UBS Group AG: 2018 Pillar 3 Report Summary
Business Context and Reporting Period
This Form 6-K filing contains the Basel III Pillar 3 report for UBS Group AG and significant regulated subsidiaries for the period ended December 31, 2018. The report details regulatory capital, risk-weighted assets (RWA), leverage ratios, and liquidity coverage. A key accounting change effective October 2018 was the shift of the presentation currency from Swiss Francs (CHF) to US Dollars (USD). Additionally, UBS adopted IFRS 9 effective January 1, 2018, and opted to phase in the effects of Expected Credit Loss (ECL) on CET1 capital over a five-year transitional period starting December 31, 2018.
Key Financial Metrics (UBS Group AG Consolidated)
| Metric | Value (USD Billion) | Ratio / % |
|---|---|---|
| Common Equity Tier 1 (CET1) Capital | 34.1 | 12.94% |
| Total Risk-Weighted Assets (RWA) | 263.7 | - |
| Basel III Leverage Ratio | Exposure: 904.6 | 5.12% |
| Liquidity Coverage Ratio (LCR) | HQLA: 173.4 / Outflow: 127.4 | 136% |
| Total Capital Ratio | 53.0 | 20.09% |
Material Changes vs. Prior Period
- RWA Increase: Total RWA increased by USD 6.7 billion to USD 263.7 billion. This was primarily driven by an USD 8.3 billion increase in Market Risk RWA (due to higher average regulatory and stressed VaR levels in the Investment Bank) and a USD 2.7 billion increase in Credit Risk RWA.
- Offsetting Decreases: The RWA increase was partially offset by a USD 3.4 billion decrease in Operational Risk RWA and a USD 1.1 billion decrease in Counterparty Credit Risk RWA.
- CET1 Capital: CET1 capital decreased by USD 0.7 billion to USD 34.1 billion, mainly reflecting accruals of capital returns to shareholders.
- LCR Improvement: The Liquidity Coverage Ratio increased by 1 percentage point to 136%, driven by lower net cash outflows from secured financing transactions, despite a decrease in High-Quality Liquid Assets (HQLA).
Guidance, Outlook, and Risks
- Regulatory Frameworks: UBS is subject to the revised Basel III securitization framework (effective Jan 1, 2018) and the revised Pillar 3 disclosure requirements. The bank is classified as a Global Systemically Important Bank (G-SIB) with a 1.0% additional CET1 buffer requirement (fully effective Jan 1, 2019), though Swiss SRB requirements exceed this.
- Model Updates: Significant RWA movements in Q4 2018 were driven by model updates, including revised models for Swiss residential mortgages and income-producing real estate, as well as a new LGD model for unsecured financing.
- Market Volatility: The increase in Market Risk RWA was attributed to significant market volatility in the fourth quarter, particularly in the Equities business.
- IFRS 9 Transition: The implementation of IFRS 9 resulted in a reduction of CET1 capital of approximately USD 0.3 billion and an increase in RWA of approximately USD 0.7 billion at adoption. The phased-in approach for ECL effects on CET1 had no material effect as of year-end 2018.
Key Facts for Investor Verification
- Currency Translation: Verify that all comparative figures have been restated to USD using spot rates, as the presentation currency changed from CHF in October 2018.
- Market Risk Sensitivity: Monitor the volatility in Market Risk RWA, which saw an 8.3 billion increase in Q4, driven by VaR and Stressed VaR levels.
- Capital Buffers: Confirm that the CET1 ratio of 12.94% comfortably exceeds the total minimum requirement (including G-SIB and countercyclical buffers) of approximately 5.65% (8.44% available after meeting minimums).
- Subsidiary Capital: Review the standalone capital positions of UBS AG (CET1: 16.87%) and UBS Switzerland AG (CET1: 10.69%) to ensure compliance with local Swiss SRB requirements.
- LCR Composition: Note that the LCR of 136% is above the 110% minimum, but HQLA levels decreased due to lower average cash balances.