UBS Group AG current report, Q3 FY2017

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UBS Group AG: Third Quarter 2017 Results Summary

Business Context and Reporting Period

This Form 6-K filing, dated October 27, 2017, presents the Third Quarter 2017 results for UBS Group AG and UBS AG. The report covers the period ended September 30, 2017, and includes presentation materials and speaker notes from Group CEO Sergio P. Ermotti and Group CFO Kirt Gardner. The results reflect a diversified business model with a focus on Global Wealth Management, Personal & Corporate Banking, Asset Management, and the Investment Bank.

Key Financial Metrics

  • Profitability: Reported profit before tax (PBT) was CHF 1.2 billion, up 39% year-over-year. Net profit was CHF 946 million. Adjusted results excluded CHF 285 million in net restructuring expenses.
  • Return on Equity: Return on tangible equity (excluding deferred tax assets impact) was 13.3%.
  • Capital and Liquidity: CET1 capital ratio stood at 13.7% (up 20 basis points). The leverage ratio was 3.7%, above the 2020 requirement of 3.5%. Total Loss-Absorbing Capacity (TLAC) was CHF 78 billion. Liquidity coverage ratio (LRD) increased to CHF 885 billion.
  • Costs: Net cost reduction run-rate increased to CHF 1.9 billion. Management expects to achieve the full CHF 2.1 billion net savings target by year-end.
  • Tax: Net tax expense was CHF 272 million, including a CHF 174 million increase in recognized deferred tax assets (DTAs), driven by a CHF 224 million upward revaluation of US tax-loss DTAs.

Material Changes vs. Prior Period

  • Global Wealth Management (GWM): PBT rose 4% year-over-year. Year-to-date PBT reached CHF 3.1 billion. Revenue increased 6%, driven by recurring net fee income and net interest income (up 8%). Invested assets in Wealth Management Americas (WMA) reached a record USD 1.2 trillion (up 9% YoY).
  • Asia-Pacific: Profit was up 37% year-to-date due to strong operating leverage and double-digit net new money growth.
  • Personal & Corporate Banking: Delivered PBT of CHF 436 million. Net interest income was down overall due to TLAC-related funding costs, though deposit income rose. The business saw its strongest 3Q net new business volume growth in a decade.
  • Asset Management: PBT grew 11% driven by operating leverage. Invested assets reached a nine-year high. Net new money (excluding money market flows) was CHF 9 billion in the quarter.
  • Investment Bank: PBT increased 3% in a challenging market. Corporate Client Solutions revenues exceeded CHF 700 million for the fourth consecutive quarter. Investor Client Services were weighed down by low volatility.
  • Corporate Center: Recorded a pre-tax loss of CHF 479 million, including CHF 280 million in litigation expenses related to the Banco UBS Pactual tax matter and RMBS Trustee Suit.

Guidance, Outlook, and Risks

  • Cost Reduction: Management reaffirmed the target of CHF 2.1 billion in net savings by year-end. Restructuring costs for Q4 are expected to be between CHF 300 million and CHF 400 million, tapering in 2018.
  • Cross-Border Outflows: Full-year guidance for cross-border outflows remains CHF 14-15 billion. Q4 outflows are expected to be around CHF 8 billion, acting as a headwind to recurring revenue growth in 2018.
  • Deferred Tax Assets: The 2017 year-end US DTA balance is expected to increase. Management recognized 75% of the expected full-year DTA write-up in Q3, with the remaining 25% expected in Q4.
  • Regulatory and Market Risks: Risks include regulatory-driven increases in Risk-Weighted Assets (RWA) and leverage ratio denominators, low/negative interest rates, geopolitical tensions, and the impact of the UK exit from the EU. The filing also notes ongoing litigation and regulatory investigations as material risks.

Key Facts for Investor Verification

  • Verify the sustainability of the 39% year-over-year PBT growth, noting the impact of the CHF 285 million restructuring expense adjustment.
  • Confirm the trajectory of cross-border outflows, specifically the expected CHF 8 billion outflow in Q4 and its impact on 2018 recurring revenue.
  • Monitor the realization of the CHF 2.1 billion cost savings target and the tapering of restructuring costs in 2018.
  • Review the assumptions behind the CHF 224 million upward revaluation of US tax-loss DTAs and the timing of the remaining 25% recognition in Q4.
  • Assess the impact of regulatory-driven RWA increases (expected CHF 4 billion in Q4) on capital ratios and leverage metrics.