Business Context and Reporting Period
This Form 6-K filing by UBS Group AG and UBS AG, dated October 28, 2016, presents the Third Quarter 2016 results. The reporting period covers the three months ended September 30, 2016. The results reflect a challenging macroeconomic environment characterized by geopolitical tensions, negative interest rates, and subdued market activity, alongside substantial litigation provisions.
Key Financial Metrics
- Net Profit: CHF 827 million attributable to shareholders.
- Adjusted Pre-Tax Profit: CHF 1.3 billion.
- Adjusted Return on Tangible Equity (ROTE): 10.1%.
- Capital Ratios: Fully applied Basel III CET1 capital ratio of 14.0%; CET1 leverage ratio of 3.45%.
- Cost Reduction: Annualized net cost reductions increased to CHF 1.5 billion.
- Net Tax Expense: CHF 49 million (benefited by a CHF 424 million increase in recognized deferred tax assets).
Segment Performance (Adjusted Pre-Tax Profit)
| Segment | Profit (CHF) | Key Highlights |
|---|---|---|
| Wealth Management | 643 million | Expenses down 6%; Net new money of CHF 9.4 billion; Net margin improved to 27%. |
| Wealth Management Americas | 367 million (USD) | Record performance; Profit up 28% year-over-year; Invested assets over USD 1.1 trillion. |
| Personal & Corporate Banking | 473 million | Best performance since 2008; Profit up 11%; Expenses at record low. |
| Asset Management | 138 million | Flat year-over-year; Performance fees nearly doubled to CHF 44 million. |
| Investment Bank | 342 million | Profit declined year-over-year due to lower client activity; ROTE of 18%. |
| Corporate Center | (654 million) | Loss driven by Non-core and Legacy Portfolio provisions of ~CHF 400 million for RMBS matters. |
Material Changes vs. Prior Period
- Profitability: Adjusted pre-tax profit of CHF 1.3 billion was delivered despite litigation provisions. Wealth Management Americas saw a 28% year-over-year profit increase, while the Investment Bank profits declined due to lower client activity and a business mix skewed toward Europe and APAC.
- Costs: Group-wide expenses were managed effectively. Wealth Management expenses fell 6%, and Personal & Corporate Banking expenses dropped 7% to record lows.
- Capital and Leverage: The leverage ratio denominator decreased by CHF 21 billion, primarily due to reduced securities financing transactions and derivatives exposures in the Investment Bank.
- Tax Assets: A significant net upward revaluation of US Deferred Tax Assets (DTAs) of CHF 681 million occurred, driven by increased profit forecasts for Wealth Management Americas.
Guidance, Outlook, and Risks
- Outlook: Management maintains a "prudently cautious" outlook due to subdued market conditions, negative interest rates, elevated litigation expenses, and pending finalization of Basel 3/4 regulations.
- Capital Returns: The priority for 2016 remains delivering a baseline dividend of 60 Rappen per share, unchanged from 2015.
- Cost Reduction Target: The Group aims for a net cost reduction of CHF 2.1 billion. Achieving this will require incurring more restructuring costs than the initially estimated CHF 3 billion due to higher-than-anticipated regulatory expenses.
- Risks: Key risks include the impact of negative interest rates (estimated cumulative drag of CHF 400 million on net interest income over 3 years), Brexit uncertainty, regulatory changes (TLAC, leverage ratios), and ongoing litigation (RMBS provisions totaled CHF 1.4 billion as of Q3).
Investor Verification Checklist
- Verify the sustainability of the Wealth Management Americas record performance amidst low transaction volumes.
- Confirm the timeline and total cost impact of the RMBS litigation provisions, which currently stand at CHF 1.4 billion.
- Monitor the realization of the CHF 2.1 billion net cost reduction target against rising regulatory expense headwinds.
- Assess the impact of negative interest rates on the banking book, particularly in Personal & Corporate Banking.
- Review the assumptions behind the CHF 681 million upward revaluation of US Deferred Tax Assets.