UBS Group AG current report, Q4 FY2018

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UBS Group AG: 2018 Investor Update Summary

Business Context and Reporting Period

This Form 6-K summarizes the UBS Investor Update presentations held on October 25, 2018. The filing details the bank's strategic execution, financial targets for the 2019–2021 period, and operational plans following the completion of major restructuring and legal entity transformation. UBS reaffirmed its strategy as the world's leading global wealth manager, emphasizing sustainable growth, capital efficiency, and disciplined cost management.

Key Financial Metrics and Targets

  • Profitability Targets: UBS targets a reported Return on CET1 (Core Equity Tier 1) of approximately 15% for 2019, with an ambition of around 17% by 2021. This replaces the previous Return on Tangible Equity (ex-DTAs) metric.
  • Efficiency Targets: The Group aims for an adjusted Cost/Income ratio of approximately 77% in 2019, improving to around 72% by 2021.
  • Cost Reduction: UBS plans to reduce Corporate Center costs by CHF 800 million over the next three years (excluding performance-related compensation) and achieve roughly flat total Group costs over the same period.
  • Capital Generation: Management expects to generate nearly as much free capital in the next three years as was generated in the previous six years (approx. CHF 23 billion over the prior six years).
  • Shareholder Returns: UBS remains committed to a progressive dividend (mid-to-high single-digit growth) and share buy-backs. CHF 650 million in shares were repurchased year-to-date, exceeding the CHF 550 million target.
  • Functional Currency: Effective Q4 2018, the functional currency changed to USD to reduce earnings volatility and improve Net Interest Income (NII) by approximately CHF 300 million annually from 2019.

Material Changes and Strategic Initiatives

  • Global Wealth Management (GWM): The division targets 10–15% annual Pre-Tax Profit (PBT) growth, aiming for the upper end of this range by 2021. It expects to deliver 250 million in annual cost savings by 2021, reinvested into growth. The US business targets a 25% PBT margin by 2021.
  • Investment Bank (IB): The IB return target was adjusted from "greater than 15%" to "around 15%" on a like-for-like basis due to increased equity and cost attributions from the Corporate Center. The division aims to reduce its Cost/Income ratio to 75% by 2021.
  • Personal & Corporate Banking (P&C): The Swiss business targets 3–5% annual PBT growth through 2021, with a focus on digital expansion and shifting assets to GWM.
  • Asset Management: Targets 10% annual adjusted PBT growth through 2021, driven by strategic priorities in Wholesale, Indexed, and Alternative Beta products.
  • Capital Allocation: Starting in Q1 2019, nearly 100% of Group CET1 capital will be attributed to business divisions to improve transparency and optimization.

Outlook, Risks, and Management Commentary

Management expressed confidence in the bank's ability to navigate market volatility, citing a balanced portfolio of "beta" (market-driven) and "alpha" (management-driven) growth levers. Key growth drivers include wealth creation in Asia, the opening of China's financial markets, and the consolidation of wealth management capabilities.

Risks and Contingencies:

  • Market Conditions: Performance is sensitive to equity market performance (assumed at 7% annually) and interest rate environments.
  • Regulatory and Legal: Ongoing legacy litigation remains a risk, though management believes the portfolio is shrinking. Regulatory costs are expected to peak and decline as legal entity transformation completes.
  • Technology Investment: While technology spend is expected to remain flat in absolute terms, the focus is shifting from regulatory compliance to business growth and digitization.

Key Facts for Investor Verification

  • Verify the impact of the new USD functional currency on Q4 2018 and 2019 Net Interest Income.
  • Monitor the execution of the CHF 800 million Corporate Center cost reduction and its allocation to business divisions.
  • Track the progress of the Global Wealth Management division in achieving the upper end of its 10–15% profit growth target, specifically in the US and APAC regions.
  • Assess the Investment Bank's ability to maintain a 15% return on attributed equity despite the pro-forma reduction in returns due to capital attribution changes.
  • Review the status of legacy litigation and any potential one-off charges that could impact reported results versus adjusted targets.