UBS Group AG current report, Q2 FY2017

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG and UBS AG, dated July 28, 2017, presents the Second Quarter 2017 results. The reporting period covers the three months ended June 30, 2017. The filing includes presentation materials and speaker notes from Group CEO Sergio P. Ermotti and Group CFO Kirt Gardner, highlighting a quarter characterized by strong momentum in Wealth Management contrasted with low client activity in the Institutional business due to low market volatility.

Key Financial Metrics

  • Net Profit: CHF 1.2 billion for Q2 2017 (up 14% year-over-year); CHF 2.4 billion for the first half of 2017 (up 40% year-over-year).
  • Adjusted Profit Before Tax (PBT): CHF 1.7 billion for Q2 2017; CHF 3.6 billion for the first half of 2017 (up nearly 20% year-over-year).
  • Return on Tangible Equity (ROTE): Adjusted ROTE was 11.4% for Q2 2017 and 12% for the first half of 2017. Excluding deferred tax assets, these figures were nearly 16% and almost 17%, respectively.
  • Capital Ratios: CET1 capital ratio stands at 13.5%. CET1 leverage ratio increased to 3.7%.
  • Capital Levels: CET1 capital grew to CHF 32 billion; Total loss-absorbing capital exceeds CHF 74 billion.
  • Liquidity: Liquidity Reserve Denominator (LRD) reduced to a historic low of CHF 861 billion.
  • Cost Reduction: Net cost reduction run-rate increased to CHF 1.8 billion, with a target of CHF 2.1 billion by year-end.

Material Changes vs. Prior Period

  • Global Wealth Management (WM): PBT increased 15% to over CHF 1 billion in Q2. Revenue rose 7% driven by improved client sentiment, higher US dollar rates, and increased mandate penetration (over 32%). Net new money for Q2 was CHF 14 billion, the highest in a decade.
  • Personal and Corporate Banking: PBT declined 18% to CHF 379 million due to negative interest rate headwinds, though transaction and recurring fee revenues grew 7% and 8% respectively. Net credit loss expense was CHF 28 million compared to a CHF 2 million recovery in Q2 2016.
  • Asset Management: PBT decreased 10% year-over-year to CHF 133 million, primarily due to margin compression from a shift to passive strategies. However, the business attracted over CHF 10 billion in net new money (excluding money market flows).
  • Investment Bank (IB): PBT declined 6% despite a strong 18% return on attributed equity. Foreign Exchange, Rates, and Credit (FRC) revenues fell 36% due to low volatility and volumes, partially offset by a 10% increase in Corporate Client Solutions and higher Equities revenues.
  • Risk-Weighted Assets (RWA): Regulatory-driven methodology changes and inflation contributed to a CHF 25 billion increase in RWA over the last six quarters, with nearly half occurring in Q2 2017.

Guidance, Outlook, and Risks

  • Outlook: Management expects net new money in Wealth Management to stabilize in the coming quarters as recruiting policies normalize. For the second half of 2017, the firm anticipates CHF 3 billion in outflows related to euro deposit charging and approximately CHF 11 billion in cross-border outflows.
  • Restructuring: Restructuring costs are expected to be around CHF 700 million in the second half of 2017, tapering significantly from 2018.
  • Regulatory Impact: The firm expects around CHF 6 billion in regulatory-driven RWA increases in the second half of 2017. Future increases depend on the finalization of Basel 3.
  • Strategic Milestones: UBS received a Private Fund Management license in China, a significant milestone for offering onshore investment products.
  • Risks: Key risks include the low/negative interest rate environment, low market volatility affecting trading revenues, regulatory changes (Basel 3, TLAC, leverage ratios), Brexit uncertainty, and ongoing litigation and regulatory investigations.

Investor Verification Checklist

  • Verify the sustainability of Wealth Management profit growth given the reliance on improved client sentiment and US dollar rates.
  • Confirm the impact of the CHF 25 billion regulatory RWA increase on future capital ratios and potential capital return policies.
  • Monitor the execution of the CHF 2.1 billion cost reduction target and the timing of restructuring cost tapering in 2018.
  • Assess the magnitude of expected outflows (CHF 14 billion total for H2) related to euro deposit fees and cross-border shifts.
  • Review the progress of the China Private Fund Management license in generating tangible revenue for Asset Management and Wealth Management.