UBS Group AG First Quarter 2016 Filing Summary
Business Context and Reporting Period
This Form 6-K filing contains the First Quarter 2016 Report for UBS Group AG, a Swiss systemically relevant bank (SRB). The reporting period covers the three months ended March 31, 2016. The Group operates through five business divisions: Wealth Management, Wealth Management Americas, Personal & Corporate Banking, Asset Management, and the Investment Bank, supported by a Corporate Center. The filing notes the adoption of IFRS 9 own credit presentation requirements effective January 1, 2016, which moved own credit changes to Other Comprehensive Income (OCI).
Key Financial Metrics
| Metric (CHF million) | Q1 2016 | Q4 2015 | Q1 2015 |
|---|---|---|---|
| Operating Income | 6,833 | 6,775 | 8,841 |
| Operating Profit Before Tax | 978 | 234 | 2,708 |
| Net Profit (Attributable to Shareholders) | 707 | 949 | 1,977 |
| Diluted EPS (CHF) | 0.18 | 0.25 | 0.53 |
| Cost / Income Ratio | 85.7% | 95.7% | 69.2% |
| Return on Tangible Equity (RoTE) | 6.0% | 8.1% | 17.8% |
| CET1 Capital Ratio (Fully Applied) | 14.0% | 14.5% | 13.7% |
| Liquidity Coverage Ratio (3-month avg) | 134% | 124% | 116% |
Material Changes vs. Prior Periods
- vs. Q4 2015: Operating profit before tax increased significantly to CHF 978 million from CHF 234 million. This improvement was driven by a CHF 686 million decrease in operating expenses, primarily due to lower provisions for litigation and regulatory matters (CHF 39 million vs. CHF 365 million) and the absence of the annual UK bank levy expense. Adjusted operating profit before tax rose to CHF 1,366 million.
- vs. Q1 2015: Net profit attributable to shareholders declined 64% to CHF 707 million from CHF 1,977 million. This decrease was largely due to a CHF 2,008 million drop in operating income, driven by lower net interest and trading income and reduced fee income, reflecting lower market volatility and client activity compared to the post-SNB intervention period of early 2015.
- Capital & Liquidity: The fully applied CET1 capital ratio decreased 0.5 percentage points to 14.0% due to a CHF 6 billion increase in risk-weighted assets (RWA). The Liquidity Coverage Ratio (LCR) improved to 134%, bolstered by increased high-quality liquid assets (HQLA) in anticipation of US intermediate holding company requirements.
Guidance, Outlook, and Risks
- Outlook: Management expects continued headwinds from low interest rates, a strong Swiss franc, and geopolitical uncertainty (including the UK EU referendum). They anticipate net foreign currency translation losses of approximately CHF 40 million in Q2 2016 and CHF 150 million in the second half of 2016 due to the disposal of foreign branches.
- Regulatory Risks: The Basel Committee on Banking Supervision (BCBS) proposed changes to the capital framework that could significantly increase RWA. The US Department of Labor finalized a fiduciary rule effective April 2017, which may require material changes to business processes in Wealth Management Americas and Asset Management.
- Contingencies: The Group faces significant litigation and regulatory risks, including matters related to cross-border wealth management (France, Belgium, US), residential mortgage-backed securities (RMBS), the Madoff fraud, and foreign exchange/LIBOR benchmark manipulation. Provisions for litigation and regulatory matters stood at CHF 2,876 million as of March 31, 2016.
- Unusual Items: The Q1 2016 results included net foreign currency translation losses of CHF 123 million and net restructuring expenses of CHF 265 million, which were excluded from adjusted results.
Key Facts for Investor Verification
- Adjusted vs. Reported Performance: Verify the impact of adjusting items (restructuring, litigation provisions, FX translation) on the reported bottom line, as adjusted operating profit (CHF 1,366 million) was significantly higher than reported profit (CHF 978 million).
- Capital Adequacy: Confirm the trajectory of the CET1 ratio (14.0%) against the Group's target and the impact of proposed Basel III changes on future RWA and capital requirements.
- Litigation Exposure: Review the specific provisions and potential outflows related to the RMBS, Madoff, and FX/LIBOR matters, noting that the aggregate amount of possible future losses may substantially exceed current provisions.
- FX Translation Impact: Monitor the realization of expected foreign currency translation losses (CHF 190 million expected for the remainder of 2016) which will impact future earnings but not regulatory capital.
- Cost Reduction: Track progress against the CHF 2.1 billion net cost reduction target, noting that Q1 2016 saw a significant reduction in non-personnel expenses.