UBS Group AG annual report, Q4 FY2019

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UBS Group AG — 2019 Form 20-F summary

Business context and reporting period. This is UBS Group AG and UBS AG’s annual report for the fiscal year ended December 31, 2019, not a standalone fourth-quarter filing. The financial statements are prepared under IFRS and presented in U.S. dollars. Management described 2019 as a year of slower growth, intensified low- and negative-rate headwinds, subdued volatility, and geopolitical uncertainty. It said the Group had its best fourth quarter since 2010, but the supplied filing text does not provide clear standalone Q4 financial results.

Key financial metrics

Metric20192018
Operating incomeUSD 28.9bnUSD 30.2bn
Operating expensesUSD 23.3bnUSD 24.2bn
Profit before taxUSD 5.6bnUSD 6.0bn
Net profit attributable to shareholdersUSD 4.3bnUSD 4.5bn
Diluted earnings per shareUSD 1.14USD 1.18
Cost/income ratio80.5%79.9%
Adjusted cost/income ratio78.9%79.5%
Return on CET1 capital12.4%13.1%

Operating income fell 4% and profit before tax fell 7%; shareholder net profit declined 5%. Lower income reflected declines in net interest income and net fee and commission income. Reported expenses fell 4%, chiefly due to lower general and administrative costs, including lower litigation-related expenses; higher depreciation and impairment partly offset the reduction. The 2019 effective tax rate was 22.7%, versus 24.5% in 2018.

Cash flow, balance sheet, debt and liquidity

  • Cash and cash equivalents were USD 119.9bn at year-end, down USD 6.2bn. Operating cash flow was positive USD 19.7bn; investing cash flow was negative USD 1.6bn; financing cash flow was negative USD 25.6bn.
  • Total assets were USD 972.2bn, up from USD 958.5bn. Total liabilities were USD 917.5bn and total equity was USD 54.7bn.
  • Customer deposits rose 7% to USD 448.3bn; long-term debt issued increased to USD 155.5bn. Short-term borrowings fell 43% to USD 28.4bn. Customer deposits were 137% of outstanding loan balances.
  • Average fourth-quarter liquidity coverage ratio (LCR) was 134%, compared with 136% a year earlier, above the 110% Group minimum communicated by FINMA. Estimated pro forma net stable funding ratio was 111%, versus 110%.
  • CET1 capital was USD 35.6bn; the CET1 ratio was 13.7%, up from 12.9%, and the CET1 leverage ratio was 3.90%, up from 3.77%. Total loss-absorbing capacity (TLAC) was USD 89.6bn, or 34.6% of RWA and 9.8% of the leverage ratio denominator.

Business performance and changes versus 2018

  • Global Wealth Management: pretax profit rose 4% to USD 3.4bn; invested assets increased 17% to USD 2.6tn, supported by markets and USD 31.6bn of net new money. Net interest income and recurring fees declined amid margin compression and client shifts to lower-margin products. Net new money growth of 1.4% was below the prior 2–4% target range.
  • Personal & Corporate Banking: reported pretax profit fell 19% to USD 1.4bn, largely because 2018 included a material gain on the SIX investment. Adjusted pretax profit rose 3%. Net interest margin was 150 basis points, down from 153.
  • Asset Management: pretax profit rose 25% to USD 532m, with performance fees doubling to USD 160m. Invested assets grew 16% to USD 903bn, while net new money declined to USD 17.8bn from USD 32.2bn.
  • Investment Bank: pretax profit fell 47% to USD 784m, or 37% on an adjusted basis, as operating income declined 10%. A USD 110m goodwill impairment was recorded; Investment Bank goodwill was reduced to zero.
  • Invested assets for Global Wealth Management and Asset Management benefited from market appreciation. Group RWA declined USD 4.5bn to USD 259.2bn, while the leverage ratio denominator increased USD 6.7bn to USD 911.3bn.

Outlook, management commentary and material risks

  • For 2020–2022, UBS set reported targets of 12–15% return on CET1 capital, a 75–78% cost/income ratio with positive operating leverage, and 10–15% pretax profit growth in Global Wealth Management. Capital guidance was approximately 13% CET1 and 3.7% CET1 leverage. The Investment Bank is expected to use up to one-third of Group RWA and leverage resources.
  • Management aimed to keep operating costs flat in 2020 while growing revenue and funding USD 1bn of regulatory and efficiency investments. It expected a 2020 tax rate of approximately 25%, excluding potential deferred-tax-asset reassessments.
  • UBS proposed a 2019 dividend of USD 0.73 per share, up 6%, and reported USD 806m of 2019 share repurchases. It expected to repurchase about USD 450m in the first half of 2020 to complete its existing CHF 2bn program, then assess further plans. Its stated policy was to increase the ordinary dividend by USD 0.01 per share annually.
  • Management’s early-2020 outlook anticipated continued sub-trend global growth and persistent low rates. COVID-19 was identified as an emerging uncertainty with potential adverse effects on activity, markets, credit risk, and operational resilience; its full-year impact was unclear.
  • The French cross-border case remained a major contingency. UBS appealed a first-instance judgment imposing EUR 3.7bn in fines and EUR 800m in civil damages; the judgment was suspended during appeal. The provision was EUR 450m (USD 505m), and an appeal trial was scheduled for June 2020. UBS said actual penalties and damages could exceed the provision. More broadly, it said aggregate possible future losses from litigation and similar matters that are more than remote substantially exceed current provisions, but a total estimate was not practicable.
  • Other key risks include low or negative interest rates, economic and market deterioration, credit and real-estate exposure, regulatory and capital changes, Brexit-related disruption, cyber and operational failures, financial-crime controls, litigation, and UBS’s ability to execute cost, technology, growth, and resolvability plans. Swiss regulatory changes were expected to increase capital and funding demands; the Swiss NSFR was intended to take effect by mid-2021.
  • IFRS 16 adoption increased assets and liabilities by USD 3.5bn and reduced 2019 pretax profit by approximately USD 60m. The Group also changed Corporate Center allocations and segment presentation, restating prior-period comparatives. In January 2020, UBS announced a proposed sale of a 51.2% stake in UBS Fondcenter, expected to close in the second half of 2020, with an expected post-tax gain of approximately USD 600m.

Important facts for investors to verify

  • Consult UBS’s separate fourth-quarter 2019 report for Q4-only revenue, profit, cash flow, and segment results; this 20-F reports full-year figures.
  • Track the French appeal outcome, final costs, and any change to the EUR 450m provision; review other legal provisions and contingencies.
  • Verify capital and liquidity ratios against applicable regulatory requirements and monitor the effects of new Swiss and Basel rules.
  • Assess whether wealth-management growth, net new money, margin stabilization, cost efficiency, and positive operating leverage meet management’s 2020–2022 targets.
  • Check approval and payment of the proposed USD 0.73 dividend, completion of the existing repurchase program, and any subsequent capital-return decisions.
  • Review COVID-19 and broader market impacts, including credit quality and client activity, and distinguish reported results from management’s adjusted measures.