UBS Group AG Second Quarter 2019 Filing Summary
Business Context and Reporting Period
This Form 6-K filing reports the unaudited interim consolidated financial results for UBS Group AG for the quarter ended June 30, 2019. The filing includes the Second Quarter 2019 Report, detailing performance across Global Wealth Management, Personal & Corporate Banking, Asset Management, and the Investment Bank. The presentation currency is US Dollars (USD), with comparative periods restated to align with this change effective October 1, 2018.
Key Financial Metrics
| Metric (USD Million) | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Operating Income | 7,532 | 7,644 | 14,750 | 15,812 |
| Operating Expenses | 5,773 | 5,938 | 11,445 | 12,007 |
| Operating Profit Before Tax | 1,759 | 1,706 | 3,305 | 3,806 |
| Net Profit Attributable to Shareholders | 1,392 | 1,382 | 2,533 | 2,948 |
| Diluted EPS (USD) | 0.37 | 0.36 | 0.67 | 0.76 |
| Return on Equity (%) | 10.4 | 10.5 | 9.5 | 11.2 |
| Cost/Income Ratio (%) | 76.5 | 77.4 | 77.4 | 75.7 |
| Total Assets (USD Billion) | 968.7 | 952.8 | 968.7 | 952.8 |
| Common Equity Tier 1 (CET1) Ratio (%) | 13.3 | 13.4 | 13.3 | 13.4 |
| Liquidity Coverage Ratio (%) | 145 | 144 | 145 | 144 |
Material Changes vs. Prior Period
- Profitability: Operating profit before tax increased by 3% (USD 53 million) to USD 1,759 million, driven by a 3% decrease in operating expenses, which offset a 1% decline in operating income. Net profit attributable to shareholders increased by 1% to USD 1,392 million.
- Revenue Drivers: Operating income decreased by USD 112 million, primarily due to lower net interest income and fair value changes on financial instruments (USD 241 million lower). This was partially offset by higher net fee and commission income (USD 51 million increase) and other income (USD 61 million increase).
- Expense Management: Operating expenses decreased by USD 165 million. General and administrative expenses fell significantly by USD 358 million, largely due to lower litigation provisions and rent expenses (impacted by IFRS 16 adoption). Personnel expenses increased by USD 51 million due to higher salary expenses and insourcing initiatives.
- Segment Performance:
- Global Wealth Management: Operating profit decreased 9% to USD 874 million due to lower net interest and recurring fee income.
- Investment Bank: Operating profit decreased 20% to USD 427 million, driven by lower revenues in Investor Client Services (Equities and FX/Rates) despite strong performance in Corporate Client Solutions.
- Personal & Corporate Banking: Operating profit increased 14% to USD 390 million (USD basis), benefiting from lower credit loss expenses.
- Asset Management: Operating profit increased 29% to USD 124 million, driven by higher performance fees.
- Capital and Liquidity: The CET1 capital ratio increased to 13.3% from 13.0% in Q1 2019, supported by a USD 5.4 billion decrease in risk-weighted assets. The Liquidity Coverage Ratio decreased to 145% but remains well above the 110% minimum.
Guidance, Outlook, and Risks
- Outlook: Management notes that global growth has stabilized at a lower level. Downside risks include political uncertainties and geopolitical tensions. A sharp drop in interest rates is expected to adversely affect net interest income. Management expects Corporate Center to average a loss before tax of around USD 250 million per quarter in the second half of 2019.
- Regulatory Developments:
- Swiss Tax Reform: Approved in May 2019, effective January 1, 2020. At least 50% of dividends paid after this date will be subject to a 35% Swiss withholding tax.
- EU Equivalence: The EU did not extend equivalence for Swiss trading venues. UBS has redirected trade flows to Swiss venues with limited adjustment costs.
- US Regulation Best Interest: Effective June 30, 2020, requiring operational changes for US broker-dealers.
- Strategic Initiatives: Announced a strategic wealth management partnership in Japan with Sumitomo Mitsui Trust Holdings. Completed the transfer of the Swiss Asset Management business into a separate sub-group structure.
- Risks: Significant litigation and regulatory matters remain, including cross-border wealth management inquiries (France, Belgium, Italy), RMBS-related claims, and benchmark rate manipulation investigations. The filing states that the aggregate amount of possible future losses from these matters substantially exceeds current provisions.
Investor Verification Checklist
- Dividend Tax Impact: Verify the impact of the new Swiss tax reform on future dividend yields, specifically the 35% withholding tax on distributions from retained earnings starting January 1, 2020.
- Investment Bank Volatility: Monitor the Investment Bank's exposure to market volatility and client activity levels, given the 20% drop in operating profit and reliance on trading revenues.
- Cost/Income Ratio: Track the adjusted cost/income ratio (76.1% in Q2 2019) to ensure cost reduction initiatives continue to offset revenue pressures from low interest rates.
- Litigation Provisions: Review Note 16 for updates on specific litigation matters (e.g., France tax fraud verdict, RMBS settlements) and assess the adequacy of the USD 2.5 billion provision for litigation and regulatory matters.
- Capital Ratios: Confirm that the CET1 ratio remains above the Swiss SRB requirement of 13.3% (including add-ons) as regulatory frameworks tighten in 2020.