Business Context and Reporting Period
This Form 6-K filing by UBS Group AG and UBS AG covers the fourth quarter and full year ended December 31, 2017. The report details the integration of Wealth Management and Wealth Management Americas into a single Global Wealth Management division effective February 1, 2018. A significant event during the period was the enactment of the US Tax Cuts and Jobs Act (TCJA), which reduced the federal corporate tax rate and necessitated a substantial write-down of deferred tax assets (DTAs).
Key Financial Metrics
| Metric (CHF million) | Q4 2017 | Q4 2016 | Full Year 2017 | Full Year 2016 |
|---|---|---|---|---|
| Operating Income | 7,122 | 7,055 | 29,067 | 28,320 |
| Operating Expenses | 6,125 | 6,308 | 23,658 | 24,230 |
| Operating Profit Before Tax | 997 | 746 | 5,409 | 4,090 |
| Net Profit Attributable to Shareholders | (2,224) | 636 | 1,165 | 3,204 |
| Diluted EPS (CHF) | (0.60) | 0.17 | 0.30 | 0.84 |
| Return on Tangible Equity (%) | (19.2) | 5.6 | 2.7 | 6.9 |
| Cost/Income Ratio (%) | 85.0 | 89.1 | 81.0 | 85.4 |
| CET1 Capital Ratio (Fully Applied, %) | 13.8 | 13.8 | 13.8 | 13.8 |
| Liquidity Coverage Ratio (%) | 143 | 132 | 143 | 132 |
Material Changes vs. Prior Period
- Net Loss in Q4 2017: The Group reported a net loss of CHF 2.224 billion in Q4 2017, compared to a profit of CHF 636 million in Q4 2016. This was primarily driven by a CHF 2.9 billion net write-down of deferred tax assets due to the TCJA.
- Operating Profit Growth: Despite the tax impact, operating profit before tax increased 34% year-over-year in Q4 to CHF 997 million, driven by a 3% reduction in operating expenses and a 1% increase in operating income.
- Expense Reduction: The Group achieved its net cost reduction target of CHF 2.1 billion for the full year 2017. General and administrative expenses decreased by CHF 252 million in Q4, largely due to lower provisions for litigation and regulatory matters.
- Investment Bank Performance: The Investment Bank saw a significant decline in operating profit before tax (84% decrease) due to lower revenues in Foreign Exchange, Rates, and Credit, and higher credit loss expenses related to a single client margin loan.
- Wealth Management Strength: Wealth Management operating profit before tax increased 33% year-over-year, supported by higher net interest income and recurring fees. Net new money was CHF 14.2 billion in Q4.
Guidance, Outlook, and Risks
- Capital Returns: The Board intends to propose a dividend of CHF 0.65 per share for 2017. A new share repurchase program of up to CHF 2 billion over three years was announced. The previous guidance of returning at least 50% of net profit is no longer applied; instead, the Group aims to increase ordinary dividends at a mid-to-high single-digit percent annually.
- 2018-2020 Targets: The Group targets an adjusted Return on Tangible Equity (RoTE) of around 15% (excluding DTA impacts) and a fully applied CET1 capital ratio of around 13%.
- Regulatory Risks: The finalization of Basel III reforms is expected to increase Risk-Weighted Assets (RWA) by approximately CHF 35 billion by 2022. The Group estimates RWA may increase by CHF 40 billion and the Leverage Ratio Denominator by CHF 85 billion over the next three years due to regulatory changes and growth.
- Tax Outlook: The Group forecasts a full-year 2018 tax rate of approximately 25%, excluding periodic remeasurements of DTAs. The new US Base Erosion and Anti-Abuse Tax (BEAT) could increase tax liability by up to CHF 60 million in 2018.
- Accounting Changes: Adoption of IFRS 9 and IFRS 15 on January 1, 2018, is expected to reduce consolidated equity by approximately CHF 0.7 billion net of tax, with no material impact on capital ratios.
Investor Verification Checklist
- Tax Impact Verification: Confirm the final impact of the US TCJA on deferred tax assets and the accuracy of the 25% forecasted tax rate for 2018.
- Capital Adequacy: Monitor the Group's ability to maintain a fully applied CET1 ratio of 13% amidst expected RWA increases from Basel III implementation.
- Investment Bank Credit Risk: Review the status of the specific margin loan to a single client that drove Q4 credit loss expenses in the Investment Bank.
- Integration Synergies: Assess the progress and cost savings from the integration of Wealth Management and Wealth Management Americas into Global Wealth Management.
- Litigation Provisions: Verify the sufficiency of provisions for ongoing litigation and regulatory matters, particularly regarding cross-border wealth management and benchmark rate manipulations.