Business Context and Reporting Period
This Form 6-K filing contains the Second Quarter 2020 Report for UBS Group AG, covering the period ended June 30, 2020. The reporting period was significantly impacted by the global COVID-19 pandemic, which necessitated widespread remote work for approximately 90,000 employees and required the bank to support clients through government-backed lending programs, particularly in Switzerland. The firm maintained operational continuity and demonstrated resilience despite market turbulence and economic uncertainty.
Key Financial Metrics
| Metric (USD Million) | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Operating Income | 7,403 | 7,532 | 15,337 | 14,750 |
| Operating Expenses | 5,821 | 5,773 | 11,747 | 11,445 |
| Operating Profit Before Tax | 1,582 | 1,759 | 3,591 | 3,305 |
| Net Profit Attributable to Shareholders | 1,232 | 1,392 | 2,827 | 2,533 |
| Diluted EPS (USD) | 0.33 | 0.37 | 0.76 | 0.67 |
| Total Assets | 1,063,838 | 968,728 | 1,063,838 | 968,728 |
| Equity Attributable to Shareholders | 57,035 | 53,180 | 57,035 | 53,180 |
| Common Equity Tier 1 (CET1) Capital | 38,146 | 34,948 | 38,146 | 34,948 |
| Risk-Weighted Assets (RWA) | 286,436 | 262,135 | 286,436 | 262,135 |
| CET1 Capital Ratio | 13.3% | 13.3% | 13.3% | 13.3% |
| Liquidity Coverage Ratio (LCR) | 155% | 145% | 155% | 145% |
Material Changes Versus Prior Period
- Profitability: Net profit attributable to shareholders decreased by 11.5% year-over-year in Q2 2020 to USD 1.232 billion, primarily due to higher credit loss expenses and lower operating income. However, year-to-date net profit increased by 11.6% to USD 2.827 billion.
- Income Drivers: Operating income declined 2% year-over-year in Q2. This was driven by a USD 260 million increase in net credit loss expenses and a USD 163 million decrease in net fee and commission income. These were partially offset by a USD 359 million increase in net interest income and other net income from financial instruments.
- Expenses: Operating expenses increased slightly by 1% to USD 5.821 billion, driven by higher personnel expenses (including variable compensation accruals) but offset by lower general and administrative expenses due to reduced travel and marketing costs.
- Credit Losses: Total net credit loss expenses were USD 272 million in Q2 2020, a significant increase from USD 12 million in Q2 2019. This reflects updated forward-looking macroeconomic scenarios regarding the pandemic's impact on GDP and unemployment.
- Capital Position: CET1 capital increased by USD 1.5 billion to USD 38.1 billion, and the CET1 capital ratio rose to 13.3% from 12.8% in Q1 2020, reflecting strong capital generation despite the economic environment.
Guidance, Outlook, and Risks
- Outlook: Management expects elevated credit loss expenses to persist in the second half of 2020, though at lower levels than the first half. The timing and path of economic recovery remain uncertain due to the pandemic and geopolitical tensions.
- Capital Distributions: UBS has temporarily suspended share repurchases. While the firm intends to continue paying out excess capital, the mix between cash dividends and share repurchases is under review. Share repurchases may resume in the fourth quarter depending on business development and the outlook.
- Dividends: The first installment of the 2019 dividend (USD 0.365 per share) was paid in May 2020. The second installment is expected in Q4 2020, subject to shareholder approval at an Extraordinary General Meeting in November 2020.
- Regulatory Environment: Regulators in the US, UK, and EU have implemented measures restricting capital distributions and share buybacks to maintain resilience. No such measures are currently under official consideration in Switzerland.
- Key Risks:
- Credit Risk: Continued economic disruption from COVID-19 poses risks to loan portfolios, particularly in sectors like tourism, retail, and energy.
- Operational Risk: Remote working arrangements have increased cybersecurity and conduct risks, though the firm reports no significant cyber incidents in Q2.
- Legal and Regulatory: Significant ongoing litigation and regulatory matters exist, including cross-border wealth management inquiries, RMBS claims, and benchmark rate investigations. The firm estimates a potential capital loss of USD 4.3 billion over a 12-month horizon related to these operational risks.
Important Facts for Investor Verification
- Credit Loss Trajectory: Verify the sustainability of credit loss provisions in H2 2020 as economic forecasts evolve.
- Capital Return Policy: Monitor the decision on the second 2019 dividend installment and the potential resumption of share buybacks in Q4 2020.
- Disposal of UBS Fondcenter: Confirm the closing of the majority stake sale to Clearstream in Q3 2020, which is expected to generate a post-tax gain of approximately USD 600 million.
- Regulatory Capital Exemptions: Note the temporary FINMA exemption regarding central bank sight deposits in the leverage ratio denominator, which expires January 1, 2021.
- Legal Provisions: Review the specific provisions held for major litigation matters, such as the French tax fraud case (provision of EUR 450 million) and RMBS claims, as outcomes remain uncertain.