Business context and reporting period
UBS Group AG’s Form 20-F is an annual report for the fiscal year ended December 31, 2017, prepared under IFRS. UBS Group AG is the holding company of UBS AG. The filing includes both entities’ consolidated information; figures below refer to UBS Group AG consolidated unless stated otherwise. This is a full-year filing, not a standalone fourth-quarter report.
Key financial metrics
Amounts are in CHF unless otherwise indicated.
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Operating income | CHF 29.1bn | CHF 28.3bn | +3% |
| Operating expenses | CHF 23.8bn | CHF 24.2bn | -2% |
| Profit before tax | CHF 5.3bn | CHF 4.1bn | +29% |
| Net profit attributable to shareholders | CHF 1.1bn | CHF 3.2bn | -67% |
| Net interest income | CHF 6.5bn | CHF 6.4bn | +2% |
| Net fee and commission income | CHF 17.2bn | CHF 16.4bn | +5% |
| Net trading income | CHF 5.0bn | CHF 4.9bn | Broadly flat |
| Credit loss expense | CHF 128m | CHF 37m | Higher expense |
| Cost/income ratio | 81.5%; adjusted 78.1% | 85.4%; adjusted 80.9% | Improved |
| Return on tangible equity | 2.4%; adjusted 4.0% | 6.9%; adjusted 9.0% | Lower, chiefly reflecting tax write-down |
| Operating cash flow | CHF (50.9)bn | CHF (16.5)bn | Greater outflow |
| Investing / financing cash flow | CHF +5.1bn / +26.6bn | CHF +36.3bn / (1.0)bn | — |
| Cash and cash equivalents, year-end | CHF 102.2bn | CHF 121.1bn | Down CHF 18.9bn |
| Total assets / shareholder equity | CHF 915.6bn / CHF 51.2bn | CHF 935.0bn / CHF 53.6bn | Assets -2%; equity -4% |
| Customer deposits / long-term debt issued | CHF 409.0bn / CHF 142.8bn | CHF 423.7bn / CHF 132.5bn | Deposits down; debt up |
| Fully applied CET1 ratio / CET1 leverage ratio | 13.8% / 3.7% | 13.8% / 3.5% | Capital ratio flat; leverage improved |
| Liquidity coverage ratio | 143% | 132% | Improved |
| Invested assets | CHF 3.18tn | CHF 2.81tn | +13% |
Material changes versus the prior comparable period
- Underlying profitability strengthened: adjusted profit before tax rose 16% to CHF 6.2bn, on adjusted operating income growth and lower adjusted expenses. Management said net profit would have risen 22% to about CHF 4.0bn excluding the US tax-law effects.
- Reported net profit fell sharply because the US Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%, prompting a CHF 2.865bn net write-down of deferred tax assets in Q4 2017. UBS said this had negligible impact on fully applied CET1 capital.
- Adjusted net fee and commission income increased, mainly from wealth-management portfolio-management and advisory fees. General and administrative expenses declined, including lower litigation, regulatory and similar-matter expenses.
- Credit loss expense rose to CHF 128m, principally due to a margin loan to one client after a significant fall in collateral value. Gross impaired loans were CHF 1.076bn; impaired loans were 0.3% of gross loans.
- RWA increased CHF 14.8bn to CHF 237.5bn, mainly from methodology, policy and model changes. Total assets declined while trading assets and lending increased; cash and central-bank balances declined.
- Combined wealth-management net-new-money growth was 2.1%. Wealth Management recorded CHF 51.1bn inflows, Wealth Management Americas CHF 6.8bn outflows, and Asset Management CHF 58.7bn inflows, including money-market flows.
Outlook, management commentary, risks and unusual items
- Strategy and targets: Management reaffirmed its focus on global wealth management and Swiss universal banking, supported by Asset Management and a focused Investment Bank. For 2018–2020, targets include Group cost/income below 75%, about 15% return on tangible equity excluding deferred tax assets, fully applied CET1 around 13% and CET1 leverage around 3.7%. Global Wealth Management targets 10–15% average annual adjusted pre-tax profit growth over the cycle and 2–4% annual net-new-money growth.
- Shareholder returns and investment: UBS intends to propose a CHF 0.65-per-share dividend for 2017, an 8% increase, subject to shareholder approval. It announced up to CHF 2bn of share repurchases over three years, including up to CHF 550m in 2018, subject to relevant approvals and conditions. Management plans technology spending of at least 10% of Group revenue and about CHF 1bn of additional technology investment over three years.
- Capital and regulation: UBS estimates final Basel III changes could add about CHF 35bn to RWA before mitigation. Other known regulatory changes and estimated growth could add about CHF 40bn to RWA and CHF 85bn to the leverage-ratio denominator over three years; management said it may build about CHF 4bn of additional fully applied CET1 capital. These are estimates subject to regulatory implementation, market conditions and mitigation actions.
- Tax and accounting: Management forecast an approximately 25% full-year 2018 tax rate, excluding future DTA remeasurement changes, and estimated the new US BEAT could add up to CHF 60m to 2018 current tax expense. IFRS 9 adoption was expected to reduce opening 2018 equity by CHF 0.6bn after tax and CET1 capital by about CHF 0.3bn, with no material capital-ratio impact. IFRS 15 was expected to have no material transition or ongoing Group effect.
- Liquidity and funding: Estimated pro forma NSFR was 105% at year-end, down from 116%; Swiss implementation was postponed pending further review. The Group’s CHF 50.9bn operating cash outflow largely reflected movements in trading assets, lending and customer deposits; UBS cautions that traditional cash-flow analysis is less informative for a bank than its liquidity and funding measures.
- Legal and conduct exposure: Litigation, regulatory, cyber, financial-crime, reputational, market, low/negative interest-rate, currency, Brexit and regulatory-capital risks remain material. Litigation, regulatory and similar-matter provisions were CHF 2.444bn at year-end, down from CHF 3.261bn. UBS said possible future losses from these matters that are more than remote substantially exceed current provisions, but an aggregate estimate is not practicable.
- Notable legal and other items: UBS agreed to a USD 543m settlement concerning certain US mortgage-backed securities claims, subject to the trustee joining the agreement. A Hong Kong regulator’s March 2018 decision imposed a HKD 119m fine and an 18-month restriction on sponsoring IPOs; UBS said it intended to appeal. After the unaudited Q4 report, provisions increased, reducing FY 2017 pre-tax profit by CHF 141m, shareholder net profit by CHF 112m and EPS by CHF 0.03. Separately, Swiss pension changes effective in 2019 were expected to produce a CHF 225m pre-tax gain in Q1 2018; UBS Group’s planned pension payment is up to CHF 720m in 2020–2022.
Most important facts for investors to verify
- Reconcile the reported CHF 1.053bn shareholder profit with the CHF 2.865bn DTA write-down and management’s adjusted, non-IFRS performance measures.
- Review the final provisions, settlement status and possible exposure in major litigation and regulatory matters; the filing says aggregate potential losses cannot be reliably quantified and exceed provisions.
- Track RWA and leverage-denominator growth, Basel III implementation and whether the projected capital build affects the dividend and buyback plans.
- Assess liquidity and funding beyond the 143% LCR, including the estimated 105% NSFR, deposit trends, debt issuance and the restrictions on moving capital among subsidiaries.
- Monitor 2018 delivery against cost, return, growth and technology targets, while accounting for the Global Wealth Management reorganization and IFRS 9/IFRS 15 changes.