, 2020. The report details regulatory capital, risk-weighted assets (RWA), leverage ratios, and liquidity coverage ratios in accordance with Swiss Financial Market Supervisory Authority (FINMA) and Basel Committee on Banking Supervision (BCBS) requirements. The reporting period coincides with the onset of the COVID-19 pandemic, prompting temporary regulatory relief measures.
Key Financial Metrics (UBS Group Consolidated)
| Metric | Value (USD) | Ratio / % |
|---|---|---|
| Common Equity Tier 1 (CET1) Capital | $36.7 billion | 12.82% of RWA |
| Tier 1 Capital | $51.9 billion | 18.14% of RWA |
| Total Capital | $57.8 billion | 20.19% of RWA |
| Total Loss-Absorbing Capacity (TLAC) | $93.7 billion | 32.74% of RWA |
| Risk-Weighted Assets (RWA) | $286.3 billion | - |
| Leverage Ratio Exposure | $956.0 billion | 5.43% (Basel III) |
| Liquidity Coverage Ratio (LCR) | - | 139% (Average Q1) |
Material Changes vs. Prior Period
- Capital: CET1 capital increased by $1.1 billion to $36.7 billion, driven by operating profit and capital components, partially offset by share repurchases and tax expenses. Tier 1 capital remained stable at $51.9 billion due to a $1.1 billion net decrease in Additional Tier 1 (AT1) instruments following the call of a $1.25 billion loss-absorbing instrument.
- Risk-Weighted Assets: RWA increased by $27.0 billion to $286.3 billion. This was primarily due to higher credit risk ($9.0 billion increase) and market risk ($8.5 billion increase) driven by client activity and elevated market volatility. Counterparty credit risk (CCR) RWA rose by $5.2 billion.
- Leverage Ratio: The leverage ratio exposure increased by $45 billion to $956 billion, reflecting higher on-balance sheet exposures, derivative exposures, and securities financing transactions (SFTs). The Basel III leverage ratio declined to 5.43% from 5.69% in Q4 2019.
- Liquidity: The LCR increased to 139% from 134% in Q4 2019. This improvement was driven by higher average high-quality liquid assets (HQLA) and reduced net cash outflows due to lower secured financing transactions.
Guidance, Outlook, and Regulatory Measures
COVID-19 Regulatory Relief:
- Countercyclical Buffer: The Swiss National Bank deactivated the countercyclical buffer for residential real estate loans, reducing UBS's CET1 capital requirement by 29 basis points.
- Backtesting Exemptions: FINMA froze the number of backtesting exceptions for market risk models from February 1 to July 1, 2020, to prevent capital requirement increases due to market volatility. UBS did not benefit from this as of March 31, 2020, as exceptions did not trigger higher RWA.
- Leverage Ratio Relief: FINMA permitted the temporary exclusion of central bank sight deposits from the leverage ratio denominator. This resulted in a temporary reduction of the denominator by $78 billion, though it had no impact on UBS's capacity to fund clients given existing buffers.
Regulatory Changes:
- Effective January 1, 2020, UBS adopted the Standardized Approach for Counterparty Credit Risk (SA-CCR), replacing the Current Exposure Method (CEM).
- UBS AG standalone is now subject to "gone concern" capital requirements for Swiss intermediate parent banks of G-SIBs.
Outlook: Management notes that market volatility has increased backtesting exceptions and RWA. However, capital buffers remain robust, and temporary regulatory measures ensure continued funding capacity for the Swiss economy.
Key Facts for Investor Verification
- Capital Adequacy: Verify that the CET1 ratio of 12.82% remains well above the minimum requirement plus buffers (approx. 8.32% available after meeting minimums).
- TLAC Compliance: Confirm that Total Loss-Absorbing Capacity (TLAC) of $93.7 billion meets the 32.74% of RWA requirement, exceeding the minimum threshold.
- Market Risk Impact: Monitor the impact of market volatility on the $14.6 billion market risk RWA and potential future increases in capital charges due to backtesting exceptions once the FINMA freeze expires.
- AT1 Instrument Calls: Note the reduction in Tier 1 capital due to the call of $1.25 billion in AT1 instruments and assess future capital issuance plans.
- Liquidity Position: Verify the LCR of 139% against the 110% requirement, noting the reliance on high HQLA balances and reduced funding consumption.