UBS Group AG current report, Q2 FY2017

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UBS Group AG Form 6-K Summary: Basel III Pillar 3 Disclosures

Business Context and Reporting Period

This Form 6-K, filed on August 3, 2017, contains the Basel III Pillar 3 disclosures for UBS Group AG for the semiannual period ended June 30, 2017. The report details regulatory exposures, risk-weighted assets (RWA), and capital requirements under the Swiss Capital Adequacy Ordinance and FINMA regulations. It covers credit risk, counterparty credit risk, market risk, and securitization exposures.

Key Financial Metrics and Risk-Weighted Assets

The filing focuses on regulatory capital metrics rather than GAAP financial performance (revenue, profit, cash flow). Key risk metrics as of June 30, 2017, include:

  • Total Risk-Weighted Assets (RWA): CHF 237.8 billion (an increase of CHF 12.4 billion from the prior year).
  • Total Net Exposure at Default (EAD): CHF 732.9 billion.
  • Breakdown of RWA by Risk Type:
    • Credit Risk: CHF 94.6 billion.
    • Counterparty Credit Risk (CCR): CHF 34.1 billion.
    • Market Risk: CHF 13.7 billion.
    • Operational Risk: CHF 79.4 billion.
  • Defaulted Exposures: Total defaulted loans and debt securities amounted to CHF 2.4 billion.
  • Market Risk Metrics (Period End):
    • Value-at-Risk (VaR): CHF 31 million.
    • Stressed VaR (SVaR): CHF 42 million.
    • Incremental Risk Charge (IRC): CHF 271 million.

Material Changes Versus Prior Period

Comparing the period ended June 30, 2017, to December 31, 2016:

  • RWA Increase: The primary driver was a CHF 9.7 billion increase in credit risk RWA and a CHF 4.7 billion increase in counterparty credit risk RWA. These were partially offset by a CHF 1.8 billion reduction in market risk RWA and a CHF 1.4 billion reduction due to capital deductions for deferred tax assets.
  • Credit Risk Exposure: Exposures post-credit conversion factors (CCF) and credit risk mitigation (CRM) under the A-IRB approach increased by CHF 29.7 billion to CHF 499.7 billion. This was largely driven by a model update applying CCFs to previously excluded unutilized Lombard loan facilities.
  • Counterparty Credit Risk: RWA for CCR increased by CHF 6.8 billion, driven by updates to the stress period for Basel III EAD calculations and changes to Loss Given Default (LGD) parameters for multinationals, sovereigns, and financial institutions.
  • Securitization: Total securitization exposures in the banking book decreased to CHF 3.0 billion from CHF 3.4 billion. Trading book exposures decreased to CHF 66 million from CHF 95 million.
  • Backtesting: There were no Group VaR negative backtesting exceptions in the first half of 2017. The FINMA VaR multiplier decreased from 3.65 to 3.00.

Outlook, Commentary, and Risks

Management Commentary: The increase in RWA density for counterparty credit risk (to 26.6%) was primarily due to parameter updates for LGDs. The bank noted a reduction in collateral received and posted from derivative transactions, driven by lower replacement values in Foreign Exchange, Rates, and Credit businesses.

Risks and Contingencies:

  • Model Risk: Changes to PD and LGD parameters for income-producing real estate and Lombard exposures impacted average LGDs, increasing them by 3.3 percentage points.
  • Regulatory Changes: The report notes the upcoming implementation of the Standardized Approach for Counterparty Credit Risk (SA-CCR) with an expected effective date of January 1, 2018, which will alter alpha factors for regulatory EAD calculations.
  • Legacy Portfolio: Continued wind-down of the Corporate Center – Non-core and Legacy Portfolio contributed to reductions in derivative notionals and collateral.

Key Facts for Investor Verification

  • Verify the impact of the CHF 12.4 billion increase in total RWA on the bank's Common Equity Tier 1 (CET1) capital ratio, as this filing does not explicitly state the resulting capital ratio.
  • Confirm the specific details of the model update regarding unutilized Lombard loan facilities, which drove a CHF 62.9 billion increase in "Retail: other retail" exposures.
  • Monitor the transition to the SA-CCR methodology effective January 1, 2018, and its potential impact on future counterparty credit risk capital charges.
  • Review the reduction in defaulted exposures (CHF 2.4 billion) against the increase in expected loss (CHF 103 million) to assess asset quality trends.
  • Check the decrease in the FINMA VaR multiplier to 3.00 and its effect on the market risk capital charge.