UBS Group AG First Quarter 2018 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports the unaudited consolidated financial results for UBS Group AG for the quarter ended March 31, 2018. The reporting period marks the first quarter of full adoption of IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers), effective January 1, 2018. The Group operates through four main business divisions: Global Wealth Management, Personal & Corporate Banking, Asset Management, and the Investment Bank, supported by the Corporate Center.
Key Financial Metrics
| Metric (CHF million) | Q1 2018 | Q4 2017 | Q1 2017 |
|---|---|---|---|
| Operating Income | 7,698 | 7,122 | 7,532 |
| Operating Expenses | 5,725 | 6,266 | 5,842 |
| Operating Profit Before Tax | 1,973 | 855 | 1,690 |
| Net Profit Attributable to Shareholders | 1,514 | (2,336) | 1,269 |
| Diluted EPS (CHF) | 0.39 | (0.63) | 0.33 |
| Return on Tangible Equity (RoTE) | 13.6% | (20.2%) | 10.9% |
| Cost/Income Ratio | 74.1% | 86.9% | 77.6% |
| Common Equity Tier 1 (CET1) Ratio | 13.1% | 13.8% | 14.1% |
| Liquidity Coverage Ratio (LCR) | 136% | 143% | 128% |
Material Changes vs. Prior Periods
- Profitability: Net profit attributable to shareholders turned positive at CHF 1.5 billion, a significant improvement from the CHF 2.3 billion loss in Q4 2017. This was driven by higher operating income and lower operating expenses. Compared to Q1 2017, net profit grew 19%.
- Operating Income: Increased by 2% year-over-year to CHF 7.7 billion, primarily due to a CHF 120 million increase in net fee and commission income and a CHF 74 million increase in net interest income and fair value changes.
- Expenses: Total operating expenses decreased by 2% year-over-year to CHF 5.7 billion. On an adjusted basis (excluding legacy restructuring and pension plan gains), expenses increased by 4% due to higher variable compensation and staffing levels.
- Accounting Changes: The adoption of IFRS 9 resulted in a CHF 0.6 billion reduction in consolidated equity and a CHF 0.3 billion reduction in CET1 capital as of January 1, 2018. IFRS 15 adoption reduced equity by CHF 24 million.
- Capital Ratios: The CET1 capital ratio decreased 0.7 percentage points to 13.1% due to a CHF 16.3 billion increase in risk-weighted assets (RWA), partly offset by capital generation. The LCR decreased 7 percentage points to 136%, remaining above the 110% regulatory minimum.
Guidance, Outlook, and Risks
- Outlook: Management remains confident in global economic growth prospects but notes geopolitical tensions and protectionism as threats. Market volatility remains muted, which is typically less conducive to client activity. Funding costs for long-term debt are expected to be higher in Q2 2018 compared to the prior year.
- Restructuring: The Group expects residual restructuring costs related to legacy cost programs of approximately CHF 0.5 billion for the full year 2018 and under CHF 0.2 billion in 2019.
- Tax Environment: The Group forecasts a full-year 2018 tax rate of approximately 25%, including the impact of the US Base Erosion and Anti-Abuse Tax (BEAT). The impact of Swiss Tax Proposal 17 (TP17) on tax liability remains undetermined pending legislation.
- Risks: Key risks include elevated litigation and regulatory expenses, operational resilience (cybersecurity), and credit risk management under the new IFRS 9 expected credit loss (ECL) framework. The Group estimates a potential capital loss of CHF 4.8 billion over 12 months from litigation and regulatory matters subject to provisions.
Key Facts for Investor Verification
- Adjusted Performance: Verify adjusted profit before tax, which decreased 3% year-over-year to CHF 1.9 billion, excluding a CHF 225 million gain from changes to the Swiss pension plan and CHF 128 million in legacy restructuring expenses.
- Investment Bank Volatility: Review the Investment Bank's performance, where operating income increased 10% year-over-year, driven by Equities and Corporate Client Solutions, though Foreign Exchange, Rates, and Credit revenues declined.
- Capital Adequacy: Confirm the impact of the CHF 16.3 billion increase in RWA on future capital ratios, driven by model updates and regulatory add-ons.
- Dividend Proposal: Note the proposed dividend of CHF 0.65 per share, subject to shareholder approval on May 3, 2018, which is expected to reduce equity by approximately CHF 2.4 billion in Q2 2018.
- IFRS 9 Transition: Assess the ongoing refinement of ECL models and the potential for changes in credit loss provisions as the Group finalizes its 2018 financial statements.