UBS Group AG current report, Q2 FY2018

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UBS Group AG Form 6-K Summary: Second Quarter 2018 Results

Business Context and Reporting Period

This Form 6-K, filed on July 24, 2018, presents the Second Quarter 2018 results for UBS Group AG and UBS AG. The filing includes presentation materials and speaker notes from Group CEO Sergio P. Ermotti and Group CFO Kirt Gardner. The reporting period covers the six months ended June 30, 2018, highlighting a strong first half driven by Global Wealth Management and the Investment Bank.

Key Financial Metrics

  • Net Profit: Q2 2018 net profit increased 9% to CHF 1.3 billion. First-half (1H) 2018 net profit rose 15% to CHF 2.8 billion.
  • Capital Generation: The Group generated approximately CHF 3 billion in CET1 capital in 1H 2018, the highest first-half total since Basel 3 implementation began.
  • Share Repurchases: CHF 550 million in shares were repurchased in Q2, meeting the 2018 target.
  • Cost Efficiency: The Group cost-to-income ratio improved by 240 basis points in 1H 2018.
  • Capital Ratios: CET1 ratios remain comfortably above 2020 requirements; Total Loss-Absorbing Capacity (TLAC) stands at over CHF 81 billion.
  • Revenue Composition: Approximately 60% of Group revenues are recurring in nature.

Material Changes vs. Prior Period

  • Global Wealth Management (GWM): Reported profit reached CHF 2.2 billion, a 10-year high. Pre-tax profit (PBT) grew 18% reported (7% adjusted). Net interest income and recurring net fee income both hit record levels.
  • Investment Bank (IB): Delivered 44% PBT growth with a 23% return on attributed equity. Fixed Income, Currencies, and Commodities (FRC) revenues surged 72% to over CHF 500 million, partly due to the recognition of previously deferred day-1 profits.
  • Personal & Corporate Banking: PBT was CHF 378 million, nearly unchanged year-over-year despite interest rate headwinds and increased technology investment.
  • Asset Management: Reported PBT was CHF 126 million, down CHF 7 million. Normalized for a Q4 2017 business disposal, profits were up 1%. Invested assets reached a decade high.
  • Corporate Center: Non-core and Legacy Portfolio posted a small loss of CHF 17 million, including a CHF 76 million litigation provision.

Guidance, Outlook, and Risks

Management Commentary: Management emphasized the resilience of the diversified business model and the success of the digital transformation strategy. GWM is targeting 2% to 4% growth. The Group is focused on continuous cost improvement, including insourcing technology roles and reducing Corporate Center spend.

Regulatory and Operational Costs: The Group spends over CHF 1.5 billion annually on regulatory matters. Building CHF 52 billion in TLAC since 2012 has increased funding costs by approximately CHF 700 million per annum. Brexit is expected to cost over CHF 100 million.

Risks and Contingencies:

  • Regulatory: Ongoing uncertainty regarding UK exit from the EU (Brexit) and potential structural reforms in Switzerland and other jurisdictions.
  • Market Conditions: Risks associated with low/negative interest rates, geopolitical tensions, and market volatility affecting client sentiment and transaction activity.
  • Legal: Exposure to litigation and regulatory investigations, including a CHF 76 million provision in Q2.
  • Taxation: A CHF 13 million tax provision reversal was recorded in Q2 regarding the US BEAT tax, as no material impact is now expected.

Investor Verification Checklist

  • Verify the sustainability of the 240 basis point improvement in the Group cost-to-income ratio given the structurally higher costs of a global, diversified model.
  • Confirm the impact of the CHF 76 million litigation provision and the status of other ongoing regulatory investigations.
  • Assess the timeline for revenue and cost benefits from the multi-year digitization program in the Swiss Personal & Corporate bank, with benefits expected to accrue in 2019.
  • Monitor the execution of the CHF 100 million cost reduction target in GWM by year-end.
  • Review the specific adjustments made to the Investment Bank's FRC revenue regarding the recognition of deferred day-1 profits to understand underlying organic growth.