UBS Group AG current report, Q2 FY2017

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG and UBS AG, dated July 28, 2017, discloses the Basel III Pillar 3 report for the second quarter ended June 30, 2017. UBS is classified as a Systemically Relevant Bank (SRB) under Swiss banking law, subject to specific capital, leverage, and liquidity requirements enforced by the Swiss Financial Market Supervisory Authority (FINMA). The report details regulatory capital, risk-weighted assets (RWA), and liquidity metrics for the consolidated group and significant subsidiaries (UBS AG, UBS Switzerland AG, UBS Limited, and UBS Americas Holding LLC).

Key Financial Metrics

Capital and Risk-Weighted Assets (Consolidated)

  • Risk-Weighted Assets (RWA): CHF 237.8 billion (Phase-in basis), an increase of CHF 14.7 billion from the prior quarter.
  • Common Equity Tier 1 (CET1) Capital: CHF 35.2 billion, representing a 14.8% ratio against RWA.
  • Total Capital: CHF 52.4 billion, representing a 22.0% ratio against RWA.
  • Loss-Absorbing Capacity: Total eligible loss-absorbing capacity stood at CHF 76.5 billion (32.19% of RWA).

Leverage and Liquidity (Consolidated)

  • Leverage Ratio: 5.0% (Phase-in) and 4.7% (Fully applied) as of June 30, 2017.
  • Liquidity Coverage Ratio (LCR): 131% (Average for Q2 2017), exceeding the 110% minimum requirement.
  • High-Quality Liquid Assets (HQLA): Average weighted value of CHF 194 billion in Q2 2017.

Subsidiary Highlights

  • UBS AG (Standalone): CET1 ratio of 14.9%; LCR of 128%.
  • UBS Switzerland AG (Standalone): CET1 ratio of 10.9%; LCR of 125%.
  • UBS Limited (Standalone): CET1 ratio of 20.5% (GBP basis).
  • UBS Americas Holding LLC (Consolidated): CET1 ratio of 20.9% (USD basis).

Material Changes vs. Prior Period

During the second quarter of 2017, RWA increased by CHF 14.7 billion compared to March 31, 2017. The primary drivers for this increase were:

  • Counterparty Credit Risk: Increased by CHF 5.3 billion, largely due to model updates regarding LGD parameters and stress period adjustments for derivative exposures.
  • Credit Risk: Increased by CHF 5.3 billion (CHF 4.9 billion under IRB), driven by model updates to PD and LGD parameters for income-producing real estate and sovereign exposures.
  • Market Risk: Increased by CHF 4.3 billion, primarily due to higher average Stressed Value-at-Risk (SVaR) levels.

The Liquidity Coverage Ratio improved by 3 percentage points to 131%, driven by a decrease in net cash outflows related to secured lending and customer deposits, partially offset by a reduction in eligible HQLA due to increased liquidity requirements for US operations.

Outlook, Risks, and Regulatory Context

Regulatory Framework: The filing notes the implementation of enhanced Pillar 3 disclosure requirements by the Basel Committee on Banking Supervision (BCBS), with staggered implementation dates from 2017 to 2019. UBS is currently operating under phase-in rules for Swiss SRB requirements.

Capital Requirements: UBS remains well above minimum regulatory thresholds. The total loss-absorbing capacity requirement for the fully applied Swiss SRB framework is projected to reach 28.82% of RWA by 2020, compared to the current phase-in requirement of 18.42%.

Risks and Contingencies: The report highlights that capital ratios are calculated based on phase-in rules. Significant regulatory adjustments were made to CET1 capital, including deductions for goodwill (CHF 5.0 billion) and deferred tax assets (CHF 6.6 billion). The filing does not provide specific forward-looking guidance on revenue or profit, focusing strictly on prudential regulatory metrics.

Investor Verification Checklist

  • Verify the impact of the CHF 14.7 billion increase in RWA on future capital generation and dividend capacity.
  • Confirm the trajectory of the Liquidity Coverage Ratio given the noted reduction in HQLA due to US operational requirements.
  • Review the "Capital Management" section of the separate Q2 2017 report for detailed breakdowns of the model updates driving RWA increases.
  • Monitor the transition from phase-in to fully applied Swiss SRB capital requirements, specifically the increase in Total Loss-Absorbing Capacity (TLAC) targets by 2020.
  • Check the reconciliation between IFRS and regulatory consolidation scopes, noting the deconsolidation of non-banking entities (e.g., life insurance subsidiaries) affecting the balance sheet.