UBS Group AG current report, Q3 FY2015

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG, dated September 29, 2015, incorporates a presentation delivered by Group Chief Financial Officer Tom Naratil at the Bank of America Merrill Lynch Banking & Insurance Conference. The filing outlines the strategic transformation of UBS, focusing on its position as the world's largest wealth manager, capital strength under Basel III and Swiss SRB regulations, and progress in improving resolvability through legal entity restructuring.

Key Financial Metrics

  • Capital Ratios: As of June 30, 2015, the fully applied Basel III CET1 capital ratio was 14.4% (Swiss SRB) and 13.5% (BIS). The post-stress fully applied Basel III CET1 ratio exceeded 10%.
  • Leverage Ratio: The fully applied Swiss SRB leverage ratio was 4.2% as of June 30, 2015. The Leverage Ratio Denominator (LRD) was approximately CHF 949.3 billion.
  • Capital Components: CET1 capital stood at CHF 30.3 billion, and AT1 capital was CHF 3.8 billion. In August 2015, UBS issued USD 1.6 billion in AT1 instruments.
  • Wealth Management Performance: Invested assets grew at an 8% CAGR, operating income at a 7% CAGR, and profit before tax at a 14% CAGR (1H12 to 1H15). Wealth management businesses contributed 76% of operating income and 59% of profit before tax in the 1Q13-2Q15 cumulative period.
  • Cost Reduction: Corporate Center cost reductions reached CHF 0.9 billion in net annualized reductions as of June 2015, representing 64% of the CHF 1.4 billion year-end 2015 target.
  • Cash Flow and Dividends: The business model is described as highly cash-flow generative. A supplementary capital return of CHF 0.25 per share was paid on September 22, 2015.

Material Changes and Strategic Progress

  • Strategic Transformation: UBS announced the successful completion of its strategic transformation, resulting in a capital-accretive business model with reduced risk-weighted assets (RWA) and LRD.
  • Resolvability and Structure: Significant progress was made in adapting the legal entity structure, including the incorporation of UBS Group AG as a group holding company and the creation of UBS Business Solutions AG. The SESTA squeeze-out of minority shareholders in UBS AG was completed in 3Q15.
  • Regulatory Compliance: UBS met current fully applied 2019 estimated capital requirements four years early. The US Intermediate Holding Company (IHC) was incorporated and became operational.
  • Portfolio Reduction: The Non-core and Legacy Portfolio was reduced, contributing to a ~30 basis point improvement in the leverage ratio.

Guidance, Outlook, and Risks

  • Profit Growth Target: UBS targets 10-15% pre-tax profit growth for its combined wealth management businesses.
  • Capital Return Policy: The company targets a payout ratio of at least 50% of net profits, conditional on maintaining a fully applied Basel III CET1 ratio of at least 13% and a post-stress ratio of at least 10%.
  • Efficiency Initiatives: A CHF 2.1 billion cost savings program is in progress through 2017, with CHF 1.2 billion already achieved. Pricing initiatives and balance sheet optimization are key actions to maintain a 15% adjusted Return on Tangible Equity (RoTE) amidst increased leverage ratio requirements.
  • Risks and Contingencies: Forward-looking statements are subject to risks including regulatory changes (capital, liquidity, tax), market volatility, litigation liabilities, operational failures, and the ability to retain talent. Specific uncertainties include FINMA approval for RWA reductions and the impact of mandatory structural reforms.

Investor Verification Checklist

  • Verify the exact figures for Q3 2015 financial results in the subsequent quarterly report, as this filing relies on 2Q15 data and forward-looking estimates.
  • Confirm the final approval status of the US Intermediate Holding Company (IHC) and the completion of the SESTA squeeze-out procedures.
  • Monitor the progress of the CHF 2.1 billion cost savings program and the exit strategy for the Non-core and Legacy Portfolio.
  • Review the impact of the August 2015 AT1 issuance on the leverage ratio and capital adequacy in upcoming filings.
  • Assess the status of regulatory investigations and litigation provisions, which are cited as material risks to financial performance.