UBS Group AG Form 6-K Summary: Basel III Pillar 3 Report
Business Context and Reporting Period
This Form 6-K, filed on October 25, 2018, contains the Basel III Pillar 3 Report for UBS Group AG and its significant regulated subsidiaries for the period ended September 30, 2018. UBS is classified as a Systemically Relevant Bank (SRB) under Swiss banking law and is subject to capital adequacy, liquidity, and funding requirements defined by the Swiss Financial Market Supervisory Authority (FINMA) and the Basel Committee on Banking Supervision (BCBS). The report details risk-weighted assets (RWA), capital composition, leverage ratios, and liquidity coverage ratios.
Key Financial Metrics (Consolidated Group)
- Risk-Weighted Assets (RWA): CHF 252.2 billion (broadly unchanged from Q2 2018).
- Capital Ratios:
- Common Equity Tier 1 (CET1): 13.5%
- Tier 1 Capital: 17.9%
- Total Capital: 20.5%
- Leverage Ratio: 5.0% (fully applied), with a Leverage Ratio Denominator (LRD) of CHF 898.0 billion.
- Liquidity Coverage Ratio (LCR): 135% (average for Q3 2018), above the FINMA minimum of 110%.
- Loss-Absorbing Capacity: Total eligible loss-absorbing capacity was CHF 80.6 billion (31.96% of RWA).
Material Changes vs. Prior Period
- RWA Movements: Total RWA remained stable. Decreases in market risk RWA (CHF 1 billion) and credit valuation adjustment (CVA) RWA (CHF 0.7 billion) were offset by a net increase in counterparty credit risk RWA of CHF 1.9 billion.
- Methodology Change: A CHF 3.2 billion increase in counterparty credit risk RWA resulted from a revised methodology for structured margin lending transactions.
- Liquidity: The LCR decreased by 9 percentage points to 135% from 144% in Q2 2018. This decline was driven by reduced High-Quality Liquid Assets (HQLA), primarily due to increased assets subject to transfer restrictions in US branches, and higher net cash outflows from secured financing transactions.
- Capital Composition: CET1 capital stood at CHF 34.2 billion. Total regulatory adjustments to CET1 were CHF 17.0 billion, primarily due to deductions for goodwill, deferred tax assets, and compensation-related components.
Outlook, Risks, and Regulatory Developments
- Regulatory Changes: UBS expects to implement new Pillar 3 disclosure requirements (e.g., KM1, PV1, CC1) starting in the Q4 2018 report, following FINMA's revised Circular 2016/01.
- Capital Requirements: The Group maintains capital levels significantly above the required Swiss SRB going concern (13.13%) and gone concern (7.65%) requirements.
- Subsidiary Performance:
- UBS AG (Standalone): CET1 ratio of 17.3%; LCR of 137%.
- UBS Switzerland AG (Standalone): CET1 ratio of 10.6%; LCR of 125%.
- UBS Limited (Standalone): CET1 ratio of 20.8%; LCR of 441%.
- UBS Americas Holding LLC (Consolidated): CET1 ratio of 20.8%.
- Risks: The filing highlights standard banking risks including credit, market, and operational risks. Specific attention is drawn to the impact of regulatory methodology changes on RWA and the management of liquidity in US branches.
Investor Verification Checklist
- Verify the impact of the CHF 3.2 billion methodology change on future RWA projections.
- Monitor the trend in the Liquidity Coverage Ratio (LCR) given the 9 percentage point drop in Q3.
- Review the upcoming Q4 2018 Pillar 3 report for the first-time disclosure of new tables (KM1, PV1, CC1).
- Confirm the status of assets subject to transfer restrictions in US branches affecting HQLA.
- Check the reconciliation between IFRS and regulatory scope of consolidation, noting the deconsolidation of insurance and real estate entities.