UBS Group AG First Quarter 2016 Results Summary
Business Context and Reporting Period
This Form 6-K reports the First Quarter 2016 results for UBS Group AG and UBS AG, covering the period ended March 31, 2016. The filing includes presentation materials and earnings call remarks delivered on May 3, 2016. The quarter was characterized by pronounced client risk aversion, abnormally low transaction volumes, and challenging market conditions, particularly in the Investment Bank and Asset Management divisions.
Key Financial Metrics
- Profitability: Adjusted profit before tax was CHF 1.4 billion. Net profit attributable to shareholders was CHF 707 million. Adjusted return on tangible equity (ROTE) was 8.5%.
- Capital and Liquidity: Fully applied Basel III CET1 capital ratio stood at 14%. The Swiss SRB leverage ratio was 5.4%.
- Costs: The Group achieved an additional CHF 100 million in annualized net cost reductions in the Corporate Center during the quarter. Total net cost savings since 2011 exceeded CHF 2 billion.
- Dividends: Management reaffirmed a policy of returning at least 50% of net profits to shareholders.
Material Changes vs. Prior Period
- Wealth Management: Pre-tax profit increased 26% to CHF 636 million, driven by lower litigation expenses and higher net interest income, despite transaction revenues hitting record lows for a first quarter. Net new money was CHF 15.5 billion, the highest since 2007.
- Personal & Corporate Banking: Pre-tax profit rose 7% to CHF 422 million. Net new business volume growth from retail clients was 4.9%, the highest rate since Q1 2012.
- Asset Management: Results declined due to challenging conditions for active managers and performance fees. Net new money outflows (excluding money markets) were CHF 5.9 billion, including significant pricing-related outflows from a single client.
- Investment Bank: Pre-tax profit was CHF 370 million. While satisfactory relative to cost of equity (19% adjusted return on attributed equity), revenues were significantly lower than the exceptional Q1 2015 driven by the SNB currency floor removal. Corporate Client Solutions revenues fell 39% year-over-year.
- Corporate Center: Loss before tax improved to CHF 211 million from CHF 326 million in the prior quarter, aided by lower litigation provisions.
Guidance, Outlook, and Risks
- Cost Reduction: UBS remains committed to delivering a net CHF 2.1 billion cost reduction target by the end of 2017, despite rising regulatory costs. Initiatives include simplifying the Investment Bank and integrating Wealth Management operations.
- Capital Strategy: The bank aims to grow the ordinary dividend while building capital to meet new Swiss "too big to fail" requirements. In Q1, UBS issued CHF 1.4 billion of high-trigger AT1 capital and CHF 1.3 billion of TLAC.
- Risks and Contingencies:
- Credit Risk: While credit losses were minimal, management noted that the strength of the Swiss Franc could impact domestic lending counterparties in future periods.
- Oil & Gas Exposure: Total funded and unfunded net banking products exposure decreased to CHF 5.5 billion. A credit loss expense of CHF 17 million was recognized, bringing total provisions to CHF 56 million.
- Market Volatility: Continued low transaction volumes and negative interest rates remain headwinds for the Investment Bank and Personal Banking divisions.
Investor Verification Checklist
- Verify the sustainability of Wealth Management net new money inflows (CHF 15.5 billion) given the historical volatility of such figures.
- Monitor the trajectory of the Investment Bank's revenue recovery against the backdrop of muted global fee pools and low client activity.
- Assess the impact of the strong Swiss Franc on future credit loss provisions within the Personal & Corporate Banking domestic portfolio.
- Confirm progress on the CHF 2.1 billion cost reduction target, specifically the execution of front-to-back initiatives in the Investment Bank and Wealth Management.
- Review the composition of Asset Management outflows to determine if the CHF 7.2 billion pricing-related outflow from one client represents a recurring risk or a one-time event.