UBS Group AG current report, Q2 FY2020

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG and UBS AG, dated July 22, 2020, presents the Second Quarter 2020 results and includes the related earnings call transcript. The reporting period covers the three months ended June 30, 2020, and the first half of 2020. The results were delivered amidst the global COVID-19 pandemic, characterized by volatile market conditions, economic disruption, and increased unemployment.

Key Financial Metrics

  • Net Profit: USD 1.2 billion for Q2 2020; USD 2.8 billion for H1 2020 (up 12% year-over-year).
  • Pre-Tax Profit (PBT): USD 1.6 billion for Q2 2020 (down 10% year-over-year); up 9% for H1 2020.
  • Return on Capital: Return on CET1 (RoCET1) was 13.2% for Q2 and 15.4% for H1 2020.
  • Capital Ratios: CET1 capital ratio stood at 13.3% at quarter-end. The leverage ratio was 3.9% (excluding temporary FINMA exemptions).
  • Credit Loss Expenses (CLE): Total Group CLE was USD 272 million for Q2 (USD 202 million Stage 1/2; USD 70 million Stage 3).
  • Cost/Income Ratio: Improved to just below 76% for Q2 and below 70% for H1 2020.
  • Net New Money: Over USD 70 billion for H1 2020; USD 9 billion in GWM and USD 19 billion in Asset Management for Q2.
  • Risk-Weighted Assets (RWA): Remained flat since the end of March.

Material Changes vs. Prior Period

  • Profitability: H1 net profit increased 12% year-over-year despite higher credit loss expenses, driven by top-line growth in asset gathering and institutional businesses.
  • Segment Performance:
    • Global Wealth Management (GWM): PBT rose 1% in Q2 (8% ex-CLE). Operating income was stable month-over-month. Recurring fees declined 8% year-over-year due to billing dynamics and lower invested asset bases in prior periods, though net interest income grew 6%.
    • Personal & Corporate Banking (P&C): PBT fell 41% in Q2, primarily due to USD 104 million in credit loss expenses and lower transaction-based income from reduced travel and leisure spending.
    • Asset Management: PBT increased 27% to USD 157 million, driven by exceptional performance fees. Net new money was USD 19 billion.
    • Investment Bank (IB): PBT grew 43% with operating income up 9%. Global Markets revenues increased 25%, while Global Banking revenues decreased 14% due to lower advisory fees.
  • Costs: Operating expenses excluding variable compensation and litigation were down 2% in Q2. GWM costs decreased 4% year-over-year due to efficiency measures.

Guidance, Outlook, and Risks

  • Capital Returns: UBS plans to pay the second tranche of the 2019 dividend in November. For 2020, the firm is rebalancing the mix between cash dividends and buybacks, aiming for a payout ratio more aligned with US peers. Share buybacks are not ruled out for Q4 2020, contingent on business development and outlook.
  • Credit Outlook: Management expects elevated credit loss expenses in H2 2020 but below H1 levels. The baseline macroeconomic scenario assumes a sharp GDP deterioration with a slower recovery in the US relative to Switzerland and the Eurozone.
  • Strategic Priorities: Acceleration of digital transformation, cloud migration, and automation. The firm is reassessing its real estate footprint, anticipating that 20-30% of the workforce may work remotely on a regular basis post-pandemic.
  • Risks and Contingencies:
    • COVID-19: Continued uncertainty regarding the pandemic's duration and economic impact.
    • Geopolitics: Tensions in Hong Kong/China and the US presidential election are noted as concerns for investors, though management sees limited immediate impact on client activity.
    • Regulatory: Basel III implementation has been delayed to 2022. Regulators are urging prudence in capital returns.
    • Legal: Ongoing French tax appeal proceedings are considered a one-off issue affecting capital return planning.

Investor Verification Checklist

  • Verify the sustainability of the 13.3% CET1 ratio and the specific assumptions used in the updated IFRS 9 macroeconomic scenarios (baseline vs. crisis weighting).
  • Monitor the timing and magnitude of the rebalanced capital return policy (dividend vs. buyback mix) in the upcoming Q3 and Q4 announcements.
  • Track the trajectory of credit loss expenses in H2 2020 to confirm if they remain below H1 levels as projected.
  • Assess the impact of the "Fondcenter" transaction closing in Q3 2020 on the full-year effective tax rate (targeted around 20%).
  • Review the progress of the GWM and IB collaboration initiatives, specifically regarding loan growth and cross-divisional deal revenues.