UBS Group AG current report, Q1 FY2016

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG, dated March 16, 2016, summarizes materials presented at a Morgan Stanley conference. The presentation reviews the bank's strategic transformation initiated in 2011, focusing on a shift toward a capital-efficient model centered on Wealth Management and Personal & Corporate Banking, supported by a streamlined Investment Bank. The reporting context covers full-year 2015 results and provides an outlook for the first quarter of 2016.

Key Financial Metrics

  • Capital Strength: Fully applied Common Equity Tier 1 (CET1) ratio of 14.5% at year-end 2015; Swiss SRB leverage ratio of 5.45% (pro forma).
  • Profitability: Investment Bank adjusted return on attributed equity averaged 21% (29% excluding litigation costs) over the past three years. Wealth Management earnings average approximately CHF 800 million per quarter.
  • Cash Flow and Returns: Generated over CHF 20 billion in capital over four years (including CET1 increase, litigation costs, and dividends). Committed to returning at least 50% of net profits to shareholders.
  • Dividends (2015): Ordinary dividend of 60 Rappen per share and a special dividend of 25 Rappen per share.
  • Cost Reduction: Corporate Center costs reduced by approximately CHF 2 billion since 2011; target of CHF 2.1 billion in net savings by end of 2017.
  • Technology Investment: Approximately CHF 2 billion invested in technology projects in 2015.
  • Asset Base: Wealth Management invested assets affected by market volatility; Net new money averaged CHF 12 billion per quarter over the past four years.

Material Changes and Performance Drivers

UBS has successfully reduced risk-weighted assets by over CHF 170 billion since November 2011. The Investment Bank's equity consumption dropped from 65% of allocated equity in 2012 to 39% in Q4 2015. In 2015, over 70% of division profits (CHF 6 billion) were generated by asset-gathering businesses (Wealth Management and Personal & Corporate Banking), which provide stable, recurring fee income. The US market remains a critical contributor, with nearly 100% of earnings falling to the bottom line due to the utilization of deferred tax assets (DTA).

Outlook, Risks, and Management Commentary

  • Q1 2016 Outlook: Management expects challenging conditions to persist. Investment Bank advisory activity has slowed year-over-year. Equity volumes are buoyant in the US but flat in Europe and declined sharply in Asia. A tough year-over-year comparison is expected due to prior-year FX revenues from the Swiss Franc peg removal and strong APAC equity performance.
  • Investment Bank Target: In the current environment, satisfactory performance is defined as the Investment Bank covering its cost of equity, which management expects to achieve comfortably in Q1.
  • Oil and Gas Exposure: Based on sensitivity analysis with oil at USD 25 per barrel through 2017, UBS estimates a credit loss expense of approximately CHF 100 million, primarily related to exploration and production lending.
  • Dividend Policy: No special dividend is anticipated for 2016 as material DTA write-ups are not expected (guided at around CHF 500 million). The focus remains on growing the ordinary dividend.
  • Regulatory Capital: To meet 2019 Swiss SRB requirements, UBS needs to build roughly CHF 3 billion in CET1 equity. The bank recently priced a USD 1.5 billion AT1 issuance.
  • Risks: Headwinds include low interest rates pressuring net interest margins, macroeconomic and political uncertainties, and potential permanent regulatory costs that may not fall away as anticipated.

Investor Verification Checklist

  • Verify the actual Q1 2016 Investment Bank performance against the "cost of equity" threshold mentioned by management.
  • Monitor the realization of the CHF 2.1 billion net cost savings target by the end of 2017 amidst rising regulatory demands.
  • Track the impact of global equity market declines on Wealth Management invested assets and fee income.
  • Confirm the extent of credit loss provisions related to Oil and Gas exposures if oil prices remain depressed.
  • Assess the progress of the CHF 3 billion CET1 capital build required for 2019 Swiss SRB compliance.