UBS Group AG: Fourth Quarter 2016 Financial Summary
Business Context and Reporting Period
This Form 6-K reports the Fourth Quarter 2016 results for UBS Group AG and UBS AG, covering the period ended December 31, 2016. The filing includes unaudited interim consolidated financial information. Key strategic developments during the period included the merger of various European subsidiaries into a new legal entity, UBS Europe SE, effective January 1, 2017, and the commencement of automatic exchange of tax information between Switzerland and EU member states.
Key Financial Metrics
| Metric (CHF Million) | Q4 2016 | Q4 2015 | Full Year 2016 | Full Year 2015 |
|---|---|---|---|---|
| Operating Income | 7,055 | 6,775 | 28,320 | 30,605 |
| Operating Expenses | 6,206 | 6,541 | 24,128 | 25,116 |
| Operating Profit Before Tax | 848 | 234 | 4,192 | 5,489 |
| Net Profit Attributable to Shareholders | 738 | 949 | 3,306 | 6,203 |
| Diluted EPS (CHF) | 0.19 | 0.25 | 0.86 | 1.64 |
| Return on Tangible Equity (RoTE) | 6.5% | 8.1% | 7.2% | 13.7% |
| Cost/Income Ratio | 87.7% | 95.7% | 85.1% | 81.8% |
| Common Equity Tier 1 (CET1) Ratio (Fully Applied) | 13.8% | 14.5% | 13.8% | 14.5% |
| Liquidity Coverage Ratio (LCR) | 132% | 124% | 132% | 124% |
Material Changes vs. Prior Period
- Profitability: Q4 2016 operating profit before tax increased significantly to CHF 848 million from CHF 234 million in Q4 2015, driven by a CHF 335 million reduction in operating expenses. However, full-year 2016 net profit attributable to shareholders declined 46.7% to CHF 3.3 billion compared to CHF 6.2 billion in 2015, largely due to a one-time tax benefit in 2015 and higher tax expenses in 2016.
- Revenue: Total operating income rose 4% in Q4 2016 to CHF 7.1 billion. This was supported by a CHF 250 million increase in "Other Income" (including gains on asset sales) and higher net interest and trading income. Net fee and commission income declined slightly due to lower underwriting fees.
- Expenses: Operating expenses decreased 5% in Q4 2016. The reduction was primarily due to CHF 203 million lower provisions for litigation, regulatory, and similar matters, and lower general and administrative expenses. Personnel expenses increased slightly due to variable compensation accruals.
- Capital and Risk: The fully applied CET1 capital ratio decreased 0.2 percentage points to 13.8% due to a CHF 6 billion increase in risk-weighted assets (RWA), primarily driven by market risk. The Liquidity Coverage Ratio improved to 132%, well above the 110% regulatory minimum.
Guidance, Outlook, and Risks
- Dividend: The Board intends to propose a dividend of CHF 0.60 per share for the 2016 financial year, payable in May 2017.
- Cost Savings: UBS achieved CHF 1.6 billion in annualized net cost savings as of year-end 2016 and remains on track to meet its CHF 2.1 billion target by the end of 2017.
- Outlook: Management notes that while macroeconomic uncertainty and geopolitical tensions persist, investor confidence is improving, particularly in the US. Negative interest rates in Switzerland and the Eurozone remain a headwind for net interest margins, though this may be offset by higher US dollar rates. Regulatory changes (Basel III, MREL, TLAC) are expected to increase capital requirements and costs.
- Risks and Contingencies:
- Litigation: Significant provisions (CHF 3.2 billion) exist for litigation, regulatory, and similar matters. Key areas include cross-border wealth management tax inquiries, residential mortgage-backed securities (RMBS) claims, Madoff-related disputes, Puerto Rico municipal bond issues, and foreign exchange/LIBOR benchmark manipulation investigations.
- Regulatory: Ongoing investigations by authorities in the US, UK, Switzerland, and elsewhere regarding FX, LIBOR, and benchmark rates. The US DOJ terminated a Non-Prosecution Agreement (NPA) in 2015, leading to a guilty plea and a USD 203 million fine in January 2017.
- Operational: Risks related to cyber security, financial crime, and conduct remain elevated.
Key Facts for Investor Verification
- Adjusted vs. Reported Results: Verify the distinction between reported and adjusted results. Adjusted Q4 2016 profit before tax was CHF 1.1 billion, excluding CHF 372 million in restructuring expenses and other non-recurring items.
- Tax Volatility: Confirm the impact of tax rate changes and deferred tax asset revaluations, which caused a swing from a CHF 715 million tax benefit in Q4 2015 to a CHF 109 million expense in Q4 2016.
- Regulatory Capital Requirements: Monitor the phase-in of Swiss SRB (Systemically Relevant Bank) requirements and the impact of new TLAC (Total Loss-Absorbing Capacity) and MREL (Minimum Requirement for Own Funds and Eligible Liabilities) rules on future capital buffers.
- Legal Provisions: Review the specific details of the CHF 3.2 billion provision for litigation and regulatory matters, noting that the ultimate outflow could be substantially greater than the recognized provision.
- Equity Attribution Framework: Note the revision to the equity attribution framework effective January 1, 2017, which changes how tangible equity is allocated to business divisions.