UBS Group AG current report, Q3 FY2015

Business Context and Reporting Period

Company: UBS Group AG and UBS AG
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter 2015 (ended June 30, 2015)
Date Filed: July 27, 2015
Context: The filing presents Q2 2015 results, highlighting a strategic transformation, successful launch of UBS Switzerland AG, and progress in reducing risk-weighted assets (RWA) and leverage ratio denominator (LRD). The bank reported strong performance across all business divisions despite macroeconomic uncertainty.

Key Financial Metrics

Metric Q2 2015 Q2 2014 1H 2015 (YTD)
Net Profit (Attributable to Shareholders) CHF 1,209 million CHF 792 million CHF 3,200 million (approx.)
Diluted EPS CHF 0.32 CHF 0.21 CHF 0.85 (approx.)
Profit Before Tax (Reported) CHF 1,759 million CHF 1,218 million CHF 3,967 million (approx.)
Adjusted Profit Before Tax CHF 1,635 million CHF 1,191 million CHF 3,903 million (approx.)
Return on Tangible Equity (Adjusted) 9.6% 7.2% 12.0% (Annualized 1H)
Basel III CET1 Ratio (Fully Applied) 14.4% 13.5% N/A
Swiss SRB Leverage Ratio (Fully Applied) 4.7% 4.2% N/A
Operating Income CHF 7,818 million CHF 7,147 million N/A
Operating Expenses CHF 6,059 million CHF 5,929 million N/A

Divisional Performance (Q2 2015 Profit Before Tax)

  • Wealth Management: CHF 769 million (Highest Q2 since 2009)
  • Wealth Management Americas: USD 231 million (Record recurring fee income)
  • Retail & Corporate: CHF 414 million (Highest Q2 since 2010)
  • Global Asset Management: CHF 134 million
  • Investment Bank: CHF 617 million (34% annualized return on attributed equity)
  • Corporate Center: Negative CHF 514 million

Material Changes vs. Prior Period

  • Profit Growth: 1H 2015 net profit increased 73% year-over-year to CHF 3.2 billion. Q2 adjusted profit before tax rose 37% year-over-year.
  • Capital Ratios: Fully applied Basel III CET1 ratio increased 70 basis points to 14.4%. Swiss SRB leverage ratio increased 10 basis points to 4.7%.
  • Balance Sheet Optimization: Significant reduction of CHF 14 billion in Non-core and Legacy Portfolio Leverage Ratio Denominator (LRD), bringing total Swiss SRB LRD down to CHF 944 billion.
  • Risk-Weighted Assets (RWA): Fully applied Basel III RWA decreased by CHF 7 billion to CHF 210 billion, driven by a CHF 4 billion reduction in supplemental operational risk RWA.
  • Wealth Management: Adjusted Net New Money (NNM) was CHF 8.4 billion, with mandate penetration rising to 26.3%.

Guidance, Outlook, and Risks

Management Commentary and Outlook

  • Capital Returns: UBS targets to pay out at least 50% of net profits, subject to maintaining a fully applied Basel III CET1 ratio of at least 13% and a post-stress ratio of at least 10%. A supplementary capital return of CHF 0.25 per share is planned for Q3 2015.
  • Deferred Tax Assets (DTA): Management expects a potential upward revaluation of US DTAs of approximately CHF 1.5 billion in Q3 2015, contingent on extending the forecast period for recognition to seven years.
  • Cost Reduction: The bank remains committed to a CHF 2.1 billion net cost reduction target. As of June 2015, CHF 0.9 billion in annualized net cost reductions had been achieved in the Corporate Center.
  • Strategic Milestones: Successful launch of UBS Switzerland AG. Plans to issue Additional Tier 1 (AT1) capital and inaugural TLAC-eligible debt in Q3 2015. Establishment of a US Intermediate Holding Company expected by July 2016.

Risks and Contingencies

  • Regulatory Changes: Uncertainty regarding FINMA approval of RWA reductions and evolving capital/liquidity requirements in Switzerland, the US, and the UK.
  • Market Conditions: Macroeconomic uncertainty, currency fluctuations (specifically the strong Swiss Franc impacting the domestic economy), and market volatility affecting trading revenues.
  • Legal and Litigation: Ongoing provisions for litigation and regulatory matters, particularly in Wealth Management Americas.
  • Operational Risks: Challenges in executing strategic plans, technology updates, and managing the Non-core and Legacy Portfolio unwind.

Key Facts for Investor Verification

  • Capital Strength: Verify the 14.4% fully applied Basel III CET1 ratio and the 4.7% Swiss SRB leverage ratio, which are among the highest for large global banks.
  • Deferred Tax Asset Revaluation: Monitor the Q3 2015 financials for the expected CHF 1.5 billion upward revaluation of US deferred tax assets and its impact on net profit.
  • Cost Reduction Progress: Track the achievement of the CHF 2.1 billion net cost reduction target against the current CHF 0.9 billion achieved in the Corporate Center.
  • Non-Core Portfolio Unwind: Assess the continued reduction of the Non-core and Legacy Portfolio LRD (currently CHF 70 billion) and the associated cost of exit.
  • Capital Return Execution: Confirm the payment of the supplementary capital return of CHF 0.25 per share in Q3 2015 and the issuance of AT1 and TLAC-eligible debt.