UBS Group AG current report, Q4 FY2015

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG and UBS AG, dated November 3, 2015, presents the Third Quarter 2015 results. The reporting period covers the three months ended September 30, 2015. The results were delivered against a backdrop of significant macroeconomic challenges, including market volatility driven by events in China and Federal Reserve rate decisions, which led to post-crisis lows in client activity, particularly in Wealth Management.

Key Financial Metrics

  • Net Profit: CHF 2.1 billion attributable to shareholders, driven by a net tax benefit of CHF 1.3 billion (largely from deferred tax asset revaluation) and a litigation provision of CHF 592 million.
  • Adjusted Profit Before Tax: CHF 1.0 billion.
  • Return on Tangible Equity (RoTE): 19.5% for the quarter; 14.5% year-to-date (adjusted).
  • Tangible Book Value Per Share: CHF 12.7, a 5.4% increase quarter-on-quarter.
  • Capital Ratios: Basel 3 fully applied CET1 ratio of 14.3%; Swiss SRB leverage ratio of 5.0%; BIS fully applied leverage ratio of 3.9%.
  • Cost Reduction: Annualized net cost reductions of CHF 1.0 billion achieved to date.
  • Divisional Performance (Pre-Tax Profit):
    • Wealth Management: CHF 698 million.
    • Wealth Management Americas: USD 287 million.
    • Retail & Corporate: CHF 428 million.
    • Asset Management: CHF 137 million.
    • Investment Bank: CHF 614 million.

Material Changes vs. Prior Period

  • Revenue Drivers: Recurring income in Wealth Management increased due to higher net interest income (up 6% to CHF 600 million), while transaction-based income fell to post-crisis lows due to market volatility.
  • Investment Bank Growth: The Investment Bank reported its best third quarter since 2010. Revenues in FX, Rates, and Credit rose 37% year-over-year, and Equities delivered its best third quarter since 2010.
  • Cost Efficiency: Investment Bank operating expenses decreased 54% year-over-year, primarily due to the absence of substantial litigation charges in the prior period. Excluding these charges, expenses were down 2%.
  • Asset Flows: Asset Management saw net new money outflows of CHF 8 billion, largely from low-margin passive products. Wealth Management Americas recorded net new money of USD 500 million.
  • Capital Position: Fully applied CET1 capital increased by approximately CHF 700 million to CHF 30.9 billion.

Guidance, Outlook, and Risks

  • Regulatory Impact: New Swiss "Too Big To Fail" (TBTF) capital proposals are expected to drag Return on Tangible Equity (RoTE) by approximately 270 basis points. UBS expects to be compliant at inception and plans to fully implement requirements over a four-year period.
  • Revised Targets: Management expects adjusted RoTE to remain around full-year 2015 levels in 2016, increasing towards 15% in 2017, with the target achieved in 2018. The cost/income ratio is expected to be 65-75% in the short-to-medium term due to regulatory costs.
  • Capital Allocation: The Group maintains a commitment to a payout ratio of at least 50% of net profit, subject to maintaining a fully applied Basel III CET1 ratio of at least 13% and 10% post-stress.
  • Risk Factors: Key risks include the impact of negative interest rates in Switzerland and Europe, lower market returns affecting invested assets, and the potential for further regulatory inflation increasing Risk-Weighted Assets (RWA) to approximately CHF 250 billion in the short-to-medium term.
  • Unusual Items: The quarter included a net tax benefit of CHF 1.3 billion from the revaluation of US deferred tax assets. A one-time acquisition fee of approximately CHF 50 million is expected in Q4 for client transfers from Wealth Management to Retail & Corporate.

Investor Verification Checklist

  • Verify the sustainability of the CHF 1.3 billion net tax benefit, noting that only 75% of the expected full-year DTA write-up was recognized in Q3, with the remainder expected in Q4.
  • Confirm the impact of the new Swiss TBTF capital rules on future capital issuance and the specific timeline for the 270 basis point RoTE drag.
  • Monitor the trend of invested assets in Wealth Management, which has declined for three consecutive quarters, and its effect on Q4 revenue.
  • Assess the quality of net new money flows, particularly the distinction between deleveraging outflows and organic client activity.
  • Review the progress of the Non-core and Legacy Portfolio (NCL) reduction, which has seen an 80% reduction in LRD since inception.