UBS Group AG current report, Q4 FY2023

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Business Context and Reporting Period

This Form 6-K filing, dated February 7, 2024, contains the transcript of UBS Group AG's fourth-quarter 2023 earnings call. The reporting period covers the full year 2023 and specifically details the first full quarter of operations following the acquisition of Credit Suisse. The filing highlights the stabilization of the Credit Suisse franchise, the commencement of the restructuring phase, and the integration of the two entities into a single global franchise.

Key Financial Metrics (Q4 2023)

  • Revenue: Underlying total revenues were $10.4 billion, down 3% sequentially. Reported revenues were $10.9 billion, including $944 million in pull-to-par effects.
  • Profitability: Underlying Profit Before Tax (PBT) was $0.6 billion. Reported net loss was $279 million, driven by a $473 million net tax benefit from deferred tax asset revaluation.
  • Operating Expenses: Underlying operating expenses were $9.7 billion, up 1% sequentially. Reported operating expenses were $11.5 billion, including $1.8 billion in integration-related expenses.
  • Capital: The Common Equity Tier 1 (CET1) capital ratio increased to 14.5%. Total Loss-Absorbing Capacity (TLAC) stands at $200 billion.
  • Liquidity: The firm maintained high liquidity levels to meet new Swiss requirements and support deposit balances.
  • Assets: Global Wealth Management (GWM) recorded $22 billion in net new assets for the quarter, bringing the total to $77 billion since the acquisition closing.

Material Changes vs. Prior Period

  • Sequential Decline in PBT: Underlying PBT decreased by $322 million from Q3 2023, primarily due to lower client activity, reduced billable invested assets, the UK bank levy, and a US FDIC special assessment.
  • Cost Reductions: The firm cut $1 billion in exit-rate gross costs in Q4. Year-to-date workforce reductions totaled 17,000 (11% vs. end of 2022), contributing to $4 billion in gross run-rate cost saves exiting 2023.
  • Non-Core and Legacy (NCL): Risk-weighted assets (RWA) in NCL declined by $6 billion in the quarter, with nearly 80% of the H2 decline driven by active wind-downs. Underlying PBT for NCL was negative $977 million.
  • Investment Bank: The division reported an operating loss of $280 million due to higher costs (34% increase) as revenues from onboarded Credit Suisse staff are still building. However, underlying revenues increased 11% year-over-year.

Guidance, Outlook, and Risks

Strategic Targets (Exit 2026)

  • Return on Capital: Target underlying Return on CET1 capital of approximately 15%.
  • Efficiency: Target underlying cost/income ratio of less than 70%.
  • Cost Savings: Expectation of $13 billion in cumulative gross cost saves by end of 2026.
  • Asset Growth: Ambition to surpass $5 trillion in invested assets by 2028, with net new assets growing to $200 billion annually by 2028.

    • Capital and Dividends

    • Dividend: Proposed ordinary dividend of 70 cents for 2023 (27% increase YoY). Expecting mid-teen percentage increase in 2024.
    • Buybacks: Share repurchases expected to resume in 2024 after the parent bank merger (targeting up to $1 billion). Total capital returns to exceed pre-acquisition levels by 2026.
    • Capital Ratio: Expect to operate with a CET1 ratio of around 14% long-term.

      • Risks and Contingencies

      • Integration Complexity: Significant risks associated with merging two G-SIBs, including IT migration, legal entity consolidation, and retaining talent.
      • Regulatory Environment: Potential changes in capital requirements (Basel III finalization) and ongoing geopolitical conflicts (Russia-Ukraine, Middle East) impacting markets.
      • Non-Core Drag: The NCL portfolio remains a drag on results, with underlying losses expected to remain around $1 billion annually until the portfolio is fully wound down.
      • Tax Inefficiencies: Effective tax rate expected to be high in 2024 (~40%) due to legal entity structures, normalizing to ~23% by 2026.

      Key Facts for Investor Verification

      • Verify the timeline for the legal entity mergers of the parent banks (US and Swiss), which are prerequisites for client migrations and significant cost synergies.
      • Monitor the trajectory of the Non-Core and Legacy (NCL) wind-down, specifically the reduction of RWA and the stabilization of underlying losses.
      • Track the realization of the $13 billion gross cost savings plan, noting that roughly half is personnel-related and half is technology/real estate.
      • Assess the Investment Bank's path to profitability, dependent on the productivity ramp-up of onboarded Credit Suisse staff and market conditions.
      • Confirm the normalization of the effective tax rate as legal entity mergers resolve current inefficiencies.