Business Context and Reporting Period
This Form 6-K filing covers the First Quarter 2019 Report of UBS Group AG, with a reporting period ending March 31, 2019. Effective October 1, 2018, the Group changed its presentation currency from Swiss francs to US dollars. The report includes significant regulatory developments, including the adoption of IFRS 16 (Leases) and the completion of the cross-border merger of UBS Limited into UBS Europe SE to prepare for the UK's withdrawal from the EU.
Key Financial Metrics
| Metric (USD Million) | Q1 2019 | Q4 2018 | Q1 2018 |
|---|---|---|---|
| Operating Income | 7,218 | 6,972 | 8,168 |
| Operating Expenses | 5,672 | 6,492 | 6,069 |
| Operating Profit Before Tax | 1,546 | 481 | 2,100 |
| Net Profit Attributable to Shareholders | 1,141 | 315 | 1,566 |
| Diluted EPS (USD) | 0.30 | 0.08 | 0.41 |
| Return on Equity (%) | 8.6 | 2.4 | 11.8 |
| Cost/Income Ratio (%) | 78.4 | 92.4 | 74.1 |
| Common Equity Tier 1 (CET1) Ratio (%) | 13.0 | 12.9 | 13.1 |
| Liquidity Coverage Ratio (%) | 153 | 136 | 136 |
Material Changes vs. Prior Comparable Period
- Profitability: Net profit attributable to shareholders decreased by 27% year-over-year to USD 1.141 billion, primarily due to a 12% decline in operating income. Operating profit before tax fell 26% to USD 1.546 billion.
- Revenue Drivers: Total operating income dropped USD 950 million. This was driven by a USD 612 million decrease in net fee and commission income (due to lower client activity and market levels) and a USD 350 million decrease in net interest income and fair value changes.
- Expense Management: Operating expenses decreased by 7% (USD 397 million) year-over-year, largely due to lower general and administrative expenses and personnel costs, partially offset by higher depreciation from IFRS 16 adoption.
- Capital and Liquidity: The CET1 capital ratio increased slightly to 13.0%. The Liquidity Coverage Ratio (LCR) improved significantly to 153%, well above the 110% minimum requirement.
Guidance, Outlook, and Risks
- Outlook: Management notes a synchronized global slowdown but expects economic growth and markets to recover and stabilize. Higher invested assets are expected to drive recurring revenue growth in Global Wealth Management and Asset Management.
- Regulatory Developments:
- IFRS 16: Adoption resulted in a USD 3.5 billion increase in assets and liabilities, with a net decrease in operating profit of USD 12 million for the quarter.
- Swiss Capital Requirements: Revised gone concern capital requirements are expected to increase the gone concern leverage ratio by approximately 100 basis points when fully phased in by 2024.
- US Regulation: Proposed tailoring of capital and liquidity requirements for foreign banks may categorize UBS as a Category III firm, subjecting it to specific liquidity and capital plan assessments.
- Risks and Contingencies:
- Legal Matters: Significant provisions exist for cross-border wealth management inquiries (notably a USD 516 million provision for the French tax fraud case), RMBS-related litigation, and benchmark rate manipulation investigations.
- Operational Risk: Operational risk RWA increased by USD 2.8 billion due to model updates reflecting litigation developments.
Key Facts for Investor Verification
- Verify the impact of the French tax fraud verdict (EUR 3.7 billion fine) on future provisions, as UBS has appealed the decision.
- Monitor the execution of cost reduction initiatives to maintain the adjusted cost/income ratio near 78% amidst revenue headwinds.
- Track the progression of the UK business transfer and the integration of UBS Europe SE as a significant regulated subsidiary.
- Assess the sustainability of the Liquidity Coverage Ratio (153%) given the high levels of high-quality liquid assets.
- Review the reconciliation of IFRS equity to Swiss SRB CET1 capital to understand the impact of regulatory deductions on capital ratios.