Business Context and Reporting Period
This Form 6-K filing by UBS Group AG and UBS AG covers the First Quarter 2020 (ended March 31, 2020). The reporting period was dominated by the global outbreak of the COVID-19 pandemic, which caused unprecedented market volatility, a sharp decline in asset values, and significant economic contraction. UBS responded by shifting approximately 90,000 employees to remote work, maintaining operational resilience, and actively supporting clients through government-backed lending programs in Switzerland and the US.
Key Financial Metrics
| Metric (USD Million) | Q1 2020 | Q4 2019 | Q1 2019 |
|---|---|---|---|
| Operating Income | 7,934 | 7,052 | 7,218 |
| Operating Expenses | 5,926 | 6,124 | 5,672 |
| Operating Profit Before Tax | 2,008 | 928 | 1,546 |
| Net Profit Attributable to Shareholders | 1,595 | 722 | 1,141 |
| Diluted EPS (USD) | 0.43 | 0.19 | 0.30 |
| Cost/Income Ratio | 72.3% | 86.8% | 78.4% |
| Return on Equity (ROE) | 11.3% | 5.2% | 8.6% |
| Return on CET1 Capital | 17.7% | 8.2% | 13.3% |
| Total Assets | 1,098,099 | 972,183 | 956,579 |
| Common Equity Tier 1 (CET1) Capital | 36,691 | 35,582 | 34,658 |
| CET1 Capital Ratio | 12.8% | 13.7% | 13.0% |
| Liquidity Coverage Ratio (LCR) | 139% | 134% | 153% |
Material Changes vs. Prior Period
- Profitability Surge: Net profit attributable to shareholders increased by 40% year-over-year (to $1.595 billion) and 121% sequentially. This was driven by a 10% increase in operating income, primarily due to higher transaction volumes in the Investment Bank and Global Wealth Management resulting from market volatility.
- Credit Losses: Credit loss expenses rose significantly to $268 million (compared to $20 million in Q1 2019). This included $89 million in Stage 1 and 2 losses (driven by energy and real estate sectors) and $179 million in Stage 3 losses (credit-impaired positions).
- Capital Ratios: The CET1 capital ratio decreased to 12.8% from 13.7% in Q4 2019, primarily due to a $27 billion increase in Risk-Weighted Assets (RWA) driven by higher credit and market risk exposures.
- Dividend Proposal: Following a request from FINMA, the Board revised the 2019 dividend proposal. Shareholders will be asked to approve a dividend of $0.365 per share, with an equal amount placed in a special dividend reserve subject to future shareholder approval. The share repurchase program was suspended.
Guidance, Outlook, and Risks
- Outlook: Management expects global GDP to contract in the near term. While UBS remains confident in its ability to support clients, it anticipates elevated credit loss expenses to persist as long as containment measures continue. Lower asset prices and interest rates are expected to pressure recurring fee income and net interest income.
- COVID-19 Impact: The pandemic is the primary driver of country risk and operational risk. UBS faces challenges related to remote work, including data security and fraud risks, though no material operational losses were reported in Q1.
- Regulatory Environment: Regulators (FINMA, Federal Reserve, ECB) have introduced temporary measures to support banks, including freezing backtesting exceptions and allowing temporary exclusions of central bank deposits from leverage ratio calculations. UBS utilized a temporary FINMA exemption, which reduced its Leverage Ratio Denominator by $78 billion for going concern purposes.
- Unusual Items: Group Functions recorded a loss of $410 million, largely due to valuation losses on auction rate securities ($143 million) and accounting asymmetries in Group Treasury ($167 million).
Key Facts for Investor Verification
- Credit Quality: Verify the trajectory of credit loss provisions, specifically in energy-related exposures and real estate investment trusts, as these drove the majority of the $268 million expense.
- Capital Adequacy: Monitor the CET1 capital ratio (12.8%) against the Swiss SRB requirement (9.66%) and the impact of the temporary FINMA leverage ratio exemption on reported ratios.
- Dividend Execution: Confirm shareholder approval of the split dividend proposal (immediate payment vs. special reserve) at the Annual General Meeting.
- Operational Resilience: Assess the long-term impact of remote working on operational risk, fraud, and data security as the pandemic duration extends.
- Investment Bank Volatility: Evaluate whether the high transaction volumes and revenues in the Investment Bank (up 39% YoY) are sustainable or a temporary anomaly of the Q1 market crash.