UBS Group AG current report, Q1 FY2023

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UBS Group AG: Q1 2023 Earnings Summary (Form 6-K)

Business Context and Reporting Period

This Form 6-K, dated April 26, 2023, contains the transcript of UBS Group AG's First Quarter 2023 earnings call. The reporting period covers January 1 to March 31, 2023. The filing highlights UBS's financial performance against a backdrop of significant market uncertainty and the announcement of the acquisition of Credit Suisse, a transaction expected to close in the second quarter of 2023.

Key Financial Metrics

  • Net Profit: Reported net profit was USD 1.0 billion. This figure includes a USD 665 million litigation provision related to legacy U.S. residential mortgage-backed securities (RMBS).
  • Underlying Performance: Excluding the litigation provision, underlying profit before tax was USD 2.4 billion.
  • Return on CET1: Underlying return on Common Equity Tier 1 (CET1) capital was 16.5%.
  • Cost-to-Income Ratio: Underlying cost-to-income ratio was 72.8%.
  • Revenue: Total revenue was USD 8.7 billion. Underlying revenue (ex-FX) decreased 8% year-over-year.
  • Net Interest Income (NII): NII was USD 2.2 billion, up 31% year-over-year and 3% quarter-over-quarter.
  • Operating Expenses: Reported operating expenses were USD 7.2 billion, including the litigation provision and USD 70 million in acquisition costs. Excluding these items and FX, expenses were down 1%.
  • Capital and Liquidity: CET1 capital ratio stood at 13.9%. Liquidity Coverage Ratio (LCR) was 162%, and Net Stable Funding Ratio (NSFR) was 118%.
  • Flows: Global Wealth Management (GWM) recorded USD 28 billion in net new money and USD 20 billion in net new fee-generating assets (6% annualized growth). Asset Management recorded USD 14 billion in net new money.

Material Changes vs. Prior Period

  • Profitability Impact: The reported net profit of USD 1.0 billion is significantly lower than the underlying profit of USD 2.4 billion due to the one-time USD 665 million RMBS litigation provision.
  • Revenue Mix: While asset-based and transaction fees declined due to lower market activity and equity derivatives volumes, Net Interest Income surged 31% year-over-year, driven by higher interest rates.
  • Deposit Shifts: Total deposits decreased 3% sequentially as clients repositioned balances from traditional deposits into money market funds and Treasury bills within the UBS platform. However, USD 9 billion in net new deposits were added in GWM, largely post-March 10.
  • Segment Performance:
    • Global Wealth Management: Profit before tax was USD 1.2 billion; revenue down 2% year-over-year.
    • Asset Management: Profit before tax was USD 94 million; revenue down 13% year-over-year.
    • Investment Bank: Profit before tax was USD 477 million; Global Markets revenue down 15% ex-FX.
    • Personal & Corporate Banking: Profit before tax was CHF 553 million (best quarter in 15 years excluding one-offs); revenue up 18% year-over-year.

Guidance, Outlook, and Risks

  • Credit Suisse Acquisition: UBS expects to close the acquisition in Q2 2023. The combined entity will have approximately USD 5 trillion in invested assets. Share repurchases have been temporarily suspended pending the transaction.
  • Cost Outlook: On a standalone basis, UBS expects costs (ex-litigation and FX) to increase by 2-3% year-over-year in 2023. The bank remains on track for a gross cost-saving program of USD 1.1 billion.
  • NII Outlook: For Q2 2023, NII is expected to decrease by a mid-single digit percentage versus Q1. Full-year NII is expected to be broadly in line with Q4 annualized levels.
  • Capital Returns: While committed to progressive dividends and buybacks, buybacks are suspended until the Credit Suisse deal closes. The bank aims to resume capital returns as soon as possible post-closing.
  • Risks and Contingencies:
    • Integration Risk: Significant complexity in merging operations, cultures, and systems with Credit Suisse.
    • Regulatory and Legal: Ongoing discussions with the U.S. Department of Justice regarding RMBS litigation; potential changes to capital requirements for the larger combined entity.
    • Market Conditions: Continued volatility, inflation, and geopolitical tensions (Russia-Ukraine war) impacting client sentiment and activity levels.
    • Client Retention: Risk of client attrition due to concentration limits post-merger, though management expects to regain assets from nervous clients.

Key Facts for Investor Verification

  • Verify the final terms and regulatory approval status of the Credit Suisse acquisition, including the specific scope of the "non-core" assets to be divested.
  • Monitor the resolution of the U.S. RMBS litigation and the final settlement amount, which currently sits as a USD 665 million provision.
  • Track the actual integration progress and the realization of the projected USD 8+ billion in cost synergies.
  • Observe the trajectory of deposit outflows and the stability of the Liquidity Coverage Ratio (LCR) as the combined entity integrates Credit Suisse's funding profile.
  • Confirm the timeline for the resumption of share buybacks and the revised capital return policy post-merger.