UBS Group AG: Fourth Quarter 2018 Financial Summary
Business Context and Reporting Period
This Form 6-K reports the Fourth Quarter 2018 results for UBS Group AG, covering the period ended December 31, 2018. A significant accounting change occurred effective October 1, 2018, where the functional currency of UBS Group AG and UBS AG's Head Office changed from Swiss francs to US dollars. Consequently, the presentation currency for consolidated financial information has changed from Swiss francs to US dollars, with prior periods restated accordingly.
Key Financial Metrics
| Metric (USD Million) | Q4 2018 | Q4 2017 | Full Year 2018 | Full Year 2017 |
|---|---|---|---|---|
| Operating Income | 6,972 | 7,207 | 30,213 | 29,622 |
| Operating Expenses | 6,110 | 6,362 | 23,840 | 24,272 |
| Operating Profit Before Tax | 862 | 845 | 6,373 | 5,351 |
| Net Profit Attributable to Shareholders | 696 | (2,417) | 4,897 | 969 |
| Diluted EPS (USD) | 0.18 | (0.65) | 1.27 | 0.25 |
| Return on Tangible Equity (%) | 6.2 | (20.3) | 10.8 | 2.2 |
| Cost/Income Ratio (%) | 87.0 | 87.2 | 78.6 | 81.6 |
| CET1 Capital Ratio (%) | 13.1 | 13.8 | 13.1 | 13.8 |
| Liquidity Coverage Ratio (%) | 136 | 143 | 136 | 143 |
Material Changes vs. Prior Period
- Profitability: Q4 2018 net profit of USD 696 million represents a significant recovery from the Q4 2017 net loss of USD 2,417 million. The prior year loss was heavily impacted by a USD 3,025 million deferred tax expense related to the US Tax Cuts and Jobs Act. Full-year 2018 net profit grew 405% to USD 4,897 million.
- Revenue: Operating income decreased 3% year-over-year in Q4 to USD 6,972 million, driven by lower net interest income and fee income. However, full-year operating income increased 2% to USD 30,213 million.
- Expenses: Operating expenses decreased 4% in Q4 to USD 6,110 million, primarily due to lower personnel and general/administrative expenses. Full-year expenses decreased 2%.
- Capital: The CET1 capital ratio decreased 0.5 percentage points to 13.1% due to a USD 6.7 billion increase in risk-weighted assets (RWA). The Liquidity Coverage Ratio (LCR) increased to 136%, remaining well above the 110% minimum.
Guidance, Outlook, and Risks
- Outlook: Management expects global economic activity to moderate but remains positive on growth. Lower invested assets from Q4 market declines are expected to impact recurring revenues in Global Wealth Management and Asset Management in Q1 2019. Geopolitical tensions and trade disputes remain risks to client activity.
- Dividends and Buybacks: The Board intends to propose a dividend of CHF 0.70 per share for 2018. The company targets share repurchases of up to USD 1 billion in 2019.
- Regulatory and Legal Risks:
- UK Withdrawal: UBS is preparing for the UK exit from the EU, with a planned business transfer and merger of UBS Limited into UBS Europe SE expected by March 1, 2019.
- Litigation: Significant ongoing matters include cross-border wealth management inquiries (France, Belgium, Italy), RMBS-related litigation (USD 850 million settlement reached), Madoff-related claims, and foreign exchange/LIBOR benchmark investigations. Provisions for litigation and regulatory matters totaled USD 2,445 million as of year-end.
- Accounting Changes: Adoption of IFRS 16 (Leases) effective January 1, 2019, is expected to increase assets and liabilities by approximately USD 3.5 billion and increase RWA and leverage ratio denominator.
Key Facts for Investor Verification
- Currency Restatement: Verify that all comparative figures have been restated from Swiss francs to US dollars to ensure accurate period-over-period analysis.
- Adjusted vs. Reported Results: Note the significant difference between reported and adjusted results due to non-recurring items, including a USD 460 million gain on the sale of SIX Payment Services and a USD 270 million remeasurement loss on UBS Securities China.
- Deferred Tax Assets (DTAs): Review the impact of the USD 275 million net tax benefit in Q4 2018 related to the remeasurement of US DTAs and the write-off of a Swiss temporary difference DTA.
- Capital Allocation Changes: Be aware of new performance targets and resource allocation methodologies effective Q1 2019, which will increase business division cost/income ratios and alter equity attribution.
- Legal Provisions: Monitor the status of the French tax fraud trial (judgment expected February 2019) and ongoing LIBOR/FX litigation settlements.