UBS Group AG current report, Q3 FY2018

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG and UBS AG, dated October 25, 2018, presents the Third Quarter 2018 results. The reporting period covers the three months ended September 30, 2018, and the nine months ended September 30, 2018. Management highlighted a strong quarter driven by the Investment Bank and Global Wealth Management, despite challenging geopolitical conditions and market volatility.

Key Financial Metrics

  • Net Profit: Q3 2018 net profit was CHF 1.2 billion (+32% YoY). Year-to-date (9M) net profit was CHF 4.0 billion (+19% YoY), the highest in a decade.
  • Profit Before Tax (PBT): Q3 reported PBT increased 37% YoY. 9M Global Wealth Management PBT was the highest in a decade.
  • Return on Equity: Adjusted return on tangible equity ex-DTAs was 15.7% for Q3 (+200 bps YoY) and 16.7% for 9M.
  • Capital Generation: 9M capital generation was CHF 4.1 billion, the strongest since Basel III implementation. This included a CHF 1.5 billion CET1 build-up, nearly CHF 2 billion accrued for dividends, and CHF 650 million in share repurchases.
  • Capital Ratios: CET1 ratio stood at 13.5%, CET1 leverage ratio at 3.8%, and Tier 1 leverage ratio at 5%. Total Loss-Absorbing Capacity (TLAC) exceeded CHF 80 billion.
  • Business Segment Performance:
    • Investment Bank: PBT up 75% YoY (44% in some contexts cited), with Americas PBT more than doubling.
    • Global Wealth Management: Reported PBT up 3% YoY; recurring net fee income reached a new high (+6%). Net new money was CHF 13.5 billion.
    • Personal & Corporate Banking: PBT was CHF 422 million (-3% YoY).
    • Asset Management: PBT was CHF 129 million, down YoY due to a strong prior-year comparison and lower performance fees.

Material Changes Versus Prior Period

  • Revenue Drivers: The Investment Bank outperformed significantly due to volatility stimulating institutional client activity, particularly in the Americas. Global Wealth Management saw a decline in transaction-based income to crisis lows due to client caution, offset by record recurring fee income and loan growth (+8%).
  • Costs and Efficiency: The Investment Bank reduced its cost/income ratio by 7 percentage points. Global Wealth Management expenses rose 4% due to technology and regulatory investments, while Personnel expenses were lower.
  • Asset Levels: Invested assets in Asset Management reached a 10-year high. Mandate penetration in Wealth Management reached a record 33.9%.
  • Currency Change: Beginning October 1, 2018, the US dollar became the functional and presentation currency, replacing the Swiss franc. Historic financials will be restated.

Guidance, Outlook, and Risks

  • Outlook: Management expects net interest income to increase by approximately USD 250 million in 2019 compared to full-year 2018. However, Q4 2018 is expected to show limited net benefit due to balance sheet repositioning costs.
  • Tax Strategy: Starting in Q4 2018, UBS will extend the recognition period for US tax-loss Deferred Tax Assets (DTAs) to reduce earnings volatility. The effective tax rate is anticipated to be around 25% in 2019, with less than half being cash tax relevant.
  • Risks and Contingencies:
    • Geopolitical tensions, trade talks, and US election concerns are weighing on markets and client sentiment.
    • Regulatory changes in Switzerland, the US, and the UK regarding capital, TLAC, and structural reform.
    • Operational risks including cyberattacks, fraud, and litigation.
    • Uncertainty regarding the UK exit from the EU (Brexit).
  • Unusual Items: Q3 results were adjusted for CHF 120 million in restructuring expenses and CHF 55 million in gains on asset sales.

Investor Verification Checklist

  • Verify the impact of the currency change from Swiss Francs to US Dollars on future comparability and restated historical data.
  • Confirm the sustainability of the Investment Bank's 75% PBT growth given the reliance on market volatility.
  • Monitor the execution of the new DTA recognition approach and its effect on Q4 2018 and 2019 earnings volatility.
  • Assess the trajectory of transaction-based income in Wealth Management as geopolitical tensions persist.
  • Review the specific details of the CHF 650 million share repurchase program and future capital return plans.