UBS Group AG current report, Q1 FY2015

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Business Context and Reporting Period

This Form 6-K filing by UBS Group AG, dated March 24, 2015, summarizes materials presented at a Morgan Stanley conference. The presentation outlines the bank's strategic direction for 2015 and beyond, focusing on unlocking potential through a clear strategy centered on wealth management, capital strength, and operational efficiency. The data primarily reflects the full year 2014 and pro forma estimates as of late February 2015.

Key Financial Metrics

  • Capital Ratios (Fully Applied Swiss SRB Basel III): As of December 31, 2014, the Common Equity Tier 1 (CET1) ratio was 13.4%, and the Total Capital ratio was 18.9%. The Leverage Ratio was 4.1%.
  • Capital Strength: UBS reported the highest Basel III fully applied CET1 capital ratio among large global banks. Pro forma figures including a February 2015 AT1 issuance of approximately CHF 3.4 billion would increase the CET1 ratio to 13.5% and the Leverage Ratio to 4.2%.
  • Wealth Management Assets: Total invested assets managed globally reached CHF 2 trillion, with USD 1 trillion in Wealth Management Americas and CHF 1.0 trillion in Wealth Management Europe.
  • Profitability Targets: The Group targets an adjusted Return on Tangible Equity (RoTE) of around 10% for 2015 and above 15% from 2016 onwards. Wealth Management combined businesses target 10-15% annual adjusted pre-tax profit growth.
  • Cost Reduction: The bank targets CHF 2.1 billion in total cost savings, with a net cost reduction target of CHF 1.0 billion in the Corporate Center by year-end 2015.
  • Dividends: A proposed ordinary dividend and a one-time supplementary capital return were announced for 2014, with a commitment to a total payout ratio of at least 50% of net profit, subject to capital ratio conditions.

Material Changes and Strategic Initiatives

UBS is executing a strategy to transform its Investment Bank and reduce its balance sheet while growing its wealth management franchise. Key changes include:

  • Balance Sheet Reduction: Targets include reducing Basel III Risk-Weighted Assets (RWA) to below CHF 215 billion by end-2015 and below CHF 200 billion by end-2017. The Leverage Ratio Denominator (LRD) target is CHF 900 billion.
  • Structural Changes: The bank is creating a new Swiss banking subsidiary and a US intermediate holding company. A SESTA squeeze-out procedure for UBS AG shares is expected to complete in the second half of 2015.
  • Cost Efficiency: Significant restructuring costs are anticipated, with approximately CHF 1.5 billion in 2015, CHF 1.0 billion in 2016, and CHF 0.5 billion in 2017. IT infrastructure simplification accounts for roughly 50% of these costs.
  • Updated Guidance: From the first quarter of 2015, the bank updated its performance targets, introducing new KPIs such as adjusted net margins for Wealth Management and Global Asset Management.

Outlook, Risks, and Contingencies

Management expects the net interest margin for Retail & Corporate to trend toward the lower end of the 140-180 bps target range if interest rates remain at current levels. The bank anticipates continued FX volatility and less visibility in the current environment.

Key Risks Identified:

  • Execution risks regarding strategic plans, cost reduction, and balance sheet reduction.
  • Market developments, including movements in securities prices, liquidity, credit spreads, and interest rates.
  • Regulatory changes in Switzerland, the US, and the UK affecting capital, liquidity, and funding requirements.
  • Uncertainty regarding FINMA approval for reductions in operational risk capital and resolvability risk measures.
  • Legal and regulatory liabilities, including litigation and investigations.
  • Operational failures, technology updates, and talent retention challenges.

Investor Verification Checklist

  • Verify the actual completion and timing of the SESTA squeeze-out procedure for UBS AG shares.
  • Monitor the execution of the CHF 2.1 billion cost reduction program, specifically the split between restructuring charges and ongoing efficiency gains.
  • Track progress against the Basel III RWA target of <CHF 215 billion by December 31, 2015.
  • Confirm the approval status of the supplemental operational risk capital analysis with FINMA.
  • Review the impact of the February 2015 AT1 issuance on the fully applied capital ratios in subsequent quarterly reports.
  • Assess the performance of the Wealth Management franchise against the 10-15% pre-tax profit growth target in a low-interest-rate environment.