UBS Group AG current report, Q2 FY2018

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG, dated July 27, 2018, provides standalone interim financial information for the half-year ended June 30, 2018. The report covers three distinct legal entities: UBS Group AG (the holding company), UBS Group Funding (Switzerland) AG (a funding vehicle), and UBS Switzerland AG (the primary Swiss banking subsidiary). The financial statements are prepared in accordance with Swiss Law on Accounting and Financial Reporting and are unaudited.

Key Financial Metrics

UBS Group AG (Holding Company)

  • Operating Income: CHF 3,320 million (H1 2018) vs. CHF 318 million (H1 2017).
  • Net Profit: CHF 3,105 million (H1 2018) vs. a loss of CHF 29 million (H1 2017).
  • Total Assets: CHF 44,829 million (June 30, 2018) vs. CHF 52,998 million (Dec 31, 2017).
  • Total Liabilities: CHF 5,745 million (June 30, 2018) vs. CHF 14,704 million (Dec 31, 2017).
  • Equity: CHF 39,084 million (June 30, 2018) vs. CHF 38,294 million (Dec 31, 2017).

UBS Group Funding (Switzerland) AG

  • Net Profit: CHF 1 million (H1 2018) vs. CHF 0 million (H1 2017).
  • Total Assets: CHF 40,767 million (June 30, 2018) vs. CHF 28,196 million (Dec 31, 2017).
  • Total Liabilities: CHF 40,756 million (June 30, 2018) vs. CHF 28,183 million (Dec 31, 2017).

UBS Switzerland AG

  • Total Operating Income: CHF 4,151 million (H1 2018) vs. CHF 4,230 million (H1 2017).
  • Net Profit: CHF 717 million (H1 2018) vs. CHF 838 million (H1 2017).
  • Total Assets: CHF 290,331 million (June 30, 2018) vs. CHF 290,310 million (Dec 31, 2017).
  • Total Liabilities: CHF 277,180 million (June 30, 2018) vs. CHF 275,525 million (Dec 31, 2017).
  • Equity: CHF 13,151 million (June 30, 2018) vs. CHF 14,785 million (Dec 31, 2017).

Material Changes vs. Prior Period

  • UBS Group AG Profitability: The holding company reported a significant turnaround from a net loss of CHF 29 million in H1 2017 to a net profit of CHF 3,105 million in H1 2018. This is primarily driven by dividend income of CHF 3,065 million received from UBS AG, compared to zero in the prior period.
  • Capital Structure Restructuring: In May 2018, outstanding perpetual capital notes qualifying as Basel III AT1 capital were transferred from UBS Group AG to UBS Group Funding (Switzerland) AG with retrospective effect to January 1, 2018. Consequently, UBS Group AG's long-term liabilities decreased significantly (from CHF 11,193 million to CHF 2,875 million), while UBS Group Funding's liabilities increased substantially.
  • UBS Switzerland AG Performance: Net profit declined by approximately 14% year-over-year (CHF 717 million vs. CHF 838 million). Operating expenses increased to CHF 3,232 million from CHF 3,173 million, driven largely by amortization of goodwill and intangible assets (CHF 525 million).
  • Dividend Payments: UBS Group AG paid an ordinary cash dividend of CHF 2,444 million from its capital contribution reserve. UBS Switzerland AG paid a cash dividend of CHF 2,351 million to UBS AG.

Outlook, Risks, and Contingencies

  • Joint and Several Liability: UBS Switzerland AG retains joint liability for approximately CHF 33 billion of contractual obligations of UBS AG existing as of the June 14, 2015 asset transfer date. This amount decreased from CHF 69 billion at year-end 2017 due to the expiration of demand obligations. Management assesses the probability of an outflow under this liability as remote.
  • Accounting Methodology Change: As of January 1, 2018, UBS Switzerland AG enhanced its valuation methodology for Swiss mortgage loans to include forward-looking macroeconomic information. This resulted in an additional credit loss expense of approximately CHF 21 million.
  • Regulatory Risks: The filing notes that under the Swiss Banking Act and FINMA regulations, authorities may modify, extinguish, or convert liabilities to common equity in the event of a resolution or insolvency.
  • Guidance: The filing text does not provide specific forward-looking financial guidance or management commentary on future earnings targets beyond the historical data presented.

Key Facts for Investor Verification

  • Verify the impact of the AT1 capital note transfer on the consolidated capital ratios of the UBS Group, as the standalone holding company balance sheet no longer reflects these instruments.
  • Confirm the sustainability of the dividend income (CHF 3,065 million) driving UBS Group AG's profitability, as this depends on the performance and dividend policy of the subsidiary UBS AG.
  • Review the CHF 33 billion joint and several liability exposure of UBS Switzerland AG and the specific conditions under which FINMA could trigger liability conversion.
  • Assess the impact of the new forward-looking credit loss methodology on future provisioning for UBS Switzerland AG's mortgage portfolio.
  • Check the full consolidated Q2 2018 report referenced in the filing for a complete view of the group's performance, as this filing only presents standalone legal entity data.