Business Context and Reporting Period
This Form 6-K filing by UBS Group AG and UBS AG, dated August 17, 2016, discloses the Basel III Pillar 3 quantitative information for the first half of 2016 (ending June 30, 2016). The report details regulatory capital, risk-weighted assets (RWA), and exposure breakdowns in accordance with the Swiss Capital Adequacy Ordinance and FINMA regulations. It serves as an update to the 2015 Annual Report disclosures.
Key Financial Metrics
Exposures and Risk-Weighted Assets (RWA)
- Total Gross Exposure at Default (EAD): CHF 742.3 billion (as of June 30, 2016).
- Total Net EAD: CHF 729.4 billion.
- Total Risk-Weighted Assets (RWA): CHF 216.7 billion.
- Total Capital Requirement: CHF 31.1 billion (based on a 14.3% Swiss SRB total capital requirement).
Capital Composition and Ratios
- Common Equity Tier 1 (CET1) Capital: CHF 37.1 billion.
- Tier 1 Capital: CHF 42.9 billion.
- Total Capital: CHF 55.0 billion.
- CET1 Ratio: 17.1%.
- Tier 1 Ratio: 19.8%.
- Total Capital Ratio: 25.4%.
Market Risk Metrics
- Regulatory Value-at-Risk (VaR) (Group Average): CHF 18 million (1-day, 99% confidence).
- Stressed VaR (Group Average): CHF 292 million.
- Incremental Risk Charge (IRC) (Group Average): CHF 180 million.
Material Changes vs. Prior Period
Exposure and RWA Movements
- Gross EAD increased by CHF 18 billion and Net EAD by CHF 19 billion compared to December 31, 2015. This was primarily driven by a CHF 21 billion increase in credit risk exposure, largely due to higher sovereign exposure to meet US liquidity requirements (HQLA).
- Total RWA increased by CHF 4 billion to CHF 216.7 billion. Higher credit risk and operational risk RWA were partially offset by lower non-counterparty-related risk RWA and market risk RWA.
- Non-counterparty-related risk EAD decreased due to the phase-in of a higher capital deduction for deferred tax assets on temporary differences (increased from 40% in 2015 to 60% in 2016).
Backtesting Exceptions
- There were five new Group VaR negative backtesting exceptions in the first half of 2016, bringing the total to nine within a 250-day window. This increased the FINMA VaR multiplier for market risk RWA from 3.0 to 3.85.
Outlook, Risks, and Management Commentary
Regulatory Framework Changes
- The revised Swiss Systemically Relevant Bank (SRB) framework became effective on July 1, 2016. Disclosures in this report are based on requirements applicable as of June 30, 2016.
- Revised Basel Committee on Banking Supervision (BCBS) Pillar 3 disclosure requirements will apply from December 31, 2016.
Risk Management Commentary
- Management attributes the increase in VaR backtesting exceptions to increased market volatility (including the UK referendum), valuation adjustments, and risks not fully captured in the VaR model (RniV). Management does not believe this indicates a deficiency in the VaR model.
- Securitization RWA decreased to CHF 1.1 billion from CHF 1.4 billion in the prior year, driven by early redemptions in the banking book and reduced residential/commercial mortgage positions in the trading book.
Investor Verification Checklist
- Verify the impact of the new Swiss SRB framework effective July 1, 2016, on future capital ratios.
- Review the "Capital management" section of the Q2 2016 report for detailed capital ratio calculations and G-SIB buffer specifics.
- Monitor the trend of VaR backtesting exceptions and the associated multiplier increase to 3.85.
- Confirm the composition of the CHF 21 billion increase in sovereign exposure related to US liquidity requirements.
- Check the reconciliation of IFRS balance sheet to regulatory scope (Table 37) for significant deconsolidations or adjustments.