UBS Group AG: 3Q23 Earnings Summary
Business Context and Reporting Period
This Form 6-K summarizes the third-quarter 2023 results for UBS Group AG, covering the period ended September 30, 2023. This represents the first full quarter of operations following the acquisition of Credit Suisse. The report details the integration progress, financial performance, and strategic outlook as UBS stabilizes the combined entity.
Key Financial Metrics
- Profitability: Underlying Profit Before Tax (PBT) was CHF 0.8 billion (USD 0.844 billion), a sequential increase of CHF 1.4 billion. Reported net loss was CHF 785 million, primarily due to a CHF 526 million tax expense that could not be offset by losses in certain subsidiaries.
- Revenue: Underlying total revenues were CHF 10.7 billion, up 6% sequentially. Total reported revenues were CHF 11.7 billion, including CHF 958 million in pull-to-par and other accounting effects.
- Expenses: Underlying operating expenses decreased 5% sequentially to CHF 9.6 billion. Integration-related expenses totaled CHF 2 billion.
- Capital and Liquidity: CET1 capital ratio stood at 14.4%. Total Loss-Absorbing Capacity (TLAC) was nearly CHF 200 billion. The Liquidity Coverage Ratio (LCR) was nearly 200%.
- Client Flows: Global Wealth Management (GWM) recorded CHF 22 billion in net new money. Personal & Corporate (P&C) saw CHF 33 billion in net new deposits across the combined franchise.
Material Changes vs. Prior Period
- Operating Leverage: The Group delivered strong positive operating leverage with CHF 0.6 billion higher revenues and CHF 0.5 billion lower operating expenses compared to the second quarter.
- Credit Losses: Credit Loss Expenses (CLE) declined sequentially by CHF 0.4 billion to CHF 0.3 billion, as the significant acquisition-related Expected Credit Loss (ECL) charges from Q2 were not repeated.
- Non-Core and Legacy (NCL): Active de-risking reduced Risk-Weighted Assets (RWA) by CHF 6 billion, with CHF 5 billion driven by active unwinds. Operational risk RWA in NCL is expected to decrease to CHF 14 billion by end-2026.
- Cost Savings: UBS achieved approximately CHF 3 billion in annualized exit-rate gross cost savings to date, with a workforce reduction of 13,000 year-to-date (9% vs. end-2022).
Guidance, Outlook, and Risks
- Strategic Targets: Management remains on track to achieve a Return on CET1 (RoCET1) of approximately 15% and a cost/income ratio of less than 70% by the end of 2026.
- Q4 Outlook: Underlying operating expenses are expected to decline further. Integration-related expenses in Q4 are projected to exceed CHF 1 billion. Net Interest Income (NII) in GWM and P&C is expected to decline by mid-to-low single digits due to deposit mix shifts.
- Capital Returns: A progressive cash dividend policy is planned. Share buybacks are not expected to resume immediately but could occur within "quarters" rather than years, pending the finalization of the three-year strategic plan in February 2024.
- Risks: Key risks include geopolitical instability (Middle East, Russia-Ukraine), execution risks in merging legal entities (critical for tax efficiency and synergies), and potential regulatory changes regarding liquidity and capital requirements.
Investor Verification Checklist
- Verify the timeline for the merger of significant legal entities in 2024, which is critical for unlocking tax synergies and reducing the effective tax rate.
- Monitor the run-down of Non-Core and Legacy assets to ensure the projected 50% reduction in operational risk RWA by 2026 is achievable without significant value destruction.
- Track the trajectory of Net Interest Income (NII) in Wealth Management as deposit mix shifts continue to impact margins.
- Confirm the sustainability of net new money inflows in the Credit Suisse Wealth Management franchise, which turned positive for the first time in 18 months.
- Review the February 2024 strategic plan for specific revenue growth assumptions and capital return targets.