UBS Group AG: Third Quarter 2020 Results Summary
Business Context and Reporting Period
This Form 6-K filing, dated October 20, 2020, presents the Third Quarter 2020 results for UBS Group AG and UBS AG. The period covers the three months ended September 30, 2020. The results were presented by outgoing CEO Sergio Ermotti and CFO Kirt Gardner, highlighting operational resilience amidst the ongoing COVID-19 pandemic and a second wave of infections in Europe.
Key Financial Metrics
- Net Profit: CHF 2.1 billion for the quarter, representing a doubling of net profit compared to the prior year.
- Pre-Tax Profit (PBT): CHF 2.6 billion reported. Adjusted for one-off items, PBT was CHF 2.1 billion, up 41% year-over-year.
- Return on CET1: 21.9% for the quarter; 17.6% for the first nine months of 2020.
- Cost-to-Income Ratio: Improved to 73% for the quarter (down 6 percentage points), the lowest level since 2006.
- Capital Ratios: CET1 ratio stood at 13.5% (14.0% before establishing a reserve for future buybacks). Leverage ratio was 3.8%.
- Credit Losses: Total IFRS 9 credit loss expense was CHF 89 million for the quarter.
- One-Off Items: Included a CHF 631 million gain from the sale of Fondcenter, a CHF 215 million gain on IP rights sale, and CHF 359 million in accelerated personnel expenses related to deferred compensation modifications.
Material Changes vs. Prior Period
- Profitability Surge: Pre-tax profit reached its highest level in a decade. Adjusted PBT rose over 40% compared to 3Q2019.
- Segment Performance:
- Global Wealth Management (GWM): Best 3Q PBT since 2011, up 18%. Record net new loan volume of over CHF 10 billion in the quarter.
- Investment Bank (IB): Best 3Q PBT since 2012 restructuring. Revenues up across all regions and products.
- Asset Management: PBT up 42% to USD 191 million (excluding one-off items). Net new run-rate fees exceeded USD 150 million annualized.
- Personal & Corporate Banking (P&C): PBT down 13% due to credit loss expenses of CHF 84 million, largely driven by a fraud case involving a commodity trade finance counterparty.
- Regional Highlights: The Americas was the largest contributor to Group earnings in 3Q20, with PBT doubling year-over-year. APAC PBT nearly doubled, becoming the largest contributor to earnings year-to-date.
Guidance, Outlook, and Management Commentary
- Capital Returns: UBS confirmed plans to pay the second installment of the 2019 cash dividend. The firm established a USD 1.5 billion reserve for potential future share buybacks, carved out of CET1 capital. Management expects to resume buybacks in 2021, subject to regulatory approval and economic conditions.
- Dividend Policy: The firm plans to adjust the mix between cash dividends and buybacks, with cash dividends accruing at roughly half the rate of the 2019 full-year dividend. The target payout ratio for cash is expected to align with US peers.
- Outlook Risks: Management cited the second wave of COVID-19 in Europe, uncertainty regarding vaccine availability, and the US election as key risks. Lower US dollar interest rates remain a headwind to deposit net interest income, though loan growth is expected to offset this.
- Strategic Priorities: Continued focus on digital transformation (including the Broadridge partnership), sustainable investing (becoming the first major bank to prefer sustainable investments for global wealth clients), and operational efficiency.
Investor Verification Checklist
- Verify the impact of the USD 1.5 billion buyback reserve on the reported CET1 ratio and tangible equity.
- Confirm the sustainability of the 73% cost-to-income ratio given the one-off acceleration of CHF 359 million in personnel expenses.
- Assess the exposure and resolution status of the CHF 54 million fraud loss in the Personal & Corporate Banking segment.
- Monitor regulatory decisions regarding the resumption of share buybacks in early 2021.
- Review the trajectory of net interest income as US dollar rate headwinds persist into 2021.