UBS Group AG current report, Q2 FY2016

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG and UBS AG, dated July 29, 2016, presents the Second Quarter 2016 results. The reporting period covers the three months ended June 30, 2016. The results were delivered amidst a challenging macroeconomic environment characterized by slowing global growth, low interest rates, and geopolitical turmoil, including the Brexit referendum. These conditions led to increased client cash holdings and reduced transaction volumes across the industry.

Key Financial Metrics

  • Profitability: Adjusted pre-tax profit was CHF 1.7 billion, slightly up from the second quarter of 2015. Net profit attributable to shareholders exceeded CHF 1 billion.
  • Return on Equity: Adjusted return on tangible equity (ROTE) was 10.1%.
  • Capital Ratios: Fully applied Basel III CET1 capital ratio increased to 14.2%; fully applied BIS Basel III CET1 leverage ratio increased to 3.4%.
  • Cost Reduction: The Group achieved CHF 1.4 billion in annualized net cost savings as of the June exit rate, a CHF 200 million improvement in the quarter, progressing toward a CHF 2.1 billion year-end 2017 target.
  • Balance Sheet: Risk-Weighted Assets (RWA) were stable, while Leverage Ratio Denominator (LRD) decreased by CHF 8 billion to CHF 267 billion in the Investment Bank.

Material Changes vs. Prior Period

  • Wealth Management: Profit before tax was CHF 606 million, down 21% year-over-year due to the lowest transaction revenue in four quarters (CHF 347 million) and a 10% reduction in recurring net fee income. However, the division attracted CHF 6 billion in net new money inflows.
  • Wealth Management Americas: Profit before tax increased 22% year-over-year, driven by record net interest income and managed account penetration, despite lower client activity.
  • Personal & Corporate Banking: Delivered its best profit before tax since Q4 2008 (CHF 463 million), up 12% year-over-year, with a cost/income ratio declining to 53%.
  • Asset Management: Profit before tax rose 10% year-over-year to CHF 148 million. Net new money excluding money markets was negative CHF 8.8 billion due to shifts from active to passive funds.
  • Investment Bank: Profit before tax was CHF 447 million. FX, Rates, and Credit revenues increased 15% year-over-year, while Equities revenues fell 22% due to lower volumes in APAC and EMEA.

Guidance, Outlook, and Risks

Guidance: Management stated that due to limited visibility regarding market conditions and regulatory ambiguity, they are no longer providing short-term return guidance. However, they remain committed to achieving targets in a normalized environment.

Dividend Policy: The Group remains committed to returning at least 50% of net profits to shareholders. The priority for 2016 is to deliver a baseline dividend of at least 60 Rappen per share, matching the 2015 level.

Risks and Contingencies:

  • Regulatory Costs: The firm faces elevated expenses related to litigation and regulatory matters, including a seasonal impact from the UK bank levy in Q4.
  • Capital Framework: Proposed changes to the Basel Committee Banking Supervision's capital framework could significantly increase RWA if adopted in Switzerland.
  • Taxation: Proposed UK tax law changes could moderately increase the effective tax rate and affect Deferred Tax Assets (DTAs).
  • Market Conditions: Continued exposure to negative interest rates and potential adverse changes in the credit environment related to the strength of the Swiss franc.

Investor Verification Checklist

  • Verify the sustainability of the 10.1% adjusted ROTE given the 21% decline in Wealth Management pre-tax profit.
  • Confirm the trajectory of the CHF 2.1 billion cost reduction target against rising regulatory and litigation expenses.
  • Assess the impact of the proposed Basel III capital framework changes on future RWA and capital requirements.
  • Monitor the execution of the Wealth Management Americas organizational changes and their effect on advisor retention and productivity.
  • Track the shift from active to passive funds in Asset Management and its long-term impact on fee income.