UBS Group AG: Third Quarter 2019 Results Summary
Business Context and Reporting Period
This Form 6-K filing, dated October 22, 2019, presents the Third Quarter 2019 results for UBS Group AG and UBS AG. The reporting period covers the three months ended September 30, 2019. The results were delivered against a backdrop of challenging global market conditions, including lingering questions over GDP growth, geopolitical tensions, and persistently low or negative interest rates.
Key Financial Metrics
- Net Profit: USD 1,049 million for the quarter.
- Return on CET1 Capital: 12.1% for the quarter; 13.8% for the first nine months of 2019.
- Global Wealth Management (GWM):
- Net inflows: USD 16 billion for the quarter.
- Total Invested Assets: USD 2.5 trillion.
- Operating income increased 1% year-over-year (YoY); Pre-tax profit (PBT) down 2% YoY (up 2% excluding litigation).
- Transaction-based income increased 14% YoY.
- Personal & Corporate Banking (P&C):
- PBT: CHF 360 million (down 10% YoY), driven by higher credit loss expenses and lower net interest income (NII).
- Net new business volume growth: 3.1% annualized for the quarter.
- Cost-to-income ratio: 59%.
- Asset Management:
- PBT: USD 135 million (up 6% YoY).
- Net inflows: USD 33 billion for the quarter.
- Invested assets reached the highest dollar level in over 15 years.
- Investment Bank (IB):
- Return on attributed equity: 6.6%.
- Costs increased 6% YoY.
- Revenues declined due to unfavorable market conditions and geographic mix (heavy weighting to EMEA and APAC).
- Capital and Liquidity:
- Tangible equity rose by USD 3 billion, largely due to a USD 2 billion recognition of a Swiss pension plan surplus.
- CET1 capital remained relatively flat at USD 35 billion.
- Share buybacks: USD 600 million executed year-to-date; intention to continue up to USD 1 billion for the full year.
Material Changes vs. Prior Period
- Profitability: The Group delivered over USD 1 billion in net profit despite mixed market conditions. GWM and Asset Management showed resilience with profit growth or stability, while the Investment Bank underperformed due to market headwinds and tough comparisons to the prior year.
- Costs: Group-wide costs decreased 3% year-to-date. However, Q3 saw specific cost increases in GWM (litigation and strategic investments) and the IB (technology and regulatory expenses).
- Interest Rates: Net interest income faced headwinds from negative rates. Management noted that a 25 basis point Fed rate cut would reduce NII by approximately USD 60 million annually.
- Restructuring: Management announced an IB reorganization expected to generate USD 90 million in net cost savings, with approximately USD 100 million in restructuring expenses anticipated in Q4.
Guidance, Outlook, and Risks
- Strategic Actions: UBS is implementing actions to evolve the Investment Bank business model, focusing on efficiency and better alignment with client needs. The bank is also optimizing its deposit base by sharing the burden of negative rates with clients (e.g., charging for euro deposits above CHF 500k and Swiss franc deposits above CHF 2m).
- Outlook: Management expects an uptick in adjusted costs in Q4 (excluding litigation) of around USD 200 million sequentially, driven by seasonality and regulatory expenses. A full update on targets and the rolling 3-year plan is expected in January 2020.
- Risks and Contingencies:
- Market Conditions: Persistent low/negative interest rates and geopolitical tensions.
- Regulatory: Ongoing investments in AML controls, Brexit-related setup costs, and LIBOR migration.
- Litigation: Significant provisions in GWM (Americas) and ongoing uncertainty regarding the French tax case (next update expected November 4, 2019).
- Capital Returns: The bank intends to maintain its dividend policy (mid-single digit growth) and execute share buybacks up to USD 1 billion for 2019.
Key Facts for Investor Verification
- Verify the impact of the announced Investment Bank reorganization on Q4 restructuring expenses (estimated at USD 100 million) and the realization of the targeted USD 90 million in annual cost savings.
- Monitor the effectiveness of the new deposit charging policies (Euro and Swiss Franc) in mitigating negative rate impacts on Net Interest Income without triggering significant client outflows.
- Track the trajectory of the Investment Bank's Return on Attributed Equity (currently 6.6%) against the management's target of exceeding 15%.
- Confirm the status and potential financial impact of the French tax case litigation, with the next update scheduled for November 4, 2019.
- Assess the sustainability of Global Wealth Management's transaction-based income growth (up 14% YoY) in a low-volatility environment.