FINANCIAL INSTITUTIONS SECTOR IN-DEPTH 4 August 2017 Analyst Contacts Andrea Usai 44-20-7772-1058 Senior Vice President [email protected]Ross J Hampson 44-20-7772-1440 Associate Analyst [email protected]Laurie Mayers 44-20-7772-5582 Associate Managing Director [email protected]Ana Arsov 212-553-3763 Managing Director [email protected]Global Investment Banks - Europe: Q2 2017 Update Weaker capital markets revenues drive profit decline In this report we provide key takeaways from the quarterly financial results of the seven European Global Investment Banks (GIBs): Barclays , BNP Paribas , Credit Suisse , Deutsche Bank , HSBC , Société Générale and UBS 1 . The figures herein are converted to US dollars using quarterly average exchange rates and therefore differ from the banks' published financials. Comparisons are between Q2 2017 and Q2 2016 figures, unless otherwise indicated. The seven European GIBs reported a $12.5 billion pre-tax profit, a 13% decline from the same period in 2016. These results show that the profitability of large European banks with sizeable capital markets operations depends upon market conditions, which were stronger in Q2 2016. Low market volatility resulted in more challenging operating conditions in Q2 2017. Aggregate revenues declined by 13% year over year to $57.3 billion. Capital markets revenues were down for all the European GIBs, though some reported higher revenues from non-capital markets activities, which include retail, commercial and corporate banking, asset management and other wholesale operations. These activities tend to generate stable revenues, partly mitigating investment banking earnings shocks. Operating expenses were 11% lower than in the same period last year but remained elevated. Restructuring charges, losses on legacy asset disposals, and conduct and litigation costs continued to weigh on European GIBs' cost bases. Targeted business growth led to cost headwinds for BNP Paribas, HSBC and Société Générale. Investments in digitalisation and business transformation programmes also remain considerable. These initiatives weigh on current profitability but should translate into greater efficiency over time. Regulatory capitalisation was up for all firms except UBS. Six firms' capital ratios increased, mostly because of retained profits and, in some cases, helped by further reductions in risk-weighted assets (RWAs) from disposals of legacy assets and businesses. The median common equity Tier 1 (CET1) ratio for the group remained broadly unchanged from the end of March 2017 at 13.3%. Credit Suisse and Deutsche Bank completed capital-raising exercises. Funding and liquidity profiles were sound and broadly unchanged. All European GIBs made further progress towards issuing Total Loss Absorbing Capacity (TLAC), helped by comparatively tight credit spreads that have resulted from prolonged quantitative easing in the region. The firms continue to have ample liquidity, as evidenced by Liquidity Coverage Ratios (LCRs) well above minimum regulatory requirements. Strong liquidity provides protection against unexpected market shocks, which could materialise in this period of heightened uncertainty in the region.
Weaker capital markets revenues driveprofit declineIn this report we provide key takeaways from the quarterly financial results of the seven EuropeanGlobal Investment Banks (GIBs): Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, HSBC,Société Générale and UBS1. The figures herein are converted to US dollars using quarterlyaverage exchange rates and therefore differ from the banks' published financials. Comparisonsare between Q2 2017 and Q2 2016 figures, unless otherwise indicated.
The seven European GIBs reported a $12.5 billion pre-tax profit, a 13% decline from thesame period in 2016. These results show that the profitability of large European banks withsizeable capital markets operations depends upon market conditions, which were stronger inQ2 2016. Low market volatility resulted in more challenging operating conditions in Q2 2017.
Aggregate revenues declined by 13% year over year to $57.3 billion. Capital marketsrevenues were down for all the European GIBs, though some reported higher revenuesfrom non-capital markets activities, which include retail, commercial and corporate banking,asset management and other wholesale operations. These activities tend to generate stablerevenues, partly mitigating investment banking earnings shocks.
Operating expenses were 11% lower than in the same period last year but remainedelevated. Restructuring charges, losses on legacy asset disposals, and conduct and litigationcosts continued to weigh on European GIBs' cost bases. Targeted business growth led tocost headwinds for BNP Paribas, HSBC and Société Générale. Investments in digitalisationand business transformation programmes also remain considerable. These initiatives weigh oncurrent profitability but should translate into greater efficiency over time.
Regulatory capitalisation was up for all firms except UBS. Six firms' capital ratiosincreased, mostly because of retained profits and, in some cases, helped by further reductionsin risk-weighted assets (RWAs) from disposals of legacy assets and businesses. The mediancommon equity Tier 1 (CET1) ratio for the group remained broadly unchanged from the end ofMarch 2017 at 13.3%. Credit Suisse and Deutsche Bank completed capital-raising exercises.
Funding and liquidity profiles were sound and broadly unchanged. All European GIBsmade further progress towards issuing Total Loss Absorbing Capacity (TLAC), helped bycomparatively tight credit spreads that have resulted from prolonged quantitative easing in theregion. The firms continue to have ample liquidity, as evidenced by Liquidity Coverage Ratios(LCRs) well above minimum regulatory requirements. Strong liquidity provides protectionagainst unexpected market shocks, which could materialise in this period of heighteneduncertainty in the region.
Challenging market conditions weighed on European GIBs' profits in the second quarterPROFIT METRICSAggregate pre-tax profits for the seven European GIBs totalled $12.5 billion in Q2 (Exhibit 1). This level corresponds to a 13%reduction from the same period in 2016, when market conditions started to pick up as rising uncertainty around the outcome of the UK'sreferendum on EU membership drove higher market volatility. European GIBs have large operations in the US, where higher interest rateshave increased the profit contribution from these operations. At the same time, the strengthening of the US dollar versus some Europeancurrencies over the last 12 months has created profit tailwinds for some firms. The weakening year-on-year financial performance in Q2also reflected one-off gains related to the sale of the banks' stakes in Visa Europe (unrated) recorded in Q2 last year.
Exhibit 1
Weaker capital markets performance led to lower profits for the European GIBs in Q2European GIBs: quarterly pre-tax profits (aggregate)
Source: Moody's Investors Service based on company data.
The variance in profitability results by firm (Exhibit 2) reflects their different business mixes, ongoing restructuring at some firms, andsome firms' progress in addressing legacy conduct and litigation issues.
Two firms reported stronger pre-tax profits in Q2. For Credit Suisse, quarterly pre-tax profit was $591 million, 2.9 times higher thanin the same period a year earlier, when the bank's performance suffered from larger losses on legacy assets. HSBC's pre-tax profit was$5.3 billion, up 46%, although this large increase reflects a number of significant P&L items in both periods, including a large goodwillimpairment in the second quarter of 2016.
UBS' Q2 pre-tax profits were broadly flat at $1.5 billion, resulting from stronger performance from the bank's combined wealth businesses,which offset weaker results from its other business lines. BNP Paribas' $3.8 billion pre-tax profit was 4% lower than in the same perioda year ago, partly reflecting gains on investment disposals in 2016. At Société Générale, a 40% drop in pre-tax profits to $1.5 billionresulted from a $330 (€300 million) litigation provision top-up during the quarter.
Barclays was the only firm in the peer group to report a loss in the quarter of $1.1 billion, which was driven by a sizeable $897 million(£700 million) provision for customer redress and a $2.1 billion (£1.6 billion) charge related to the partial sale of its operations in Africa.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.
2 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
Deutsche Bank Barclays BNP Paribas Societe Generale HSBC UBS Credit Suisse
USD
bill
ions
Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017
Note: HSBC refers to HSBC Holdings plc.Source: Moody's Investors Service based on company data.
REVENUE METRICSRevenue charts are presented by quarter to smooth out seasonality effects.
Revenues were down 13% for the European GIBs peer group, owing to weaker contributions from both capital markets andnon-capital markets activities (Exhibit 3). Net interest income continues to be constrained by protracted low interest rates due tolarge quantitative easing in the region. European GIBs are trying to mitigate this effect by increasing fees and commissions, expandinglending volumes and cutting operational expenses, with varying degrees of success thus far. We do not expect the pressure on net interestmargins to ease over the next 12 months, given the very limited prospects for interest rate hikes in the region.
Exhibit 3
Aggregate revenues decreased in Q2European GIBs: quarterly revenues breakdown (aggregate)
Capital Markets Revenue Non-Capital Markets Revenue
Source: Moody's Investors Service based on company data.
Capital markets revenues decreased by 10% for the peer group (Exhibit 4), with Deutsche Bank, Barclays, Société Générale and CreditSuisse reporting the largest year over year reductions of 18%, 12%, 11%, and 10% respectively. The reductions were more containedfor HSBC and BNP Paribas at 6% and 5%, respectively. UBS demonstrated greater resilience, with capital markets revenues broadly flatfrom the same period a year ago.
Revenues from fixed income, currencies and commodities (FICC) had the largest decline for the group at -10% to $7.4 billion, followedby investment banking fees (-8%) and equities (-6%). The prolonged period of low market volatility in Q2 and reduced client activityled to lower trading revenues for the European GIBs. This evidences, once more, the high degree of volatility inherent in earnings fromcapital markets activities, which largely depend on market conditions.
3 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 4
Lower revenues across all product linesCapital markets revenues: breakdown by product
Source: Moody's Investors Service based on company data
COST METRICSOperating expenses were 11% lower than in the previous year quarter (Exhibit 5). However, the results were different across the peergroup (Exhibit 6), reflecting individual firms' progress in restructuring their operations and, for BNP Paribas, HSBC and Société Générale,organic business growth. Cost-rationalisation programmes are still underway at some banks, and investments in IT infrastructure anddigitalisation continue to affect all firms' P&Ls, weighing on their profitability metrics. European GIBs have so far demonstrated limitedability to reduce operating costs along with revenue declines, indicating weak operational leverage levels. However, efficiency metricsshould rise over the longer term, once P&Ls no longer feel the pinch from these costs.
Exhibit 5
Operating costs were lower but remain elevatedEuropean GIBs: aggregated quarterly operating costs (aggregate)
Source: Moody's Investors Service based on company data.
4 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 6
Reductions in operating costs varied by bank in Q2European GIBs: operating costs (by bank)
-
1
2
3
4
5
6
7
8
9
10
Deutsche Bank Barclays BNP Paribas Societe Generale HSBC UBS Credit Suisse
USD
bill
ions
Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017
Note: HSBC refers to HSBC Holdings plc.Source: Moody's Investors Service based on company data.
High operating expenses and lower revenues kept operational efficiency weak for the sector, with differences by bank (Exhibit 7).
Exhibit 7
Operational efficiency levels remain weak for European GIBsEuropean GIBs: reported cost-to-income ratios (by bank)
0%
20%
40%
60%
80%
100%
120%
140%
160%
Deutsche Bank Barclays BNP Paribas Societe Generale HSBC UBS Credit Suisse
Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017
Notes: Reported cost-to-income ratios for Société Générale and BNP Paribas exclude litigation provisions. HSBC refers to HSBC Holdings plc.Source: Company data
Credit costs have declined materially over the last several quarters, reflecting improvements in borrowers' ability to repay debt in a periodof prolonged low interest rates. In addition, the stabilisation of certain troubled sectors, such as oil and gas, has provided additionalcredit risk benefits. In Q2, loan impairment charges for the European GIBs totalled $2.3 billion, corresponding to a 37% yearly reduction(Exhibit 8). Although lower credit costs have eased pressure on profitability for some banks over the last several quarters, we do notexpect European GIBs to benefit from further significant credit quality improvements over the next 12-18 months. Some of these firmshave already indicated that they expect credit costs to pick up from current very low levels in coming quarters.
5 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 8
Low interest rates and stabilisation of the oil & gas sector have reduced European GIBs' credit costEuropean GIBs: loan loss charges (aggregate)
Source: Moody's Investors Service based on company data.
Capital levels are higher for most firms and remain strong for the sectorRegulatory capitalisation rose for all firms except UBS. Higher regulatory capitalisation levels for six European GIBs resulted fromretained profits, lower RWAs and deleveraging activity for some firms. In addition, Deutsche Bank completed an €8 billion equity capitalraise in April and Credit Suisse raised CHF4 billion through a rights offering in June. UBS' CET1 ratio was down 60 basis points in thequarter owing to higher risk-weighted assets. As as result, the median CET1 ratio for the European GIBs peer group remained unchangedfrom the end of March 2017, at 13.3% (Exhibit 9).
Leverage ratios were broadly unchanged in the quarter at a median of 4.5%. The difference in leverage ratios across the peer group partlyreflects the GIBs' different regulatory minimum requirements.
Exhibit 9
Capitalisation continued to improve in the quarterEuropean GIBs: CET1 and Tier 1 leverage ratios at end-June 2017 (by bank)
14.7%14.1%
13.5% 13.3%13.1%
11.7% 11.7%
5.7%
3.8%4.7%
5.2%
4.5% 4.2% 4.2%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
HSBC Holdings Deutsche Bank UBS* Credit Suisse* Barclays BNP Paribas Societe Generale
CET1 Ratio Tier 1 Leverage ratio Median CET1 ratio (13.3%) Median leverage ratio (4.5%)
Notes: (*) Tier 1 leverage ratio for UBS and Credit Suisse reflects CET1 plus Low-Trigger Additional Tier 1 and High-Trigger Additional Tier 1. CET1 ratio and leverage ratio on a look-through/fully-loaded basis. HSBC refers to HSBC Holdings plc.Source: company data
6 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
The European GIBs continued to make good progress towards issuing total loss absorbing capacity, benefitting from tight credit spreads.The banks' funding profiles were broadly unchanged in the quarter and their liquidity profiles remained very strong, as evidenced byliquidity coverage ratios above 110% (Exhibit 10).
Exhibit 10
Liquidity metrics remained strong in the quarterEuropean GIBs: reported liquidity coverage ratios
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Credit Suisse Barclays Deutsche Bank HSBC UBS Societe Generale BNP Paribas
Note: HSBC refers to HSBC Holdings plc.Source: Company data.
7 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Bank-specific considerationsBelow are summaries of the seven European GIBs' individual results. For further detailed analysis, please refer to the Issuer Comments oneach firm, linked in the headings below and listed in Related Research at the end of this report.
BarclaysBarclays reported a net loss of £1.2 billion in Q2, compared with a net profit of £948 million in the same period a year earlier. The quarterlyloss included a £1.6 billion one-off charge related to the partial sale of Barclays Africa Group Limited (BAGL, Ba1 negative) and a further£700 million Payment Protection Insurance (PPI) provision top-up. Excluding these items, pre-tax profit for the quarter would have been£1.2 billion, compared with £733 million a year previously, corresponding to an annualised return on risk-weighted assets (RWAs) of 141basis points. The return on average tangible equity for the quarter was negative at -11%. These results show once again that Barclays’heavy restructuring, whilst progressing well, and resolution of legacy conduct and litigation issues, continue to weigh on its profitability.We expect this to continue during the next 12-18 months, albeit less severely than in previous years.
Besides the partial BAGL sale, Barclays announced the closure of its Non-Core division as of 1 July, reaching another key milestone in itsmulti-year restructuring. The remaining £233 billion of legacy assets, which still represent a sizeable 21% of total assets (or 7% of totalRWAs), will be transferred to the group’s core divisions. Whilst we consider the reduction achieved thus far a positive development, weexpect the residual legacy assets to remain a drag on core earnings for the remainder of 2017 and into 2018 (management has guidedthe market to an additional £300-£400 million of non-core losses during the second half of 2017).
Barclays’ core divisions reported good quarterly performance with a pre-tax profit of £1.9 billion (up from a pre-tax profit of £1.6 billion).The increase was driven by continued strong performance in the Corporate & Investment Bank (CIB) and Consumer, Cards and Payments.The Non-core division continued to be a drag on profits, reporting a quarterly (attributable) loss of £193 million, although it was aboutthree times lower than a year earlier. The reduction in legacy assets continued with pace in Q2, as evidenced by a further £5 billionreduction in Non-core RWAs to £27 billion, close to the c.£25 billion end-June 2017 target.
BNP ParibasBNP Paribas reported net income (group share) of €2.4 billion in Q2, up from €2.1 billion in the same period a year earlier, both adjustedfor own credit and the capital gain on investment disposals. This corresponds to an annualised (net) return on RWAs of 155 basis pointsand a return on equity of 11.5% (our calculation).
We view the Q2 results as credit neutral for bondholders, highlighting BNPP’s strong and consistent performance, benefitting from itshigh business diversification. The good performance of International Financial Services, Corporate Banking and Securities Services, as wella lower cost of risk across all divisions, more than offset weaker revenues in Domestic Markets and Global Markets. Operating costsdecreased by 0.3% mainly owing to a 6% cost reduction in the CIB division, stemming from the implementation of the transformationplan launched in the beginning of 2016. Capital markets revenues declined in the quarter by 2% as a result of very low market volatilityand reduced customer activity, although this decline was much more contained than some of BNPP’s global peers. Domestic Marketsrevenues continued to be constrained by low interest rates (particularly retail in Italy and France) despite an increase in business volumes.International Financial Services revenues increased by 3% owing to strong performances of Personal Finance, Bancwest, as well as Wealthand Asset Management.
Credit SuisseCredit Suisse reported an (unadjusted) net profit of CHF 303 million in Q2, up 78% from a year earlier. This corresponds to an annualisedreturn on RWAs of 47 basis points (bps), compared with 25 bps a year earlier, and an annualised return on equity of 2.8% (2Q16:1.5%). CS’s good quarterly performance was driven by (1) an 8% decrease in operating expenses, with decreases across all divisions apartfrom International Wealth Management (IWM), (2) a 2% rise in net revenues, as higher revenues from the Swiss Universal Bank (SUB),International Wealth Management and Asia Pacific Wealth Management and Connected offset weaker capital markets revenues and (3)strengthening capital and leverage ratios in the quarter, reflecting the CHF4 billion capital raise, bringing the CET1 ratio to 13.3% of RWAs(+160 bps), now in line with the GIB peer group median. These results are broadly in line with our expectations.
Revenue rises from wealth management and Swiss operations offset capital markets revenue weakness. Strong revenue increases wererecorded across IWM (+10%), SUB (+5%) and Asia Pacific Wealth Management and Connected (+23%). Capital markets revenues weresharply down in Asia Pacific Markets, in both equity and fixed income sales and trading (-47% combined). Revenues were also down in
8 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
GM’s Solutions product (-52%) and in debt underwriting, advisory and other fees (-12% combined) in Investment Banking and CapitalMarkets (IBCM). These declines were not offset by good results from GM in Credit (+22%) and Equities (+5%), and in IBCM from equityunderwriting (+12%).
Deutsche BankDeutsche Bank reported a €822 million pre-tax profit for Q2 , compared with a €408 million profit for the same period a year previously.Adjusting for derivative valuation effects within the Corporate and Investment Bank, pre-tax profit totalled €926 million in Q2. Based onthe quarter’s 43% tax rate, this equates to an annualized after-tax return on €355 billion of RWAs of 59 bps, compared with a break-evenquarter one year ago. The bank reported a post-tax return on average tangible equity of 3.2%, up from 0.1% in Q2 2016.
We consider these results credit neutral and broadly in line with our expectations. The bank faced stiff revenue headwinds, with reportedrevenues down 10%, but management was able to reduce operating costs by 15%, and very low credit costs mitigated the overall impacton income. Deutsche Bank continues to make progress with its strategic plan, especially in relation to cost rationalisation. The €8 billioncommon equity capital raise that closed during the quarter brings the CET1 ratio to 14.1% as of 30 June 2017, a clear credit positive. Wecontinue to expect reduced litigation and legacy costs this year, but credit costs are expected to rise in the second half, leading to onlymodest overall profitability in 2017. Nonetheless, the capital raise and litigation settlements have bolstered the cushion for creditors andenhanced the bank’s financial flexibility, even amidst revenue pressures.
Revenue headwinds continue to challenge Deutsche Bank’s performance, especially in their capital markets businesses. Revenues in thecapital markets franchises continued to be constrained by lower market volatility, in turn leading to lower client activity, as well as byidiosyncratic factors relating to Deutsche Bank’s business exits and weakened, albeit improving, client engagement, which was significantlyimpacted by market-confidence issues over the last 18 months. Revenues across the retail franchises were broadly flat, despite the ongoinglow interest rate environment, with asset management revenues increasing following improvements in market conditions.
HSBCHSBC Holdings plc reported a net profit of $3.9 billion in Q2, up 57% from the same period a year earlier. This corresponds to an annualisedreturn on after-tax (unadjusted) RWAs of 179 bps, compared with 90 bps a year earlier, and an annualised after-tax return on equity of9.3%, up from 5.7% in Q2 2016. The results were adversely affected by $748 million of pre-tax significant items (Q2 2016: $1.75 billion).On an adjusted basis, HSBC’s pre-tax profit increased 12%, driven by (1) higher revenues across the three main business segments and(2) lower loan impairment charges in Europe and North America, which offset (3) higher operating expenses. These results are broadlyin line with our expectations and have no credit implications.
Results for the quarter reflect the adverse effect of a net $748 million of significant items: $837 million of costs-to-achieve (CTA) as partof the group’s $6 billion cost savings programme, $322 million of net reversals of litigation provisions, and other items. The same periodlast year included $1.75 billion of net significant items: $800 million goodwill impairment in Global Private Banking Europe, $723 millionof litigation provisions, $677 million of CTA costs.UK customer redress costs were $89 million in Q2 2017 (Q2 2016: $33 million).
Revenues increased in all of HSBC's three largest business segments, which offset a weaker capital markets result. Retail Banking andWealth Management reported a strong revenue increase (RBWM, +9%), particularly in Hong Kong and from Asia insurance results. GlobalBanking & Markets (GB&M) revenues increased 7% as higher lending, securities services and liquidity and cash management revenueoffset a weaker capital markets result; within GB&M, capital markets revenues declined 6% as lower revenues from Credit and Rates werenot balanced by a higher FX and Equities result. Commercial Banking (CMB) revenues were broadly unchanged.
Société GénéraleSociété Générale reported net income of €1.2 billion in Q2, up from €0.9 billion in the same period last year, both adjusted for own-creditand capital gain on investment disposals. This corresponds to an annualized (net) return on RWAs of 138 bps and a return on equity of 10%.
On balance, we view SG’s results as credit neutral and supportive of its ratings. Like in the previous quarter, SG’s Q2 results were hurt bylitigation-related charges (€300 million in Q2 and €350 million in Q1), which partly offset the benefits of improved business performance.SG reported stronger quarterly revenues in International Banking and Financial Services and low cost of risk across all division, which morethan offset weaker revenues in French Retail and Global Markets and Investor Services. Operating expenses were up by 1.2%, despiteincluding a €60 million restructuring provision reversal, as a result of business growth and additional investments in digital transformation.Capital markets revenues declined by 3%, driven by weaker fixed income and equity contributions due to low market volatility and lower
9 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
client activity in the quarter. This decline was much more contained than for some of SG’s global peers. Prolonged ultra-low interest ratescontinued to weigh on the results for French Retail, partly mitigated by higher lending volumes and higher fees and commissions.
UBSUBS Group AG, the parent holding company of UBS AG, reported consolidated pre-tax earnings of CHF1.5 billion in Q2, and net profitattributable to shareholders of CHF 1.2 billion. On a Moody's adjusted basis, UBS would have reported a 9% increase in pre-tax earningsto CHF 1.4 billion and an after-tax net profit attributable to shareholders of CHF 1.1 billion, assuming a 25% tax rate.
We estimate an adjusted annualized return on average common equity of 8.1% and return on fully applied RWAs of 1.9% for the quarter.These results are consistent with our expectation of continued earnings stability as UBS benefits from growth across its global wealthfranchises and cost-reduction initiatives but faces softer performance across other business lines.
UBS reported improved results in its combined wealth business, while other business lines were weaker in the quarter. Adjusted headlinerevenues were broadly flat year-over-year at CHF 7.2 billion. The results were highlighted by improved profitability and revenues in thewealth businesses, while revenues and profit margins were softer in Personal & Corporate Banking, Asset Management and the InvestmentBank relative to Q2 2016.
Improving investor confidence appears to have supported performance in both wealth businesses, with a notable increase intransaction-based revenues. The bank highlighted that concerns over geopolitical tensions and macroeconomic uncertainty couldweigh on client activity going forward. UBS booked CHF 9 million of litigation provisions in the quarter. Total litigation reserves stoodat CHF 2.4 billion at end-June 2017. On a Moody’s adjusted basis, the cost-to-income ratio improved to 80%, from 82% in the prioryear.
10 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
» Credit Suisse Group AG: Improved capitalisation and higher pre-tax profits on positive operational leverage and lower non-corelosses
» Deutsche Bank AG: Q2 2017 Results: Weak revenues partly offset by further cost savings as restructuring progresses
» HSBC Holdings plc: Q2 2017: Higher Revenues and Lower Loan Losses Boost Profit Despite Softer Capital Markets Result; CapitalStrengthened
» Societe Generale: Q2 2017 Results: Litigation provisions diminish the benefits from a strong underlying performance
» UBS Group AG: 2Q17 results: Growth in Wealth Management businesses and expense control offset softer performance elsewhere
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.
11 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDITRISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THERELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITYMAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGSDO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’SOPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVEMODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’SPUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOTPROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THESUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATIONAND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FORPURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FORRETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACTYOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW,AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTEDOR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANYPERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as wellas other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information ituses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However,MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for anyindirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use anysuch information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses ordamages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of aparticular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatorylosses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for theavoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents,representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCHRATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (includingcorporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating,agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintainpolicies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO andrated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually atwww.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s InvestorsService Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intendedto be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, yourepresent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly orindirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion asto the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be recklessand inappropriate for retail investors to use MOODY’S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or otherprofessional adviser.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1083487
13 4 August 2017 Global Investment Banks - Europe: Q2 2017 Update : Weaker capital markets revenues drive profit decline
