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AMNA Ubs

Filed: 14 Mar 12, 8:00pm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

(Mark One)

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-15060

 

 

UBS AG

(Exact Name of Registrant as Specified in Its Charter)

Switzerland

(Jurisdiction of Incorporation or Organization)

Bahnhofstrasse 45, CH-8001 Zurich, Switzerland

and

Aeschenvorstadt 1, CH-4051 Basel, Switzerland

(Address of Principal Executive Offices)

Sarah M. Starkweather

UBS AG

677 Washington Boulevard

Stamford, CT 06901

Telephone: (203) 719-3000

Fax: (203) 719-0680

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Please see page 3.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Please see page 5.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Please see page 5.


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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of

31 December 2011:

Ordinary shares, par value CHF 0.10 per share: 3,832,121,899 ordinary shares

(including 84,955,551 treasury shares)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  þ            No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ¨             No  þ

Note — Checking the box above will not relieve any registrant required to file reports pursuant to

Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ             No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 205 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ             No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer  þ  Accelerated filer  ¨  Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

 

U.S. GAAP  ¨ 

International Financial Reporting

Standards as issued by the International

Accounting Standards Board  þ

 Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ¨             Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes  ¨            No  þ

 

 

 

 

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Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Name of each exchange on
which registered

Ordinary Shares (par value of CHF 0.10 each)  New York Stock Exchange
$300,000,000 Floating Rate Noncumulative Trust Preferred Securities  New York Stock Exchange
$300,000,000 Floating Rate Noncumulative Company Preferred Securities  New York Stock Exchange*
$1,000,000,000 6.243% Noncumulative Trust Preferred Securities  New York Stock Exchange
$1,000,000,000 6.243% Noncumulative Company Preferred Securities  New York Stock Exchange*
Subordinated Guarantee of UBS AG with respect to each of the
Noncumulative Company Preferred Securities above
  New York Stock Exchange*
$100,000,000 E-TRACS UBS Bloomberg CMCI Food ETN due April 2038  NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Agriculture ETN due April 2038  NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Energy ETN due April 2038  NYSE Arca
$100,000,000 E-TRACS UBS Bloomberg CMCI Total Return ETN due April 2038  NYSE Arca
$100,000,000 E-TRACS UBS Bloomberg Gold ETN due April 2038  NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Industrial Metals due April 2038  NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Livestock ETN due April 2038  NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Silver ETN due April 2038  NYSE Arca
$50,000,000 E-TRACS UBS Long Platinum ETN due May 2018  NYSE Arca
$50,000,000 E-TRACS UBS Short Platinum ETN due May 2018  NYSE Arca
$100,000,000 E-TRACS UBS S&P 500 Gold Hedged Index ETN due January 2040  NYSE Arca
$100,000,000 E-TRACS Dow Jones-UBS Commodity Index Total Return ETN due October 2039  NYSE Arca
$100,000,000 E-TRACS Linked to the Alerian MLP Infrastructure Index due April 2, 2040  NYSE Arca
$100,000,000 1xMonthly Short E-TRACS Linked to the Alerian MLP Infrastructure Total Return Index due October 1, 2040  NYSE Arca

 

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$100,000,000 2xMonthly Leveraged Long E-TRACS Linked to the Alerian MLP Infrastructure Index due July 9, 2040  NYSE Arca
$100,000,000 E-TRACS Linked to the Alerian Natural Gas MLP Index due July 9, 2040  NYSE Arca
$100,000,000 E-TRACS Linked to the Wells Fargo® MLP Index due October 29, 2040  NYSE Arca
$100,000,000 E-TRACS Daily Long-Short VIX ETN due November 30, 2040  NYSE Arca
$100,000,000 E-TRACS Linked to the Wells Fargo Business Development Company Index due April 26, 2041  NYSE Arca
$100,000,000 2×Leveraged Long E-TRACS Linked to the Wells Fargo® Business Development Company Index due May 24, 2041  NYSE Arca
$100,000,000 E-TRACS Oil Futures Contango ETN due June 14, 2041  NYSE Arca
$100,000,000 E-TRACS Natural Gas Futures Contango ETN due June 14, 2041  NYSE Arca
$100,000,000 E-TRACS Next Generation Internet ETN due July 19, 2041  NYSE Arca
$100,000,000 Monthly 2xLeveraged E-TRACS Next Generation Internet ETN due July 19, 2041  NYSE Arca
$100,000,000 E-TRACS Daily Short 1-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS Daily Short 2-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS Daily Short 3-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS Daily Short 4-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS Daily Short 5-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS Daily Short 6-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS 1-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS 2-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS 3-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS 4-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS 5-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca
$100,000,000 E-TRACS 6-Month S&P 500 VIX Futures ETN due September 6, 2041  NYSE Arca

 

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$100,000,000 E-TRACS ISE Solid State Drive Index ETN due September 13, 2041  NYSE Arca
$100,000,000 E-TRACS Monthly 2xLeveraged ISE Solid State Drive Index ETN due September 13, 2041  NYSE Arca
$100,000,000 E-TRACS Monthly 2xLeveraged ISE Cloud Computing TR Index ETN due October 4, 2041  NYSE Arca
$100,000,000 E-TRACS Fisher-Gartman Risk On ETN due November 27, 2041  NYSE Arca
$100,000,000 E-TRACS Fisher-Gartman Risk Off ETN due November 27, 2041  NYSE Arca

 

*Not for trading, but solely in connection with the registration of the corresponding Trust Preferred Securities.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that constitute “forward-looking statements”, including but not limited to management’s outlook for UBS’s financial performance and statements relating to the anticipated effect of transactions and strategic initiatives on UBS’s business and future development. While these forward-looking statements represent UBS’s judgments and expectations concerning the matters described, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s expectations. These factors include, but are not limited to: (1) developments in the markets in which UBS operates or to which it is exposed, including movements in securities prices or liquidity, credit spreads, currency exchange rates and interest rates and the effect of economic conditions and market developments on the financial position or creditworthiness of UBS’s clients and counterparties; (2) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings; (3) the ability of UBS to reduce its Basel III risk-weighted assets in order to comply with future Swiss capital requirements without materially adversely affecting its profitability; (4) changes in financial regulation in Switzerland, the US, the UK and other major financial centers which may impose constraints on or necessitate changes in the scope and location of UBS’s business activities and in its legal and booking structures, including the imposition of more stringent capital and liquidity requirements, incremental tax requirements and constraints on remuneration; (5) possible constraints or sanctions that regulatory authorities might impose on UBS, including as a consequence of the unauthorized trading incident announced in September 2011; (6) changes in UBS’s competitive position, including whether differences in regulatory capital and other requirements among the major financial centers will adversely affect UBS’s ability to compete in certain lines of business; (7) the liability to which UBS may be exposed due to litigation, contractual claims and regulatory investigations, some of which stem from the market events and losses incurred by clients and counterparties during the financial crisis of 2007-2009; (8) the effects on UBS’s cross-border banking business of international tax treaties recently negotiated by Switzerland and future tax or regulatory developments; (9) the degree to which UBS is successful in effecting organizational changes and implementing strategic plans, and whether those changes and plans will have the effects intended; (10) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, support and control its businesses; (11) changes in accounting standards or policies, and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other matters; (12) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (13) whether UBS will be successful in keeping pace with competitors in updating its technology, particularly in trading businesses; and (14) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures, either within UBS or within a counterparty. Our business and financial performance could be affected by other factors identified in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth in documents furnished by UBS and filings made by UBS with the SEC. UBS is not under any obligation to (and expressly disclaims any obligation to) update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

 

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PART I

 

Item 1.Identity of Directors, Senior Management and Advisors.

Not required because this Form 20-F is filed as an annual report.

 

Item 2.Offer Statistics and Expected Timetable.

Not required because this Form 20-F is filed as an annual report.

 

Item 3.Key Information

A – Selected Financial Data.

Please seeSelected Financial Data on pages 440 to 443 andStatement of changes in equity on pages 292 to 293 of the Annual Report 2011 of UBS AG (the “Annual Report”) which is annexed hereto and forms an integral part hereof.

The exchange rate for the Swiss franc as reported by the Federal Reserve System (H.10 Weekly) on 29 February 2012 was CHF 0.9023 per USD 1. See page 440 of the Annual Report for additional exchange rate information.

Ratio of Earnings to Fixed Charges.

Please see page 443 of the Annual Report and Exhibit 7 to this Form 20-F.

B – Capitalization and Indebtedness.

Not required because this Form 20-F is filed as an annual report.

C – Reasons for the Offer and Use of Proceeds.

Not required because this Form 20-F is filed as an annual report.

D – Risk Factors.

Please see pages 50 to 56 of the Annual Report.

 

Item 4.Information on the Company.

A – History and Development of the Company

1 – 3        Please seeCorporate information on page 463 of the Annual Report.

4              Please seeThe making of UBS on pages 12 to 14 of the Annual Report.

5 – 7        Not applicable.

 

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B – Business Overview.

1,2,5,7                Please refer to pages 7 and 30 to 46 of the Annual Report. For a breakdown of revenues by category of activity and geographic market for each of the last three financial years, please refer to Notes 2a and 2b to the consolidated financial statements (the “Financial Statements”) contained in the Annual Report,Segment reporting on pages 319 to 322 andSegment reporting by geographic location on page 323, respectively.

3 Please refer toSeasonal characteristics on page 28 of the Annual Report.

4 Not applicable.

6 None.

8 Please seeRegulatory developments andRegulation and supervision on pages 19 to 21 and 47 to 49, respectively, of the Annual Report.

C – Organizational Structure.

Please seeUBS and its businesses and Note 33 to the Financial Statements,Significant subsidiaries and associates, on pages 7 and 394 to 397 of the Annual Report.

D – Property, Plant and Equipment.

Please seeProperty, plant and equipment on page 444 and Notes 15 and 25 to the Financial Statements,Property and equipment andOperating lease commitments, on pages 335 and 358, respectively, of the Annual Report.

Information Required by Industry Guide 3

Please seeInformation required by industry guide 3 on pages 445 to 459 of the Annual Report. See alsoSelected financial data on pages 440 to 443 of the Annual Report for the return on equity attributable to UBS shareholders, return on average equity, return on average assets, dividend payout ratio and ratio of average equity to average assets.

 

Item 4A.Unresolved Staff Comments.

None.

 

Item 5.Operating and Financial Review and Prospects.

A – Operating Results.

Please seeKey figures on page 6,Measurement of performance on pages 27 to 29, andUBS resultson pages 62 to 81 of the Annual Report. For a discussion of operating results by business division, please refer to pages 82 to 110 of the Annual Report.

For information regarding the impact of foreign currency fluctuations, seeCorporate currency management on page 152 of the Annual Report.

B – Liquidity and Capital Resources.

We believe that our working capital is sufficient for the company’s present requirements. Liquidity and capital management is undertaken at UBS as an integrated asset and liability management function. For a detailed discussion, please seeLiquidity and funding managementon pages 144 to 150 andCapital managementon pages 153 to 160 of the Annual Report.

 

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For a discussion of UBS’s borrowings and cash flows, please seeBalance sheeton pages 72 to 75 andCash flowson pages 80 to 81 of the Annual Report.

Please see alsoInterest rate and currency managementon pages 151 to 152 of the Annual Report and Note 19 to the Financial Statements,Financial liabilities designated at fair value and debt issued held at amortized cost,on pages 339 to 340 of the Annual Report.

C – Research and Development, Patents and Licenses, etc.

Not applicable.

D – Trend Information.

Please seeCurrent market climate and industry driverson pages 16 to 18 of the Annual Report.

E – Off-balance Sheet Arrangements.

Please seeOff-balance sheet arrangementson pages 76 to 79 of the Annual Report and Notes 24 and 25 to the Financial Statements,Pledgeable off-balance-sheet securitiesandOperating lease commitments,respectively, on page 358 of the Annual Report.

F – Tabular Disclosure of Contractual Obligations.

Please seeContractual obligationson page 79 of the Annual Report.

 

Item 6.Directors, Senior Management and Employees.

A – Directors and Senior Management.

1,2,3 Please see pages 204 to 208 and pages 212 to 216 of the Annual Report.

4, 5 None.

B – Compensation.

1 Please see pages 268 to 278 of the Annual Report and also Note 30 to the Financial Statements,Equity participation and other compensation plans, on pages 381 to 390 and Note 31 to the Financial Statements,Related parties, on pages 391 to 393 of the Annual Report.

2 Please see Note 29 to the Financial Statements,Pension and other post-employment benefit plans, on pages 375 to 380 of the Annual Report.

C – Board practices.

1 Please see pages 204 to 219 of the Annual Report.

2 Please see pages 272 to 278 of the Annual Report and Note 31 to the Financial Statements,Related parties, on pages 391 to 393 of the Annual Report.

 

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3 Please seeAudit committee andHuman Resources and Compensation Committeeon pages 209 to 210 of the Annual Report.

D—Employees.

Please seeOur employeeson pages 234 to 239 of the Annual Report.

E—Share Ownership.

Please see pages 273 to 277 in the Annual Report, Note 30 to the Financial Statements,Equity participation and other compensation plans,on pages 381 to 390 of the Annual Report and “Equity holdings” in Note 31 to the Financial Statements,Related parties,on page 391 of the Annual Report.

 

Item 7.Major Shareholders and Related Party Transactions.

A—Major Shareholders.

Please seeGroup structure and shareholderson pages 197 to 198 of the Annual Report. The number of shares held by the respective shareholders listed in the “Shareholders registered in the UBS share register with 3% or more of shares issued” table on page 197 is as follows:

 

Shareholder  Number of shares held   

Chase Nominees Ltd., London

   419,533,402    

DTC (Cede & Co.), New York

   270,808,806    

Government of Singapore Investment Corp., Singapore

   245,481,682    

Nortrust Nominees Ltd., London

   160,917,513    

The listed shareholders have the same voting rights as other shareholders of UBS.

At December 31, 2011, the portion of UBS ordinary shares held in the United States was 265,029,075 by 1,229 record holders.

B—Related Party Transactions.

Please seeLoanson page 269 of the Annual Report, Note 31 to the Financial Statements,Related parties,on pages 391 to 393 of the Annual Report andLoans granted to BoD members on 31 December 2010/2011andLoans granted to GEB members on 31 December 2010/2011 on page 278 of the Annual Report.

The aforementioned loans (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (c) did not involve more than the normal risk of collectability or present other unfavorable features.

C—Interests of Experts and Counsel.

Not applicable because this Form 20-F is filed as an annual report.

 

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Item 8.Financial Information.

A—Consolidated Statements and Other Financial Information.

1, 2, 3, 4, 5, 6 Please see Item 18 of this Form 20-F.

7 Information on material legal and regulatory proceedings is in Note 21 to the Financial Statements,Provisions and contingent liabilities, on pages 341 to 348 of the Annual Report. For developments during the year, please see also Note 15,Provisions and contingent liabilities, in the Financial Information section in each of our quarterly reports: First Quarter 2011 Report, filed on Form 6-K dated April 26, 2011; Second Quarter 2011 Report, filed on Form 6-K dated July 26, 2011; Third Quarter 2011 Report, filed on Form 6-K dated October 25, 2011; and Fourth Quarter 2011 Report, filed on Form 6-K dated February 7, 2012. The Notes in each such Quarterly Report speak only as of their respective dates.

8 Please refer toDistributions to shareholderson page 159 of the Annual Report for a description of UBS’s dividend policy.

B—Significant Changes.

UBS is not aware of any significant change that has occurred since the date of the annual financial statements included in this Form 20-F. Please see Note 32 to the Financial Statements,Events after the reporting period,on pages 393 to 394 of the Annual Report.

 

Item 9.The Offer and Listing.

A – Offer and Listing Details.

1,2,3,5,6,7 Not required because this Form 20-F is filed as an annual report.

 

4Please seeStock exchange prices on page 160 of the Annual Report.

B—Plan of Distribution.

Not required because this Form 20-F is filed as an annual report.

C—Markets.

UBS’s shares are listed and traded on the SIX Swiss Exchange and the New York Stock Exchange. The symbols are shown on page 461 of the Annual Report.

D—Selling Shareholders.

Not required because this Form 20-F is filed as an annual report.

E—Dilution.

Not required because this Form 20-F is filed as an annual report.

F—Expenses of the Issue.

Not required because this Form 20-F is filed as an annual report.

 

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Item 10.Additional Information.

A—Share Capital.

Not required because this Form 20-F is filed as an annual report.

B—Memorandum and Articles of Association.

Please see the Articles of Association of UBS AG and the Organization Regulations of UBS AG (Exhibits 1.1 and 1.2, respectively, of this Form 20-F).

Set forth below is a summary of the material provisions of our Articles of Association, which we call the “Articles” throughout this document, Organization Regulations and the Swiss Code of Obligations relating to our shares. This description does not purport to be complete and is qualified in its entirety by references to Swiss law, including Swiss company law, and to the Articles and Organization Regulations.

The shares are registered shares with a par value of CHF 0.10 per share. The shares are fully paid up.

Each share carries one vote at our shareholders’ meetings. Voting rights may be exercised only after a shareholder has been recorded in our share register as a shareholder with voting rights. Registration with voting rights is subject to certain restrictions. See “— Transfer of Shares” and “—Shareholders’ Meeting”.

The Articles provide that we may elect not to print and deliver certificates in respect of registered shares. Shareholders may, however, following registration in the share register, request at any time that we issue a written statement in respect of their shares.

Transfer of Shares

The transfer of shares is effected by corresponding entry in the books of a bank or depository institution following an assignment in writing by the selling shareholder and notification of such assignment to us by the bank or depository institution. The transfer of shares further requires that the purchaser file a share registration form in order to be registered in our share register as a shareholder. Failing such registration, the purchaser may not vote at or participate in shareholders’ meetings.

A purchaser of shares will be recorded in our share register with voting rights upon disclosure of its name, citizenship and address. However, we may decline a registration with voting rights if the shareholder does not declare that it has acquired the shares in its own name and for its own account. If the shareholder refuses to make such declaration, it will be registered as a shareholder without voting rights.

There is no limitation under Swiss law or our Articles on the right of non-Swiss residents or nationals to own or vote our shares.

Shareholders’ Meeting

Under Swiss law, annual ordinary shareholders’ meetings must be held within six months after the end of our financial year, which is 31 December. Shareholders’ meetings may be convened by the Board of Directors (BoD) or, if necessary, by the statutory auditors, with twenty-days’ advance notice. The BoD is further required to convene an extraordinary shareholders’ meeting if so resolved by a shareholders’ meeting or if so requested by shareholders holding in aggregate at least 10% of our nominal share capital. Shareholders holding shares with an aggregate par value of at least CHF 62,500 have the right to request that a specific proposal be put on the agenda and voted upon at the next shareholders’ meeting. A shareholders’ meeting is convened by publishing a notice in the Swiss Official Commercial Gazette (Schweizerisches Handelsamtsblatt) at least twenty days prior to such meeting.

 

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The Articles do not require a minimum number of shareholders to be present in order to hold a shareholders’ meeting.

Resolutions generally require the approval of an “absolute majority” of the votes cast at a shareholders’ meeting. Shareholders’ resolutions requiring a vote by absolute majority include:

 

  

Amendments to the Articles;

 

  

Elections of directors and statutory auditors;

 

  

Approval of the annual report and the consolidated statements of accounts;

 

  

Approval of the annual financial statements and the resolution on the use of the balance sheet profit (declaration of dividend);

 

  

Decisions to discharge directors and management from liability for matters disclosed to the shareholders’ meeting; and

 

  

Passing resolutions on matters which are by law or by the Articles reserved to the shareholders’ meeting (e.g., the ordering of an independent investigation into the specific matters proposed to the shareholders’ meeting).

Under the Articles, a resolution passed at a shareholders’ meeting with a supermajority of at least two thirds of the Shares represented at such meeting is required to:

 

  

Change the limits on BoD size in the Articles;

 

  

Remove one fourth or more of the members of the BoD; or

 

  

Delete or modify the above supermajority requirements.

Under Swiss corporate law, a resolution passed by at least two thirds of votes represented and an absolute majority of the par value of the shares represented must approve:

 

  

A change in our stated purpose in the Articles;

 

  

The creation of shares with privileged voting rights;

 

  

A restriction on transferability;

 

  

An increase in authorized capital;

 

  

An increase in capital out of equity against contribution in kind, for the purpose of acquisition and granting of special rights;

 

  

Changes to pre-emptive rights;

 

  

A change of domicile of the corporation; or

 

  

Dissolution of the corporation without liquidation.

At shareholders’ meetings, a shareholder can be represented by his or her legal representative or under a written power of attorney by another shareholder eligible to vote, by a corporate proxy, by the independent proxy or by a custodial proxy. Votes are taken electronically, by written ballot or by a show of hands. If a written ballot is requested by at least 3% of the votes present at the shareholders’ meeting or such ballot is ordered by the Chairman of the meeting, a written ballot will be conducted.

Net Profits and Dividends

Swiss law requires that at least 5% of the annual net profits of a corporation must be retained as general reserves for so long as these reserves amount to less than 20% of the corporation’s nominal share capital. Any net profits remaining are at the disposal of the shareholders’ meeting, except that, if an annual dividend exceeds 5% of the nominal share capital, then 10% of such excess must be retained as general reserves.

 

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Under Swiss law, dividends may be paid out only if the corporation has sufficient distributable profits from previous business years or if the reserves of the corporation are sufficient to allow distribution of a dividend. In either event, dividends may be paid out only after approval by the shareholders’ meeting. The BoD may propose that a dividend be paid out, but cannot itself set the dividend. The auditors must confirm that the dividend proposal of the Board conforms with statutory law. In practice, the shareholders’ meeting usually approves the dividend proposal of the BoD.

Dividends are usually due and payable after the shareholders’ resolution relating to the allocation of profits has been passed. Under Swiss law, the statue of limitations in respect of dividend payments is five years.

U.S. holders of shares will receive dividend payments in U.S. dollars, unless they provide notice to our U.S. transfer agent, BNY Mellon Shareowner Services, that they wish to receive dividend payments in Swiss francs. The U.S. transfer agent will be responsible for paying the U.S. dollars or Swiss francs to registered holders, and for withholding any required amounts for taxes or other governmental charges. If the U.S. transfer agent determines, after consultation with us, that in its judgment any foreign currency received by it cannot be converted into U.S. dollars or transferred to U.S. holders, it may distribute the foreign currency received by it, or an appropriate document evidencing the right to receive such currency, or in its discretion hold such foreign currency for the accounts of U.S. holders.

Preemptive Rights

Under Swiss law, any share issue, whether for cash or non-cash consideration or for no consideration, is subject to the prior approval of the shareholders’ meeting. Shareholders of a Swiss corporation have certain preemptive rights to subscribe for new issues of shares in proportion to the nominal amount of shares held. The Articles or a resolution adopted at a shareholders’ meeting with a supermajority may, however, limit or suspend preemptive rights in certain limited circumstances.

Borrowing Power

Neither Swiss law nor the Articles restrict in any way our power to borrow and raise funds. No shareholders’ resolution is required.

Conflicts of Interests

Swiss law does not have a general provision on conflicts of interests. However, the Swiss Code of Obligations requires directors and members of senior management to safeguard the interests of the corporation and, as such, imposes a duty of care and a duty of loyalty on directors and officers. This rule is generally understood as disqualifying directors and senior officers from participating in decisions that directly affect them. Directors and officers are personally liable to the corporation for any breach of these provisions. In addition, Swiss law contains a provision under which payments made to a shareholder or a director or any person associated therewith, other than at arm’s length, must be repaid to us if the shareholder or director was acting in bad faith.

In addition, our Organization Regulations prohibit any member of the BoD from participating in discussions and decision-making regarding a matter as to which he or she has a conflict of interest.

 

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Repurchase of Shares

Swiss law limits a corporation’s ability to hold or repurchase its own shares. We and our subsidiaries may only repurchase shares if we have sufficient free reserves to pay the purchase price and if the aggregate nominal value of the shares does not exceed 10% of our nominal share capital. Furthermore, we must create a special reserve on our balance sheet in the amount of the purchase price of the acquired shares. Such shares held by us or our subsidiaries do not carry any rights to vote at shareholders’ meetings.

Notices

Notices to shareholders are made by publication in the Swiss Official Gazette of Commerce. The BoD may designate further means of communication for publishing notices to shareholders.

Notices required under the listing rules of the SIX Swiss Exchange will be published in two Swiss newspapers in German and French. We or the SIX Swiss Exchange may also disseminate the relevant information on the online exchange information systems.

Registration and Business Purpose

We are registered as a corporation in the commercial registers of Canton Zurich and Canton Basle-City under the registration number CH-270.3.004.646-4 and have registered offices in Zurich and Basel, Switzerland.

Our business purpose, as set forth in our Articles, is the operation of a bank, with a scope of operations extending to all types of banking, financial, advisory, trading and service activities in Switzerland and abroad.

Duration, Liquidation and Merger

Our duration is unlimited.

Under Swiss law, we may be dissolved at any time by a shareholders’ resolution which must be passed by (1) an absolute majority of the shares represented at the meeting in the event we are to be dissolved by way of liquidation, or (2) a supermajority of at least two thirds of the votes represented and an absolute majority of the par value of the shares represented at the meeting in other events (for example, in a merger where we are not the surviving entity). Dissolution by court order is possible if we become bankrupt.

Under Swiss law, any surplus arising out of a liquidation (after the settlement of all claims of all creditors) is distributed to shareholders in proportion to the paid-up nominal value of shares held.

Disclosure of Principal Shareholders

Under the applicable provisions of the new Swiss Stock Exchange Act, shareholders and shareholders acting in concert with third parties who reach, exceed or fall below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 33 1/3%, 50% or 66 2/3% of the voting rights of a Swiss listed corporation must notify the corporation and the SIX Swiss Exchange on which such shares are listed of such holdings, whether or not the voting rights can be exercised. Following receipt of such notification, the corporation has the obligation to inform the public. The corporation must disclose in an attachment to the balance sheet the identity of any shareholders who own in excess of 5% of its shares.

 

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Mandatory Tender Offer

Under the Swiss Stock Exchange Act, shareholders and groups of shareholders acting in concert who acquire more than 33 1/3% of the voting rights of a listed Swiss company will have to submit a takeover bid to all remaining shareholders. A waiver from the mandatory bid rule may be granted by our supervisory authority. If no waiver is granted, the mandatory takeover bid must be made pursuant to the procedural rules set forth in the Swiss Stock Exchange Act and implementing ordinances.

Other

Ernst & Young Ltd, Aeschengraben 9, CH-4051 Basel, Switzerland, have been appointed as statutory auditors and as auditors of the consolidated accounts of UBS. The auditors are subject to confirmation by the shareholders at the ordinary general meeting on an annual basis.

Please seeCapital structureon pages 199 to 201,Shareholders’ participation rightson pages 202 to 203 andElections and terms of officeon page 208 of the Annual Report.

C—Material Contracts.

The Fiscal Agency Agreement related to the loss-absorbing tier 2 note issued on 22 February 2012 is filed herewith as an exhibit. Please see the description of this note underTier 2 capital on page 156 of the Annual Report.

D—Exchange Controls.

There are no restrictions under UBS’s Articles of Association or Swiss law, presently in force, that limit the right of non-resident or foreign owners to hold UBS’s securities freely. There are currently no Swiss foreign exchange controls or other Swiss laws restricting the import or export of capital by UBS or its subsidiaries. In addition, there are currently no restrictions under Swiss law affecting the remittance of dividends, interest or other payments to non-resident holders of UBS securities.

E—Taxation.

This section outlines the material Swiss tax and U.S. federal income tax consequences of the ownership of UBS ordinary shares by a U.S. holder (as defined below) who holds UBS ordinary shares as capital assets. It is designed to explain the major interactions between Swiss and U.S. taxation for U.S. persons who hold UBS shares.

The discussion does not address the tax consequences to persons who hold UBS ordinary shares in particular circumstances, such as tax-exempt entities, banks, financial institutions, life insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for securities holdings, holders liable for alternative minimum tax, holders that actually or constructively own 10% or more of the voting stock of UBS, holders that hold UBS ordinary shares as part of a straddle or a hedging or conversion transaction, holders that purchase or sell ordinary shares as part of a wash sale for tax purposes or holders whose functional currency for U.S. tax purposes is not the U.S. dollar. This discussion also does not apply to holders who acquired their UBS ordinary shares through a tax-qualified retirement plan, nor generally to unvested UBS ordinary shares held under deferred compensation arrangements.

If a partnership holds UBS ordinary shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding the ordinary shares should consult its tax advisor with regard to the U.S. federal income tax treatment of an investment in the ordinary shares.

 

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The discussion is based on the tax laws of Switzerland and the United States, including the U.S. Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations under the Internal Revenue Code, published rulings and court decisions, as in effect on the date of this document, as well as the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, which we call the “Treaty,” all of which may be subject to change or change in interpretation, possibly with retroactive effect.

For purposes of this discussion, a “U.S. holder” is any beneficial owner of UBS ordinary shares that is for U.S. federal income tax purposes:

 

  

A citizen or resident of the United States;

 

  

A domestic corporation or other entity taxable as a corporation;

 

  

An estate, the income of which is subject to U.S. federal income tax without regard to its source; or

 

  

A trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.

The discussion does not generally address any aspects of Swiss taxation other than income and capital taxation or of U.S. taxation other than federal income taxation. Holders of UBS shares are urged to consult their tax advisors regarding the U.S. federal, state and local and the Swiss and other tax consequences of owning and disposing of these shares in their particular circumstances.

(a) Ownership of UBS Ordinary Shares-Swiss Taxation

Dividends and Distributions

Dividends paid by UBS to a holder of UBS ordinary shares (including dividends on liquidation proceeds and stock dividends) are in principle subject to a Swiss federal withholding tax at a rate of 35%.

Until the end of 2010, the Par Value Principle was applicable. Under the Par Value Principle any distribution, which was not a repayment of the par value of the shares, was subject to Swiss withholding tax.

On 1 January 2011, the Par Value Principle was replaced by the Capital Contribution Principle. Under the Capital Contribution Principle, the repayment of capital contributions, including share premiums made by the shareholders after December 31, 1996 is in principle no longer subject to Swiss withholding tax if certain requirements regarding the booking of these capital contributions are met. The Swiss Federal Tax Administration issued guidelines on how the Capital Contribution Principle has to be applied. Nevertheless certain aspects are still unclear and disputed respectively.

A U.S. holder that qualifies for Treaty benefits may apply for a refund of the withholding tax withheld in excess of the 15% Treaty rate (or for a full refund in case of qualifying retirement arrangements). The claim for refund must be filed with the Swiss Federal Tax Administration, Eigerstrasse 65, CH-3003 Berne, Switzerland no later than December 31 of the third year following the end of the calendar year in which the income subject to withholding was due. The form used for obtaining a refund is Swiss Tax Form 82 (82 C for companies; 82 E for other entities; 82 I for individuals; 82 R for regulated investment companies), which may be obtained from any Swiss Consulate General in the United States or from the Swiss Federal Tax Administration at the address above. The form must be filled out in triplicate with each copy duly completed and signed before a notary public in the United States. The form must be accompanied by evidence of the deduction of withholding tax withheld at the source.

 

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BNY Mellon Shareowner Services, the registrar for UBS AG shares in the United States, is offering tax reclamation services for the cash dividends.

Transfers of UBS Ordinary Shares

The purchase or sale of UBS ordinary shares, whether by Swiss resident or non-resident holders (including U.S. holders), may be subject to a Swiss securities transfer stamp duty of up to 0.15% calculated on the purchase price or sale proceeds if it occurs through or with a bank or other securities dealer in Switzerland as defined in the Swiss Federal Stamp Tax Act in Switzerland or the Principality of Liechtenstein. In addition to the stamp duty, the sale of UBS ordinary shares by or through a member of a recognized stock exchange may be subject to a stock exchange levy.

Capital gains realized by a U.S. holder upon the sale of UBS ordinary shares are not subject to Swiss income or gains taxes, unless such U.S. holder holds such shares as business assets of a Swiss business operation qualifying as a permanent establishment for the purposes of the Treaty. In the latter case, gains are taxed at ordinary Swiss individual or corporate income tax rates, as the case may be, and losses are deductible for purposes of Swiss income taxes.

(b) Ownership of UBS Ordinary Shares-U.S. Federal Income Taxation

Dividends and Distributions

Subject to the passive foreign investment company rules discussed below, U.S. holders will include in gross income the gross amount of any dividend paid, before reduction for Swiss withholding taxes, by UBS out of its current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, as ordinary income when the dividend is actually or constructively received by the U.S. holder. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a return of capital to the extent of the U.S. holder’s basis in its UBS ordinary shares and thereafter as capital gain.

Dividends paid to a noncorporate U.S. holder in taxable years beginning before January 1, 2013 that constitute qualified dividend income will be taxable to the holder at a maximum rate of 15%, provided that the holder has a holding period in the shares of more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends paid by UBS with respect to the shares will generally be qualified dividend income.

For U.S. federal income tax purposes, a dividend will include a distribution characterized under Swiss law as a repayment of capital contributions if the distribution is made out of current or accumulated earnings and profits, as described above.

Dividends will generally be income from sources outside the United States for foreign tax credit limitation purposes, and will, depending on the holder’s circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to the holder. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% rate. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.

The amount of the dividend distribution included in income of a U.S. holder will be the U.S. dollar value of the Swiss franc payments made, determined at the spot Swiss franc/U.S. dollar rate on the date such dividend distribution is includible in the income of the U.S. holder, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend distribution is included in income to the date such dividend distribution is converted into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. Such gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

 

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Subject to U.S. foreign tax credit limitations, the nonrefundable Swiss tax withheld and paid over to Switzerland will be creditable or deductible against the U.S. holder’s U.S. federal income tax liability. To the extent a refund of the tax withheld is available to a U.S. holder under the laws of Switzerland or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. holder’s U.S. federal income tax liability, whether or not the refund is actually obtained. See “(a) Ownership of UBS Ordinary Shares – Swiss Taxation” above, for the procedures for obtaining a tax refund.

Transfers of UBS Ordinary Shares

Subject to the passive foreign investment company rules discussed below, a U.S. holder that sells or otherwise disposes of UBS ordinary shares generally will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount realized and the tax basis, determined in U.S. dollars, in the UBS ordinary shares. Capital gain of a non-corporate U.S. holder is generally taxed at preferential rates if the UBS ordinary shares were held for more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

Passive Foreign Investment Company Rules

UBS believes that UBS ordinary shares should not be treated as stock of a passive foreign investment company for U.S. federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change. In general, UBS will be a passive foreign investment company with respect to a U.S. holder if, for any taxable year in which the U.S. holder held UBS ordinary shares, either (i) at least 75% of the gross income of UBS for the taxable year is passive income or (ii) at least 50% of the value, determined on the basis of a quarterly average, of UBS’s assets is attributable to assets that produce or are held for the production of passive income (including cash). If UBS were to be treated as a passive foreign investment company, then unless a U.S. holder were to make a mark-to-market election with respect to the UBS ordinary shares, gain realized on the sale or other disposition of UBS ordinary shares would in general not be treated as capital gain. Instead, a U.S. holder would be treated as if the holder had realized such gain and certain “excess distributions” ratably over the three preceding taxable years or, if shorter, the holder’s holding period for the shares and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, a holder’s UBS ordinary shares will be treated as stock in a passive foreign investment company if UBS was a passive foreign investment company at any time during the holder’s holding period in the UBS ordinary shares. In addition, dividends received from UBS would not be eligible for the preferential tax rate applicable to qualified dividend income if UBS were to be treated as a passive foreign investment company either in the taxable year of the distribution or the preceding taxable year, but would instead be taxable at rates applicable to ordinary income.

F—Dividends and Paying Agents.

Not required because this Form 20-F is filed as an annual report.

G—Statement by Experts.

Not required because this Form 20-F is filed as an annual report.

 

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H—Documents on Display.

UBS files periodic reports and other information with the Securities and Exchange Commission. You may read and copy any document that we file with the SEC on the SEC’s website, www.sec.gov, or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 (in the United States) or at +1 202 942 8088 (outside the United States) for further information on the operation of its public reference room. Much of this additional information may also be found on the UBS website at www.ubs.com/investors.

I—Subsidiary Information.

Not applicable.

 

Item 11.Quantitative and Qualitative Disclosures About Market Risk.

(a) Quantitative Information About Market Risk.

Please seeMarket riskon pages 133 to 139 of the Annual Report.

(b) Qualitative Information About Market Risk.

Please seeMarket riskon pages 133 to 139 of the Annual Report.

(c) Interim Periods.

Not applicable.

 

Item 12.Description of Securities Other than Equity Securities.

A – Debt Securities

Not required because this Form 20-F is filed as an annual report.

B – Warrants and Rights

Not required because this Form 20-F is filed as an annual report.

C – Other Securities

Not required because this Form 20-F is filed as an annual report.

D – American Depositary Shares

1,2 Not required because this Form 20-F is filed as an annual report.

3,4 Not applicable.

 

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PART II

 

Item 13.Defaults, Dividend Arrearages and Delinquencies.

There has been no material default in respect of any indebtedness of UBS or any of its significant subsidiaries or any arrearages of dividends or any other material delinquency not cured within 30 days relating to any preferred stock of UBS AG or any of its significant subsidiaries.

 

Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds.

Not applicable.

 

Item 15.Controls and Procedures.

(a) Disclosure Controls and Procedures.

Please seeUS regulatory disclosure requirementson page 221 of the Annual Report. See also Exhibit 12 to this Form 20-F.

(b) Management’s Annual Report on Internal Control over Financial Reporting.

Please seeManagement’s Report on Internal Control over Financial Reportingon page 284 of the Annual Report.

(c) Attestation Report of the Registered Public Accounting Firm.

Please seeReport of independent registered public accounting firm on internal control over financial reporting on pages 285 to 286 of the Annual Report.

(d) Changes in Internal Control over Financial Reporting.

Please seeUpdate on internal control over financial reporting on page 283 of the Annual Report for a discussion of changes in UBS’s internal control over financial reporting identified in connection with the evaluation of such controls described therein.

 

Item 15T.Controls and Procedures.

Not applicable.

 

Item 16A.Audit Committee Financial Expert.

Please seeAudit committeeon page 209 andCorporate governanceon page 196 of the Annual Report.

 

Item 16B.Code of Ethics.

The Code of Business Conduct and Ethics (the “Code”) was not amended in 2011. No waiver from any provision of the Code was granted to any employee in 2011.

The Code is published on our website under http://www.ubs.com/1/e/investors/corporategovernance/business_conduct.html.

 

Item 16C.Principal Accountant Fees and Services.

Please seeAuditorson pages 218 to 219 of the Annual Report. None of the non-audit services disclosed in the table on page 219 were approved by the Audit Committee pursuant to paragraph (c) (7)(i)(C ) of Rule 2-01 of Regulation S-X.

 

Item 16D.Exemptions from the Listing Standards for Audit Committees.

Not applicable.

 

Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Please seeTreasury share activitieson page 159 of the Annual Report.

 

Item 16F.Changes in Registrant’s Certifying Accountant.

Not applicable.

 

Item 16G.Corporate Governance.

Please seeCorporate governance on page 196 of the Annual Report.

 

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PART III

 

Item 17.Financial Statements.

Not applicable.

 

Item 18.Financial Statements.

Please see the Financial Statements and the Notes to the Financial Statements on pages 280 to 410 of the Annual Report.

 

Item 19.Exhibits.

 

Exhibit
number

 

Description

1.1 Articles of Association of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed May 6, 2011)
1.2 Organization Regulations of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed January 4, 2012)
2(b) Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.
 We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
4.1 Fiscal Agency Agreement dated 22 February 2012 between UBS AG, acting through its Jersey branch, and The Bank of New York Mellon, acting through its London Branch.
7 Statement regarding ratio of earnings to fixed charges.
8 Significant Subsidiaries of UBS AG.
 Please see Note 33 to the Financial StatementsSignificant subsidiaries and associates, on pages 394 to 397 of the Annual Report.
12 The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a))
13 The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).
15 Consent of Ernst & Young Ltd.

 

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused the undersigned to sign this annual report on its behalf.

 

UBS AG

    /s/    Sergio Ermotti

Name: Sergio Ermotti
Title: Group Chief Executive Officer

 

    /s/    Tom Naratil

Name: Tom Naratil
Title: Group Chief Financial Officer

March 15, 2012

 

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INDEX TO EXHIBITS

 

Exhibit
number

 

Description

1.1 Articles of Association of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed May 6, 2011)
1.2 Organization Regulations of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed January 4, 2012)
2(b) Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.
 We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
4.1 Fiscal Agency Agreement dated 22 February 2012 between UBS AG, acting through its Jersey branch, and The Bank of New York Mellon, acting through its London Branch.
7 Statement regarding ratio of earnings to fixed charges.
8 Significant Subsidiaries of UBS AG.
 Please see Note 33 to the Financial StatementsSignificant subsidiaries and associates, on pages 394 to 397 of the Annual Report.
12 The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a))
13 The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).
15 Consent of Ernst & Young Ltd.

 

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LOGO

   Annual Report 2011  

 

LOGO

Ourperformance in 2011


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Annual Report 2011

Letter to shareholders

 

Dear shareholders,

 

For the financial year 2011 we report a net profit attributable to UBS shareholders of CHF 4.2 billion and diluted earnings per share of CHF 1.08. During the year we strengthened our industry-leading capital position, with our Basel II tier 1 capital ratio increasing significantly to 19.6% from 17.8%, and our Basel 2.5 tier 1 capital ratio rising to 15.9%. We attracted significant net new money inflows despite the challenging operating environment, recording combined net inflows in our wealth- and asset-gathering businesses of almost CHF 40 billion. We have also made progress in reducing both risk-weighted assets and costs and, taking into account the challenges we faced, the performance of our businesses gives us great confidence in the firm’s future. We are therefore proposing to pay a dividend1 to our shareholders for the financial year 2011 of CHF 0.10 per share, subject to shareholder approval at our Annual General Meeting of Shareholders (AGM) in May.

2011 was challenging for the firm and the industry as a whole. Markets were affected by ongoing concerns surrounding eurozone sovereign debt, the European banking system, the US federal budget deficit and economic growth issues, all of which affected client confidence. Activity levels were very subdued as many investors sought out safe haven investments, including in the Swiss franc, and remained on the sidelines of markets for most of the second half of the year. We also faced our own challenges, as in September we discovered unauthorized trading that led to a loss of CHF 1.8 billion.

During the year, it became increasingly clear that higher regulatory capital and liquidity requirements would put pressure on structures and business models throughout the industry, fundamentally impacting many business areas, most notably for investment banks. In light of the changed market environment and more stringent regulatory requirements, the Board of Directors and Group Executive Board re-evaluated the Group’s strategy to ensure we continue to place our clients at the center of everything we do and with the ultimate goal of delivering more attractive and sustainable returns in future. The results of this re-evaluation were presented at our Investor Day 2011.

Our future strategic course has now been set: our wealth management businesses globally and our universal bank in Switzerland are central to our strategy. In order to serve the needs of our core wealth management clients, our Global Asset Management business and our Investment Bank must each be strong and successful in meeting the needs of their

clients. Going forward, our Investment Bank will be less complex and less capital intensive. It will focus firmly on its corporate, institutional, sovereign, ultra high net worth, wealth management and other clients and will be an important partner to them. Only a competitive and successful Investment Bank will enable us to take our wealth management businesses to the next level.

Our plans build on the strengths of all of our businesses together with our leading capital and sound liquidity and funding profile. The new operating environment will require the industry to build capital and improve capital efficiency. In line with our desire to reduce complexity and drive high-quality risk-adjusted returns, by 2016 we aim to reduce risk-weighted assets in the Investment Bank and in the legacy portfolio together by 50% compared with 30 September 2011 levels calculated on a pro forma Basel III basis.

We believe our leading capital position gives us a distinct competitive advantage, and we are determined to build on this strength to maintain that advantage in the Basel III banking environment. FIN-MA, our Swiss regulator, will require that systemically important banks such as UBS hold significantly higher levels of total capital in future. We made good progress towards achieving our strategic target of a common equity tier 1 ratio of 13% under Basel III, well above FINMA’s minimum requirements, ending the year with an estimated ratio of 10.8%. As a further step towards meeting these more stringent requirements, we also initiated an issuance program of loss-absorbing capital in February 2012, with a USD 2 billion inaugural issue. We continued to reduce risk-weighted assets and, in the fourth quarter alone, we achieved a 5% reduction in pro forma Basel III risk-weighted assets2. We are determined to build on this progress over coming quarters, and we are confident that our targeted capital structure, which is well in excess of international core capital requirements, will bolster confidence further in the firm. The more stringent Basel III capital and liquidity requirements will likely lead to greater competition for stable sources of funding, both secured funding and deposits, and to increased funding costs. Our sound funding position, derived from our wealth management businesses and our Retail & Corporate business, reinforces our financial position further.

In line with our new strategy, we updated our financial targets for our business divisions and the Group, underlined our determina-

 

 

1  The term “dividend” is used throughout the report, notwithstanding that for Swiss tax purposes the distribution is characterized as a payment from capital contribution reserves. Refer to the “Statement of appropriation of retained earnings” of the Parent Bank in the “Financial information” section of this report for more information.  2  Our pro forma Basel III risk-weighted assets calculation is a combination of the existing Basel 2.5 risk-weighted assets, a revised treatment for securitization exposures which applies a fixed risk weighting, as well as several new capital charges which require the development of new models and calculation engines. Our pro forma Basel III risk-weighted assets are based on estimates of the impact of these new capital charges, and will be refined as we progress with our implementation of the new models and associated systems.

 

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LOGO

Sergio P. Ermotti Group Chief Executive Officer        Kaspar Villiger Chairman of the Board of Directors

 

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Annual Report 2011

Letter to shareholders

 

tion to control costs and announced our intention to implement a progressive capital returns policy, beginning with the CHF 0.10 dividend we propose to pay this year.

We are well advanced in implementing our CHF 2 billion cost reduction program announced in July, and we expect to see more of the benefits as a result of these measures coming through in 2012 and 2013. We remain vigilant on costs and will continue to seek additional efficiencies by exploring opportunities to lower the structural cost base of the firm. As already stated, our capacity for further tactical cost-cutting measures is limited and we must focus on strategic changes which go to the heart of our organizational design and structures. In addition, we will monitor markets actively and, if conditions deteriorate materially, we will take further measures to reduce our cost base.

Despite the challenges we faced in 2011, most of our businesses delivered improved profitability compared with the prior year. Wealth Management reported a pre-tax profit of CHF 2.7 billion, up from CHF 2.3 billion in 2010. Wealth Management Americas made notable progress reporting a pre-tax profit of CHF 534 million compared with a loss of CHF 130 million in the prior year, and our Retail & Corporate business recorded a pre-tax profit of CHF 1.9 billion, up from CHF 1.8 billion, attracting the highest level of new client assets since 2007. Together, these businesses delivered a 30% increase in pre-tax profits compared with the previous year. We also saw a marked improvement in our net new money performance across our wealth management businesses. Wealth Management’s net new money improved significantly, with net inflows of CHF 23.5 billion compared with net outflows of CHF 12.1 billion in 2010, reflecting improvements in all regions and client segments. Wealth Management Americas attracted net new money inflows of CHF 12.1 billion compared with outflows of CHF 6.1 billion in 2010. This turnaround reflects the success we have had in both retaining and recruiting experienced financial advisors during the year.

In a difficult year for the asset management industry, our Global Asset Management business reported a pre-tax profit of CHF 428 million. Although de-risking continued to dominate investors’ decisions, the business achieved an increase in total net new money during 2011. Notably, we attracted net inflows from third-party clients of CHF 12.2

billion, excluding money market flows. Clients continued to recognize the strengths of the business’s diversified product range and, in particular, its leading alternative investment offerings and fast-growing passive capabilities. Expanding these areas remains a key strategic objective for the business in order to capture the opportunities presented by the longer-term industry trends.

A reduction in volumes and client activity as well as the strengthening of the Swiss franc impacted the Investment Bank’s result for the year, as did the CHF 1.8 billion loss associated with the unauthorized trading incident in September. As soon as this incident was discovered we acted swiftly to mitigate its effects on the firm and our shareholders. We were deeply disappointed by this occurrence and we have already taken action designed to reinforce our control framework and we remain committed to ensuring that we address any further recommendations that come out of the ongoing independent investigations quickly and decisively. Despite these circumstances, the business reported a pre-tax profit of CHF 154 million, and a number of our businesses in the Investment Bank delivered notable performances. Our cash equities exchange market share rose slightly compared with 2010 levels, and revenues in our macro business rose to CHF 2.6 billion, an increase of 15% reflecting higher revenues across all interest rates business lines. Our foreign exchange business took advantage of market volatility in the second half of 2011, bolstered by the investments we have made in our new e-trading platform. In our advisory business, our market share and revenues increased as our efforts to build client relationships bore fruit. Additionally, the business successfully reduced its risk-weighted assets, something that is fundamental to its overall strategy and that will enable the business to deliver attractive and sustainable returns in future.

In September, the Board of Directors accepted the resignation of Oswald J. Grübel. We would like to reiterate our gratitude to him for the outstanding contribution he made to the firm. In November, the Board confirmed the appointment of Sergio P. Ermotti as Group Chief Executive Officer with immediate effect. Chairman of the Board Kaspar Villiger announced his decision not to stand for reelection and, as a result, Axel Weber has been proposed to succeed as Chairman, subject to his election at this year’s AGM. In addition, we announced that Beatrice Weder di Mauro and Isabelle Romy will be nominated for election to the Board and, if elected, they will bring with them invaluable experience and

 

 

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expertise to strengthen the Board further. Bruno Gehrig has decided not to stand for reelection and we would like to express our thanks to Bruno for his exceptional contribution and great commitment since joining the Board in 2008 during some testing times for the firm.

Over the coming months, we will continue to mark our 150th anniversary by expressing our gratitude to all those who have supported us over the years, and by giving back to the communities we belong to across the globe, with a particular focus on projects promoting education and entrepreneurship. Our employees will be able to share this experience and will have the opportunity to volunteer for regional fundraising and other events that will bring long-lasting benefits to the communities in which they live and work.

Looking ahead, 2012 will be a year of progress for the Group. We will continue our efforts to drive efficiencies throughout the firm, we will drive home our distinct competitive advantages by continuing to strengthen our capital position and we will ensure that we continue to place our clients at the center of everything we do. We believe our clients will continue to place great value in safety and stability and will look to us more than ever to provide the best possible advice and solutions to help them achieve their investment aims. 2012 will also be a year of transition for the Investment Bank as we continue the process of reducing risk-weighted assets and reshaping the business to ensure its future success. By achieving our strategic objectives in a disciplined and timely manner, we are confident we will be able to provide more attractive and sustainable returns to our shareholders.

15 March 2012

Yours sincerely,

UBS

 

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Kaspar Villiger  Sergio P. Ermotti
Chairman of the  Group Chief
Board of Directors  Executive Officer
 

 

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Annual Report 2011

 

Key figures

 

 

  As of or for the year ended 
CHF million, except where indicated  31.12.11  31.12.10  31.12.09 
Group results    
              
Operating income   27,788    31,994    22,601  
              
Operating expenses   22,439    24,539    25,162  
              
Operating profit from continuing operations before tax   5,350    7,455    (2,561
              
Net profit attributable to UBS shareholders   4,159    7,534    (2,736
              
Diluted earnings per share (CHF)1   1.08    1.96    (0.75
              
Key performance indicators, balance sheet and capital management2    
              
Performance    
              
Return on equity (RoE) (%)   8.5    16.7    (7.8
              
Return on risk-weighted assets, Basel II, gross (%)   13.7    15.5    9.9  
              
Return on assets, gross (%)   2.1    2.3    1.5  
              
Growth    
              
Net profit growth (%)3   (44.8  N/A    N/A  
              
Net new money (CHF billion)4   42.4    (14.3  (147.3
              
Efficiency    
              
Cost/ income ratio (%)   80.5    76.5    103.0  
              
Capital strength    
              
BIS tier 1 ratio, Basel 2.5 (%)5   15.9    
              
BIS tier 1 ratio, Basel II (%)5   19.6    17.8    15.4  
              
FINMA leverage ratio (%)6   5.4    4.4    3.9  
              
Balance sheet and capital management    
              
Total assets   1,419,162    1,317,247    1,340,538  
              
Equity attributable to UBS shareholders   53,447    46,820    41,013  
              
Total book value per share (CHF)6   14.26    12.35    11.65  
              
Tangible book value per share (CHF)6   11.68    9.76    8.52  
              
BIS total ratio, Basel 2.5 (%)5   17.2    
              
BIS total ratio, Basel II (%)5   21.6    20.4    19.8  
              
BIS risk-weighted assets, Basel 2.55   240,962    
              
BIS risk-weighted assets, Basel II5   198,494    198,875    206,525  
              
BIS tier 1 capital, Basel 2.55   38,370    
              
BIS tier 1 capital, Basel II5   38,980    35,323    31,798  
              
Additional information    
              
Invested assets (CHF billion)   2,167    2,152    2,233  
              
Personnel (full-time equivalents)   64,820    64,617    65,233  
              
Market capitalization7   42,843    58,803    57,108  
              

1  Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report for more information.  2  For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report.  3  Not meaningful and not included if either the reporting period or the comparison period is a loss period.  4  Excludes interest and dividend income.  5  Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital management” section of this report for more information.  6  Refer to the “Capital management” section of this report for more information.  7  Refer to the appendix “UBS registered shares” in this report for more information.

The 2011 results and the balance sheet in this report differ from those presented in our fourth quarter 2011 report issued on 7 February 2012. The net impact of adjustments made subsequent to the publication of the unaudited fourth quarter 2011 financial report on net profit attributable to UBS shareholders was a loss of CHF 74 million, which decreased basic and diluted earnings per share by CHF 0.02.

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Refer to the “Certain items affecting our results in 2011” sidebar in the “Group results” section and to “Note 32 Events after the reporting period” in the “Financial information” section of this report for more information

 

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UBS and its businesses

We draw on our 150-year heritage to serve private, institutional and corporate clients worldwide, as well as retail clients in Switzerland. Our business strategy is centered on our pre-eminent global wealth management businesses and our universal bank in Switzerland. Together with a client-focused Investment Bank and a strong, well-diversified Global Asset Management business, we will drive further growth and expand our premier wealth management franchise. Headquartered in Zurich and Basel, Switzerland, we have offices in more than 50 countries, including all major financial centers, and employ approximately 65,000 people. Under Swiss company law, we are organized as an Aktiengesellschaft (AG), a corporation that has issued shares of common stock to investors. UBS AG is the parent company of the UBS Group (Group). The operational structure of the Group comprises the Corporate Center and four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank.

 

Wealth Management & Swiss Bank focuses on delivering comprehensive financial services to high net worth and ultra high net worth individuals around the world – except to those served by Wealth Management Americas – as well as private and corporate clients in Switzerland. Our Wealth Management business unit provides clients in over 40 countries, including Switzerland, with financial advice, products and tools to fit their individual needs. Our Retail & Corporate business unit provides individual and business clients with an array of banking services, such as deposits and lending, and maintains a leading position across its client segments in Switzerland. Starting with the first quarter of 2012, we will report Wealth Management and Retail & Corporate as separate business divisions, and will no longer report Wealth Management & Swiss Bank which will cease to be a business division.

Wealth Management Americas provides advice-based solutions through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth and high net worth individuals and families. It includes the domestic US business, the domestic Canadian business and international business booked in the US.

Global Asset Management is a large-scale asset manager with businesses diversified across regions, capabilities and distribution channels. It offers investment capabilities and styles across all major traditional and alternative asset classes including equities, fixed income, currency, hedge fund, real estate, infrastructure and private equity that can also be combined into multi-asset strategies. The fund services unit provides professional services, including legal fund set-up, accounting and reporting for traditional investment funds and alternative funds.

TheInvestment Bank provides a broad range of products and services in equities, fixed income, foreign exchange and commodities to corporate and institutional clients, sovereign and government bodies, financial intermediaries, alternative asset managers and UBS’s wealth management clients. The Investment Bank is an active participant in capital markets flow activities, including sales, trading and market-making across a broad range of securities. It provides financial solutions to a wide range of clients, and offers advisory and analytics services in all major capital markets.

TheCorporate Center provides treasury services, and manages support and control functions for the business divisions and the Group in such areas as risk control, finance, legal and compliance, funding, capital and balance sheet management, management of non-trading risk, communications and branding, human resources, information technology, real estate, procurement, corporate development and service centers. It allocates most of the treasury income, operating expenses and personnel associated with these activities to the businesses based on capital and service consumption levels. The Corporate Center also encompasses certain centrally managed positions, including the SNB StabFund option and (starting with the first quarter 2012 reporting) the legacy portfolio formerly in the Investment Bank.

 

 

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Annual Report 2011

 

Our Board of Directors

 

LOGO

 

The Board of Directors (BoD) is our most senior body. Under the leadership of the Chairman, it determines the strategy of the Group based upon the the recommendations of the Group Chief Executive Officer (Group CEO). It exercises ultimate supervision of management and is responsible for the appointment and dismissal of all Group Executive Board (GEB) members, the Company Secretary and the head of Group Internal Audit as well as supervising and setting appropriate risk management and control principles for the firm. With the exception of its current Chairman, Kaspar Villiger, all members of the BoD are independent.

 

 

 

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1  Kaspar Villiger Chairman of the Board of Directors, Chairperson of the Governance and Nominating Committee and member of the Corporate Responsibility Committee  2  Michel DemaréIndependent Vice Chairman, member of the Audit Committee and the Governance and Nominating Committee  3  David Sidwell Senior Independent Director, Chairperson of the Risk Committee and member of the Governance and Nominating Committee  4  Rainer-Marc Frey Member of the Audit Committee and the Risk Committee  5  Bruno Gehrig Member of the Governance and Nominating Committee and the Human Resources and Compensation Committee  6  Ann F. Godbehere Chairperson of the Human Resources and Compensation Committee, member of the Audit Committee and the Corporate Responsibility Committee  7  Axel P. Lehmann Member of the Governance and Nominating Committee and the Risk Committee  8  Wolfgang Mayrhuber Chairperson of the Corporate Responsibility Committee and member of the Human Resources and Compensation Committee  9  Helmut Panke Member of the Human Resources and Compensation Committee, member of the Risk Committee  10  William G. Parrett of Chairperson of the Audit Committee  11  Joseph Yam Member of the Corporate Responsibility Committee and the Risk Committee

 

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Annual Report 2011

 

Our Group Executive Board

 

LOGO

 

The management of the firm is delegated by the BOD to the GEB. Under the leadership of the Group CEO, the GEB has executive management responsibility for the Group and its businesses. It assumes overall responsibility for the development of the Group and business division strategies and the implementation of approved strategies.

 

 

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1  Sergio P. Ermotti Group Chief Executive Officer  2  Markus U. Diethelm Group General Counsel  3  John A. Fraser Chairman and CEO Global Asset Management  4  Lukas Gähwiler CEO UBS Switzerland and co-CEO Wealth Management & Swiss Bank  5  Carsten Kengeter Chairman and CEO Investment Bank  6  Ulrich Körner Group Chief Operating Officer, CEO Corporate Center and CEO UBS Group Europe, Middle East and Africa  7  Philip J.  Lofts Group Chief Risk Officer  8  Robert J.McCann CEO Wealth Management Americas and CEO UBS Group Americas  9  Tom Naratil Group Chief Financial Officer  10  Alexander Wilmot-Sitwell Co-Chairman and co-CEO of UBS Group Asia Pacific  11  Chi-Won Yoon Co-Chairman and co-CEO of UBS Group Asia Pacific  12  Jürg Zeltner CEO UBS Wealth Management and co-CEO Wealth Management & Swiss Bank

 

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Annual Report 2011

 

The making of UBS

In 2012, UBS celebrates its 150th anniversary. This important milestone in our long history serves to demonstrate the firm’s established and pivotal role in the development and growth of Swiss banking traditions.

 

The heritage of the banking industry in Switzerland can be traced back to its origins in medieval times. This long history may help explain the widespread impression, reinforced in popular fiction, that Switzerland has always possessed a strong financial sector. In reality, the size and international reach of the Swiss banking sector we know today is largely a product of the second half of the 20th century, strongly influenced by two banks: Union Bank of Switzerland and Swiss Bank Corporation (SBC), which merged to form UBS in 1998.

At the time of the merger, both banks were already well established and successful in their own right. Union Bank of Switzerland celebrated its 100th anniversary in 1962, tracing its origins back to the Bank in Winterthur. SBC marked its centenary in 1972 with celebrations in honor of its founding forebear, the Basler Bankverein. The historical roots of PaineWebber, acquired by UBS in 2000, go back to 1879, while S.G. Warburg, the central pillar upon which today’s Investment Bank was built, commenced operations in 1946.

 

 

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In the early 1990s, SBC and Union Bank of Switzerland were both commercial banks operating mainly out of Switzerland. The banks shared a similar vision: to become a world leader in wealth management, a successful global investment bank, and a top-tier global asset manager while remaining an important commercial and retail bank in their home market of Switzerland.

Union Bank of Switzerland, the largest and best-capitalized Swiss bank of its time, pursued these goals primarily through a strategy of organic growth. In contrast, SBC, then the third-largest Swiss bank, grew through a combination of partnership and acquisition. In 1989, SBC started a joint venture with O’Connor, a leading US derivatives firm noted for its dynamic and innovative culture, its meritocracy and its team-oriented approach. O’Connor brought state-of-the-art risk management and derivatives technology to SBC, and in 1992 SBC moved to fully acquire O’Connor. In 1994, SBC added to its capabilities when it acquired Brinson Partners, a leading US-based institutional asset management firm.

The next major milestone was in 1995, when SBC acquired S.G. Warburg, the British merchant bank. The deal helped SBC fill a strategic gap in its corporate finance, brokerage, and research capabilities and, most importantly, brought with it an institutional client franchise that remains crucial to our equities business to this day.

The 1998 merger of SBC and Union Bank of Switzerland into the firm we know today created a world-class wealth manager and the biggest universal bank in Switzerland complemented by a strong investment bank and a leading global institutional asset manager. In 2000, UBS grew further with the acquisition of PaineWebber, establishing the firm as a significant player in the US. Since 2000, UBS has built a strong presence in the Asia Pacific region and the emerging markets. Our new global reach found expression through our new global UBS brand identity introduced in 2003.

 

 

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Annual Report 2011

 

The firm’s progress was reflected by the fact that 2006 was the most successful year in our history. However, in 2007 the effects of the global financial crisis started to be felt across the financial industry. This crisis had its origins in the structured financial product business linked to the US residential real estate market. Between the third quarter of 2007 and the fourth quarter of 2009, UBS incurred losses of more than CHF 50 billion on these assets and received an equity investment from the Swiss Confederation concurrent with the Swiss National Bank’s establishment of a fund to purchase illiquid securities and other positions from UBS. UBS responded with decisive action designed to reduce its risk exposures and stabilize its businesses. More recently, UBS increased its capital strength to meet new and enhanced industry-wide regulatory requirements, as well as better equipping the firm for the new post-crisis market realities.

Over the past few years, we have successfully reduced our balance sheet and legacy positions: compared with the end of 2008, our balance sheet is over half a trillion Swiss francs smaller and our Basel II risk-weighted assets are approximately 35% lower. Today, our Basel 2.5 tier 1 capital ratio is one of the highest in the industry. We will continue to build on this strength as well as on our stable funding and sound liquidity positions by leveraging the complementary capabilities of all our businesses to generate sustainable returns. With our focus on putting clients at the center of everything we do, increasing collaboration across the firm, building capital and continuing to reduce risk-weighted assets, while remaining vigilant on costs, we believe UBS will be able to deliver sustainable earnings and increasingly attractive returns to our shareholders. We have every reason to be confident about our future.

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For a full overview of UBS’s history, please see the interactive timeline at http://www.ubs.com/history

 

 

 

Celebrating our 150th anniversary

 

In 2012, we are celebrating our firm’s 150th anniversary. Our celebrations focus on enhancing our social and charitable commitments around the world. We want to build on our legacy by strengthening and deepening our business relationships, and by helping the communities in which we live and work through long-lasting and valuable programs. Last but not least, our activities in 2012 signal that UBS is looking to the future with optimism and confidence.

There are a wide range of activities planned during the year, including celebrations for selected guests in Switzerland and our main business locations around the globe. Overall, we are hosting 25 client events in the Asia Pacific region, Europe, the US and South America.

Additionally, we are using this opportunity to launch our global “Excellence in Volunteering” award. Employees around the world who give of their time freely to help their local community are eligible to receive one of 150 awards in recognition of outstanding achievement. We are focusing on projects that promote education and entrepreneurship, the two umbrella themes for our community affairs activities. These include theYoung Enterprise Switzerland project,The Bridge Academy in Hackney in London,Investing for Success in the Americas as well as community employee engagement programs in the Asia Pacific region.

In Switzerland, our home market, we will host a small birthday celebration in all UBS branches on 25 June 2012, the actual

date of UBS’s founding 150 years ago. The bank will present an anniversary leisure offering to both clients and the general public.

In addition, the UBS Kids Cup is holding a special competition and will distribute gifts to young Swiss athletes who participated in the competition. Through our partnership with Stiftung Landschaftsschutz Schweiz, UBS volunteers can engage in a variety of projects designed to protect and conserve the natural beauty of the Swiss countryside. In Switzerland UBS is also offering social, environmental and educational charities additional help both through financial support and volunteers.

If you would like to find out more about our 150th anniversary celebrations then go tohttp://www.ubs.com/150years.

 

 

 

 

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Operating

environment

and strategy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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Operating environment and strategy

Current market climate and industry drivers

 

Current market climate and industry drivers

 

Sovereign debt stress continues to test financial stability

The start of 2011 was characterized by a modest global economic recovery. Thereafter, the markets were affected by ongoing concerns surrounding eurozone sovereign debt, the European banking system and US federal budget deficit issues, as well as renewed uncertainty about the global economic outlook in general. As a result, volatility increased in the markets and investor activity levels fell significantly, especially in the second half of the year. Switzerland was perceived as a safe haven by investors and the resulting appreciation of the Swiss franc led the Swiss National Bank (SNB) to intervene in early September, announcing that it would not tolerate an exchange rate of less than CHF 1.20 per euro.

Growth in 2011: subdued initial recovery stymied by macroeconomic and sovereign concerns

In the early part of 2011, the world experienced a subdued, two-speed recovery. Developed economies continued to grow modestly but steadily, though unemployment remained high. At the same time, activity in many emerging markets, which came out of the crisis relatively unscathed, was buoyant, though coupled with some inflationary pressures and risks of overheating. Monetary policy was highly accommodative, especially in advanced economies (central bank interest rates remained low) and fiscal policy provided additional stimulus globally. Bond and equity markets generally rebounded.

From the second quarter onwards, the global economy entered a new phase. Economic activity slowed markedly, as the earthquake and tsunami in Japan affected the global supply chain, unrest in the Middle East caused oil prices to rise and the sovereign debt crisis escalated considerably.

In the US, growth lagged behind that of previous recoveries, especially as difficulties in the housing market persisted, dampening consumer demand, while in Europe, the debt crisis spread increasingly beyond weaker countries and began to challenge core countries as well. As the “Arab spring” changed the political landscape in the Middle East and North Africa, it also impacted economic activity in the region. Finally, growing concerns over problems affecting China’s real estate market and banking sector in particular increased fears of a possible hard landing for the country’s economy.

After the financial crisis of 2008 and 2009, the public sector replaced the private sector in sustaining aggregate demand. In 2011, however, the public sector also started to retrench in many countries due to heightened pressure on public finances. At the same time, the macroeconomic environment and forthcoming regulatory overhaul prompted banks to deleverage, exacerbating the situation further.

Sovereign stress: eurozone debt crisis and political deadlock around the US debt ceiling

The European sovereign debt crisis was one of the most significant factors influencing global financial markets through most of 2011, with market pressure eventually reaching the eurozone core countries. Following initial stabilization packages for Greece and Ireland in 2010, the early part of the year saw European leaders agreeing to a bail-out of Portugal and negotiations on a second support package for Greece. However, these actions, combined with the creation of a permanent stabilization fund, failed to prevent yields on Spanish and Italian bonds from rising sharply from August onward.

In autumn, a reinforced “three-pronged” agreement on measures to alleviate the pressure on Greece by European leaders, including a reduction in the net present value of Greek sovereign debt held by the private sector, a top-up for the eurozone bailout fund and requirements for European banks to hold more capital, also proved to be insufficient in preventing a further escalation of the crisis. While yields for debt issued by Spain and Italy rose further, core countries, including France, were also challenged. Following another round of talks, eurozone countries and other EU members agreed to press ahead with an intergovernmental treaty enshrining new budgetary rules to tackle the crisis. Towards the end of the year, the European Central Bank announced two longer-term refinancing operations which contributed to the stabilization of financial markets going into the early part of 2012. Nonetheless, discussions on measures and support for Greece were ongoing in early 2012.

As a consequence of these developments, 12 out of 17 euro-zone countries were downgraded by rating agencies; France and Austria lost their Standard & Poor’s AAA status in early 2012.

Meanwhile, politicians from the Democratic and Republican parties in the US struggled to reach an agreement to increase the US debt ceiling, the limit beyond which the US Department of the Treasury may not borrow. After the debt ceiling was initially reached in April without a political solution, extraordinary measures were taken to allow the government to continue functioning. A last-minute agreement was finally reached at the end of July.

The political stalemate prompted Standard & Poor’s to downgrade the US from AAA to AA+ in August, quoting reduced confidence in the government’s ability to manage its finances. As the deadlock continued, the Congressional super committee set up to find ways to reduce the budget deficit also failed to reach an agreement.

Nevertheless, the US dollar remained the world’s main reserve currency and yields on US 10-year government bonds fell to below 2% by the end of the year, while the labor market showed signs of slow improvements.

 

 

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Operating environment and strategy

 

 

Foreign exchange markets: Swiss franc appreciation leads to Swiss National Bank intervention

Switzerland was seen as a safe haven by investors amid a deteriorating economic environment. The Swiss franc appreciated strongly against most major currencies during the first half of 2011. By early August, it neared parity with the euro in light of these developments, on 6 September 2011 the SNB set a minimum rate of CHF 1.20 per euro, arguing that the massive overvaluation of the Swiss franc posed an acute threat to the Swiss economy and carried the risk of deflation. The SNB stressed that it would defend this rate with the utmost determination and was prepared to buy foreign currency in unlimited quantities. Since the announcement, the Swiss franc has fluctuated but remained slightly above the rate of CHF 1.20 per euro. However, the SNB has said the franc’s value remains high even at a rate of CHF 1.20 per euro, and unless the Swiss franc weakens further, additional SNB measures cannot be ruled out.

Outlook

Sovereign debt concerns will continue to dominate the market environment in 2012. While the world economy is expected to grow slightly below 3% for the year, high uncertainty in the eurozone remains the main factor weighing on growth prospects in the region, leading to a recessionary outlook. However, this should not be sufficient to derail recovery in the US and emerging economies. Against this backdrop and as inflation pressures remain limited, monetary policy in developed economies will probably remain very accommodative up to at least well into 2013.

Industry drivers

Regulation driving structural and business model changes

Following the 2008/2009 financial crisis, regulators and legislators in major financial centers embarked on a path toward significantly stricter regulation of financial services. This remains the biggest driver of structural and business model changes in the industry. At the same time, regulatory uncertainty persists, hindering the necessary adaptation process and presenting a major obstacle to future growth.

On the one hand, such far-reaching legal reforms as the Independent Commission on Banking’s recommendations for the ring-fencing of retail activities in the UK, the US Volcker rule prohibiting proprietary trading and, to some extent, the Swiss “too-big-to-fail” law are forcing substantial structural changes on banks. While implementation timetables extend over the next few years, banks must already start considering the implications, plan ahead and adjust their business models accordingly.

    On the other hand, new rules requiring banks to hold more capital and liquidity, starting with the Basel III international standards, are impacting the relative attractiveness of certain businesses and will generally pressure banks’ returns on equity. More than ever, regulatory capital is becoming a key constraint for banks, and this will have a fundamental

impact on the investment banking business. Over time, this is likely to lead to a new equilibrium characterized by greater industry concentration, higher pricing, and reduced levels of compensation. Meanwhile, the increased liquidity needs resulting from the Basel III liquidity coverage ratio and net stable funding ratio are likely to lead to increased competition for both secured funding and deposits as a stable source of funding, thus leading to higher funding costs. As a consequence, banks are expected to focus even more on fee-generating businesses that require less capital and funding, with the resulting increased competition in these businesses putting pressure on returns as well.

Regulation is putting pressure on banking models to become simpler and more transparent, more risk-averse and less leveraged. As an indirect consequence of reform, consumers are likely to pay higher costs for banking services, while credit extended to companies is already being constrained or made more expensive.

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Refer to the “Regulatory developments” section of this report for more information

Macroeconomic environment impacting the industry

A low-yield environment and flat yield curve, as well as very low growth, put pressure on net interest margins, while clients became more risk averse, undermining activity levels and trading volumes, especially in the second part of 2011. At the same time, investors adopted a risk-on, risk-off approach, resulting in increased correlation and volatility in the market. Together with regulatory changes, this made the operating environment particularly challenging for the banking industry which led to lower revenues and earnings, resulting in many banks taking measures to reduce costs, including redundancies.

Funding stability: a key near-term market challenge

Obtaining sufficient medium- and long-term funding across all tenors to maintain a cost efficient and properly balanced liquidity and funding position was one of the key challenges for banks in 2011’s difficult market conditions, particularly in the second half of the year. Market turmoil, especially in Europe, disrupted both short-term and long-term unsecured funding markets. The cost of raising new long-term unsecured funding remained well above pre-crisis levels, while the securitization markets were partially closed.

    Many banks that were challenged to fulfill their appropriate funding requirements sourced liquidity from central banks. Starting in summer 2011, some European banks experienced a rather acute shortage of USD funding, as US money market funds significantly reduced their exposure to European banks. Differences in funding costs between the strongest banks and those perceived by the market as weaker are already increasing, and financial strength will continue to be a strong competitive advantage for the foreseeable future.

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Refer to the “Liquidity and funding management” section of this report for more information

 

 

 

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Operating environment and strategy

Current market climate and industry drivers

 

Pressure on client confidentiality is materially changing the environment for Swiss banks

Pressure on client confidentiality continues to increase worldwide. In this context, Switzerland signed withholding tax agreements with Germany and the UK in 2011. Under the agreements, persons resident in Germany and in the UK can have their existing banking relationships in Switzerland retrospectively taxed either by making a one-time tax payment or by disclosing their accounts. If implemented, future investment income and capital gains of German and British bank clients in Switzerland (which are not disclosed) will be subject to a final withholding tax, with Switzerland transferring the proceeds to the

German and British authorities. The tax agreements are currently pending approval of the parliaments in all three countries and, if approved, should enter into force in early 2013. Additional discussions are likely to occur between Switzerland and other countries. The pressure on client confidentiality will have an impact on the business of banks serving cross-border clients, particularly in Switzerland. As a consequence, banks such as UBS will need to adapt to new client demands, rethink their cross-border value propositions and make significant efforts to ensure operational readiness and compliance. This is likely to be a challenge for smaller banks and is expected to lead to further consolidation in the sector.

 

 

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Operating environment and strategy

 

Regulatory developments

In 2011, designing policy measures to address the “too-big-to-fail” issue was the key regulatory focus. Switzerland’s parliament adopted a law to define the regulatory framework for the country’s largest banks, while the G20 heads of states endorsed a set of measures for global systemically important banks, including additional loss absorbency requirements, standards on effective resolution regimes and stricter supervision.

 

Swiss “too-big-to-fail” law

Following the recommendations presented in October 2010 by the Commission of Experts appointed by the Swiss Federal Government, the political process continued around the “too-big-to-fail” law to define the framework for the largest banks in Switzerland.

The Federal Council issued an initial text for consultation between December 2010 and March 2011 and presented the draft law and explanatory notes to the Swiss parliament in April 2011. Following the parliamentary process, the law (a revision of the Swiss banking law or Bankengesetz) was finally adopted on 30 September 2011. This revision applies to systemically important Swiss banks as designated by the Swiss National Bank, currently only UBS and Credit Suisse. Finally, in December 2011, the Swiss Federal Department of Finance (FDF) launched a consultation on the changes to the banking and capital adequacy ordinances necessary to implement the “too-big-to-fail” law. This consultation lasted until 16 January 2012.

Key elements of the law and of the draft ordinances as proposed for consultation include the following:

1.

Capital:higher capital requirements than for other banks, to be determined by the Swiss Financial Market Supervisory Authority (FINMA). We expect the capital requirements to consist of (i) a minimum of 4.5% (of risk-weighted assets (RWA)) in the form of common equity tier 1, (ii) a buffer of 8.5% composed of a minimum of 5.5% common equity tier 1 and up to 3% of high-trigger contingent capital, and (iii) a progressive component based on market share and aggregate exposure that can be fulfilled with low-trigger contingent capital. Accordingly, the progressive component is currently expected to amount to 6%, bringing total capital requirements to 19%. The ordinances also contain provisions for a leverage ratio.

2.

Organization:each systemically important bank is required to produce an emergency plan, demonstrating how their systemically important functions within Switzerland can be maintained in case of impending insolvency.

3.

Liquidity and risk:banks will be subject to tighter liquidity and enhanced risk diversification requirements.

The law contains a review clause to allow for future international policy developments to be taken into account. Also, the largest banks

are eligible for a capital rebate, if they take actions that facilitate recovery and resolvability beyond ensuring that systemically important functions are maintained in case of insolvency.

The ordinances implementing the “too-big-to-fail” law must now be presented to the Swiss parliament for approval during the course of 2012. They are expected to come into force on 1 January 2013. Thereafter, UBS must comply with the new rules, based on a transitional timetable lasting until the beginning of 2019.

 è 

Refer to the “Capital management” section of this report for more information

Proposals for the introduction of macroprudential measures in Switzerland

In November 2011, the FDF issued a consultation for the introduction of a countercyclical capital buffer in Switzerland. According to the proposal, the buffer would apply in principle to all risk-weighted positions in Switzerland, but its scope can be limited to certain sectors of the economy, for example, to credit positions related to the Swiss mortgage market. It would be capped at 2.5% of the risk-weighted positions in Switzerland. It would be the Swiss National Bank’s responsibility to request activation of the buffer, spelling out its scope and the size in percentage terms applicable to each affected category of risk-weighted positions. The Federal Council would have to take the ultimate decision on any proposed activation. These capital requirements would have to be satisfied with common equity tier 1. The FDF estimates the impact on the two large banks in terms of additional capital requirements to be between 0.1% and 0.6% of RWA, depending on the scope and size of the buffer. These capital requirements would be in addition to all other capital requirements to which banks in Switzerland are subject. Following the FDF’s review of the various consultation responses, the effective date of implementation of the proposal – not synonymous with the potential activation date of the buffer – could be in the first half of 2012.

Separately, the FDF issued a consultation paper outlining proposed changes to the capital adequacy ordinance focusing on increased capital requirements for mortgage loans secured by residential properties. The proposal includes higher risk weights for residential mortgages under the Basel standard approach, where the loan-to-value or income coverage ratio exceeds prudent standards. For banks using the advanced internal ratings-based ap-

 

 

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Regulatory developments

 

proach, including UBS, the FDF proposes the introduction of an additional capital charge that corresponds to the difference between the determined RWA and an amount that corresponds to 80% of the RWA that the bank would report, if it adopted the standard approach. If implemented as proposed, this would significantly increase the capital requirements for our Swiss mortgage book.

International regulatory framework for large banks

In December 2010, the Basel Committee on Banking Supervision (BCBS) launched “Basel III: A global regulatory framework for more resilient banks and banking systems” that set internationally agreed capital and liquidity standards. Since the beginning of 2011, international regulatory discussions have focused principally on an additional regulatory framework to solve the “too-big-to-fail” issue.

On 25 June 2011, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the BCBS, announced measures for global systemically important banks (G-SIB). Based on the results of a related consultation process over the summer, the heads of state at the G20 Summit in November 2011 endorsed a series of measures developed by the BCBS and the Financial Stability Board (FSB). These measures must now be implemented in national regulatory frameworks and comprise the following:

1.

A methodology to determine G-SIB and additional loss absorbency requirements for G-SIB.The methodology uses an indicator-based measurement approach. Once implemented, banks identified as G-SIB would be required to hold additional capital requirements of 1% to 2.5% of RWA in the form of common equity tier 1 over and above the Basel III international standards. An additional, though currently empty, bucket with requirements of 3.5% of RWA has been created to discourage banks from increasing their systemic relevance further. These additional loss absorbency requirements will be phased-in in parallel with the capital conservation and countercyclical buffers of the Basel III framework, i.e. between 2016 and 2018, becoming fully effective on 1 January 2019.

2.

The FSB’s“Key attributes of effective resolution regimes”are intended to set minimum international standards that will enable authorities to resolve financial institutions in the case of insolvency, while maintaining the continuation of their vital economic functions and without exposing taxpayers to losses. The measures proposed are targeted at national authorities and comprise an international standard

 

for national resolution regimes, requirements for recovery and resolution planning and resolvability assessments as well as institution-specific cross-border cooperation agreements.

3.

More intensive and effective supervision of systemically important financial institutions (SIFI), including stronger supervisory mandates, resources and powers, and higher supervisory expectations for risk management functions, data aggregation capabilities, risk governance and internal controls.

Based on the G-SIB methodology put forward by the BCBS, an initial list of 29 G-SIFI was published by the FSB. The list includes UBS. While the term G-SIB applies specifically to banks and the list currently contains only banking groups, SIFI refers to financial institutions in general. In the future, the list will be updated and could include G-SIFI that are not banking groups. The additional loss absorption measures referred to above are not expected to affect UBS, given that UBS will already be subject to the elevated capital requirements to be imposed by FINMA.

Basel 2.5 market risk framework

The primary effect of revisions to the Basel II market risk framework (commonly referred to as Basel 2.5) issued by the BCBS in 2009 was to introduce new requirements to incorporate the effects of stressed markets. The new requirements have led to lower Bank for International Settlements (BIS) tier 1 and total capital and to higher BIS RWA, thereby lowering UBS’s BIS tier 1 and total capital ratios. In line with the BIS transition requirement, the impact of Basel 2.5 is included in our disclosures from 31 December 2011onwards.

 è 

Refer to the “Capital management” and “Basel 2.5 Pillar 3” sections for more information on the Basel 2.5 framework

Regulatory developments in other jurisdictions

Developments in US regulatory initiatives are focused on rule-making stemming from the Dodd-Frank Act passed in July 2010. Regulators have made significant progress with implementation of many provisions to occur in 2012. A key topic remains the so-called “Volcker Rule,” which would prohibit banking entities from engaging in proprietary trading, subject to a defined set of permitted exceptions, including market-making, hedging, and

 

 

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underwriting activities. The rule would also limit banking entities from investing in hedge funds, private equity funds and other similar “covered funds” except under limited circumstances. The two-year transition period to comply with the Volcker Rule’s prohibition commences in July 2012. US regulators have proposed regulations to further implement the Volcker Rule, which are expected to be issued in final form later in 2012. UBS expects that certain of its historical trading activities will be considered prohibited proprietary trading. UBS Investment Bank’s decision to exit equities proprietary trading business segments, announced during our Investor Day on 17 November 2011, includes businesses likely to be prohibited. For principal trading activity permitted under one of the exemptions, UBS anticipates that it will be required to implement a compliance regime including calculation of required metrics for each trading book. As proposed, the implementing regulations may effectively require the Investment Bank to implement its compliance program globally. Depending on the nature of the final rules, as well as the manner in which they are implemented, the Volcker Rule could have a substantial impact on market liquidity and the economics of market-making. UBS is not able to estimate the effect of implementation of the Volcker Rule compliance program on permitted trading activities until regulations (including the required metrics) are finalized and the required metrics are calculated and calibrated. The Volcker Rule also broadly limits investments and other transactional activities between banks and covered funds. The proposed implementing regulations both expand the scope of covered funds and provide only a very limited exclusion for activities of UBS outside the US. If adopted as proposed, the regulations could limit certain activities of UBS in relation to funds, particularly outside the US.

US regulators have also begun to issue final regulations governing swaps and derivatives markets as contemplated by the Dodd-Frank Act. UBS expects that UBS AG’s swaps activities will require it to register as a swap dealer with the US Commodity Futures Trading Commission and the Securities and Exchange Commission during 2012. The regulations will impose substantial new requirements for clearing, trade execution, recordkeeping, transaction reporting, compliance and conduct in relations to swaps activities. US regulators have not yet issued guidance on the application of US regulation to activities of registered swap dealers outside the US. The potential extraterritorial application of swap dealer regulatory requirements could impose a significant operational and compliance burden and creates the potential for duplicative and conflicting regulation.

In the EU, 2011 saw many important legislative proposals from the European Commission (including a review of the Markets, in Financial Instruments Directive (MiFID), Capital Requirements Directive IV, a review of the Market Abuse Directive and Credit Rating Agencies Regulation III), political agreement by the Council and European Parliament on the Short Selling Regulation, which has now moved to the rule-making phase, negotiations on the European Market Infrastructure Regulation, and consultations on secondary legislation on the Alternative Investment Fund Managers Directive.

Of particular note are the legislative proposals on the review of MiFID, which contains a very broad reform agenda encompassing the trading market structure, transparency regime, regulation of commodity derivatives, investor protection and third-country access to the EU single market. The dossier is now being considered by EU legislators, with political agreement only expected in the first half of 2013. Significant progress was also made on the European Market Infrastructure Regulation, which once it comes into force in 2012, will mandate the clearing of all standardized over-the-counter derivative contracts through central counterparties and reporting of over-the-counter derivative contracts to trade repositories in line with commitments made at the G20 summit in Pittsburgh in 2009.

In the UK, in September 2011, the Independent Commission of Banking issued its final recommendations on reforms of the UK banking sector to promote financial stability and competition. These included the ring-fencing of retail activities and additional loss absorbency requirements for banks. The UK government responded in December 2011, agreeing with the thrust of the recommendations, but amending some points and subjecting a set of issues to a further consultation scheduled for the second quarter of 2012. On the reform of the UK regulatory architecture, the government is moving closer to transferring regulatory responsibility to the Financial Policy Committee (macroprudential regulator), the Prudential Regulation Authority (PRA) (prudential regulator for certain deposit-takers and investment banks) and the Financial Conduct Authority (conduct and markets regulator as well as prudential regulator for non-PRA firms). The related Financial Services Bill was introduced to Parliament in January 2012, and is expected to receive Royal Assent by the end of 2012, with full implementation of the new architecture by the middle of 2013.

 

 

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Our strategy

 

Our strategy

UBS is a client-focused financial services firm that aims to provide superior financial advice and solutions to clients. Our strategy is shaped by our commitment to deliver attractive and sustainable risk-adjusted returns and takes into account the changing business environment and more stringent capital regulatory requirements. We believe the successful execution of this strategy will enable us to implement a progressive capital returns policy starting with the dividend of CHF 0.10 per share we propose to pay to our shareholders for the financial year 2011.

 

At our Investor Day in November 2011, we provided a comprehensive update on our strategic plans, which center on our preeminent wealth management businesses and our universal bank in Switzerland supported by our Global Asset Management business and the Investment Bank. Our strategy builds on the strengths of all of these businesses, and at the same time targets a significant reduction in risk-weighted assets and improvements to our strong capital position. At the end of 2011, our Basel 2.5 capital ratio was one of the highest in the industry at 15.9%, and our Basel III pro forma common equity ratio, calculated on the phased-in basis that will become applicable as of January 2013, stood at an estimated 10.8%. We will build on this strength as well as on our stable funding and sound liquidity positions by capitalizing on the complementary capabilities of all our businesses to generate more sustainable returns. This requires us to make changes to our risk profile and to focus and simplify some aspects of our Investment Bank. In line with our desire to reduce complexity and drive high-quality risk-adjusted returns, we aim to reduce risk-weighted assets. To facilitate this objective and as announced during our Investor Day in November 2011, we transferred a portfolio of legacy assets from the Investment Bank to the Corporate Center. By 2016, we aim to reduce risk-weighted assets in the Investment Bank and in the legacy portfolio together by 50% from 30 September 2011 levels calculated on a pro forma Basel III basis.

    Since the last financial crisis, we have turned around the performance of Wealth Management and Wealth Management Americas. When adjusted for restructuring costs, the gain made on the sale of our strategic investment portfolio in 2011 and a provision related to an arbitration matter in 2010, our wealth management businesses increased their 2011 aggregate profits by 19% to CHF 2.9 billion despite challenging market conditions. This progress also led to increased confidence amongst our clients and we recorded combined net new money of CHF 35.6 billion compared with net outflows of CHF 18.2 billion in 2010. Combined invested assets increased by CHF 2 billion to CHF 1,459 billion. Improved profitability and our ability to attract new assets have enabled us both to retain and recruit high-quality advisors, as evidenced in particular by the significant reduction in advisor attrition rates in our Wealth Management Americas business. We remain committed to our home market and to growing the profitability of our leading Retail & Corporate business, which is critical to the Group in terms of both revenue and profitability, as well as delivering growth to other businesses. The more stringent Basel III capital and liquidity

requirements are likely to lead to increased competition for both secured funding and deposits as a stable source of funding, and to higher funding costs. Our solid funding position, derived from our wealth management businesses and our Retail & Corporate business, as well as the stable earnings generated by our Retail & Corporate business, reinforces our financial position further. Our strategy centers on these businesses and we are committed to building on the progress we have made in the last few years.

Our strategy puts our clients at the center of everything we do and close collaboration between our businesses allows us to deliver the very best of UBS to them. Today, our clients benefit from the comprehensive range of complementary capabilities offered by the Group as a whole. While collaboration has always been part of our corporate ethos, we believe there are further benefits to be delivered both for our clients and our shareholders. As a key part of this, the Investment Bank will work more closely with UBS’s wealth management businesses and increase its emphasis on the execution, advisory and research capabilities it provides to wealth management clients.

The Investment Bank is critical to the success of our wealth management businesses and the Group as a whole. The complementary needs of clients of the Investment Bank and of our wealth management businesses means we can maximize value for them and for the firm. Making connections between clients, markets and ideas is the essence of value creation, and these connections between private wealth and wholesale markets are especially close in areas where we already have a strong presence, such as the Asia Pacific region. There, for example, we have the strongest combination of wealth management and investment banking businesses and through closer collaboration we can build further on our leading position. However, new regulations require us to build and improve the quality of our capital base, and so we are adjusting our Investment Bank to make it simpler, more focused, less capital-intensive and able to deliver improved risk-adjusted returns. We will build on its strengths in equities, foreign exchange and advisory, while shaping the business in favor of the products and services that our clients demand, that offer the best growth opportunities and that are less capital-intensive.

    We will continue to invest in key geographies and products where we identify opportunities across the Group. In practice, this means that our Wealth Management business will work to

 

 

 

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strengthen its industry-leading positioning, while accelerating development within growth markets. Our Wealth Management Americas business will continue with its strategic banking initiatives, including its mortgage lending initiatives, to ensure continued growth in balances coming from credit lines to our target high net worth and ultra high net worth client base. It will also sharpen the focus on “delivering the bank”, as we aim to become the provider of choice for companies, their employees and families for all their wealth management needs. Our Retail & Corporate business will further enhance the range of life cycle products and services we offer our clients, while capitalizing on additional growth opportunities in advisory and execution. Our Global Asset Management business will expand its alternatives platform further and invest in fast-growing passive capabilities, while continuing to grow its third-party wholesale business. Finally, the Investment Bank will work to service our core clients competitively, optimize capital allocation and reduce risk-weighted assets in core businesses with the goal of delivering attractive and sustainable risk-adjusted returns.

Capital strength remains the foundation for our success and we will continue to build capital to achieve our targeted Basel III tier 1 common equity ratio of 13%. This target is above the regulatory requirements for both the Swiss Financial Market Supervisory Authority (FINMA) and the Basel Committee on Banking Supervision and we believe this will provide even greater comfort to our clients and increase confidence further in the firm as a whole. We have built a strong track record both in balance sheet and legacy asset reductions. Over the past few years, we have successfully reduced our balance sheet and legacy positions: compared with the end of 2008, our balance sheet is over half a trillion Swiss francs smaller and our Basel II risk-weighted assets are approximately 35% lower. We have achieved significant reductions in legacy positions in the Investment Bank since the end of 2008. We will continue to reduce risk by exiting or shrinking businesses within our Investment Bank that deliver unattractive returns relative to their capital consumption, particularly in our fixed income, currencies and commodities operations.

    Vigilance on costs remains paramount in an industry undergoing fundamental change, and since the financial crisis of 2007–2009 we have successfully reduced expenses, with costs for 2011 around 20% below 2008 levels. As concerns mounted around issues in the eurozone and the US during 2011, we took further action to prepare our cost base for more challenging market conditions. In August 2011, we announced a CHF 2 billion cost reduction program. We have already seen some benefits as a result of these measures, and we expect more of the benefits to become apparent in our results over coming quarters. Given the cost reductions we have implemented and announced, scope for further material tactical cuts is limited. Thus we are focused on making strategic changes which go to the heart of our organization’s structure and design. While we believe these changes will be adequate to resize our cost base to the current environment and to meet our financial targets, we will monitor markets actively and, if conditions deteriorate materially, we will take further action.

Our reputation remains our most valuable asset, and retaining the trust and confidence of all our stakeholders is critical to the long-term success of UBS. We have set ourselves the key strategic objective of strengthening our operational risk framework to ensure that all of our employees, at every level of the organization, pay even greater attention to safeguarding and reinforcing our reputation. As a first step, we are enhancing our performance management processes to ensure operational risk has a stronger weighting in the assessment of individuals, teams and business performance. This assessment will be fundamental to the success, compensation and career prospects of all UBS employees.

We are confident that our focus, placing our clients at the center of everything we do, increasing collaboration across the firm, continuing to reduce risk-weighted assets and build capital, while remaining vigilant on costs, constitutes the right strategy to enable us to deliver sustainable earnings and increasingly attractive capital returns to our shareholders.

The strategic priorities for our businesses

Our strategy centers on our Wealth Management and Wealth Management Americas businesses and our universal bank in Switzerland supported by our Global Asset Management business and the Investment Bank.

Wealth management is a growth business area with attractive profit margins and high barriers to entry in many markets. Our preeminent Wealth Management business has a strong global footprint in all major financial centers, making it ideally placed to take advantage of these conditions and the opportunities they present. Wealth Management Americas is a client-focused and advisor-centric business. We believe the long-term growth prospects of the wealth management business are attractive in the Americas, with the high net worth and ultra high net worth markets expected to be the fastest growing segments in terms of invested assets.

    Our strategy forWealth Management builds on the considerable progress we have made and aims to extend our industry-leading position. We plan to achieve this through a combination of targeted investments and the expansion of client advisor capabilities in markets we believe present attractive growth opportunities. We aim to increase efficiency by consolidating our on- and offshore European businesses to reflect the convergence of client needs in this market, and we will focus our investment in regions with the highest potential for growth, particularly Asia Pacific and the emerging markets where we expect to see the fastest market growth in the global ultra high net worth and high net worth client segments. We also aim to enhance the business’s gross margin through pricing initiatives and increasing lending opportunities. Our transformation from a traditional private bank into a more dynamic investment manager with strong advisory capabilities will help to meet our clients’ needs whatever the market environment. Our clients will continue to benefit from the access our

 

 

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Our strategy

 

Investment Bank gives them to execution, capital markets, investment insight and research, as well as advisory and other capabilities.

InWealth Management Americaswe remain committed to our client-focused and advisor-centric strategy. We will build on our achievements by continuing to focus on delivering advice-based solutions and by seeking to capture more banking and lending opportunities in the high net worth and ultra high net worth client segments through our unique position in the market and our force of high-quality financial advisors. We will bolster our financial advisors’ productivity through increased training and platform enhancements, and work to strengthen our partnership with the Investment Bank further. We believe we are uniquely positioned to serve high net worth and ultra high net worth investors in the world’s largest wealth market. We are large enough to be relevant, but small enough to be nimble, enabling us to combine the advantages of both large and boutique wealth managers. We aim to differentiate ourselves from competitors by being a trusted and leading provider of financial advice and solutions to our clients by enabling our financial advisors to leverage the full resources of UBS, including unique access to wealth management research and global solutions from our asset-gathering businesses and the Investment Bank.

Our leadingRetail & Corporate business constitutes a central building block for the universal bank model in Switzerland and is critical to the Group in terms of both revenue and profitability, as well as delivering growth to other businesses. Our goal is to deliver value-added services that make us the bank of choice for retail clients. We will continue to refine our suite of life cycle-based offerings which provide our clients with products and dedicated services to fulfill their evolving needs. Through systematic and consistent sales management, we will continue to ensure an efficient and seamless sales process. We will continue to put our clients first by investing in our branches and electronic channels, using technology to complement, rather than replace, our traditional branch network.

Our diversity and size puts us in a unique position to serve all our clients’ complex financial needs. We aim to be the main bank of Swiss corporate and institutional clients ranging from small- and medium-size

enterprises to multinationals, and from pension funds and commodity traders to banks and insurers. We strive to further expand and leverage our transaction banking capabilities and increase our presence and grow in the commodities trade finance business. Combining the universal bank approach with our local market expertise will enable us to provide access to all UBS capabilities, while generating opportunities to cross-sell and increase referrals. Achieving these goals for the business will allow the firm to continue to benefit from the advantages this success brings to our global brand in general and to our leading wealth management business in particular.

We have shaped ourGlobal Asset Management strategy according to the changing needs of clients by developing a diversified business model across investment capabilities, regions and distribution channels. The diversification of our business places us in a good position to benefit from shifting market dynamics and provides a solid foundation for capturing industry growth opportunities.

With long-term performance as our focus, we will work closely with clients in pursuit of their investment goals. In particular, we are continuing to expand our strong third-party institutional business both in developed and emerging markets; while expanding third-party wholesale distribution in the Americas and Europe, building on our strengths in areas including Asia Pacific and Switzerland. We also remain committed to delivering distinctive products and solutions to the clients of UBS’s wealth management businesses. We aim to expand our successful alternatives platform, building on our established positions in real estate and fund of hedge fund businesses, and invest in our fast-growing passive capabilities, including exchange-traded funds and strategies tracking non-standard indices.

TheInvestment Bank is critical to the success of UBS, and its strategy is built on the principles of client relevance, capital efficiency and close collaboration with our Wealth Management and Wealth Management Americas businesses. The business is focused firmly on meeting the needs of our corporate, institutional, sovereign, ultra high net worth, wealth management and other clients while adapting to more stringent capital requirements. Having a

 

 

We are building on the strengths all our businesses

 

 

Investment Bank Wealth Management Retail & Corporate. Global Asset Management
  Wealth Management Americas    

– Consistently top-ranked research house1

– Top 3 global equities house2

– Top 3 overall FX market share3 consistently since 2005, #1 FX house 20114

– Best equity derivative house in Asia5

– Top 3 in structured credit in the first half of 20116

– Strong global footprint: consistently among top 3 in APAC IBD, rated # 1 pan-European brokerage firm and a leading Australian Franchise

 

– World’s leading HNW and UHNW wealth manager: CHF 1.5 trillion of invested assets

– Unrivalled in scope, reach and client mix

– Strong footprint in all major financial centers

– WM: among industry-leading cost/income ratios, significant increase in return on assets since 2009

– WMA: highest financial advisor productivity and invested assets per financial advisor among main US peers

 

– Leading retail and corporate business in Switzerland

– Driver of growth in Wealth Management, Global Asset Management and the Investment Bank

– Continued to attract strong deposit inflows

– Inherently stable business with strong cash flow generation

– Full-year 2011 per-tax profit of CHF 1.9 billion

 

– Invested assets: CHF 574 billion, of which 66% from third-party channels

– Full-year 2011 third-party net new money inflows of over CHF 12 billion

– Well diversified across investment capabilities, regions and distribution channels

– Successful alternatives platform, including our real estate7 and fund of hedge funds8 business, both ranked # 2 globally

 

 

1  Institutional investor, 2011.  2  UBS estimates based on companies reporting 31.12.2011 YTD revenues.  3  Euromoney FX Poll (2005–2011)  4  Risk Magazine, September 2011.  5  Risk – Structured Products Awards, 2011.  6  Coalition, November 2011.  7  Pensions & Investments, October 2011.  8  InvestHedge, September 2011.

 

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competitive and successful Investment Bank is critical to the success of our wealth management businesses. To achieve this we will build on our current strengths in providing flow, solutions and advisory services. We aim to grow our leading equities franchise through targeted technology investments and to reshape our fixed income, currencies and commodities business to materially reduce its level of risk and capital consumption and to make the business more client-focused. We also aim to increase market share in our investment banking department and global capital markets businesses by leveraging our client relationships and global footprint further. To ensure we are able to deliver effectively, we will be highly disciplined in executing, trading, actively managing our portfolio and using our resources to the best possible advantage. To support our goal of becoming more focused and less complex while taking on less risk, we will continue with our efforts to increase our capital efficiency and to actively reduce risk-weighted assets. We will do this by optimizing our business mix in favor of products and services that have the highest relevance to clients, offer the best growth opportunities and are less capital-intensive.

Reducing risk and building capital

We benefit from a strong liquidity position as measured under the proposed Basel III guidelines, and our mix of funding sources is stable and well diversified by market, product and currency, with client deposits providing the single largest source of funding for the firm. Our capital strength is the foundation for the future success of our

businesses and today our Basel 2.5 capital ratio is one of the highest in the industry. We will continue derisking our balance sheet and building our capital base to ensure we remain among the world’s best-capitalized banks under Basel III.

Our strategic imperative to achieve our targets for Basel III capital ratios requires a rapid and prudent reduction of risk deployed in our Investment Bank and in the legacy portfolio in the Corporate Center. We intend to reduce the Group’s Basel III risk-weighted assets by a third with a targeted reduction of risk-weighted assets in the Investment Bank and the legacy portfolio of around half by 2016. These plans to improve capital efficiency in the Investment Bank involve a reduction in risk-weighted assets in our core businesses of approximately 35% and a reduction of around 90% in legacy risk-weighted assets by 2016. We will continue to invest in growth businesses where we have strong market positions and in areas critical to the success of the Group as a whole.

 è 

Refer to the “Capital management” section of this report for more information on Basel III

Measuring our performance

To track our progress in executing our strategy, we have established annual target performance ranges for each of our business divisions and for the Group as a whole. These ranges focus on the key performance metrics of growth, profitability and efficiency. We believe these are the appropriate metrics against which to judge our future success. While any target framework will naturally be subject to the vagaries of the market, we believe these

 

 

 

LOGO

1  Our pro-forma Basel III risk-weighted assets are based on estimates and will be refined as we progress with our implementation of new models and associated systems.   2  The 30 September 2011 pro-forma risk-weighted assets of around CHF 400 billion was already factored in the reversal of CHF 17 billion of stress value-at-risk related to the unauthorized trading incident in the fourth quarter of 2011.  3  SNB StabFund option or underlying assets; assumed constant for future periods (around CHF 20 billion).  4  Final composition of the legacy portfolio as of September 2011. Original 30 September 2011 disclosure was CHF around 70 billion in legacy and around CHF 230 billion in core investment Bank.  5  Target assumes constant foreign exchange rates.

 

LOGO

1  Annual performance ranges for 2012 through 2016; excluding own credit and future significant non-recurring items, if any. Targets assume constant foreign exchange rates.  2  Client assets (invested and custody-only assets) and loans (on-balance sheet client liabilities).  3  Net interest income (annualized)/average loans.  4  The return on equity target for the Group and the return on attributed equity target for the Investment Bank apply from the beginning of 2013. 2012 is a transition year as the Group is targeting a substantial reduction in risk-weighted assets. As a result, equity attributed to the Investment Bank is expected to be reduced, including a component to be allocated to the Corporate Center relating to the legacy portfolio that was transferred from the Investment Bank to the Corporate Center before the end of 2011 and will be managed and reported with effect from the first quarter of 2012 within the Corporate Center.

 

 

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Our strategy

 

ranges are realistic and achievable on an annual basis over the next five years. As we have previously stated, we have taken 2013 as the starting point for the Group’s return on equity target and the Investment Bank’s return on attributed equity target, because 2012 will be a year of transition for the Investment Bank in which we will focus on reducing

risk-weighted assets in the business. The target performance ranges for all other business divisions apply from 2012. Achieving these divisional targets should enable the Group to deliver a return on equity of 12–17% starting in 2013 and a cost/income ratio of 65–75%.

 

 

 

UBS Switzerland

 

UBS is the largest and strongest universal bank in Switzerland. Switzerland is the only country where we operate in retail, corporate and institutional banking, wealth and asset management as well as investment banking. Our strong position in the Swiss home market is crucial to sustain our global brand and further grow our global core business. We are fully committed to our home market, and by building on our 150 years of banking heritage, UBS Switzerland maintains a leading position in all five business areas. With approximately 300 branches and 4,700 client-facing staff, we are able to reach approximately 80% of Swiss wealth, one in three households, one in every three wealthy individuals and almost half of all Swiss companies.

We strive to be the leading bank in Switzerland with regard to client satisfaction,

employee engagement and sustainable profitability. UBS Switzerland’s unique universal bank model is central to our success. Our dedicated Swiss management team has representatives from all five business areas, and ensures a uniform approach to the market when offering our full range of banking products, expertise and services. Our cross-divisional management approach allows us to utilize efficiently our existing resources, promotes cross-divisional thinking and enables seamless collaboration across all business areas. As a result, we are in a unique position to efficiently serve our clients with a comprehensive range of banking products and services to fit their needs. We are able to differentiate ourselves through leveraging our strengths across all segments while ensuring stability and continuity throughout the client’s life cycle.

Our universal bank model has proven itself to be highly effective in Switzerland and provides a substantial part of the Group’s revenues.

Given the strength of the economy and stable political environment in Switzerland, the country remains an attractive and growing financial market. This inherent stability and growth has been the basis for our success and the constant contribution from UBS Switzerland to the Group financial performance. Thanks to our universal bank model, vast client base and branch network, we are well-positioned to capture future market growth and strengthen our leading position in our home market.

 

 

 

 

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Measurement of performance

 

Performance measures

Key performance indicators

Our key performance indicators (KPI) framework focuses on key drivers of total shareholder return, which measures the total return of a UBS share, i.e. both the dividend yield and the capital appreciation of the share price. The KPI framework is reviewed by our senior management on a regular basis to ensure that it is always aligned to the changing business conditions.

The Group and business divisions are managed based on this KPI framework, which emphasizes risk awareness, effective risk and capital management, sustainable profitability, and client focus. Both Group and

business division KPI are taken into account in determining variable compensation of executives and personnel.

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Refer to the “Compensation” section of this report for more information on total shareholder return

The Group and business division KPI are explained in the “Group/business division key performance indicators” table.

In keeping our focus on the key performance metrics of growth, profitability and efficiency, a few enhancements will be made to the KPI framework with effect from the first quarter of 2012 reporting onwards.

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Refer to the “Changes to key, performance indicators in 2012” sidebar for more information

 

 

Group / business division key performance indicators

 

        Wealth Management &
Swiss Bank
         
Key performance indicators Definition  Group  Wealth
Management
  Retail &
Corporate
  Wealth
Management
Americas
  Global Asset
Management
  Investment
Bank
Net profit growth (%) Change in net profit attributable to UBS shareholders from continuing operations between current and comparison periods / net profit attributable to UBS shareholders from continuing operations of comparison period  l              
                     
Pre-tax profit growth (%) Change in business division performance before tax between current and comparison periods / business division performance before tax of comparison period    l      l      l      l      l    
                     
Cost / income ratio (%) Operating expenses / operating income before credit loss (expense) or recovery  l      l      l      l      l      l    
                     
Return on equity (RoE) (%) Net profit attributable to UBS shareholders on a year-to-date basis (annualized as applicable) / average equity attributable to UBS shareholders (year-to-date basis)  l              
                     
Return on attributed equity (RoaE) (%) Business division performance before tax on a year-to-date basis (annualized as applicable) / average attributed equity (year-to-date basis)            l    
                     
Return on assets, gross (%) Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable) / average total assets (year-to-date basis)  l              l    
                     
Return on risk-weighted assets, gross (%) Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable) / average risk-weighted assets (year-to-date basis)  l              
                     
FINMA leverage ratio (%) FINMA tier 1 capital / average adjusted assets as per definition by the Swiss Financial Market Supervisory Authority (FINMA)  l              
                     
BIS tier 1 ratio (%) BIS tier 1 capital / BIS risk-weighted assets  l              
                     
Net new money (CHF billion) Inflow of invested assets from new and existing clients less outflow from existing clients or due to client defection  l      l        l      l      
                     
Gross margin on invested assets (bps) Operating income before credit loss (expense) or recovery (annualized as applicable) / average invested assets    l        l      l      
                     
Impaired loans portfolio as a % of total loans portfolio, gross (%) Impaired loans portfolio, gross / total loans portfolio, gross      l          
                     
Average VaR (1-day, 95% confidence, five years of historical data) Value-at-Risk (VaR) expresses maximum potential loss measured to a 95% confidence level, over a 1-day time horizon and based on five years of historical data            l    
                     

 

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Our strategy

 

Client/invested assets reporting

We report two distinct metrics for client funds:

 

The measure “client assets” encompasses all client assets managed by or deposited with us, including custody-only assets and assets held for purely transactional purposes.

 

The measure “invested assets” is a more restrictive term and includes only client assets managed by or deposited with us for investment purposes.

Of the two, invested assets is our central measure and includes, for example, discretionary and advisory wealth management portfolios, managed institutional assets, managed fund assets and wealth management securities or brokerage accounts. It excludes all assets held for purely transactional and custody-only purposes, as we only administer the assets and do not offer advice on how these assets should be invested. Non-bankable assets (for example, art collections) and deposits from third-party banks for funding or trading purposes are excluded from both measures.

Net new money in a reported period is the amount of invested assets that are entrusted to us by new or existing clients less those withdrawn by existing clients or clients who terminated their relationship with us. Negative net new money means that there are more outflows than inflows. Interest and dividend income from invested assets is not counted as net new money inflow. However, in Wealth Management Americas we also show net new money including interest and dividend income to facilitate comparison with a US peer. Market and currency movements, as well as fees, commissions and interest on loans charged, are excluded from net new money as are the effects of any acquisition or divestment of a UBS subsidiary or business. Reclassifications between invested assets and client assets as a result of

a change in the service level delivered are treated as net new money inflows or outflows. The Investment Bank does not track invested assets and net new money. However, when a client is transferred from the Investment Bank to another business division, this produces net new money even though client assets were already with UBS.

When products are managed in one business division and sold by another, they are counted in both the investment management unit and the distribution unit. This results in double counting within our total invested assets, as both units provide an independent service to their respective client, add value and generate revenues. Most double counting arises when mutual funds are managed by Global Asset Management and sold by Wealth Management & Swiss Bank and Wealth Management Americas. The business divisions involved count these funds as invested assets. This approach is in line with both finance industry practices and our open architecture strategy, and allows us to accurately reflect the performance of each individual business. Overall, CHF 216 billion of invested assets were double counted in 2011 (CHF 225 billion in 2010).

 è 

Refer to “Note 34 Invested assets and net new money” in the “Financial information” section of this report for more information

Seasonal characteristics

Our main businesses do not generally show significant seasonal patterns, although the Investment Bank’s revenues have been affected in some years by the seasonal characteristics of general financial market activity and deal flows in investment banking. Other business divisions are only slightly impacted by seasonal components, such as asset withdrawals that tend to occur in the fourth quarter and by lower client activity levels related to the summer and end-of-year holiday seasons.

 

 

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Changes to key performance indicators in 2012

 

Commencing in the first quarter of 2012, we will implement two new key performance indicators for our Retail & Corporate segment; namely, “Net new business volume growth (%)” and “Net interest margin (%)”. Both new key performance indicators will be used to assess and monitor the performance of this business. “Net new business volume growth (%)” will capture our success in

expanding our business volume from lending to clients as well as acquiring client assets. The “Net interest margin (%)” is a key profit driver as net interest income contributes to more than half of our total operating income. Wealth Management Americas will also report a new key performance indicator “Share of recurring revenue (%)” to measure its business performance.

The currently disclosed KPI “Net new money (CHF billion)” for the Group and the segments Wealth Management, Wealth Management Americas and Global Asset Management will be replaced by “Net new money growth (%)”. Our senior management considers the change from an absolute to a growth rate of net new money to be a more meaningful key performance indicator.

 

 

Group / business division key performance indicators

 

Key performance indicators  Definition Group Wealth
Management
 Retail &
Corporate
 Wealth
Management
Americas
 Global Asset
Management
Net new business volume growth (%)  Net new business volume (i.e. total net inflows and outflows of client assets and loans) for the period (annualized as applicable) / business volume (i.e. total of client assets and loans) at the beginning of the period   l      
              
Net interest margin (%)  Net interest income on a year-to-date basis (annualized as applicable) / average loans (year-to-date basis)   l      
              
Share of recurring revenue (%)  Total recurring fees and net interest income / total operating income    l     
              
Net new money growth (%)  Net new money for the period (annualized as applicable) / invested assets at the beginning of the period l     l      l     l    
              

 

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Wealth Management

Headquartered in Switzerland, with a presence in over 40 countries, Wealth Management provides wealthy private clients with financial advice, products and tools to fit their individual needs.

 

Business

Wealth Management delivers comprehensive financial services to wealthy private clients around the world – except those served by Wealth Management Americas. With CHF 750 billion of invested assets at the end of 2011, we are one of the largest wealth managers in the world. Our clients benefit from the entire spectrum of UBS resources, ranging from asset management to estate planning and corporate finance advice, in addition to the specific wealth management products and services outlined below. An open product platform provides clients with access to a wide array of products from third-party providers that complement our own product lines.

Strategy and clients

Our goal is to be the bank of choice for wealthy individuals worldwide. We offer products and services to private clients, focusing in particular on the ultra high net worth (clients with investable assets of more than CHF 50 million) and high net worth client segments (clients with investable assets between CHF 2 million and CHF 50 million). In addition, we also provide wealth management solutions, products and services to financial intermediaries.

We remain confident on the long-term growth prospects of our wealth management business, and we expect the wealth management market to grow twice as fast as the gross domestic product in all regions of the globe. From a client segment perspective, the global ultra high net worth

market shows the highest growth potential, followed by the high net worth market. Our broad client base and strong global footprint put us in an excellent position to take advantage of the substantial growth opportunities this expected wealth creation presents. This applies in particular to Asia, Latin America, the Middle East and Central and Eastern Europe, the areas where we expect to see the fastest market growth based on economic development and entrepreneurial wealth creation. In the key onshore locations in which we are expanding, our Wealth Management business benefits from our established local Investment Bank and Global Asset Management business relationships.

We continue to build on our integrated client service model, bundling competencies across the Group to identify investment opportunities in all market conditions and tailor products to individual client needs. We intend to increase our client advisor base to about 4,700 advisors in the medium term, with a particular emphasis on the emerging markets and Asia Pacific growth regions. Our global booking centers give us a strong local presence that enables us to book client assets in multiple locations. In an increasingly complex regulatory environment, we aim to differentiate ourselves from competitors through our sophisticated and robust compliance framework. In our pursuit of the highest possible levels of compliance, we make ongoing investments to optimize our risk management processes and conduct extensive employee training. We strive to adapt quickly to changes to regulatory and suitability requirements in every region, drawing on our local know-how and experience.

 

 

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In Asia Pacific, we continue to focus on Hong Kong and Singapore, the leading financial centers in the region, as well as on selective presences in the major onshore markets. Today, we are present in seven markets and have already established sizeable businesses in several onshore locations such as Japan and Taiwan. We continue to invest in our local presences in China and India to capture long-term growth opportunities.

In the emerging markets, we are focusing on the Middle East, Latin America, as well as Central and Eastern Europe, and we already have local presences in more than 20 countries. As the majority of our clients from emerging markets prefer to book their assets in established financial centers, we are strengthening our emerging markets coverage through our booking centers in the US, the UK and Switzerland. We will continue to expand our local presence where appropriate, for example, through the establishment of new advisory offices, such as the one recently opened in Israel.

In Europe, our growth ambition is underpinned by an established European footprint in all major booking centers and a broad franchise. We are combining the management of our European offshore and onshore businesses to reflect the converging needs of clients in the region. This reorganization enables us to leverage our extensive Swiss product offering, while creating economies of scale and helping us to deal more efficiently with increased regulatory requirements.

In Switzerland, our wealth management operations’ close collaboration with our leading retail, corporate, asset management and investment banking businesses gives us the foundation to grow market share in our Wealth Management franchise, and provides our clients access to investment insight and research, products, capital markets and execution as well as to advisory and other capabilities. Our extensive branch network, including over 100 wealth management offices, fosters referrals from the Swiss corporate and retail client base as well as retail clients’ development to our wealth management operations as their wealth increases.

We aim to build on our position as market leader in the ultra high net worth segment, which we regard as having considerable growth potential, by continuously enhancing our service and product offering. We have, for example, recently introduced a new product group in our philanthropy offering called “Impact Investing”, which aims to make measurable, positive social and environmental impacts at the same time as generating financial returns for the investor. Moreover, to cover the needs of the largest 250 family offices worldwide, we have created the Global Family Office Group as a joint venture between Wealth Management and the Investment Bank. With its dedicated specialist teams from both Wealth Management and the Investment Bank, the Global Family Office Group delivers the full range of capabilities our integrated bank has to offer this highly sophisticated client group.

Our Global Financial Intermediaries (Global FIM) business serves approximately 1,700 asset managers. Based on defined business models, Global FIM supports financial intermediaries as a strategic business partner, offering professional investment advisory services and tailored solutions that enable them to advise their clients more effectively. Global FIM is represented in 11 Swiss locations and 14 international locations. We regard financial intermediaries as an attractive client segment offering high growth potential.

Organizational structure

Wealth Management is headquartered in Switzerland, with a presence in over 40 countries and approximately 200 wealth management and representative offices, half of which are outside Switzerland, mostly in Europe, Asia Pacific, Latin America and the Middle East. As of the end of 2011, Wealth Management employed roughly 16,000 people worldwide, of whom approximately 4,200 were client advisors. The Wealth Management business unit is governed by an executive committee and is primarily organized along regional lines with the business areas Asia Pacific,

 

 

 

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Europe, Global Emerging Markets, Switzerland and Global Ultra High Net Worth Clients. Our business is supported by a Chief Investment Officer and a global Investment Products & Services unit as well as central functions.

Competitors

Our major global competitors include Credit Suisse, Julius Bär, HSBC, Deutsche Bank, JP Morgan and Citigroup. In the European domestic markets, we primarily compete with the private banking operations of such large local banks as Barclays in the UK, Deutsche Bank in Germany and Unicredit in Italy. The private banking franchises of HSBC, Citigroup and Credit Suisse are our main competitors in Asia Pacific.

Products and services

As a global, integrated firm, UBS has the necessary expertise to identify appropriate investment opportunities for clients and the local presence to advise them in a timely manner. We provide our clients with the financial advice, products and tools that best fit their individual needs. We accommodate the individual needs of our clients by offering services across the full investment spectrum, from execution only to discretionary mandates. Clients who opt for a discretionary mandate delegate the management of their assets to a team of professional portfolio managers. Clients who prefer to be actively involved in the management of their assets can choose an advisory mandate, in which investment professionals provide analysis and monitoring of portfolios, together with tailor-made proposals to support investment decisions. Our clients can trade the full range of financial instruments from single securities, such as equities and bonds, to various investment funds, structured products and alternative investments. Additionally, we offer structured lending, corporate finance and wealth planning advice on client needs such as funding for education, inheritance and succession. For our ultra high net worth clients, we offer institutional-like servicing that provides special access to our Investment Bank and Global Asset Management offerings.

    Financial markets have changed fundamentally over the last few years and are characterized by a high degree of uncertainty and volatility. In these difficult market conditions our clients have become increasingly focused on protecting their assets and expect strong advisory support for their investment decisions. We are, therefore, continuing to evolve our wealth management business model from a traditional private bank towards an investment manager with strong advisory capabilities. This implies active relationships between our highly qualified client advisors and their clients. Fast and focused communication, new investment ideas, access to growth markets and wealth protection are critical for our clients’ success. To this end, and with the ultimate goal of improving our clients’ investment performance, we have set up a new team under the leadership of our Chief Investment Officer that formulates our investment view by integrating the research and expertise of our

investment specialists across all business divisions and from all around the globe. Based on this “UBS house view”, our client advisors actively and regularly inform our clients about our opinion on developments in the financial markets. Clients receive investment proposals directly related to our house view, as well as solutions for alternative scenarios should clients have diverging views on market trends.

Our Investment Products & Services unit ensures our offering is consistently adapted to market conditions by aligning our products with the investment views of our Chief Investment Officer. Wealth Management also gives clients access to the knowledge, and product and service offerings from Global Asset Management and the Investment Bank, complemented by an open product platform providing access to a wide array of products from third-party providers. By aggregating private investment flows into institutional-size flows, we are in a position to offer our Wealth Management clients access to investments that would otherwise only be available to institutional clients.

Our integrated client service model allows client advisors to analyze their clients’ financial situation, and develop and implement systematic, tailored investment strategies. These strategies are regularly reviewed and based on individual client profiles, which comprise all important investment criteria such as a given client’s life cycle needs, risk appetite and performance expectations. We continuously train our client advisors and provide them with ongoing support to ensure they present the best solutions to our clients.

 

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Retail & Corporate

As the leading retail and corporate banking business in Switzerland, our goal is to deliver comprehensive financial products and services to our retail, corporate and institutional clients, provide stable and substantial profits for the Group and create revenue opportunities for other businesses within the Group.

 

Business

Our Retail & Corporate business unit delivers comprehensive financial products and services to our retail, corporate and institutional clients in Switzerland, and maintains a leading position in these client segments. As shown in the “Business mix” chart, Retail & Corporate has generated stable profits which have contributed substantially to the overall financial performance of the Group. We are market leaders in the retail and corporate loan market in Switzerland, with a highly collateralized lending portfolio of CHF 135 billion on 31 December 2011, as shown in the “Loans, gross” chart. This portfolio is managed for profitability rather than for market share.

Our Retail & Corporate unit constitutes a central building block for the universal bank model of UBS Switzerland. Retail & Corporate supports our other business divisions by referring clients to them and assisting retail clients to build their wealth to a level at which we can transfer them to our Wealth Management unit. Furthermore, Retail & Corporate leverages the cross-selling potential of products and services provided by our asset-gathering and investment banking businesses. Together, these actions contribute strongly to our Group profitability. In addition, Retail & Corporate provides and pays for a substantial part of the Swiss infrastructure, including nearly 300 branches, and the Swiss banking product platform.

Strategy and clients

Our goal is to deliver value-added services that make us the bank of choice for retail clients in Switzerland. With a network of around 300 branches, 1,250 automated teller machines, self-service terminals and

customer service centers, alongside e-banking and mobile banking, we serve one in three households in Switzerland. We are continuously refining our suite of life cycle-based offerings which provide our clients with products and dedicated services to fulfill their evolving needs. Through systematic and consistent sales management, we ensure an efficient and seamless sales process. In order to improve our clients’ experience of banking with us, we will continue to invest in our branches and electronic channels, using technology to complement, rather than replace, our traditional branch network.

Our size in Switzerland and the diversity of businesses we operate put us in a unique position to serve all our clients’ complex financial needs. We aim to be the main bank of corporate and institutional clients ranging from small- and medium-size enterprises to multinationals, and from pension funds and commodity traders to banks and insurers. We serve almost one in two Swiss companies, including more than 85% of the 1,000 largest Swiss corporations, as well as one in three pension funds in Switzerland, including 75 of the largest 100. We strive to further expand and leverage our transaction banking capa-

 

 

 

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bilities (e.g. payment and cash management services, custody solutions, trade and export finance). In addition, we plan to increase our presence and grow in the commodities trade finance business. Combining the universal bank approach with our local market expertise across all Swiss regions enables us to optimize our client service by providing access to all UBS capabilities while generating opportunities to cross-sell and increase referrals.

As the leading retail and corporate banking business in Switzerland, we understand the importance of our role in supporting the needs of our clients. In 2011, we initiated the necessary steps to hone and simplify our service commitments across the business, including streamlining our processes, reducing the administrative burden on our client advisors and enhancing their productivity without compromising our risk standards.

Organizational structure

The Retail & Corporate unit is a core element of UBS Switzerland’s universal bank delivery model, which allows us to extend the expertise of the entire bank to our Swiss retail, corporate and institutional clients.

To ensure consistent delivery throughout Switzerland, the Swiss network is organized into ten geographical regions. Dedicated management teams in the regions and in the branches derived from all business areas are responsible for executing the universal bank model, fostering cross-divisional collaboration and ensuring that the public and clients have a uniform experience based on a single corporate image and shared standards of service.

Competitors

In the Swiss retail banking business, our competitors are Credit Suisse, Raiffeisen, the cantonal banks and PostFinance, as well as other regional and local Swiss banks.

In the Swiss corporate and institutional business, our main competitors are Credit Suisse, the cantonal banks and foreign banks in Switzerland.

Products and services

Our retail clients have access to a life cycle-based, comprehensive offering including cash accounts, payments, savings and retirement solutions, investment fund products, residential mortgages, as well as life insurance and advisory services. These are tailored to clients’ individual needs and requirements. We provide financing solutions to our corporate clients, offering access to capital markets (equity and debt capital), syndicated and structured credit, private placements, leasing and traditional financing. Our transaction banking offers solutions for payments and cash management services, trade and export finance, receivable finance, as well as global custody solutions to institutional clients. Our close collaboration with the Investment Bank enables us to offer capital market products such as foreign exchange offerings, hedging strategies (currency, interest rates, and commodities) and trading (equities and fixed income, currencies and commodities), and to provide corporate finance advice in fields such as mid-market mergers and acquisitions, corporate succession planning and real estate. We also cater to the asset management needs of institutional clients by offering portfolio management mandates, strategy execution and fund distribution.

 

 

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Wealth Management Americas

Wealth Management Americas provides advice-based relationships through its financial advisors, who deliver a fully integrated set of wealth management solutions designed to address the needs of high net worth and ultra high net worth individuals and families.

 

Business

Wealth Management Americas is among the leading wealth managers in the Americas in terms of financial advisor productivity and invested assets, and includes the domestic US and Canadian businesses as well as international business booked in the US. On 31 December 2011, the business division had CHF 709 billion in invested assets.

Strategy and clients

Our goal is to be the best wealth management business in the Americas. In order to achieve this, we must continue to be both client-focused and advisor-centric. We deliver a fully integrated set of advice-based wealth management solutions and banking services through our financial

advisors in key metropolitan markets to meet the needs of our target client segments: high net worth clients (USD 1 million to USD 10 million in investable assets) and ultra high net worth clients (more than USD 10 million in investable assets), while also serving the needs of the core affluent (USD 250,000 to USD 1 million in investable assets). We are committed to providing high-quality advice to our clients across all their financial needs by employing the best professionals in the industry, delivering the highest standard of execution, and running a streamlined and efficient business.

We believe we are uniquely positioned to serve high net worth and ultra high net worth investors in the world’s largest wealth market. With a network of almost 7,000 financial advisors and CHF 709 billion in invested assets, we are large enough to be relevant, but small enough to be nimble, enabling us to combine the

 

 

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Our strategy

 

advantages of both large and boutique wealth managers. We aim to differentiate ourselves from competitors and be a trusted and leading provider of financial advice and solutions to our clients by enabling our financial advisors to leverage the full resources of UBS, including unique access to wealth management research and global solutions from our asset-gathering businesses and the Investment Bank. These resources are augmented by our commitment to an open architecture and our partnerships with many of the world’s leading third-party institutions. Moreover, our wealth management offerings are complemented by banking, mortgage, and financing solutions that enable us to provide advice on both the asset and liability sides of our clients’ financial balance sheets.

We believe the long-term growth prospects of the wealth management business are attractive in the Americas, with high net worth and ultra high net worth expected to be the fastest growing segments in terms of invested assets in the region. In 2011, our strategy and focus led to an improvement in financial results, retention of high-quality financial advisors and net new money growth. Building on this progress, we aim for continued growth in our business by developing our financial advisors’ focus toward advice-based solutions, leveraging the global capabilities of UBS to clients by partnering with the Investment Bank and Global Asset Management, and delivering banking and lending services that complement our wealth management solutions. We also plan to continue investing in improved platforms and technology. We expect these levels of client satisfaction, strengthen our client relationships, and lead to greater revenue productivity among our financial advisors and a more profitable business.

Organizational structure

Wealth Management Americas consists of branch networks in the US, Puerto Rico and Canada, with 6,967 financial advisors as of 31 December 2011. Most corporate and operational functions of the business division are located in the home office in Weehawken, New Jersey.

In the US and Puerto Rico, Wealth Management Americas operates through direct and indirect subsidiaries of UBS AG. Securities and operations activities are conducted primarily through two registered broker-dealers, UBS Financial Services Inc. and UBS Financial Services Incorporated of Puerto Rico. Our banking services in the US include those conducted through the UBS AG branches and UBS Bank USA, a federally regulated Utah bank, which provides Federal Deposit Insurance Corporation (FDIC)- insured deposit accounts, enhanced collateralized lending services and mortgages.

Canadian wealth management and banking operations are conducted through UBS Bank (Canada).

Significant business transfers in the past few years included the 2009 sales of 56 branches Incorporated and UBS’s Brazilian financial services business, UBS Pactual, to BTG Investments, LP.

Competitors

Wealth Management Americas competes with national full-service brokerage firms, domestic and global private banks, regional broker-dealers, independent broker-dealers, registered invest-

 

 

 

 

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ment advisors, trust companies, and other financial services firms offering wealth management services to US and Canadian private clients, as well as foreign non-resident clients seeking wealth management services within the US. Our main competitors include the wealth management businesses of Bank of America, Morgan Stanley, and Wells Fargo.

Products and services

Wealth Management Americas offers clients a full array of solutions that focus on the individual financial needs of each client. Comprehensive planning supports clients through the various stages of their lives, including education funding, charitable giving, tax management strategies, estate strategies, insurance, retirement, and trusts and foundations with corresponding product offerings for each stage. Our advisors work closely with internal consultants in areas such as wealth planing, portfolio strategy, retirement and annuities, alternative investments, managed accounts, structured products, banking and lending, equities, and fixed income. Clients also benefit from our dedicated Wealth Management Research team, which provides research guidance to help support the clients’ investment decisions.

Our offerings are designed to meet a wide variety of investment objectives, including wealth accumulation and preservation, income generation and portfolio diversification. To address the full range of our clients’ financial needs, we also offer competitive lending and cash management services such as securities-backed lending, the resource management account, FDIC-insured deposits, mortgages and credit cards.

Additionally, our Corporate Employee Financial Services unit provides a comprehensive, personalized stock benefit plan and related services to many of the largest US corporations and their executives. For corporate and institutional clients, we offer a robust suite of solutions, including equity compensation, administration, investment consulting, defined benefit and contribution programs and cash management services.

Our clients can choose asset-based pricing, transaction-based pricing or a combination of both. Asset-based accounts have access to both discretionary and non-discretionary investment advisory programs. Non-discretionary advisory programs enable the client to maintain control over all account transactions, while clients with discretionary advisory programs direct investment professionals to manage a portfolio on their behalf. Depending on the type of discretionary program, the client can give investment discretion to a qualified financial advisor, a team of our investment professionals or a third-party investment manager. Separately, mutual fund advisory programs are also offered, whereby a financial advisor works with the client to create a diversified portfolio of mutual funds guided by a research-driven asset allocation framework.

For clients who favor individual securities, we offer a broad range of equity and fixed income instruments. In addition, qualified clients may take advantage of structured products and alternative investment offerings to complement their portfolio strategies.

All of these solutions are supported by a dedicated markets execution group. This group partners with the Investment Bank and Global Asset Management in order to access the resources of the entire firm as well as third-party investment banks and asset management firms.

 

 

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Global Asset Management

Global Asset Management is a large-scale asset manager with businesses well diversified across regions, capabilities and distribution channels. We serve third-party institutional and wholesale clients and the clients of UBS’s wealth management businesses with a broad range of investment capabilities and styles across all major traditional and alternative asset classes.

 

Business

Global Asset Management’s investment capabilities encompass equities, fixed income, currency, hedge funds, real estate, infrastructure and private equity. We also enable clients to invest in a combination of different asset classes through multi-asset strategies. Our fund services unit, a global fund administration business, provides professional services including legal fund set-up, accounting and reporting. Invested assets totaled CHF 574 billion and assets under administration were CHF 375 billion on 31 December 2011. Global Asset Management is a leading fund house in Europe, the largest mutual fund manager in Switzerland and one of the largest fund of hedge funds and real estate investment managers in the world.

Strategy

With long-term performance as our focus, we work closely with clients in pursuit of their investment goals. In particular, we are continuing to expand our strong third-party institutional business both in developed

and emerging markets while also expanding third-party wholesale distribution in the Americas and Europe, building on our strengths in this channel in Asia Pacific and Switzerland. We also remain committed to delivering distinctive products and solutions to the clients of UBS’s wealth management businesses.

In the highly volatile market environment, investors are increasingly looking for market-like returns (“beta”) from passive investments, complemented by higher potential returns (“alpha”) from higher-risk investments, including alternatives. In response to this, we continue to expand our successful alternatives platform, building on our established positions in real estate and fund of hedge funds businesses. In addition, we continue to invest in our fast-growing passive capabilities, including exchange-traded funds and strategies tracking non-standard indices.

The current environment and near-term outlook are characterized by market uncertainty, investor risk aversion and lower interest rates. In this environment, the diversification of our business places us in a good position to benefit from shifting market dynamics and provides a solid foundation for capturing industry growth opportunities.

 

 

Business structure

 

Investment capabilities are globally coordinated but with boutique-like discretion and accountability ...

Equities Fixed income Global investment solutions 

Alternative and quantitative

investments

 Global real estate Infrastructure and private equity Fund services

 

 

... distribution is regionally organized ...

Americas Switzerland Europe Asia Pacific

 

Global sovereign markets1

 

 

... and supported by global functions

Communications2 Financial control2 Human resources2 IT2 Legal & compliance2 

Operations &

fund treasury

 Risk control2 

Strategic

planning

 

1  Works in close coordination with region heads and the Pan Asia Institutional team.  2  Reports to UBS Group functional head.

 

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The long-term outlook for the asset management industry remains strong, with three main drivers: (i) the financial crisis has reduced the assets of both the retired and the working population, creating a pressing need for increased savings rates; (ii) emerging markets will continue to drive growth in the mutual funds industry and retirement schemes in these markets; and (iii) as governments focus on reducing deficits, they will need to reduce support for benefits and pensions and will face increased pressure to privatize infrastructure assets.

Organizational structure

The “Business structure” chart shows the investment, distribution and support structure of the business division. We employ around 3,800 personnel in 26 countries, and have our principal offices in London, Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo and Zurich. Global Asset Management operates through UBS AG or its subsidiaries.

Significant recent acquisitions, business transfers and other developments

 

In November 2011, investment management responsibility for a private equity fund of funds was transferred to Global Asset Management from Wealth Management & Swiss Bank.

 

In October 2011, Global Asset Management completed the acquisition of the ING Investment Management Limited business in Australia. This currently operates as a subsidiary of UBS Global Asset Management (Australia) Ltd and will be fully integrated during 2012.

 

In July 2011, the infrastructure and private equity fund of funds businesses were transferred from our alternative and quantitative investment area to our infrastructure investment area which, as a result, was renamed infrastructure and private equity.

 

In January 2011, investment management responsibility for a multi-manager alternative fund was transferred to Global Asset Management from Wealth Management & Swiss Bank.

 

In October 2010, UBS increased from 51.0% to 94.9% its holding in UBS Real Estate Kapitalanlagegesellschaft mbH (KAG), a Global Asset Management joint venture with Siemens in Munich, Germany.

 

In September 2010, investment management responsibility for Wealth Management Americas’ US hedge fund business was transferred to Global Asset Management’s alternative and quantitative investments area. A joint venture between the two business divisions aims to deliver attractive hedge fund and fund of hedge funds solutions to Wealth Management Americas’ clients.

 

In December 2009, the real estate investment management business of Wealth Management & Swiss Bank was transferred to Global Asset Management.

 

In September 2009, UBS completed the sale of its Brazilian financial services business, including its asset management business, UBS Pactual Asset Management.

Competitors

Our competitors include global firms with wide-ranging capabilities, such as Fidelity Investments, AllianceBernstein Investments, BlackRock, JP Morgan Asset Management and Goldman Sachs Asset Management. Most of our other competitors are more regional or local specialist niche players that focus mainly on one asset class, particularly in the real estate, hedge fund or infrastructure investment areas.

Clients and markets

Global Asset Management serves third-party institutional and wholesale clients, and the clients of UBS’s wealth management businesses. As shown in the chart of invested assets by channel, at 31 December 2011, approximately 66% of invested assets originated from third-party clients, including institutional clients (e.g. corporate and public pension plans, governments and their central banks) and wholesale clients (e.g. financial intermediaries and distribution partners). A further 34% originated from UBS’s wealth management businesses.

Products and services

Global Asset Management’s business lines are as follows: traditional investments (equities, fixed income and global investment solutions); alternative and quantitative investments; global real estate; infrastructure and private equity; and fund services. Revenues and key performance indicators are reported according to these business lines and a breakdown of invested assets by business line is shown in the chart on the next page.

The “Investment capabilities and services” chart illustrates our offering, which can be delivered in the form of segregated, pooled and advisory mandates, along with a range of more than 1,000 registered investment funds, exchange-traded funds and other investment vehicles in a wide variety of jurisdictions and across all major asset classes.

 

 

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Our strategy

 

Investment capabilities and services

 

Equities

 

Fixed income

 

Global investment

solutions

 

Alternative and

quantitative

investment

 

Global real estate

 

Infrastructure and

private equity

 

Fund services

Core/value 

Global

 

Global

 Single-manager hedge funds 

Global

 Direct infrastructure investment 

Fund/product set-up

Global

 

Country and regional

 

Country and regional

 Multi-manager hedge funds 

Country and regional

 Infrastructure fund of funds International distribution support
Country and regional 

Money market

 

Asset allocation

 

Quantitative

 Income, core value-added and opportunistic strategies Private equity fund of funds Fund/product administration

Emerging markets

 

Short duration

 

Currency management

 Active commodities, multi-manager 

Multi-manager funds

   

Shareholder service

Thematic and SRI

 

Core and core plus

 Return and risk targeted   

Listed securities

   

Private labeling

Long/short

 

Sector specific

 

Structured portfolios

   

Farmland

   

Reporting

Opportunity/high alpha 

Emerging markets

 

Risk management

       Ancillary services for fund of hedge fund
Growth 

High yield

 

Advisory services

        

Global

 

Indexed

 

Multi-manager

        
Country and regional 

Unconstrained

          

Emerging markets

 

Customized solutions

          
Structured            

Global and regional

            

Indexed

            

Enhanced indexed

            

ETFs

            

Market neutral

            

Multi-strategy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equitiesoffers a full spectrum of investment styles with varying risk and return objectives. It has three investment pillars with distinct strategies, including core/value (portfolios managed according to a price-to-intrinsic-value philosophy), growth (portfolios of quality growing companies that we believe to be undervalued in the market) and structured (strategies that employ proprietary analytics and quantitative methods, including passive).

 

Fixed incomeoffers a diverse range of global, regional and local market-based investment strategies. Its capabilities include single-sector strategies such as government and corporate bond portfolios, multi-sector strategies such as core and core plus bond, and extended-sector strategies such as high-yield and emerging market debt. In addition to this suite of traditional fixed income offerings, the team also manages unconstrained fixed income, currency strategies and customized solutions.

 

Global investment solutionsoffers active asset allocation, currency, multi-manager, structured solutions, risk advisory and strategic investment advisory services. It manages a wide array of regional and global multi-asset investment strategies across the full investment universe and risk/return spectrum, structured portfolios, convertible bonds and absolute-return strategies. Through its risk management and strategic investment advisory services, it supports clients in a wide range of investment-related functions.

 

Alternative and quantitative investmentshas two primary business lines – Alternative Investment Solutions (AIS) and O’Connor. AIS offers a full spectrum of hedge fund solutions and advisory services including multi-manager strategies. O’Connor is a key provider of single-manager global hedge funds.

 

Global real estateactively manages real estate investments globally and regionally within Asia, Europe, Switzerland and

 

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the US, across the major real estate sectors. Its capabilities are focused on core and value-added strategies but also include other strategies across the risk/return spectrum. It offers direct and indirect investment, multi-manager and real estate securities strategies.

 

Infrastructure and private equitymanages direct infrastructure investment and multi-manager infrastructure and private equity strategies for both institutional and high net worth investors. Infrastructure asset management manages direct investments in core infrastructure assets globally. Alternative Fund Advisory (AFA) infrastructure and AFA private equity construct broadly diversified fund of funds portfolios across the infrastructure and private equity asset classes, respectively.

 

Fund services,the global fund administration business, provides professional services, including legal set-up, reporting and accounting for retail and institutional investment funds, hedge funds and other alternative products.

Distribution

Our capabilities and services are distributed through our regional business structure (Americas, Asia Pacific, Europe and Switzerland) as detailed in the “Business structure” chart. A breakdown of invested assets across these regions is shown in the bar chart.

Through regional distribution, we are able to leverage the full resources of our global investment platforms and functions to provide clients with relevant investment management products and services, client servicing and reporting at a local level.

We also have a dedicated global sovereign markets group to deliver an integrated approach to this client segment and ensure that sovereign institutions receive the focused advisory, investment and training solutions they require.

 

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Our strategy

 

Investment Bank

The Investment Bank provides a broad range of products and services in equities, fixed income, foreign exchange and commodities to corporate and institutional clients, sovereign and government bodies, financial intermediaries, alternative asset managers and UBS’s wealth management clients. The Investment Bank is an active participant in capital markets flow activities, including sales, trading and market-making across a broad range of securities. It provides financial solutions to a wide range of clients, and offers advisory and analytics services in all major capital markets.

 

Business

The Investment Bank is organized into three distinct business areas to align the delivery of our services and the execution of our strategy with the needs of our clients:

 

equities

 

fixed income, currencies and commodities (FICC)

 

the investment banking department

The equities and FICC businesses are aligned within securities to foster a higher degree of cooperation across sales and trading. Together, they offer access to the primary and secondary securities markets, foreign exchange and prime brokerage services as well as research on equities, fixed income, commodities, and economic and quantitative research. The investment banking department provides advice on mergers and acquisitions and raises capital for corporate, institutional and sovereign clients in the debt and equity markets. In addition, the investment banking department plays a lead role in marketing UBS to corporates by leveraging senior client relationships.

Strategy

The Investment Bank is critical to the success of UBS’s strategy. It is well positioned across many businesses and regions – for example, we are among the market leaders in equities, equity derivatives and foreign exchange and we have a strong presence across all businesses in Asia.

We are repositioning the Investment Bank to align our businesses more closely with the needs of our core clients and the wealth management franchise, and to address economic and regulatory changes that affect the entire industry. Our business model aims to be simpler and more focused, with the goal of optimizing returns predicated on the efficient execution of our strategy across three strategic pillars: (i) flow; (ii) solutions; and (iii) advisory and analytics. Each pillar represents businesses that have similar transactional characteristics and success factors.

We believe that while none of the three pillars can support our franchise or deliver adequate returns on its own, a carefully balanced combination can better protect our profitability against fluctuations in client demand, costs or market movements.

To support our goal of becoming more focused and less complex while taking on less risk, we have intensified efforts to increase our capital efficiency and to actively reduce risk-weighted assets. In line with this strategy, we plan on reducing risk-weighted assets in the core businesses by approximately one-third and reducing our legacy portfolio (managed and reported in the

Corporate Center starting with the first quarter of 2012) by close to 90% by the end of 2016. In our operating plan, we estimate the potential revenue loss from the risk-weighted assets reduction in our core businesses to be approximately CHF 500 million per annum. To this end, we will optimize our business mix in favor of products and services that have the highest relevance to clients, offer the best growth opportunities and are less capital intensive.

 

In reshaping our securities business, we are exiting certain areas, including FICC asset securitization, complex structured products, FICC macro directional and equities proprietary trading. With the exception of macro directional and equities proprietary trading, the assets associated with the areas we intend to exit will be managed in a legacy asset portfolio, which will be reported in the Corporate Center starting with the first quarter of 2012.

 

We have also revised our approach to other businesses with high capital intensity relative to returns, such as long-dated rates derivatives in flow rates, which will be scaled back

Our strategy

 

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significantly. We will nevertheless continue to invest in businesses in which we have a strong presence and those that offer attractive risk-return characteristics, such as cash and equity derivatives, foreign exchange, certain credit businesses and commodities.

 

In advisory and capital markets, we are increasing the intensity of our coverage to leverage our global footprint more effectively. This includes strengthening our presence in the Americas, restoring our position in Europe, the Middle East and Africa and extending our leading market position in Asia Pacific.

Across the Investment Bank, we will continue to invest in infrastructure, technology, the retention and development of our people and hiring of talent in key areas to ensure the successful execution of our strategy. The Investment Bank is also investing to improve its internal risk control systems and increasing its focus on corporate governance. In 2011, we continued to focus on the efficiency of our cost base through a number of initiatives, and we expect the full impact of our activities to be realized during the course of 2012 and 2013. These initiatives include headcount reductions, refocusing of discretionary spending on client revenue generating activities and increasing efficiency of our operating model and processes.

 è 

Please refer to the “Our strategy” section of this report for further information about our strategy and targets

Organizational structure

The Investment Bank comprises the three business areas described in the “Business” section above. Additionally, the global capital markets business is a joint venture between securities and the investment banking department, which consists of two separate areas: equity capital markets and debt capital markets. Global leveraged finance is a joint venture between the investment banking department and FICC and includes the global syndicated finance business.

We employ approximately 17,000 personnel in over 30 countries. We operate through branches and subsidiaries of UBS AG. Securities activities in the US are conducted through UBS Securities LLC, a registered broker-dealer.

Significant recent acquisitions, disposals and business transfers

In September 2009, UBS completed the sale of its Brazilian financial services business, UBS Pactual.

In April 2010, UBS entered into an agreement to acquire Link Investimentos, a Brazilian financial services firm.

Competitors

Our main competitors are the major global investment banks, including Bank of America/Merrill Lynch, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley. Other competing firms are active in many of the businesses and markets in which we participate.

Products and services

Securities

The securities segment provides a coordinated distribution platform with enhanced cross-asset delivery and specialist skills. Securities research is a consistently top-ranked research house, which provides in-depth investment analysis across various asset classes of more than 3,400 companies worldwide, or about 85% of the global market capitalization, in over 50 markets. In addition, we have a specialist research function offering quantitative analysis, socially responsible investing, alternative research, valuation and accounting, and special situations analysis.

Equities

We are one of the world’s largest participants in the primary and secondary markets for cash equity and equity-related products, including listed options, structured products, equity-linked securities, swaps, futures and over-the-counter (OTC) derivative contracts. Our equities franchise utilizes a client-centric model to serve hedge funds, asset managers, wealth management advisors, banks, pension funds and corporations globally. We structure, execute, distribute, finance and clear cash equity and equity-related products, in addition to distributing new equity and equity-related issues. Our prime services franchise includes prime brokerage and execution and clearing services, which enables clients to address regulatory changes in the OTC derivative markets.

The main business lines of the equities business area are outlined below:

 

Cash equities provides clients with liquidity, investment advisory, trade execution and related consultancy services, together with comprehensive access to primary markets, corporate management and subject matter experts. We offer full-service trade execution for single stocks and portfolios, including capital commitment, block trading, small-cap execution and commission management services. In addition, we provide clients with a full suite of advanced electronic trading algorithms, strategies and analytical tools.

 

Derivatives and equity-linked provides a full range of flow, structured, synthetic and equity-linked products with global access to primary and secondary markets. The franchise enables clients to hedge and manage risk through a wide range of exchange-traded, OTC, securitized and fund–wrapped products. We create customized structured products for institutional and retail investors with returns linked to individual companies, sectors and indices across multiple asset classes.

 

Prime services offers an integrated global prime brokerage business, including multi-asset class clearing and custody, capital consultancy, financing, securities lending and equity swaps execution. In addition, we provide clients with execution and clearing capabilities on futures and options contracts across all asset classes, including equities, fixed income and commodities, on more than 70 exchanges globally.

 

 

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Our strategy

 

 

Fixed income, currencies and commodities

The FICC business area delivers products and solutions to corporate, institutional and public-sector clients in all major markets, as well as to private clients via targeted intermediaries. The main business lines of the FICC business area are outlined below:

 

Macro consists of the foreign exchange, money market and interest rate sales and trading businesses, as well as cash and collateral trading. We provide a range of foreign exchange, precious metals, treasury, and liquidity management solutions to institutional and private clients via targeted intermediaries. Interest rate activities include standardized rate-driven products and services such as interest rate derivatives trading, underwriting and trading of government and agency securities.

 

Creditsales and trading encompasses the origination, underwriting, trading and distribution of cash and synthetic products across the credit spectrum – bonds, derivatives, notes and loans. We are active across all major markets in secondary trading and market making of flow and structured credit instruments, securitized products and loans, and are focused on providing market liquidity and tailored solutions to our clients. In partnership with the investment banking department, we also provide capital markets debt financing and liability risk management solutions to corporates and institutions.

 

Theemerging marketsbusiness offers investors in Central and Eastern Europe, the Middle East, Latin America and selected Asian countries access to international markets, and provides international investors with an opportunity to add exposure through our onshore presence in key locations. We also provide liquidity in local markets across foreign exchange, credit, rates and structured products.

 

Ourcommodities business includes market-leading indices and precious metals offerings, combined with flow trading in agriculture, base metals and energy. We service a broad spectrum of institutional and corporate clients from risk management to direct or structured

  

investments, enabling them to structure deals at all levels of complexity and to access liquidity during and outside exchange times and across time zones. From the first quarter of 2012, this business will be part of the macro business.

Investment banking department

The investment banking department provides strategic advice and a range of capital markets execution services to corporate clients, financial institutions, financial sponsors, sovereign clients and hedge funds. With a presence in all major financial markets, investment banking coverage is based on a matrix of country, sector and product banking professionals.

The main business lines of the investment banking department business area are outlined below:

 

Theadvisory group assists in acquisitions and sale processes, and also advises on strategic reviews and corporate restructuring solutions.

 

Global capital markets is a joint venture with the securities business. It offers financing and advisory services that cover all forms of capital raising as well as risk management solutions. It comprises the equity capital markets business, aligned with equities, whose products include initial public offerings, secondary offerings and equity-linked transactions; and the debt capital markets business, aligned with FICC, whose products include commercial paper, medium-term notes, senior debt, high-yield debt, subordinated debt and hybrid capital. All our financing products are provided alongside risk management solutions, which include derivatives, structured finance, ratings advisory services and liability management.

 

Global leveraged finance provides event-driven (acquisition, leveraged buyout) loans, and bond and mezzanine leveraged finance to corporate clients and financial sponsors.

 

 

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Corporate Center

The Corporate Center enables UBS to operate coherently and effectively by providing and managing support and control functions for the business divisions and the Group. It provides services in the areas of risk, finance (including funding, capital and balance sheet management, and management of non-trading risk), legal and compliance, information technology, human resources, real estate, procurement, communication and branding, corporate development, security and offshoring.

Aims and objectives

 

The Corporate Center provides the business divisions with Group-level control in the areas of finance, risk, legal and compliance, and a global corporate shared services organization comprising support and logistics functions. We strive to maintain effective corporate governance processes, including compliance with relevant regulations, ensuring an appropriate balance between risk and return. Each functional head in the Corporate Center has authority over all businesses in their area of responsibility, including the authority to issue Group-wide policies for that area.

The integration of Group-wide shared service functions (information technology, human resources, real estate, procurement, communication and branding, corporate development, security and offshoring) into the Corporate Center under the leadership of the Group Chief Operating Officer (Group COO) was completed in 2009. At the same time, the control functions were centralized under the Group Chief Financial Officer (Group CFO), the Group Chief Risk Officer (Group CRO), and the Group General Counsel (Group GC), respectively.

The Corporate Center has improved efficiency, execution and service quality. We have upgraded our cost management for global and Group-wide cost responsibilities, and have implemented simple service delivery models with clear responsibilities. Our investment governance process provides oversight, review and approval of programs in the project portfolio and of those in the pipeline. This is part of a global service level agreement framework, ensuring investments are aligned with the Group’s strategic priorities. Overall, the integrated structure helps us to maintain independent control functions and a core platform from which we can create synergies for revenue growth and enhance shareholder value.

The Corporate Center also encompasses certain centrally managed positions, including the SNB StabFund option and (with effect from the first quarter of 2012) the legacy portfolio formerly in the Investment Bank.

In 2011, the Corporate Center focused on further streamlining the organization, implementing strategic change programs and improving operational excellence. At the end of the year, there were approximately 19,300 employees across all of the Corporate Center functions. The majority of the Corporate Center’s treasury income, costs and headcount are re-allocated to the business divisions for which the respective services are performed.

Organizational structure

The Corporate Center consists of the control functions Group Finance, Group Risk, and Group General Counsel, in addition to the shared services functions.

Group Chief Financial Officer

The Group CFO is responsible for transparency in, and appraisal of, the financial performance of the Group and its business divisions; the Group’s financial reporting; forecasting, planning and controlling processes; and for providing advice on financial aspects of strategic projects and transactions. The Group CFO manages the divisional and Group financial control functions. He manages and controls our tax affairs and treasury and capital management, including management and control of funding and liquidity risk as well as regulatory capital ratios. After consultation with the Board of Directors’ Audit Committee, the Group CFO makes proposals to the Board of Directors (BoD) regarding the policies for accounting we have adopted, and defines the policies for financial reporting and disclosure. Together with the Group Chief Executive Officer (CEO), the Group CFO provides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act 2002, and, in coordination with the Group CEO, manages relations with analysts, investors and rating agencies.

Group Chief Operating Officer

The Group COO is responsible for the management and performance of the shared service functions of the Group, including the management and control of Group-wide information technology, procurement, real estate and corporate administrative services, human resources, strategy, communications and branding as well as for physical and information security and offshoring. In addition, the Group COO supports the Group CEO in developing our strategy and addressing key strategic issues. The Group COO also acts as the CEO of the Corporate Center, and oversees the business and strategic planning of shared services.

 

 

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Our strategy

 

Group Chief Risk Officer

The Group CRO is responsible for developing and implementing principles and appropriate independent control frameworks for credit, market, country and operational risks within the Group. In particular, the Group CRO formulates and implements the frameworks for risk capacity and appetite, risk measurement, portfolio controls and risk reporting; and has management responsibility over the divisional and Group risk control functions. He implements the risk control mechanisms as determined by the BoD, the BoD Risk Committee or the Group CEO. In addition, the Group CRO approves transactions, positions, exposures, portfolio limits and provisions in accordance with the delegated risk control authorities, and monitors and challenges the firm’s risk-taking activities.

Group General Counsel

The Group GC is responsible for legal and compliance matters, policies and processes, and for managing the legal and compliance function for the UBS Group. The Group GC assumes responsibility for establishing a Group-wide management and control process for our relationship with regulators, in close cooperation with the Group CRO and the Group CFO where relevant, and for maintaining the relationships with our key regulators with respect to legal and compliance matters. The Group GC is further responsible for reporting legal and compliance risks and material litigation, for managing litigation and special and regulatory investigations, and for ensuring that we meet relevant regulatory and professional standards in the conduct of our business.

 

 

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Regulation and supervision

 

As a Swiss-registered company, our home country regulator and consolidated supervisor is the Swiss Financial Market Supervisory Authority (FINMA). However, our operations are global and are therefore regulated and supervised by the relevant authorities in each of the jurisdictions in which we conduct business. The next sections describe the regulation and supervision of our business in Switzerland and the regulatory and supervisory environments in the US and the UK, our next two largest areas of operation.

Regulation and supervision in Switzerland

Swiss Federal Legislation

We are regulated by the Swiss Federal Law relating to Banks and Savings Banks of 8 November 1934, as amended, and the related Implementing Ordinance of 17 May 1972, as amended, which are together known as the Federal Banking Law. Depending on the license obtained under this law, banks in Switzerland may engage in a full range of financial services activities, including commercial banking, investment banking and asset management. Banking groups may also engage in insurance activities, but these must be undertaken through a separate subsidiary. The Federal Banking Law establishes a framework for supervision by FINMA.

Switzerland implemented the internationally agreed capital adequacy rules of the Basel Capital Accord (Basel II) by means of the Capital Adequacy Ordinance of 29 September 2006, and subsequent FINMA circulars. Switzerland imposes a more differentiated and tighter regime than the internationally agreed rules, including more stringent risk weights. The revised decree on capital requirements issued at the end of 2008 increased the risk-based buffer and complemented it with a leverage ratio requirement, i.e. a minimum ratio of capital and balance sheet assets. In the course of 2010, the Swiss Federal Council and FINMA incorporated the Basel II enhancements issued by the Basel Committee on Banking Supervision on 13 July 2009 into the Capital Adequacy Ordinance and related circulars. The enhancements strengthen the Basel II rules governing trading book capital, and enhance the three pillars of the Basel II framework. The revised Capital Adequacy Ordinance, together with the FINMA circulars, entered into force on 1 January 2011. These requirements are being upgraded to reflect the Basel III framework issued by the Basel Committee on Banking Supervision as implemented in Switzerland.

 è 

Refer to the “Capital management” section of this report for more information about capital requirements

In autumn 2011, the Swiss parliament amended the Federal Banking Law to address the lessons learned from the financial crisis and to address the “too big to fail” issue. The amended sections are applicable to the largest Swiss banks including UBS and contain specific capital requirements and provisions to ensure that systemically relevant

functions can be maintained in case of insolvency. In addition, and in line with global requirements, UBS is required to produce and update recovery and resolution plans that will help the firm and the regulator prevent another crisis or to mitigate its effects on both clients and counterparties. These new sections are expected to enter into force during 2012.

The Federal Act of 10 October 1997 on the Prevention of Money Laundering in the Financial Sector lays down a common standard for due diligence obligations for the whole financial sector, which must be met to prevent money laundering.

The legal basis for the investment funds business in Switzerland is the Swiss Federal Act on Collective Investment Schemes (Collective Investment Schemes Act) of 23 June 2006, which came into force on 1 January 2007. The supervisory authority for investment funds in Switzerland is FINMA, which is responsible for the authorization and supervision of the institutions and investment funds subject to its control.

In our capacity as a securities broker, we are governed by the Swiss Stock Exchange Act; FINMA is the competent supervisory authority.

Regulation by the Swiss Financial Market Supervisory Authority

FINMA is strongly involved in the shaping of the legislative framework for banks:

 

FINMA has substantial influence on the drafting of Swiss federal acts and ordinances from the Federal Council or the parliament.

 

On a more technical level, FINMA is empowered to issue its own ordinances and circulars.

Self-regulation by the SIX Swiss Exchange and the Swiss Bankers Association

Certain aspects of securities brokering, such as the organization of trading, are subject to self-regulation through the SIX Swiss Exchange (SIX), under the overall supervision of FINMA. Further more, we are also an issuer of listed shares subject to self-regulation by the SIX.

FINMA also officially endorses self-regulatory guidelines to issued by the banking industry (through the Swiss Bankers Association), making them an integral part of banking regulation.

Two-tier system of supervision and direct supervision of UBS

Generally, supervision in Switzerland is based on a division of tasks between FINMA and a number of authorized audit firms. Under this two-tier supervisory system, FINMA has the responsibility for overall supervision and enforcement measures while the authorized audit firms carry out official duties on behalf of FINMA.

 

 

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Regulation and supervision

 

The responsibility of external auditors encompasses the audit of financial statements, the review of banks’ compliance with all prudential requirements and on-site audits.

Because of its importance to the Swiss financial system, UBS is directly supervised by dedicated teams at FINMA. The regime of direct supervision is regulated by FINMA Circular 08/9 on the Supervision of Large Banking Groups. Supervisory tools include scheduled meetings with management and information exchange encompassing all control and business areas, independent assessments through review activities, and a regular exchange of views with internal audit functions, external auditors and important host supervisors.

We are directly supervised by the FINMA team “Supervision of UBS,” which is supported by teams specifically monitoring investment banking activities, risk management, and solvency and capital aspects.

Role of the Swiss National Bank and division of tasks between FINMA and the Swiss National Bank

While the Swiss National Bank (SNB) does not exercise any banking supervision and is not responsible for enforcing banking legislation, it is mandated to contribute to the stability of the financial system, is responsible for the supply of liquidity and conducts the monetary policy. In fulfilling its mandate, the SNB monitors developments in the banking sector from the perspective of the system as a whole. Accordingly, FINMA and the SNB work together in the following areas: (i) assessment of the soundness of systemically important banks; (ii) regulations that have a major impact on the soundness of banks, including liquidity, capital adequacy and risk distribution provisions, where they are of relevance for financial stability; and (iii) contingency planning and crisis management. FINMA and the SNB exchange information and share opinions about the soundness of the banking sector and systemically important banks, and are authorized to exchange information and documents that are not publicly accessible if they require these in order to fulfill their tasks. With regard to systemically important banks, the SNB may also carry out its own enquiries and may request that these banks provide information as required.

 è 

Refer to the “Regulatory developments” and “Risk factors” sections of this report for more information

Regulation and supervision in the US

Banking regulation

Our operations in the US are subject to a variety of regulatory regimes. We maintain branches in several states including Connecticut, Illinois, Florida and New York. These branches are licensed either by the Office of the Comptroller of the Currency or the state banking authority of the state in which the branch is located. Each US branch is subject to regulation and examination by its licensing authority. We also maintain state and federally chartered trust companies and other limited purpose banks, which are regulated by state regulators or the Office of the Comptroller of the Currency. In addition, the Board of Governors of the Federal Reserve System exercises examination and regulatory authority

over our state-licensed US branches. Only the deposits of our subsidiary bank located in the state of Utah are insured by the Federal Deposit Insurance Corporation. The regulation of our US branches and subsidiaries imposes restrictions on the activities of those branches and subsidiaries, as well as prudential restrictions, such as limits on extensions of credit to a single borrower, including UBS subsidiaries and affiliates.

The licensing authority of each US branch of UBS AG has the authority, in certain circumstances, to take possession of the business and property of UBS located in the state of the office it licenses. Such circumstances generally include violations of law, unsafe business practices and insolvency. As long as we maintain one or more federal branches, the Office of the Comptroller of the Currency also has the authority to take possession of the US operations of UBS under generally similar circumstances, as well as in the event that a judgment against a federally licensed branch remains unsatisfied, and this federal power may pre-empt the state insolvency regimes that would otherwise be applicable to our state-licensed branches. As a result, if the Office of the Comptroller of the Currency exercised its authority over the US branches of UBS, pursuant to federal law in the event of a UBS insolvency, all US assets of UBS would generally be applied first to satisfy creditors of these US branches as a group, and then made available for application pursuant to any Swiss insolvency proceeding.

In addition to the direct regulation of our US banking offices, because we operate US branches, we are subject to oversight regulation by the Board of Governors of the Federal Reserve System under various laws (including the International Banking Act of 1978 and the Bank Holding Company Act of 1956). On 10 April 2000, UBS was designated a “financial holding company” under the Bank Holding Company Act of 1956. Financial holding companies may engage in a broader spectrum of activities than bank holding companies or foreign banking organizations that are not financial holding companies, including underwriting and dealing in securities. To maintain our financial holding company status, (i) UBS, our US subsidiary federally chartered trust company and our US subsidiary bank located in Utah are required to meet certain capital ratios, (ii) our US branches, our US subsidiary federally chartered trust company, and our US subsidiary bank located in Utah are required to meet certain examination ratings, and (iii) our subsidiary bank in Utah is required to maintain a rating of at least “satisfactory” under the Community Reinvestment Act of 1997.

    A major focus of US governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to UBS and our subsidiaries impose obligations to maintain effective policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their clients. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious consequences for the firm, both in legal terms and in terms of our reputation.

 

 

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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 impacts the financial services industry by addressing, among other issues, the following: (i) systemic risk oversight, (ii) bank capital standards, (iii) the liquidation of failing systemically significant financial institutions, (iv) OTC derivatives, (v) the ability of deposit-taking banks to engage in proprietary trading activities and invest in hedge funds and private equity (the so-called Volcker rule), (vi) consumer and investor protection, (vii) hedge fund registration, (viii) securitization, (ix) investment advisors, (x) shareholder “say on pay,” (xi) the role of credit-rating agencies, and more. The details of the legislation and its impact on UBS’s operations will depend on the final regulations ultimately adopted by various agencies and oversight boards.

US regulation of other US operations

In the US, UBS Securities LLC and UBS Financial Services Inc., as well as our other US-registered broker-dealer entities, are subject to regulations that cover all aspects of the securities business, including: sales methods; trade practices among broker-dealers; use and safekeeping of clients’ funds and securities; capital structure; record-keeping; the financing of clients’ purchases; and the conduct of directors, officers and employees.

These entities are regulated by a number of different government agencies and self-regulatory organizations, including the SEC and the Financial Industry Regulatory Authority (FINRA). Each entity is also regulated by some or all of the following: the NYSE, the Municipal Securities Rulemaking Board, the US Department of the Treasury, the Commodities Futures Trading Commission and other exchanges of which it may be a member, depending on the specific nature of the respective broker-dealer’s business. In addition, the US states, provinces and territories have local securities commissions that regulate and monitor activities in the interest of investor protection. These regulators have a variety of sanctions available, including the authority to conduct administrative proceedings that can result in censure, fines, the issuance of cease-and-desist orders or the suspension or expulsion of the broker-dealer or its directors, officers or employees.

FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA covers a broad spectrum of securities businesses, including: registering and educating industry participants; examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering a dispute resolution forum for investors and registered firms. It also performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange and the Chicago Climate Exchange.

Many of the provisions of the Dodd-Frank Act discussed above will affect the operation of these non-banking entities, as well as UBS’s US banking operations. Again, the impact of this statute on UBS’s operations will depend on the final regulations ultimately adopted by various agencies and oversight boards.

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Refer to the “Regulatory developments” and “Risk factors” sections of this report for more information

Regulation and supervision in the UK

Our operations in the UK are mainly regulated by the Financial Services Authority (FSA), which establishes a regime of rules and guidance governing all relevant aspects of financial services businesses. UBS AG, London Branch is regulated by both the FSA and FINMA.

The FSA has established a risk-based approach to supervision and has a wide variety of supervisory tools available to it, including regular risk assessments, on-site inspections (which may relate to an industry-wide theme or be firm-specific) and the ability to commission reports by skilled persons (who may be the firm’s auditors, IT specialists, lawyers or other consultants as appropriate). The FSA also has an extremely wide set of sanctions which it may impose under the Financial Services and Markets Act 2000, broadly similar to those available to US regulators.

Some of our subsidiaries and affiliates are also regulated by the London Stock Exchange and other UK securities and commodities exchanges of which we are a member. We are also subject to the requirements of the UK Panel on Takeovers and Mergers, where relevant.

Financial services regulation in the UK is conducted in accordance with EU directives which require, among other things, compliance with certain capital adequacy standards, client protection requirements and conduct of business rules (such as the Markets in Financial Instruments Directive). These directives apply throughout the EU and are reflected in the regulatory regimes of the various member states.

The UK government has committed to changing the current regulatory structures, including splitting responsibility for prudential regulation and conduct of business regulation and the replacement of the FSA with new regulatory bodies reporting to the Bank of England. These proposals are currently the subject of consultation and legislative consideration.

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Refer to the “Regulatory developments” and “Risk factors” sections of this report for more information

 

 

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Risk factors

 

Certain risks, including those described below, may impact our ability to execute our strategy and directly affect our business activities, financial condition, results of operations and prospects. Because the business of a broad-based international financial services firm such as UBS is inherently exposed to risks that become apparent only with the benefit of hindsight, risks of which we are not presently aware or which we currently do not consider to be material could also materially affect our business activities, financial condition, results of operations and prospects. The sequence in which the risk factors are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences.

Regulatory and legislative changes may adversely affect our business and ability to execute our strategic plans

Fundamental changes in the laws and regulations affecting financial institutions could have a material and adverse effect on our business. In the wake of the recent financial crisis, and in light of the current instability in global financial markets, regulators and legislators have proposed, adopted, or are actively considering, a wide range of changes to these laws and regulations. The measures are generally designed to address the perceived causes of the crisis and to limit the systemic risks posed by major financial institutions. These measures include the following:

 

significantly higher regulatory capital requirements;

 

changes in the definition and calculation of regulatory capital, including the capital treatment of certain capital instruments issued by UBS and other banks;

 

changes in the calculation of risk-weighted assets (RWA);

 

new or significantly enhanced liquidity requirements;

 

requirements to maintain liquidity and capital in multiple jurisdictions where activities are conducted and booked;

 

limitations on principal trading and other activities;

 

new licensing, registration and compliance regimes;

 

limitations on risk concentrations and maximum levels of risk;

 

taxes and government levies that would effectively limit balance sheet growth;

 

a variety of measures constraining, taxing or imposing additional requirements relating to compensation;

 

requirements to adopt structural and other changes designed to reduce systemic risk and to make major financial institutions easier to wind down or disassemble.

    A number of measures have been adopted and will be implemented in the next several years; some are subject to legislative action or to further rulemaking by regulatory authorities before final implementation. As a result, there is a high level of uncertainty regarding a number of the measures referred to above, including the timing of their implementation.

Notwithstanding attempts by regulators to coordinate their efforts, the proposals differ by jurisdiction and therefore enhanced regulation may be imposed in a manner that makes it more difficult to manage a global institution. The absence of a coordinated approach is also likely to disadvantage certain banks, such as UBS, as they attempt to compete with less strictly regulated financial institutions and unregulated non-bank competitors.

In September 2011, the Swiss parliament adopted the “too-big-to-fail” law to address the issues posed by large banks. The law became effective on 1 March 2012. Accordingly, Swiss regulatory change efforts are generally proceeding more quickly than those in other major jurisdictions, and the Swiss Financial Market Supervisory Authority (FINMA), the Swiss National Bank (SNB) and the Swiss Federal Council are implementing requirements that are significantly more onerous and restrictive for major Swiss banks, such as UBS, than those adopted, proposed or publicly espoused by regulatory authorities in other major global banking centers.

The Swiss Federal Department of Finance has consulted on proposed changes to the banking ordinance and capital adequacy ordinance. These ordinances, when final, could in effect result in higher capital adequacy requirements than the 19% of RWA that has been publicly discussed. In particular, de facto higher capital requirements (to be fulfilled at the level of the Group and the parent holding systemically relevant functions) may be the result of the leverage ratio if implemented as currently proposed, or of the planned early implementation in Switzerland of the anticyclical buffer requirement recommended by the Basel Committee on Banking Supervision. In addition, the Swiss Government’s proposed changes to the risk weighting of residential mortgages would significantly increase the capital requirements for our Swiss mortgage book.

The new ordinances will, among other things, contain provisions regarding emergency plans for systemically important functions, recovery and resolution planning and intervention measures that may be triggered when certain capital thresholds are breached. Those intervention levels may be set at higher capital levels than under current law, and may depend upon the capital structure and type of buffer capital the bank will have to issue to meet the specific Swiss requirements (6% to cover systemic risk in addition to the 13% to be required due to the combination of Basel III and the “Swiss finish”). The Swiss Federal Council will have to present the revised ordinances to the Swiss parliament for approval; the ordinances are expected to come into force on 1 January 2013.

If we are not able to demonstrate that our systemically relevant functions in Switzerland can be maintained even in case of a threatened insolvency, FINMA may impose more onerous requirements on us. Although the actions that FINMA may take in such circumstances are not yet defined, we could be required directly

 

 

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or indirectly, for example, to alter our legal structure (e.g., separate lines of business into dedicated entities, possibly with limitations on intra-group funding and guarantees), or in some manner to reduce business risk levels.

Regulatory changes in other locations in which we operate may subject us to requirements to move activities from UBS AG branches into subsidiaries, which in turn creates operational, risk control, capital and tax inefficiencies, as well as higher local capital requirements and potentially client and counterparty concerns about the credit quality of the subsidiary. Such changes could also negatively impact our funding model and severely limit our booking flexibility. For example, we have significant operations in the UK and use London as a global booking center for many types of products. The UK Independent Commission on Banking (ICB) has recommended structural and non-structural reform of the banking sector to promote financial stability and competition. Key measures proposed include the ring-fencing of retail activities in the UK, additional common equity tier 1 capital requirements of up to 3% of RWA for retail banks, and the issuance of debt subject to “bail-in” provisions. Such measures could have a material effect on our businesses located or booked in the UK, although the applicability and implications of such changes to offices and subsidiaries of foreign banks are not yet entirely clear. Already, we are being required by regulatory authorities to increase the capitalization of our UK bank subsidiary, UBS Limited, and expect to be required to change our booking practices to reduce or even eliminate our utilization of UBS AG London branch as a global booking center for the Investment Bank.

The adoption of the Dodd-Frank Act in the US will also affect a number of our activities as well as those of other banks. The implementation of the Volcker Rule as of July 2012, for example, is one reason for our announced decision to exit equities proprietary trading business segments within the Investment Bank. For other trading activity, we will be required to implement a compliance regime, including the calculation of detailed metrics for each trading book, and may be required to implement a compliance plan globally. Depending on the nature of the final rules, as well as the manner in which they are implemented, the Volcker Rule could have a substantial impact on market liquidity and the economics of market-making activities. The Volcker Rule broadly limits investments and other transactional activities between banks and covered funds. The proposed implementing regulations both expand the scope of covered funds and provide only a very limited exclusion for activities of UBS outside the US. If adopted as proposed, the regulations could limit certain of our activities in relation to funds, particularly outside the US.

Because many of the regulations that must be adopted to implement the Dodd-Frank Act have not yet been finalized, the effect on business booked or conducted by UBS in whole or in part outside the US cannot yet be determined fully.

    In addition, in 2009 the G20 countries committed to move all standardized over-the-counter (OTC) derivative contracts on exchange and clear them through central counterparties by the end of 2012. This commitment is being implemented through the

Dodd-Frank Act in the US and corresponding legislation in the European Union and other jurisdictions, and will have a significant impact on our OTC derivatives business, primarily in the Investment Bank. For example, most OTC derivatives trading will move toward a central clearing model, increasing transparency through trading on exchanges or swap execution facilities. Although we are preparing for these thematic market changes, they are likely to reduce the revenue potential of certain lines of business for market participants generally, and we may be adversely affected.

In connection with the rules being adopted on swaps and derivative markets in the US as part of the Dodd-Frank Act, UBS AG could be required to register as a swap dealer in the US during 2012. The new regulations will impose substantial new requirements on registered swap dealers, but no guidance has been issued yet on their application to the activities of swap dealers outside the US. The potential extra-territorial application of the new rules could create a significant operational and compliance burden and potential for duplicative and conflicting regulation.

We are currently required to produce recovery and resolution plans in the US, UK and Switzerland. Resolution plans may increase the pressure for structural change if our analysis identifies impediments that are not acceptable to regulators. Such structural changes may negatively impact our ability to benefit from synergies between business units.

The planned and potential regulatory and legislative developments in Switzerland and in other jurisdictions in which we have operations may have a material adverse effect on our ability to execute our strategic plans, on the profitability or viability of certain business lines globally or in particular locations, and in some cases on our ability to compete with other financial institutions. They are likely to be costly to implement and could also have a negative impact on our legal structure or business model. Finally, the uncertainty related to legislative and regulatory changes may have a negative impact on our relationships with clients and our success in attracting client business.

Due to recent changes in Swiss regulatory requirements, and due to liquidity requirements imposed by certain jurisdictions in which we operate, we have been required to maintain substantially higher levels of liquidity overall than had been our usual practice in the past. Like increased capital requirements, higher liquidity requirements make certain lines of business, particularly in the Investment Bank, less attractive and may reduce our overall ability to generate profits.

Our reputation is critical to the success of our business

Damage to our reputation can have fundamental negative effects on our business and prospects. Our reputation is critical to the success of our strategic plans. Reputational damage is difficult to reverse, and improvements tend to be slow and difficult to measure. This was demonstrated in recent years as our very large losses during the financial crisis, the US cross-border matter and other events seriously damaged our reputation. Reputational damage was an important factor in our loss of clients and client assets across our asset-gathering businesses, and contributed to our loss of and dif-

 

 

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ficulty in attracting staff, in 2008 and 2009. These developments had short-term and also more lasting adverse effects on our financial performance. We recognized that restoring our reputation would be essential to maintaining our relationships with clients, investors, regulators and the general public, as well as with our employees. The unauthorized trading incident that we announced in September 2011 also adversely affected our reputation. Any further reputational damage could have a material adverse effect on our operational results and financial condition and on our ability to achieve our strategic goals and financial targets.

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Refer to the “Certain items affecting our results in 2011” sidebar for more information on the unauthorized trading incident

Our capital strength is important in supporting our strategy, client franchise and competitive position

Our capital position, as measured by the BIS tier 1 and total capital ratios, is determined by (i) RWA (credit, non-counterparty related, market and operational risk positions, measured and risk-weighted according to regulatory criteria) and (ii) eligible capital. Both RWA and eligible capital are subject to change. Eligible capital would be reduced if we experience net losses, as determined for the purpose of the regulatory capital calculation. Eligible capital can also be reduced for a number of other reasons, including certain reductions in the ratings of securitization exposures, adverse currency movements directly affecting the value of equity and prudential adjustments that may be required due to the valuation uncertainty associated with certain types of positions. RWA, on the other hand, are driven by our business activities and by changes in the risk profile of our exposures. For instance, substantial market volatility, a widening of credit spreads (the major driver of our value-at-risk), a change in regulatory treatment of certain positions (such as the application of market stresses in accordance with Basel 2.5 adopted in the last quarter of 2011), adverse currency movements, increased counterparty risk or a deterioration in the economic environment could result in a rise in RWA. Any such reduction in eligible capital or increase in RWA could materially reduce our capital ratios.

    The required levels and calculation of our regulatory capital and the calculation of our RWA are also subject to changes in regulatory requirements or their interpretation. We are subject to regulatory capital requirements imposed by FINMA, under which we have higher RWA than would be the case under BIS guidelines. Forthcoming changes in the calculation of RWA under Basel III and FINMA requirements will significantly increase the level of our RWA and, therefore, have an adverse effect on our capital ratios. We have announced plans to reduce RWA very substantially and to mitigate the effects of the changes in the RWA calculation. However, there is a risk that we will not be successful in pursuing our plans, either because we are unable to carry out fully the actions we have planned or because other business or regulatory developments to some degree counteract the benefit of our actions.

In addition to the risk-based capital requirements, FINMA has introduced a minimum leverage ratio, which must be achieved by 1 January 2013. The leverage ratio operates separately from the risk-based capital requirements, and, accordingly, under certain circumstances could constrain our business activities even if we are able to satisfy the risk-based capital requirements.

Changes in the Swiss requirements for risk-based capital or leverage ratios, whether pertaining to the minimum levels required for large Swiss banks or to the calculation thereof (including changes of the banking law under the “too-big-to-fail” measures), could have a material adverse effect on our business and could affect our competitive position internationally compared with institutions that are regulated under different regimes. Moreover, although we have recently identified certain businesses that we plan to exit in response to regulatory and business changes, changes in the calculation and level of capital requirements or other regulatory changes may render uneconomic certain other businesses conducted in our Investment Bank or in other business divisions, or may undermine their viability in other ways. The reduction or elimination of lines of business could adversely affect our competitive position, particularly if competitors are subject to different requirements under which those activities continue to be sustainable.

Performance in the financial services industry is affected by market conditions and the economic climate

The financial services industry prospers in conditions of economic growth; stable geopolitical conditions; transparent, liquid and buoyant capital markets and positive investor sentiment. An economic downturn, inflation or a severe financial crisis can negatively affect our revenues and ultimately our capital base.

    A market downturn can be precipitated by a number of factors, including geopolitical events, changes in monetary or fiscal policy, trade imbalances, natural disasters, pandemics, civil unrest, war or terrorism. Because financial markets are global and highly interconnected, even local and regional events can have widespread impacts well beyond the countries in which they occur. A crisis could develop, regionally or globally, as a result of disruptions in emerging markets which are susceptible to macroeconomic and political developments, or as a result of the failure of a major market participant. We have material exposures to certain emerging market economies, both as a wealth manager and as an investment bank. As our presence and business in emerging markets increases, and as our strategic plans depend more heavily upon our ability to generate growth and revenue in the emerging markets, we become more exposed to these risks. The ongoing eurozone crisis demonstrates that such developments, even in more developed markets, can have similarly unpredictable and destabilizing effects. Adverse developments of these kinds have affected our businesses in a number of ways, and may continue to have further adverse effects on our businesses as follows:

 

a general reduction in business activity and market volumes, as we have experienced in recent quarters, affects fees, commissions and margins from market-making and client-driven transactions and activities; local or regional economic factors, such as the ongoing eurozone sovereign debt and banking industry concerns, could also have an effect on us;

 

 

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a market downturn is likely to reduce the volume and valuations of assets we manage on behalf of clients, reducing our asset- and performance-based fees;

 

reduced market liquidity limits trading and arbitrage opportunities and impedes our ability to manage risks, impacting both trading income and performance-based fees;

 

assets we own and account for as investments or trading positions could fall in value;

 

impairments and defaults on credit exposures and on trading and investment positions could increase, and losses may be exacerbated by falling collateral values; and

 

if individual countries impose restrictions on cross-border payments or other exchange or capital controls, or change their currency (for example, if one or more countries should leave the euro), we could suffer losses from enforced default by counterparties, be unable to access our own assets, or be impeded in – or prevented from – managing our risks.

Because we have very substantial exposures to other major financial institutions, the failure of one or more of such institutions could have a material effect on us.

The developments mentioned above can materially affect the performance of our business units and of UBS as a whole, and ultimately our financial condition. There is also a somewhat related risk that the carrying value of goodwill of a business unit might suffer impairments and deferred tax assets levels may need to be adjusted.

We hold legacy and other risk positions that may be adversely affected by conditions in the financial markets; legacy risk positions may be difficult to liquidate

UBS, like other financial market participants, was severely affected by the financial crisis that began in 2007. The deterioration of financial markets since the beginning of the crisis was extremely severe by historical standards, and we recorded substantial losses on fixed income trading positions, particularly in 2008 and to a lesser extent in 2009. Although we have significantly reduced our risk exposures starting in 2008, in part through transfers in 2008 and 2009 to a fund controlled by the SNB, we continue to hold substantial legacy risk positions, the value of which was reduced significantly by the financial crisis. In many cases these risk positions continue to be illiquid and have not recovered much of their lost value. In the fourth quarter of 2008 and the first quarter of 2009, certain of these positions were reclassified for accounting purposes from fair value to amortized cost; these assets are subject to possible impairment due to changes in market interest rates and other factors.

    We have announced and begun to carry out plans to reduce drastically the risk-weighted assets associated with the legacy risk positions, but the continued illiquidity and complexity of many of these legacy risk positions could make it difficult to sell or otherwise liquidate these exposures. At the same time, our strategy rests heavily on our ability to reduce sharply the risk-weighted assets associated with these exposures in order to meet our future capital targets and requirements without incurring unacceptable losses.

We hold positions related to real estate in various countries, including a very substantial Swiss mortgage portfolio, and we could suffer losses on these positions. In addition, we are exposed to risk in our prime brokerage, reverse repo and Lombard lending activities, as the value or liquidity of the assets against which we provide financing may decline rapidly.

Our global presence subjects us to risk from currency fluctuations

We prepare our consolidated financial statements in Swiss francs. However, a substantial portion of our assets, liabilities, invested assets, revenues and expenses are denominated in other currencies, particularly the US dollar, the euro and the British pound. Accordingly, changes in foreign exchange rates, particularly between the Swiss franc and the US dollar (US dollar revenue accounts for the largest portion of our non-Swiss franc revenue) have an effect on our reported income and expenses, and on other reported figures such as invested assets, balance sheet assets, RWA and tier 1 capital. For example, the strengthening of the Swiss franc especially against the US dollar and euro, which occurred during 2011, had an adverse effect on our revenues and invested assets. Since exchange rates are subject to constant change, sometimes for completely unpredictable reasons, our results are subject to risks associated with changes in the relative values of currencies.

We are dependent upon our risk management and control processes to avoid or limit potential losses in our trading and counterparty credit businesses

Controlled risk-taking is a major part of the business of a financial services firm. Credit is an integral part of many of our retail, wealth management and Investment Bank activities. This includes lending, underwriting and derivatives businesses and positions. Changes in interest rates, credit spreads, equity prices and liquidity, foreign exchange levels and other market fluctuations can adversely affect our earnings. Some losses from risk-taking activities are inevitable, but to be successful over time, we must balance the risks we take against the returns we generate. We must, therefore, diligently identify, assess, manage and control our risks, not only in normal market conditions but also as they might develop under more extreme (stressed) conditions, when concentrations of exposures can lead to severe losses.

    As seen during the financial crisis of 2007–2009, we are not always able to prevent serious losses arising from extreme or sudden market events that are not anticipated by our risk measures and systems. Value-at-risk, a statistical measure for market risk, is derived from historical market data, and thus by definition could not have anticipated the losses suffered in the stressed conditions of the financial crisis. Moreover, stress loss and concentration controls and the dimensions in which we aggregate risk to identify potentially highly correlated exposures proved to be inadequate. Notwithstanding the steps we have taken to strengthen our risk management and control frame-

 

 

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work, we could suffer further losses in the future if, for example:

 

we do not fully identify the risks in our portfolio, in particular risk concentrations and correlated risks;

 

our assessment of the risks identified or our response to negative trends proves to be inadequate or incorrect;

 

markets move in ways that we do not expect in – terms of their speed, direction, severity or correlation – and our ability to manage risks in the resultant environment is, therefore, affected;

 

third parties to whom we have credit exposure or whose securities we hold for our own account are severely affected by events not anticipated by our models, and accordingly we suffer defaults and impairments beyond the level implied by our risk assessment; or

 

collateral or other security provided by our counterparties proves inadequate to cover their obligations at the time of their default.

We also manage risk on behalf of our clients in our asset and wealth management businesses. Our performance in these activities could be harmed by the same factors. If clients suffer losses or the performance of their assets held with us is not in line with relevant benchmarks against which clients assess investment performance, we may suffer reduced fee income and a decline in assets under management, or withdrawal of mandates.

If we decide to support a fund or another investment that we sponsor in our asset or wealth management businesses (such as the property fund to which Wealth Management & Swiss Bank has exposure), we might, depending on the facts and circumstances, incur charges that could increase to material levels.

Investment positions, such as equity holdings made as a part of strategic initiatives and seed investments made at the inception of funds that we manage, may also be affected by market risk factors. These investments are often not liquid and generally are intended or required to be held beyond a normal trading horizon. They are subject to a distinct control framework. Deteriorations in the fair value of these positions would have a negative impact on our earnings.

Valuations of certain assets rely on models; models have inherent limitations and may use inputs which have no observable source

Where possible, we mark our trading book assets at their quoted market price in an active market. Such price information may not be available for certain instruments and, therefore, we apply valuation techniques to measure such instruments. Valuation techniques use “market observable inputs” where available, derived from similar assets in similar and active markets, from recent transaction prices for comparable items or from other observable market data. In the case of positions for which some or all of the inputs required for the valuation techniques are not observable or have limited observability, we use valuation models with non-market observable inputs. There is no single market standard for valuation models of this type. Such models have inherent limitations; different assumptions and inputs would generate different results, and these differences could have a significant impact on our financial results. We regularly review and update our valuation models to incorporate all factors that market participants would consider

in setting a price, including factoring in current market conditions. Judgment is an important component of this process. Changes in model inputs or in the models themselves, or failure to make the changes necessary to reflect evolving market conditions, could have a material adverse effect on our financial results.

We are exposed to possible outflows of client assets in our wealth management and asset management businesses

We experienced substantial net outflows of client assets in our wealth management and asset management businesses in 2008 and 2009. The net outflows resulted from a number of different factors, including our substantial losses, the damage to our reputation, the loss of client advisors, difficulty in recruiting qualified client advisors and developments concerning our cross-border private banking business. Many of these factors have been successfully addressed, as evidenced by our overall net new money inflows in 2011, but others, such as the long-term changes affecting the cross-border private banking business model, will continue to affect client flows for an extended period of time. If we experience again material net outflows of client assets, the results of our wealth management and asset management businesses are likely to be adversely affected.

Liquidity and funding management are critical to our ongoing performance

The viability of our business depends upon the availability of funding sources, and its success depends upon our ability to obtain funding at times, in amounts, for tenors and at rates that enable us to efficiently support our asset base in all market conditions. A substantial part of our liquidity and funding requirements is met using short-term unsecured funding sources, including wholesale and retail deposits and the regular issuance of money market securities. The volume of our funding sources has generally been stable, but could change in the future due to, among other things, general market disruptions, which could also influence the cost of funding. A change in the availability of short-term funding could occur quickly.

Reductions in our credit ratings can increase our funding costs, in particular with regard to funding from wholesale unsecured sources, and can affect the availability of certain kinds of funding. In addition, as we experienced in recent years, ratings downgrades can require us to post additional collateral or make additional cash payments under master trading agreements relating to our derivatives businesses. Our credit ratings, together with our capital strength and reputation, also contribute to maintaining client and counterparty confidence and it is possible that ratings changes could influence the performance of some of our businesses.

The more stringent Basel III capital and liquidity requirements will likely lead to increased competition for both secured funding and deposits as a stable source of funding, and to higher funding costs.

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Refer to the “Risk, treasury and capital management” section of this report for more information on our approach to liquidity and funding management

 

 

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Operational risks may affect our business

All of our businesses are dependent on our ability to process a large number of complex transactions across multiple and diverse markets in different currencies, to comply with requirements of many different legal and regulatory regimes to which we are subject and to prevent, or promptly detect and stop, unauthorized, fictitious or fraudulent transactions. Our operational risk management and control systems and processes are designed to help ensure that the risks associated with our activities, including those arising from process error, failed execution, unauthorized trading, fraud, system failures, cyber-attacks and failure of security and physical protection, are appropriately controlled. If our internal controls fail or prove ineffective in identifying and remedying such risks we could suffer operational failures that might result in material losses, such as the loss from the unauthorized trading incident announced in September 2011.

Certain types of operational control weaknesses and failures could also adversely affect our ability to prepare and publish accurate and timely financial reports. We identified control deficiencies following the unauthorized trading incident announced in September 2011, and management determined that we had a material weakness in our internal control over financial reporting as of the end of 2010 and 2011, although this has not affected the reliability of our financial statements for either year.

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Refer to the “Update on internal control over financial reporting” and the “Management’s report on internal control over financial reporting” in the “Financial information” section of this report for more information

Legal claims and regulatory risks and restrictions arise in the conduct of our business

Due to the nature of our business, we are subject to regulatory oversight and liability risk. We are involved in a variety of claims, disputes, legal proceedings and government investigations in jurisdictions where we are active. These proceedings expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil penalties, in addition to potential regulatory restrictions on our businesses. The outcome of these matters cannot be predicted and they could adversely affect our future business or financial results. We continue to be subject to government inquiries and investigations, and are involved in a number of litigations and disputes, many of which arose out of the financial crisis of 2007–2009. The unauthorized trading incident announced in September 2011 has triggered a joint investigation by FINMA and the UK Financial Services Authority and separate enforcement proceedings by the two authorities. We are also subject to potentially material exposure in connection with claims relating to US RMBS and mortgage loan sales, the Madoff investment fraud, Lehman principal protection notes, LIBOR rate submissions and other matters.

We are in active dialogue with our regulators concerning the actions that we are taking to improve our operational and risk management

controls, processes and systems. Ever since our losses in 2007 and 2008, we have been subject to a very high level of regulatory scrutiny and to certain regulatory measures that constrain our strategic flexibility. While we believe that we have largely remediated the deficiencies that led to the material losses during the recent financial crisis, the unauthorized trading incident announced in September 2011 has revealed different shortcomings that we are also urgently addressing. The unauthorized trading incident has presented us with further challenges and potential constraints on the execution of our business strategy, as we seek once again to enhance our operational and control framework and demonstrate its effectiveness to regulatory authorities. Notwithstanding the remediation we have already completed and which is in process, the consequences of the ongoing regulatory review and enforcement proceedings arising from the incident cannot be predicted.

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Refer to “Note 21 Provisions and contingent liabilities” in the “Financial information” section of this report for more information on litigation and regulatory matters and other contingent liabilities

We might be unable to identify or capture revenue or competitive opportunities, or retain and attract qualified employees

The financial services industry is characterized by intense competition, continuous innovation, detailed (and sometimes fragmented) regulation and ongoing consolidation. We face competition at the level of local markets and individual business lines, and from global financial institutions that are comparable to UBS in their size and breadth. Barriers to entry in individual markets are being eroded by new technology. We expect these trends to continue and competition to increase.

Our competitive strength and market position could be eroded if we are unable to identify market trends and developments, do not respond to them by devising and implementing adequate business strategies or are unable to attract or retain the qualified people needed to carry them out.

    The amount and structure of our employee compensation are affected not only by our business results but also by competitive factors and regulatory considerations. Constraints on the amount of employee compensation, higher levels of deferral and claw-backs and performance conditions may adversely affect our ability to retain and attract key employees, and may in turn negatively affect our business performance. Starting with the performance year 2009, the portion of variable compensation granted in the form of deferred shares was much higher than in the past. Although our peers have over time also increased their deferral percentages, we continue to be subject to the risk that key employees will be attracted by competitors and decide to leave UBS, or that we may be less successful than our competitors in attracting qualified employees. Regulatory constraints and pressure from regulators and other stakeholders affect not only UBS but also the other major international banks, but some of our peers may have a competitive advantage due to differences in the requirements and intensity of pressure among different jurisdictions.

 

 

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Operating environment and strategy

Risk factors

 

Our financial results may be negatively affected by changes to accounting standards

We are required to report our results and financial position in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Changes to IFRS may mean that our reported results and financial position differ in the future from those expected. Such changes also may affect our regulatory capital and ratios. When accounting changes are finalized, UBS assesses the potential impact and discloses significant future changes in its financial statements. Currently, there are a number of finalized and potential accounting changes that are expected to impact our reported results, financial position and regulatory capital in the future.

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Refer to the “Financial Information” section of this report for more information on changes in accounting requirements

Our financial results may be negatively affected by changes to assumptions supporting the value of our goodwill

The goodwill we have recognized on our balance sheet is tested for impairment at least annually. Our impairment test in respect of the assets recognized as of 31 December 2011 indicated that the value of our goodwill is not impaired. The impairment test is based on assumptions regarding estimated earnings, discount rates and long-term growth rates impacting the recoverable amount of each segment and on estimates of the carrying amounts of the segments to which the goodwill relates. If the estimated earnings and other assumptions in future periods deviate from the current outlook, the value of our goodwill may become impaired in the future, giving rise to losses in the income statement.

We are exposed to risks arising from the different regulatory, legal and tax regimes applicable to our global businesses

We operate in more than 50 countries, earn income and hold assets and liabilities in many different currencies and are subject to many different legal, tax and regulatory regimes. Our ability to execute our global strategy depends on obtaining and maintaining local regulatory approvals. This includes the approval of acquisitions or other transactions and the ability to obtain and maintain the necessary licenses to operate in local markets. Changes in local tax laws or regulations and their enforcement may affect the ability or the willingness of our clients to do business with us or the viability of our strategies and business model.

The effects of taxes on our financial results are significantly influenced by changes in our deferred tax assets and final determinations on audits by tax authorities

The deferred tax assets we have recognized on our balance sheet as of 31 December 2011 in respect of prior years’ tax losses are based on profitability assumptions over a five-year horizon. If the business plan

earnings and assumptions in future periods substantially deviate from the current outlook, the amount of deferred tax assets may need to be adjusted in the future. This could include write-offs of deferred tax assets through the income statement if actual results come in substantially below the business plan forecasts and /or if future business plan forecasts are revised downward substantially.

In the coming years, our effective tax rate will be highly sensitive both to our performance and to the development of new business plan forecasts. Currently unrecognized deferred tax assets in the UK and especially the US could be recognized if our actual and forecasted performance in those countries is strong enough to justify further recognition of deferred tax assets under the governing accounting standard. Our results in recent periods have demonstrated that changes in the recognition of deferred tax assets can have a very significant effect on our reported results. If, for example, the Group’s performance in the UK and especially in the US is strong, we could be expected to write up additional US and / or UK deferred tax assets in the coming years. The effect of doing so would significantly reduce the Group’s effective tax rate in years in which any write ups are made. Conversely, if our performance in those countries does not justify additional deferred tax recognition, but nevertheless supports our maintaining current deferred tax levels, we expect the Group’s effective tax rate to be in the range of 20–25% (although the tax rate may differ if there are significant book tax adjustments, which generally mainly affect Swiss taxable profits, for example own credit gains/ losses).

Our effective tax rate is also sensitive to any future reductions in tax rates, particularly in the US and Switzerland, which would cause the expected future tax saving from items such as tax loss carry-forwards in those locations to diminish in value. This in turn would cause a write-down of deferred tax assets.

Additionally, the final effect of income taxes we accrue in the accounts is often only determined after the completion of tax audits (which generally takes a number of years) or the expiry of statutes of limitations. In addition, changes to, and judicial interpretation of, tax laws or policies and practices of tax authorities could cause the amount of taxes ultimately paid by UBS to materially differ from the amount accrued.

    In 2011, the UK government introduced a balance sheet based levy payable by banks operating and / or resident in the UK. An expense for the year of CHF 109 million has been recognized in operating expenses (within pre-tax profit) in the fourth quarter of 2011. In November 2011 the UK government announced its intention to increase the rate of the levy by 17% from 1 January 2012. The Group’s bank levy expense for future years will depend on both the rate and the Group’s taxable UK liabilities at each year end: changes to either factor could increase the cost. Whilst not yet certain, we expect that the annual bank levy expense will continue to be recognized for IFRS purposes as a one-off cost arising in the final quarter of each financial year, rather than being accrued throughout the year, as it is charged by reference to the year-end balance sheet position.

 

 

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operating

performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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Financial and operating performance

Critical accounting policies

 

Critical accounting policies

 

Basis of preparation and selection of policies

We prepare our Financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The application of certain of these accounting principles requires considerable judgment based upon estimates and assumptions that involve significant uncertainty at the time they are made. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Changes in assumptions may have a significant impact on the Financial statements in the periods when assumptions are changed. Accounting policies that are deemed critical to our results and financial position, in terms of materiality of the items to which the policy is applied, and which involve significant assumptions and estimates, are discussed in this section. A broader and more detailed description of the accounting policies that we use is included in “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report.

The application of assumptions and estimates means that any selection of different assumptions could cause the reported results to differ. We believe that the assumptions we have made are appropriate, and that our Financial statements therefore present the financial position and results fairly in all material respects. The alternative outcomes discussed below are presented solely to assist the reader in understanding our Financial statements. They are not intended to suggest that other assumptions would be more appropriate.

Fair value of financial instruments

The fair values of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using valuation techniques. In these cases, the fair values are estimated using observable data in respect of similar financial instruments as well as models. Where market observable inputs are not available, inputs are estimated based on appropriate assumptions. Where valuation techniques or models are used to determine fair values, they are periodically reviewed and validated by qualified personnel independent of those who sourced them. Models are calibrated to ensure that outputs reflect actual data and comparative market prices. Where practicable, models use only observable data; however, areas such as default rates, volatilities and correlations require management to make estimates.

The valuation techniques or models employed may not fully reflect all the factors relevant to the positions we hold. Valuations are therefore adjusted, where appropriate, to allow for additional factors, including model risk, liquidity risk and credit risk. We use different

approaches to calculate the credit risk, depending on the classification of a financial instrument at fair value. A credit valuation adjustment approach based on an expected exposure profile is used to adjust the fair value ofPositive replacement valuesto reflect counterparty credit risk if deemed necessary. Correspondingly, a debit valuation adjustment approach is applied to incorporate own credit risk in the fair value of uncollateralizedNegative replacement values. Own credit risk forFinancial liabilities designated at fair valueis calculated using the funds transfer price curve.

As of 31 December 2011, financial assets and financial liabilities for which valuation techniques or models are used and whose inputs are observable (level 2) amounted to CHF 550 billion and CHF 561 billion, respectively. Financial assets and financial liabilities whose valuations include significant unobservable inputs (level 3) amounted to CHF 25 billion and CHF 24 billion, respectively.

Changes in assumptions for input factors would affect the reported fair value of financial instruments. If management had used reasonably possible alternative assumptions for our level 3 instruments accounted for at fair value through profit or loss, the net fair value of non-derivative instruments would have been up to CHF 0.6 billion higher or lower on 31 December 2011. Similarly, the net fair value of derivative instruments would have been up to CHF 1.1 billion higher or lower than the amounts recognized on our balance sheet on 31 December 2011.

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Refer to “Note 26 Fair value of financial instruments” in the “Financial information” section of this report for more information on valuation of financial instruments

Goodwill impairment test

UBS performs an impairment test on its goodwill assets on an annual basis, or when indicators of a potential impairment exist. The impairment test is performed for each segment for which goodwill is allocated and compares the recoverable amount and the carrying amount of the segment. An impairment charge is recognized if the carrying amount exceeds the recoverable amount. The impairment test is based on a number of assumptions, as described further below.

The recoverable amount is determined using a discounted cash flow model, which uses inputs that consider features of the banking business and its regulatory environment. The recoverable amount of a segment is the sum of the discounted earnings attributable to shareholders from the first five individually forecasted years and the terminal value. The terminal value reflecting all periods beyond the fifth year is calculated on the basis of the forecast of fifth-year profit, the discount rate and the long-term growth rate.

The carrying amount for each segment is determined by reference to the equity attribution framework. Within this framework,

 

 

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which is described in the “Capital management” section of this report, management attributes equity to the businesses after considering their risk exposure, risk-weighted assets usage, asset size, goodwill and intangible assets. The framework is used primarily for purposes of measuring the performance of the businesses and includes certain management assumptions. Attributed equity equates to the capital that a segment requires to conduct its business and is considered an appropriate starting point from which to determine the carrying value of the segments. The attributed equity methodology is aligned with the business planning process, the inputs from which are used in calculating the recoverable amounts of the respective cash-generating units.

Valuation parameters used within the Group’s impairment test model are linked to external market information, where applicable. The model used to determine the recoverable amount is most sensitive to changes in the forecast earnings available to shareholders in years one to five, to changes in the discount rates, and to changes in the long-term growth rate. The applied long-term growth rate is based on long-term economic growth rates for different regions worldwide. Earnings available to shareholders are estimated based on forecast results, which are part of the business plan approved by the Board of Directors. The discount rates are determined by applying a capital-asset-pricing-model-based approach, as well as considering quantitative and qualitative inputs from both internal and external analysts and the view of UBS’s management.

If the estimated earnings and other assumptions in future periods deviate from the current outlook, the value of our goodwill may become impaired in the future, giving rise to losses in the income statement. This may be the case if the regulatory pressure on the banking industry further intensifies and conditions in the financial markets diminish our performance relative to forecast. Recognition of any impairment of goodwill would reduce IFRS equity attributable to UBS shareholders and net profit. It would not impact cash flows and, as goodwill is required to be deducted from capital under the Basel capital framework, there would be no impact to the BIS tier 1 capital ratio or BIS total capital ratio of the UBS Group.

As of 31 December 2011, the following four segments carried goodwill: Wealth Management (CHF 1.3 billion), Wealth Management Americas (CHF 3.3 billion), Global Asset Management (CHF 1.4 billion), and the Investment Bank (CHF 3.0 billion). On the basis of the impairment testing methodology described above, UBS concluded that the year-end 2011 balances of goodwill allocated to its segments remain recoverable.

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Refer to “Note la) 21) Goodwill and intangible assets” and “Note 16 Goodwill and intangible assets” in the “Financial information” section of this report for more information

Impairment of loans and receivables measured at amortized cost

Loan impairment allowances represent management’s best estimate of losses incurred in the lending portfolio at the balance

sheet date. The loan portfolio, which is measured at amortized cost less impairment, consists of financial assets presented on the balance sheet linesDue from banks and Loans, including reclassified securities. In addition, irrevocable loan commitments are tested for impairment as described below.

Credit loss expense is recognized if there is objective evidence that the Group will be unable to collect all amounts due according to the original contractual terms or the equivalent value. A financial asset or group of financial assets is impaired only if a loss event occurred after the initial recognition of the financial asset(s), but not later than at the balance sheet date (“incurred loss model”). Management is required to exercise judgment in making assumptions and estimations when calculating impairment losses both on a counterparty-specific level and collectively.

The impairment loss is the excess of the carrying value of the financial asset over the estimated recoverable amount. The estimated recoverable amount is the present value, using the loan’s original effective interest rate, of expected future cash flows, including amounts that may result from restructuring or the liquidation of collateral. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. An allowance for credit losses is reported as a reduction of the carrying value of the financial asset on the balance sheet.

Estimated cash flows associated with financial assets reclassified fromHeld for trading toLoans and receivables in accordance with the requirements in “Note 1a) 10) Loans and receivables” in the “Financial information” section of this report and other similar assets acquired subsequently, are revised periodically. Adverse revisions in cash flow estimates related to credit events are recognized in profit or loss as credit loss expenses. For reclassified securities, increases in estimated future cash receipts as a result of increased recoverability are recognized as an adjustment to the effective interest rate on the loan from the date of change.

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Refer to “Note 9a Due from banks and loans”, “Note 9b Allowances and provisions for credit losses” and “Note 28 Measurement categories of financial assets and financial liabilities” in the “Financial information” section of this report for more information

On 31 December 2011, our gross loan portfolio was CHF 267 billion and the related allowances amounted to CHF 0.8 billion, of which CHF 83 million related to reclassified and similar acquired securities.

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Refer to “Note la) 11) Allowance and provision for credit losses” in the “Financial information” section of this report for more information

Consolidation of special purpose entities

We sponsor the formation of special purpose entities (SPE) and interact with non-sponsored SPE for a variety of reasons, including allowing clients to obtain or be exposed to specific risk and reward profiles, to provide funding or to sell or purchase

 

 

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Critical accounting policies

 

credit risk. In accordance with IFRS, we do not consolidate special purpose entities that we do not control. In order to determine whether or not we control an SPE, we evaluate a range of factors, including whether (i) the activities of the SPE are being conducted on our behalf according to our specific business needs so that we obtain the benefits from the SPE operations, or (ii) we have decision-making powers to obtain the majority of the benefits of the activities of the SPE, or we have delegated these decision-making powers by setting up an autopilot mechanism, or (iii) we have the right to obtain the majority of the benefits of the activities of an SPE and, therefore, may be exposed to risks arising from the activities of the SPE, or (iv) we retain the majority of the residual or ownership risks related to the SPE or its assets in order to obtain the benefits from its activities. In many instances, elements are present that, considered in isolation, indicate control or lack of control over an SPE, but when considered together require a significant degree of judgment to reach a conclusion. The exposure to volatility in profits and the absorption of risks and rewards, as well as the ability to make operational decisions for the SPE in question, are generally the factors to which most weight is given in reaching a conclusion.

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Refer to “Note la) 3) Subsidiaries” in the “Financial information” section of this report for more information

Equity compensation

We recognize shares, performance shares, options and share-settled stock appreciation rights awarded to employees as compensation expense based on their fair value at grant date. The fair value of UBS shares issued to employees is determined by reference to quoted market prices, adjusted, where appropriate, to take into account the terms and conditions inherent in the award. Options, stock appreciation rights, and certain performance shares issued by UBS to its employees have features which are not directly comparable with our shares and options traded in active markets. Accordingly, we determine the fair value using suitable valuation models. The models require inputs such as expected dividends, share price volatility and historical employee exercise behavior patterns.

Some of the model inputs we use are not market observable and have to be estimated or derived from available data. Use of different estimates would produce different valuations, which in turn would result in recognition of higher or lower compensation expense.

Several recognized valuation models exist. The models we apply have been selected because they are able to handle the specific features included in the various instruments granted to our employees. If we were to use different models, the values produced would differ, even if the same inputs were used.

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Refer to “Note la) 25) Equity participation and other compensation plans” and “Note 30 Equity participation and other compensation plans” in the “Financial information” section of this report for more information

Deferred taxes

Deferred tax assets arise from a variety of sources, the most significant being the following: (i) tax losses that can be carried forward to be utilized against profits in future years; and (ii) expenses recognized in our income statement that are not deductible until the associated cash flows occur

We record a valuation allowance to reduce our deferred tax assets to the amount which can be recognized in line with the relevant accounting standards. The level of deferred tax asset recognition is influenced by management’s assessment of our future profitability regarding relevant business plan forecasts. Existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. This review is conducted annually, in the second half of each year, but adjustments may be made at other times, if required. In a situation where recent losses have been incurred, the relevant accounting standards require convincing evidence that there will be sufficient future profitability.

Swiss tax losses can be carried forward for seven years, US federal tax losses for 20 years and UK and Jersey tax losses for an unlimited period. The deferred tax assets recognized on 31 December 2011 have been based on future profitability assumptions over a five-year time horizon, adjusted to take into account the recognition criteria of lAS 12Income Taxes. The level of deferred tax assets recognized may, however, need to be adjusted in the future in the event of changes in those profitability assumptions. On 31 December 2011, the deferred tax assets amounted to CHF 8.5 billion, which included an amount of CHF 8.0 billion in respect of tax losses (mainly in Switzerland and the US) that can be utilized to offset taxable income in future years.

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Refer to “Note 22 Income taxes” and “Note la) 22) Income taxes” in the “Financial information” section of this report for more information

Hedge accounting

    The Group uses derivative instruments as part of its asset and liability management activities to manage exposures particularly to interest rate and foreign currency risks, including exposures arising from forecast transactions. If derivative and non-derivative instruments meet certain criteria, they are designated as hedging instruments in fair value hedges, cash flow hedges or net investment hedges. The designation of derivative or non-derivative hedging instruments is at our discretion.

At the time a financial instrument is designated in a hedge relationship, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction and the methods that will be used to assess the effectiveness of the hedging relationship. Accordingly, the Group assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging instruments, primarily derivatives, have been “highly effective” in offsetting changes in the fair value or cash flows associated with the designated risk of the hedged items.

 

 

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Changes in the fair value of derivatives that qualify as fair value hedges are recorded in the income statement along with the change in the fair value of the hedged item attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that qualify as cash flow hedges is recognized in equity and transferred to profit or loss in the same periods in which the hedged cash flows affect profit or loss. Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges.

The Group discontinues hedge accounting when it determines that a hedging instrument is not, or has ceased to be, highly effective as a hedge; when the derivative expires or is sold, terminated or exercised; when the hedged item matures, is sold or repaid; or when a forecast transaction is no longer deemed highly probable. In certain circumstances, the Group may decide to discontinue hedge accounting voluntarily, even though the mentioned criteria for discontinuing are not fulfilled. De-designated hedging derivatives from hedge relationships are treated as held for trading from the de-designation date.

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Refer to “Note la) 15) Derivative instruments and hedge accounting” and “Note 23 Derivative instruments and hedge accounting” in the “Financial information” section of this report for more information

Provisions

Provisions are recognized when we have a present legal or constructive obligation as a result of past events, if it is probable that an outflow of resources will be required to settle or discharge the obligation and a reliable estimate of the obligation can be made.

Recognition of provisions often requires use of an estimate as the exact amount of the obligation is often unknown. The estimate is based on all available information and reflects the amount that in management’s opinion represents the best estimate of the expenditure required to settle or discharge the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Future events that may affect the amount required to settle or discharge the obligation are reflected in the amount provided, whenever there is sufficient objective evidence that such future events will occur. We revise existing provisions up or down when additional information becomes available which allows the estimates to be quantified more accurately. Management necessarily exercises judgment in making assumptions and estimates when calculating provisions.

Provisions are classified in “Note 21 Provisions and contingent liabilities” in the “Financial information” section of this report into the following categories: operational risks, litigation and regulatory matters, restructuring, provisions for loan commitments and guarantees, and other. Operational risks include provisions resulting from security risks and transaction processing risks. Litigation and regulatory matters includes provisions for claims related to legal, liability and compliance risks. Provisions for reinstatement costs for leasehold improvement, provisions for onerous lease contracts, provisions for employee benefits and other items are disclosed underOther.

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Refer to “Note la) 27) Provisions” in the “Financial information” section of this report for more information

Pension and other post-employment benefit plans

The defined benefit obligation at the end of the year and the net periodic pension cost for the year depend on the expected future benefits to be provided, determined using a number of economic and demographic assumptions. The assumptions include life expectancy, the discount rate, expected salary increases, expected returns on plan assets and pension rates.

Life expectancy is determined by reference to published mortality tables. The discount rate is determined by reference to rates of return on high-quality fixed-income investments of appropriate term at the measurement date. The assumption for salary increases reflects the long-term expectations for salary growth and takes into account inflation, seniority, promotion and other relevant factors such as supply and demand in the labor market. The expected return on plan assets is the long-term average return that management believes is expected on the pension assets, based on class of asset.

The most significant plan is the Swiss pension plan. Life expectancy for this plan has been based on the 2010 BVG generational mortality tables. This change has resulted in higher life expectancies than the prior year, which was based on the 2005 BVG mortality table that preceded the 2010 tables. The assumptions for the discount rate and the expected return on plan assets also changed from the prior year, to 2.3% and 3.5%, respectively.

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Refer to “Note 29 Pension and other post-employment benefit plans” and “Note la) 24) Pension and other post-employment benefit plans” in the “Financial information” section of this report for more information

 

 

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UBS results

 

UBS results

Net profit attributable to UBS shareholders was CHF 4,159 million in 2011 compared with CHF 7,534 million in 2010. Pre-tax profit declined to CHF 5,350 million from CHF 7,455 million, reflecting lower operating income primarily in the Investment Bank, partly offset by cost reductions. In 2011, we recorded a net tax expense of CHF 923 million compared with a net tax benefit of CHF 381 million in 2010.

Income statement

 

 

  For the year ended  % change from 
CHF million  31.12.11  31.12.10  31.12.09  31.12.10 
Continuing operations     
                  
Interest income   17,969    18,872    23,461    (5
                  
Interest expense   (11,143  (12,657  (17,016  (12
                  
Net interest income   6,826    6,215    6,446    10  
                  
Credit loss (expense) / recovery   (84  (66  (1,832  27  
                  
Net interest income after credit loss expense   6,742    6,149    4,614    10  
                  
Net fee and commission income   15,236    17,160    17,712    (11
                  
Net trading income   4,343    7,471    (324  (42
                  
Other income   1,467    1,214    599    21  
                  
Total operating income   27,788    31,994    22,601    (13
                  
Personnel expenses   15,591    16,920    16,543    (8
                  
General and administrative expenses   5,959    6,585    6,248    (10
                  
Depreciation of property and equipment   761    918    1,048    (17
                  
Impairment of goodwill   0    0    1,123   
                  
Amortization of intangible assets   127    117    200    9  
                  
Total operating expenses   22,439    24,539    25,162    (9
                  
Operating profit from continuing operations before tax   5,350    7,455    (2,561  (28
                  
Tax expense / (benefit)   923    (381  (443 
                  
Net profit from continuing operations   4,426    7,836    (2,118  (44
                  
Discontinued operations     
                  
Profit from discontinued operations before tax   0    2    (7  (100
                  
Tax expense   0    0    0   
                  
Net profit from discontinued operations   0    2    (7  (100
                  
Net profit   4,427    7,838    (2,125  (44
                  
Net profit attributable to non-controlling interests   268    304    610    (12
                  

from continuing operations

   268    303    600    (12
                  

from discontinued operations

   0    1    10    (100
                  
Net profit attributable to UBS shareholders   4,159    7,534    (2,736  (45
                  

from continuing operations

   4,158    7,533    (2,719  (45
                  

from discontinued operations

   0    1    (17  (100
                  
Comprehensive income     
                  
Total comprehensive income   7,457    6,484    (2,792  15  
                  
Total comprehensive income attributable to non-controlling interests   560    609    484    (8
                  
Total comprehensive income attributable to UBS shareholders   6,896    5,875    (3,276  17  
                  

 

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2011

Performance before tax

Profit from continuing operations before tax was CHF 5,350 million down from CHF 7,455 million, mainly due to a decline in operating income of CHF 4,206 million, partly offset by cost reductions of CHF 2,100 million.

Operating income

Total operating income was CHF 27,788 million in 2011, down CHF 4,206 million from CHF 31,994 million in 2010. This decline was mainly due to a reduction of CHF 1,924 million in net fee and commission income on lower underwriting fees and a decline in asset-based fees, the loss of CHF 1,849 million related to the unauthorized trading incident, and (even excluding the effect of the unauthorized trading incident) lower trading revenues in our equities and fixed income, currencies and commodities (FICC) businesses. These declines were partly offset by an own credit gain on financial liabilities designated at fair value of CHF 1,537 million, compared with a loss of CHF 548 million in the prior year. In addition, in 2011 we incurred a loss of CHF 133 million on the valuation of our option to acquire the SNB StabFund’s equity compared with a gain of CHF 745 million in 2010. Furthermore, in 2011 we recorded a gain of CHF 722 million on the sale of our strategic investment portfolio.

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Refer to the “Certain items affecting our results in 2011” sidebar in this section of this report for more information on the unauthorized trading incident, the sale of our strategic investment portfolio and our cost reduction program

Net interest and trading income

Net interest and trading income was CHF 11,169 million, down CHF 2,517 million from the prior year. In 2011, we recorded a loss of CHF 1,849 million related to the unauthorized trading incident, which was partly offset by an own credit gain of CHF 1,537 million due to the widening of our credit spreads during the year. Own credit in 2010 was a loss of CHF 548 million as credit spreads tightened during the year.

Net interest and trading income in FICC, excluding own credit, was down by CHF 1,621 million, partly reflecting the strengthening of the Swiss franc. Credit trading revenues declined due to concerns surrounding the eurozone and the global economic outlook in general, which led to increased market volatility and significantly impacted liquidity and client activity. Emerging market interest and trading revenues also declined. Furthermore, in 2011 we recorded a loss of CHF 284 million related to credit valuation adjustments for monoline credit protection compared with a gain of CHF 667 million in 2010. These declines were partly offset by higher macro net interest and trading revenues which increased across interest rates and foreign exchange business lines.

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Refer to “Note 26 Fair value of financial instruments” in the “Financial information” section of this report for more information on own credit

Equities interest and trading revenues, excluding own credit and the unauthorized trading incident, declined by CHF 523 million reflecting the strengthening of the Swiss franc, and lower revenues in the derivatives and equity-linked businesses.

Net interest income in Wealth Management increased by CHF 231 million, mainly as higher treasury-related income and a 10% growth in average lending volumes compensated for margin pressure resulting from low market interest rates. In addition, net interest income benefited from income derived from the strategic investment portfolio in the first nine months of 2011. Income derived from the strategic investment portfolio was significantly lower in 2010 as the portfolio was only established during the fourth quarter of that year. Net trading income in Wealth Management also increased by CHF 231 million, partly due to treasury-related revenues.

Net interest income in Retail & Corporate declined by CHF 94 million due to margin pressure that was partly offset by higher volumes.

Net trading revenues in Wealth Management Americas fell by CHF 120 million, impacted by the strengthening of the Swiss franc, lower taxable fixed income and municipal trading income, partly offset by higher trading income from structured notes.

Corporate Center trading revenues included a loss of CHF 133 million on the valuation of our option to acquire the SNB StabFund’s equity compared with a gain of CHF 745 million in 2010.

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Refer to the “Risk management and control section” section of this report for more information on our option to acquire the SNB StabFund’s equity

Credit loss expense/recovery

In 2011, we recorded a net credit loss expense of CHF 84 million, mainly reflecting an increase in collective loan loss allowances due to increased credit risks arising predominantly from Swiss corporate clients that had become exposed to significant foreign currency related risk as a result of the impact of the strengthening Swiss franc on their financial position. In 2010, we reported net credit loss expenses of CHF 66 million, which included CHF 172 million of impairment charges taken on reclassified and acquired securities, partially offset by recoveries on certain loan positions.

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Refer to the “Risk management and control section” section of this report for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures

Net fee and commission income

Net fee and commission income was CHF 15,236 million compared with CHF 17,160 million in the previous year.

Underwriting fees decreased by CHF 732 million or 38% to CHF 1,180 million, reflecting a decline in both equity and debt underwriting fees. The decline in equity underwriting fees resulted in part from an overall market slowdown due to volatility in

 

 

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Net interest and trading income

 

 

  For the year ended  % change from 
CHF million  31.12.11   31.12.10   31.12.09  31.12.10 
Net interest and trading income       
                    
Net interest income   6,826     6,215     6,446    10  
                    
Net trading income   4,343     7,471     (324  (42
                    
Total net interest and trading income   11,169     13,686     6,122    (18
                    

Credit loss (expense) / recovery

 

 

  For the year ended  % change from 
CHF million  31.12.11  31.12.10  31.12.09  31.12.10 
Wealth Management   11    11    45    0  
                  
Retail & Corporate   (101  (76  (178  33  
                  
Wealth Management & Swiss Bank   (90  (64  (133  41  
                  
Wealth Management Americas   (6  (1  3    500  
                  
Investment Bank   12    0    (1,698 
                  

of which: related to reclassified securities1

   37    (133  (425 
                  

of which: related to acquired securities

   (28  (39  (18 
                  
Corporate Center   (1  0    (5 
                  
Total   (84  (66  (1,832  27  
                  

1  Refer to “Note 28b Reclassification of financial assets” in the “Financial information” section of this report.

 

capital markets and a reduced market fee pool. Debt underwriting fees declined due to lower revenues in the Investment Bank’s debt capital market business, in part reflecting the market impact of European sovereign debt concerns.

A decline of CHF 601 million in net brokerage fees reflected a downturn in the market, with lower transactional volumes and reduced level of client activity.

Portfolio management and advisory fees for the Group fell 7%, or CHF 408 million, to CHF 5,551 million, mainly due to the strengthening of the Swiss franc.

Investment fund fees decreased CHF 321 million, or 8%, to CHF 3,577 million, due to lower asset-based fees resulting from a lower average invested asset base, primarily as a result of the strengthening of the Swiss franc.

Merger and acquisition and corporate finance fees increased by CHF 135 million, or 16%, reflecting a somewhat improved merger and acquisition environment in 2011 with the completion of several large deals.

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Refer to “Note 4 Net fee and commission income” in the “Financial information” section of this report for more information

Other income

Other income was CHF 1,467 million compared with CHF 1,214 million in the previous year.

In 2011, net gains from financial investments available-for-sale were CHF 887 million compared with 132 million in 2010. Gains in 2011 included CHF 722 million from the sale of our strategic investment portfolio as well as gains of CHF 81 million in Wealth Management Americas’ available-for-sale portfolio.

Other income in 2011 also included gains of CHF 344 million from the sale of loans and receivables compared with CHF 324 million in 2010. The 2011 gains mainly related to the sale of collateralized loan obligations, which had been reclassified previously fromHeld for trading toLoans and receivables, and were partly offset by related hedge termination losses recorded in net trading income. Additionally, in 2011 we recorded a gain of CHF 78 million on sale of a property in Switzerland, compared with a gain of CHF 158 million on sale of a property in Switzerland in 2010.

Net gains from disposals of investments in associates were down CHF 236 million, mainly as 2010 included a gain of CHF 180 million from the sale of investments in associates owning office space in New York. Other income in 2010 further included a CHF 69 million demutualization gain from our stake in the Chicago Board Options Exchange.

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Refer to “Note 5 Other income” in the “Financial information” section of this report for more information

Operating expenses

Total operating expenses were CHF 22,439 million in 2011 compared with CHF 24,539 million in 2010. Operating expenses in 2011 included CHF 380 million of net restructuring charges compared with CHF 113 million in 2010.

Personnel expenses

Personnel expenses decreased by CHF 1,329 million, or 8%, to CHF 15,591 million due to strengthening of the Swiss franc.

 

 

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In 2011, we recorded CHF 261 million in personnel-related net restructuring charges, compared with a net release of CHF 2 million in the prior year

Salary costs decreased by CHF 174 million, or 2%, as a result of the strengthening of the Swiss franc.

Expenses for discretionary variable compensation were CHF 3,392 million, a decrease of CHF 690 million, or 17%, from the prior year. Expenses relating to 2011 bonus awards recognized in the performance year 2011 were CHF 1,807 million, down CHF 804 million or 31% from the prior year, reflecting a 40% decrease in the overall bonus pool for the 2011 performance year. The amortization of deferred compensation awards from prior years increased by CHF 114 million, or 8%, to CHF 1,585 million.

Other variable compensation increased by CHF 86 million, mainly reflecting an increase in restructuring-related severance charges.

Financial advisor compensation in Wealth Management Americas decreased by CHF 149 million to CHF 2,518 million. In US dollar terms, financial advisor compensation increased, reflecting higher revenue production and higher compensation commitments and advances related to recruited financial advisors.

Other personnel expenses decreased by CHF 369 million, mainly as the prior year included a charge of CHF 200 million for the UK bank payroll tax.

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Refer to “Note 6 Personnel expenses” and “Note 30 Equity participation and other compensation plans” in the “Financial information” section of this report and to the “Compensation” section of this report for more information

General and administrative expenses

General and administrative expenses were CHF 5,959 million in 2011 compared with CHF 6,585 million in 2010. The strengthening of the Swiss franc contributed substantially to the overall decrease.

Occupancy costs decreased by CHF 193 million or 15% mainly as vacant office space was provisioned for in the prior year, and also as a result of reduced rental expenses and favorable currency translation effects.

Rent and maintenance of machines and equipment decreased by CHF 126 million, or 23%, mainly due to reduced costs for IT maintenance services. Expenses for communications and market data services decreased by CHF 48 million, or 7%, mainly as a result of reduced costs for market data services.

Administration costs decreased by CHF 48 million, or 7%, as a result of a release of value added tax accruals in the UK and the favorable effect of the strengthening of the Swiss franc, largely offset by a CHF 109 million charge related to the UK bank levy. The prior year included a charge of CHF 40 million to reimburse the Swiss government for costs incurred in connection with the US cross-border matter.

Marketing and public relations expenses increased by CHF 54 million, or 16%, primarily due to higher costs associated with sponsoring activities and marketing. Professional fees increased by CHF 68 million, or 9%, mainly due to higher legal fees.

Outsourcing of IT and other services increased by CHF 73 million, or 7%, due to higher IT business demand and capacity expansion needed for control functions related to increased regulatory requirements.

Expenses for litigation and regulatory matters decreased by CHF 355 million, or 56%, mainly due to lower charges for litigation provisions in Wealth Management Americas and the Investment Bank.

Other general and administrative expenses decreased by CHF 53 million, or 30%, due to a release of provisions for value-added tax in Switzerland and favorable currency translation effects, partially offset by increased real restate related restructuring charges which were CHF 93 million in 2011 compared with CHF 79 million in the prior year

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Refer to “Note 7 General and administrative expenses” in the “Financial information” section of this report for more information

Depreciation and amortization

Depreciation of property and equipment was CHF 761 million, a decrease of CHF 157 million, or 17%, from the prior year. The strengthening of the Swiss franc contributed substantially to the overall decrease.

Depreciation of IT and other equipment decreased partly as the useful life of some assets was extended. In 2011 we recorded a reversal of impairment losses on a property of CHF 34 million, partly offset by CHF 26 million restructuring related impairments of real estate assets. The prior year included CHF 37 million impairment charges related to restructuring in Wealth Management Americas.

Amortization of intangible assets was CHF 127 million compared with CHF 117 million in 2010. Higher impairment charges on intangible assets, mainly resulting from the impairment of intangible assets related to a past acquisition in the UK, were only partially offset by lower amortization of intangible assets due to favorable currency impacts.

Income tax

We recognized a net income tax expense in the income statement for the year of CHF 923 million. This includes a Swiss net deferred tax expense of CHF 1,063 million, which reflects a tax expense of CHF 949 million for the amortization of deferred tax assets, as tax losses are used against profits arising from business operations. In addition, it reflects a tax charge of CHF 245 million relating to the revaluation of deferred tax assets (reflecting updated profit forecast assumptions including the expected geographical mix) partly offset by a CHF 131 million tax effect relating to the unauthorized trading incident. Additionally, it includes a foreign net deferred tax benefit of CHF 246 million, including a US tax benefit of CHF 400 million, which mainly relates to a write-up of deferred tax assets for US tax losses incurred in previous years, predominantly in the parent bank, UBS AG. This was partly offset by a tax expense of CHF 41 million relating to the downward revaluation of deferred tax assets for Japan, following a change in statutory tax rates and loss offset rules, and a tax expense of CHF 113 million

 

 

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for the amortization of deferred tax assets, as tax losses are used against profits in various locations. It also includes a current tax expense of CHF 106 million, which reflects tax expenses of CHF 277 million for taxable profits of Group entities, partly offset by current tax benefits of CHF 171 million relating to prior periods.

During 2010, we recognized a net income tax benefit in our income statement of CHF 381 million. This reflected a deferred tax benefit mainly relating to the recognition of additional deferred tax assets in respect of tax losses, partly offset by current tax expenses relating to taxable profits of Group entities.

In the first half of 2012, we expect our tax rate to be in the region of 20–25%. However, the tax rate may differ if there are significant book tax adjustments, which generally mainly affect Swiss taxable profits – for example, own credit gains/losses. In the second half of 2012, consistent with past practice, we expect to revalue our deferred tax assets based on a reassessment of future profitability taking into account updated business plan forecasts.

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Refer to “Note 22 Income taxes” in the “Financial information” section of this report for more information

Net profit attributable to non-controlling interests

Net profit attributable to non-controlling interests for 2011 was CHF 268 million, compared with CHF 304 million in 2010. This mainly reflected dividends paid on preferred securities and dividend accruals triggered by the call of a hybrid tier 1 instrument in 2011.

Comprehensive income attributable to UBS shareholders

Comprehensive income attributable to UBS shareholders includes all changes in equity (including net profit) attributed to UBS shareholders during a period, except those resulting from investments by and distributions to shareholders as well as equity-settled share-based payments. Items included in comprehensive income, but not in net profit, are reported under other comprehensive income (OCI). Most of those items will be recognized in net profit when the underlying item is sold or realized.

Comprehensive income attributable to UBS shareholders in 2011 was CHF 6,896 million, including net profit attributable to

UBS shareholders of CHF 4,159 million, and other comprehensive income attributable to UBS shareholders of CHF 2,737 million.

OCI attributable to UBS shareholders included foreign currency translation gains of CHF 706 million, fair value gains on financial investments available-for-sale of CHF 495 million, and fair value gains of CHF 1,537 million on interest rate swaps designated as cash flow hedges.

Foreign currency translation gains of CHF 706 million were predominantly related to net investments in US foreign operations, which led to gains as the US dollar appreciated in the second half of 2011. Fair value gains of CHF 495 million on financial investments available-for-sale were almost entirely driven by net gains of CHF 545 million related to the strategic investment portfolio. Declining market interest rates resulted in an increase in fair values of CHF 1,267 million and other comprehensive income gains prior to the sale of the portfolio in the third quarter of 2011, more than offsetting unrealized losses of CHF 545 million recognized in OCI in 2010. Upon sale, a realized gain of CHF 722 million was recognized in the income statement within other income, which reduced other comprehensive income accordingly. Fair value gains of CHF 1,537 million on net fixed receiver interest rate swaps designated as cash flow hedges resulted from declining long-term interest rates across all major currencies.

OCI attributable to UBS shareholders in 2010 was negative CHF 1,659 million, mainly reflecting foreign currency translation losses of CHF 909 million and fair value losses on financial investments available-for-sale of CHF 607 million.

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Refer to the “Statement of comprehensive income” in the “Financial information” section of this report for more information

Performance by reporting segment

The management discussion and analysis by reporting segment is provided in the following sections of this report.

Development of invested assets

Net new money

In Wealth Management, net new money improved significantly, with net inflows of CHF 23.5 billion compared with net outflows of CHF 12.1 billion in 2010 due to improvements in all regions

 

 

Performance from continuing operations before tax

 

 

  For the year ended  % change from 
CHF million  31.12.11  31.12.10  31.12.09  31.12.10 
Wealth Management   2,676    2,308    2,280    16  
                  
Retail & Corporate   1,919    1,772    1,629    8  
                  
Wealth Management & Swiss Bank   4,596    4,080    3,910    13  
                  
Wealth Management Americas   534    (130  32   
                  
Global Asset Management   428    516    438    (17
                  
Investment Bank   154    2,197    (6,081  (93
                  
Corporate Center   (363  793    (860 
                  
Operating profit from continuing operations before tax   5,350    7,455    (2,561  (28
                  

 

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Net new money1

 

 

  For the year ended 
CHF billion  31.12.11  31.12.10  31.12.09 
Wealth Management   23.5    (12.1  (87.1
              
Wealth Management Americas   12.1    (6.1  (11.6
              
Global Asset Management   4.3    1.8    (45.8
              

of which: money market flows

   (4.7  (6.4  (12.1
              

1  Excludes interest and dividend income.

    

Invested assets

 

 

  As of   % change from 
CHF billion  31.12.11   31.12.10   31.12.09   31.12.10 
Wealth Management   750     768     825     (2
                     
Retail & Corporate   134     136     135     (1
                     
Wealth Management & Swiss Bank   883     904     960     (2
                     
Wealth Management Americas   709     689     690     3  
                     
Traditional investments   497     487     502     2  
                     

of which: money market funds

   92     96     111     (4
                     
Alternative and quantitative investments   31     34     41     (9
                     
Global real estate   38     36     39     6  
                     
Infrastructure and private equity1   8     1     1     700  
                     
Global Asset Management   574     559     583     3  
                     
Total   2,167     2,152     2,233     1  
                     

1  With effect from 2011, the Infrastructure and private equity fund of funds businesses were transferred from Alternative and quantitative investments to Infrastructure, which following the transfer was renamed Infrastructure and private equity. As the amounts were not material, prior periods were not restated.

   

 

and client segments. The strongest net inflows were recorded in Asia Pacific and the emerging markets as well as globally from ultra high net worth clients. Europe reported net outflows, mainly related to the offshore business with countries neighboring Switzerland partly offset by net inflows from the European onshore business.

Net new money inflows in Wealth Management Americas were CHF 12.1 billion compared with net outflows of CHF 6.1 billion in 2010. This turnaround was due to improved net inflows from net recruiting of financial advisors, including higher inflows from recruitment of experienced financial advisors, and lower outflows from financial advisor attrition. Net new money from financial advisors employed with UBS for more than one year remained positive, but declined from 2010.

In Global Asset Management, excluding money market flows, net new money inflows from third parties were CHF 12.2 billion in 2011 compared with net inflows of CHF 16.2 billion in 2010, and net outflows from clients of UBS’s wealth management businesses were CHF 3.1 billion compared with net outflows of CHF 8.1 billion. The flows from UBS’s wealth management businesses included two transfers of investment management and research responsibility

from Wealth Management & Swiss Bank to Global Asset Management: a CHF 1.8 billion multi-manager alternative fund was transferred to alternative and quantitative investments, and CHF 2.9 billion in private equity funds of funds were transferred to infrastructure and private equity. It should be noted that these assets are reported as invested assets in both business divisions, as Wealth Management & Swiss Bank continues to advise the clients of the funds.

Money market net inflows from third parties were CHF 0.2 billion compared with CHF 2.0 billion in 2010, and money market net outflows from clients of UBS’s wealth management businesses were CHF 5.0 billion compared with CHF 8.3 billion.

Invested assets

Total invested assets were CHF 2,167 billion on 31 December 2011, up slightly from CHF 2,152 billion on 31 December 2010. Net new money inflows of CHF 42 billion and the addition of CHF 25 billion in invested assets related to the ING Investment Management acquisition were largely offset by adverse market impacts.

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Refer to the Wealth Management”, “Wealth Management Americas” and “Global Asset Management” sections of this report for more information

 

 

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Certain items affecting our results in 2011

 

Cost reduction program

In July 2011, we announced a cost reduction program intended to align our cost base with changes in the market environment. As part of this program, in August we announced that we would reduce our headcount by approximately 3,500 and rationalize our real estate requirements. As a result, we expect to recognize restructuring charges totaling approximately CHF 550 million, of which CHF 403 million was recognized in 2011.

Staff reductions announced in August included redundancies as well as natural attrition. Of the expected 3,500 staff reductions, approximately 45% will come from the Investment Bank, 35% from Wealth Management & Swiss Bank, 10% from Global Asset Management, and 10% from Wealth Management Americas. The majority of affected staff departed in 2011.

UBS will continue to be vigilant in managing its cost base while remaining committed to investing in growth areas.

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Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information

Unauthorized trading incident

In September 2011, we announced that the Investment Bank had incurred a loss of CHF 1,951 million (USD 2,229 million) due to an unauthorized trading incident.

Large stock index futures positions were offset in our systems with fictitious, forward-settling exchange-traded funds (ETF) positions. These fictitious ETF positions masked the risk related to the futures positions, and ultimately the substantial losses incurred on them. Our risk and operational systems detected unauthorized or unexplained activity, but this was not sufficiently investigated nor was appropriate

action taken to ensure that existing controls were enforced.

The resulting loss adversely impacted the Group’s pre-tax profit for the year by CHF 1,849 million. The remainder of the loss, CHF 102 million, was a foreign currency translation loss recognized directly in equity (other comprehensive income) as a result of the fact that the activity took place in a foreign operation in a functional currency other than the Swiss franc.

A special committee of the Board of Directors was established and is conducting an investigation of the unauthorized trading activity and its relation to the control environment. A second investigation is being carried out jointly by the Swiss Financial Market Supervisory Authority (FINMA) and the UK Financial Services Authority (UK FSA); they have retained KPMG for this purpose. In addition, FINMA and the UK FSA have announced that they have commenced enforcement proceedings against UBS in relation to this matter. We are cooperating fully with these investigations and are committed to addressing all findings to ensure that we have a risk management framework that better protects the firm and its shareholders.

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Refer to the “Impact of the unauthorized trading” sidebar in the “Compensation” section of this report for more information

Sale of our strategic investment portfolio

In the third quarter of 2011, we sold our strategic investment portfolio comprised of long-term fixed-interest-rate US Treasury securities with a face value of USD 9.4 billion and UK Government bonds with a face value of GBP 2.9 billion. The gain on sale of CHF 722 million was recognized as other income. Of this gain, CHF 433 million was allocated to Wealth Management and CHF 289 million to Retail & Corporate.

This portfolio was established in the fourth quarter of 2010 to hedge negative effects on the bank’s net interest income stemming from the prolonged period of very low interest rate yields. As the market yields of the positions were declining below targeted levels, we closed these positions to realize gains.

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Refer to the “Interest rate and currency management” section of this report for more information on our management of non-trading interest rate risk

Adjustments to 2011 results after issuance of fourth quarter report

After the publication of our fourth quarter 2011 financial report on 7 February 2012, management adjusted the 2011 results to account for subsequent events. The net, after-tax effect of these adjustments was to reduce net profit attributable to UBS shareholders by CHF 74 million, which decreased basic and diluted earnings per share by CHF 0.02.

The principal change relates to an agreement in principle that we entered into with a monoline insurer in March 2012, under which we agreed to the commutation of certain credit default swap contracts in exchange for a net cash payment. This had the effect of reducing the Investment Bank’s 2011 net trading income by CHF 167 million. The settlement, if consummated, would also include the resolution of litigation and the mutual release of claims, as well as the removal of certain existing impediments to the restructuring or sale by UBS of legacy assets which account for aggregate Basel III risk-weighted assets of almost CHF 15 billion. The transaction is in keeping with our strategy to reduce our Basel III risk-weighted assets in anticipation of future capital requirements. We cannot predict when or at what prices the underlying assets may be restructured or sold.

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Refer to “Note 32 Events after the reporting period” in the “Financial information” section of this report for more information.

 

 

 

 

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2010

Results

In 2010, we reported a Group net profit attributable to shareholders of CHF 7,534 million, a profit before tax from continuing operations of CHF 7,455 million and a profit before tax from discontinued operations of CHF 2 million. In 2009, we recorded a net loss attributable to shareholders of CHF 2,736 million.

Operating income

Total operating income was CHF 31,994 million in 2010, up from CHF 22,601 million in 2009. Net interest income was CHF 6,215 million compared with CHF 6,446 million in the prior year.

Net interest and trading income

Net interest and trading income was CHF 13,686 million compared with CHF 6,122 million in 2009.

The Investment Bank’s fixed income, currencies and commodities’ (FICC) trading revenues improved due to an increase in credit trading revenues, which was partially offset by decreases in trading revenues in our macro and emerging markets businesses. A major part of the improvement was due to de-risking and reduction of the residual positions portfolio. Equities trading revenues, excluding own credit, decreased compared with the previous year, primarily in the derivatives and equity-linked business.

An own credit loss on financial liabilities designated at fair value of CHF 548 million was recorded in 2010, compared with a CHF 2,023 million loss in 2009. This was due to continuing but comparatively less tightening of our credit spreads in 2010. Debit valuation adjustments on derivatives in the Investment Bank’s FICC business were positive CHF 155 million compared with negative CHF 1,882 million in 2009. This resulted from the widening of overall credit spreads in the second quarter, partially offset by a tightening of the credit spreads in the third and fourth quarters.

Interest income in Wealth Management was down CHF 116 million, or 6%, due to pressure from the low interest rate environment and the decrease in value of the euro and US dollar against the Swiss franc in 2010. Interest income in Retail & Corporate was down 259 million, or 10%, partly as low market interest rates continued to exert downward pressure on interest margins. In Wealth Management Americas, interest income declined by CHF 105 million, or 13%, to CHF 695 million due to lower investment portfolio interest income, partly offset by higher income from securities-backed lending. Net trading income in Wealth Management Americas declined CHF 193 million to CHF 570 million, partly due to lower municipal trading income.

Net interest and trading income in the Corporate Center increased and included a CHF 745 million gain on the valuation of our option to acquire the SNB StabFund’s equity compared with a CHF 117 million gain in the prior year.

Credit loss expenses

In 2010, we reported net credit loss expenses of CHF 66 million. This included CHF 172 million of impairment charges taken on reclassified and acquired securities, partially offset by recoveries on certain loan positions. The net credit loss expenses in 2009 amounted to CHF 1,832 million.

The net credit loss expenses of the Investment Bank were nil in 2010, compared with net credit loss expenses of CHF 1,698 million in 2009. Credit loss expenses of CHF 172 million in relation to reclassified and acquired securities were primarily related to impairments on our student loan auction rate securities inventory, offset by recoveries on certain loan positions.

Wealth Management & Swiss Bank reported net credit loss expenses of CHF 64 million for 2010, compared with CHF 133 million in 2009.

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Refer to the “Risk, treasury and capital management” section of this report for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures

Net fee and commission income

Net fee and commission income was CHF 17,160 million, compared with CHF 17,712 million in the previous year. Income declined slightly in all major fee categories except for portfolio management and advisory fees, as outlined below:

 

Underwriting fees were CHF 1,912 million compared with CHF 2,386 million in the prior year, due to a decline in both equity and debt underwriting fees. The decrease in equity underwriting fees resulted from an overall market slowdown. Debt underwriting fees declined due to lower revenues in the Investment Bank’s debt capital market business.

 

Mergers and acquisitions and corporate finance fees were CHF 857 million, a decrease from CHF 881 million in the prior year. This was due to reduced market activity as deal appetite remained subdued in the first half of 2010.

 

Net brokerage fees fell 8% to CHF 3,837 million mainly due to low transaction volumes and margin compression in 2010.

 

Investment fund fees were CHF 3,898 million, a 3% decrease compared with the prior year. Lower asset based commission fees on UBS funds were partly offset by higher fees on third-party funds and sales-based commission income.

 

Portfolio management and advisory fees increased 2% to CHF 5,959 million, mainly due to higher portfolio management fees in our Wealth Management Americas business division. This was partly offset by lower portfolio management fees in Global Asset Management, primarily resulting from lower performance fees in its alternative and quantitative investments business, and by lower portfolio management and advisory fees in Wealth Management & Swiss Bank and the Investment Bank.

 

Other commission expense fell 10% to CHF 964 million, mainly due to lower commissions paid for payment transactions, other services and management advisory.

 

 

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Other income

Other income was CHF 1,214 million in 2010, compared with CHF 599 million in the previous year. Other income in 2010 included a CHF 180 million gain from the sale of investments in associates owning real estate in New York, a gain of CHF 158 million from the sale of a property in Zurich, gains of CHF 324 million from the disposal of loans and receivables (including sales and issuer redemptions of auction rate securities), a CHF 69 million demutualization gain from our stake in the Chicago Board Options Exchange, and a negative CHF 45 million valuation adjustment on a property fund held by Wealth Management & Swiss Bank.

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Refer to “Note 5 Other income” in the “Financial information” section of this report for more information

Operating expenses

Total operating expenses were CHF 24,539 million in 2010, compared with CHF 25,162 million in 2009. Operating expenses in 2010 included CHF 113 million of net restructuring charges, while operating expenses in 2009 included goodwill impairment charges of CHF 1,123 million and restructuring charges of CHF 791 million.

Personnel expenses

Personnel expenses were CHF 16,920 million, up from CHF 16,543 million in the prior year. Personnel expenses recorded in 2010 included discretionary variable compensation expenses of CHF 4.1 billion, of which CHF 1.5 billion relates to variable compensation brought forward from prior years. The discretionary bonus pool granted to employees for the performance year 2010 was CHF 4.2 billion, 11% lower than in the previous year. Of this amount, CHF 2.6 billion is recognized in the income statement in 2010, and CHF 1.6 billion will be deferred to future periods. Other personnel expenses in 2010 included a charge of CHF 0.2 billion for the UK bank payroll tax.

Other variable compensation was CHF 230 million in 2010 compared with CHF 699 million in 2009. The decrease was mainly due to restructuring-related severance costs recognized in 2009.

 è 

Refer to “Note 6 Personnel expenses” and “Note 30 Equity participation and other compensation plans” in the “Financial information” section of this report and to the “Compensation” section of this report for more information

General and administrative expenses

General and administrative expenses were CHF 6,585 million in 2010 compared with CHF 6,248 million in 2009. Marketing and public relations expenses increased primarily due to the costs associated with sponsoring and branding campaigns related to the global re-launch of the UBS brand. Other general and administrative expenses increased due to higher litigation provisions, partially offset by lower restructuring provisions. Costs of outsourcing IT and other services as well as travel and entertainment were higher compared with the prior year. These increases were partly offset by reduced spending on occupancy, rent and maintenance of IT and

other equipment, communication and market data services, administration and professional fees.

 è 

Refer to “Note 7 General and administrative expenses” in the “Financial information” section of this report for more information

Depreciation, amortization and impairment of goodwill

Depreciation was CHF 918 million in 2010, compared with CHF 1,048 million in 2009. Amortization of intangible assets was CHF 117 million compared with CHF 200 million in the prior year. No goodwill impairment charges were recorded in 2010. A goodwill impairment charge of CHF 1,123 million relating to the sale of UBS Pactual was recorded in 2009.

Income tax

We recognized a net income tax benefit in our income statement of CHF 381 million for 2010. This included a deferred tax benefit of CHF 605 million and current tax expenses of CHF 224 million.

The deferred tax benefit reflects the recognition of additional deferred tax assets in respect of tax losses and temporary differences in a number of foreign locations including the US (tax benefit of CHF 1,161 million) and Japan (tax benefit of CHF 98 million), taking into account the updated taxable profit forecast assumptions over the five-year time horizon used for recognition purposes. This was partly offset by a Swiss net deferred tax expense. Swiss tax losses, for which deferred tax assets have previously been recognized, were used against profits for the year (tax expenses of CHF 1.409 million). This was partly offset by an upward revaluation of Swiss deferred tax assets taking into account revised profit forecast assumptions (tax benefit of CHF 741 million).

The current tax expenses relate to tax expenses in respect of taxable profits of Group entities, partially offset by tax benefits arising from the agreement on prior year positions with tax authorities in various locations.

During 2009, we recognized a net income tax benefit in our income statement of CHF 443 million. This reflected a deferred tax benefit mainly relating to the recognition of additional deferred tax assets in respect of tax losses, partly offset by current tax expenses relating to taxable profits of Group entities.

Net profit attributable to non-controlling interests

Net profit attributable to non-controlling interests for 2010 was CHF 304 million, compared with CHF 610 million for 2009. This decrease was primarily the consequence of the attribution in 2009, rather than in 2010, of CHF 132 million of net profit to non-controlling interests in connection with certain dividends payable in 2010 on hybrid capital instruments classified as non-owner equity. This attribution was made out of 2009’s net profit following a determination that a triggering event had occurred that caused the 2010 dividend payments to become obligatory under the terms of these hybrid capital instruments. The triggering event was the cash payment made by UBS in 2009 to the

 

 

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Swiss Confederation in consideration of the Confederation’s waiver of its right to receive future coupon payments on the mandatory convertible notes due in 2011.

Had the 2010 dividend payments been applied to net profit in 2010 rather than in 2009, the net profit attributed to non-controlling interests would have been CHF 478 million in 2009 and CHF 436 million in 2010.

Comprehensive income attributable to UBS shareholders

Comprehensive income attributable to UBS shareholders in 2010 was CHF 5,875 million, including net profit attributable to UBS shareholders of CHF 7,534 million, partially offset by other comprehensive income attributable to UBS shareholders of negative CHF 1,659 million.

OCI attributable to UBS shareholders was negative in 2010 due to: (i) losses in the currency translation account of CHF 909 million (net of tax) related to the Swiss franc carrying value of investments in subsidiaries whose reporting currencies are other than Swiss francs; (ii) fair value losses on financial investments available-for- sale of CHF 607 million (net of tax); and (iii) changes in the replacement values of interest rate swaps designated as hedging instruments of negative CHF 143 million (net of tax). Foreign currency translation-related OCI losses attributable to UBS shareholders of CHF 1,501 million (net of tax) in 2010 largely resulted from the strengthening of the Swiss franc against

the US dollar, British pound and euro. We have foreign operations conducted through entities with these functional currencies. These losses in foreign currency translation were partially offset by an out-of-period credit of CHF 592 million resulting from the correction of prior period misstatements. Fair value losses on financial investments available-for-sale predominantly relate to our fixed-interest bearing long-term bond portfolio, which consists of US and UK government bonds. During the fourth quarter, the fair value of this portfolio decreased, mostly due to rising market interest rates. On a net basis, the fair value movement of US dollar, euro and British pound fix-receiver and fixed-payer interest rate swaps designated in cash flow hedges was slightly negative during the year.

 è 

Refer to the “Statement of comprehensive income” and “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information

Invested assets

Total invested assets were CHF 2,152 billion on 31 December 2010, a decrease of 4% from CHF 2,233 billion on 31 December 2009. Positive market developments were more than offset by negative currency effects and net new money outflows.

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Refer to the “Wealth Management”. “Wealth Management Americas” and “Global Asset Management” sections of this report for more information

 

 

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Balance sheet

Balance sheet

 

 

  

 

  % change from 
CHF million  31.12.11  31.12.10  31.12.09  31.12.10 
Assets     
                  
Cash and balances with central banks   40,638    26,939    20,899    51  
                  
Due from banks   23,218    17,133    16,804    36  
                  
Cash collateral on securities borrowed   58,763    62,454    63,507    (6
                  
Reverse repurchase agreements   213,501    142,790    116,689    50  
                  
Trading portfolio assets   181,525    228,815    232,258    (21
                  

of which: pledged as collateral

   39,936    61,352    44,221    (35
                  
Positive replacement values   486,584    401,146    421,694    21  
                  
Cash collateral receivables on derivative instruments   41,322    38,071    53,774    9  
                  
Financial assets designated at fair value   10,336    8,504    10,223    22  
                  
Loans   266,604    262,877    266,477    1  
                  
Financial investments available-for-sale   53,174    74,768    81,757    (29
                  
Accrued income and prepaid expenses   6,327    5,466    5,816    16  
                  
Investments in associates   795    790    870    1  
                  
Property and equipment   5,688    5,467    6,212    4  
                  
Goodwill and intangible assets   9,695    9,822    11,008    (1
                  
Deferred tax assets   8,526    9,522    8,868    (10
                  
Other assets   12,465    22,681    23,682    (45
                  
Total assets   1,419,162    1,317,247    1,340,538    8  
                  
Liabilities     
                  
Due to banks   30,201    41,490    31,922    (27
                  
Cash collateral on securities lent   8,136    6,651    7,995    22  
                  
Repurchase agreements   102,429    74,796    64,175    37  
                  
Trading portfolio liabilities   39,480    54,975    47,469    (28
                  
Negative replacement values   473,400    393,762    409,943    20  
                  
Cash collateral payables on derivative instruments   67,114    58,924    66,097    14  
                  
Financial liabilities designated at fair value   88,982    100,756    112,653    (12
                  
Due to customers   342,409    332,301    339,263    3  
                  
Accrued expenses and deferred income   6,850    7,738    8,689    (11
                  
Debt issued   140,617    130,271    131,352    8  
                  
Other liabilities   61,692    63,719    72,344    (3
                  
Total liabilities   1,361,309    1,265,384    1,291,905    8  
                  
Equity     
                  
Share capital   383    383    356    0  
                  
Share premium   34,614    34,393    34,824    1  
                  
Treasury shares   (1,160  (654  (1,040  77  
                  
Equity classified as obligation to purchase own shares   (39  (54  (2  (28
                  
Retained earnings   23,603    19,444    11,910    21  
                  
Cumulative net income recognized directly in equity, net of tax   (3,955  (6,693  (5,034  (41
                  
Equity attributable to UBS shareholders   53,447    46,820    41,013    14  
                  
Equity attributable to non-controlling interests   4,406    5,043    7,620    (13
                  
Total equity   57,852    51,863    48,633    12  
                  
Total liabilities and equity   1,419,162    1,317,247    1,340,538    8  
                  

 

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2011 asset development

LOGO

2011 liabilities and equity development

LOGO

 

 

Balance sheet development

31.12.11 vs. 31.12.10

Our total assets stood at CHF 1,419 billion on 31 December 2011, up CHF 102 billion or 8% from CHF 1,317 billion on 31 December 2010. The increase occurred mainly in positive replacement values, which grew by CHF 85 billion to CHF 487 billion.

Our funded assets volume, which excludes positive replacement values, rose by CHF 16 billion to CHF 933 billion. Collateral trading assets grew by CHF 67 billion to CHF 272 billion, while lending assets, which include cash deposits at central banks, rose by CHF 25 billion to CHF 341 billion. These increases were partially offset by lower trading portfolio assets, which dropped CHF 47 billion to CHF 182 billion, reduced financial investments

available-for-sale positions, which fell by CHF 22 billion to CHF 53 billion, and prime brokerage receivables in other assets, which declined by CHF 10 billion to CHF 6 billion.

Currency movements between 31 December 2010 and 31 December 2011 had only a small effect on our funded balance sheet assets, which led to a net increase of CHF 2 billion.

To a large extent, the total asset increase occurred in the Investment Bank, as the abovementioned change in positive replacement values and collateral trading assets significantly contributed to the business division’s CHF 107 billion increase to CHF 1,074 billion. Wealth Management and Wealth Management Americas increased their lending activities resulting in balance sheet assets growth of CHF 7 billion to CHF 101 billion and CHF 4 billion to CHF 54 billion, respectively. The Corporate Center’s balance sheet

 

 

Balance sheet development – assets

LOGO

Balance sheet development – liabilities and equity

LOGO

 

 

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declined by CHF 10 billion to CHF 27 billion following the sale of our strategic investment portfolio in the third quarter of 2011. Retail & Corporate’s assets declined by a net CHF 4 billion to CHF 149 billion, as the reduction in cash deposits at central banks outweighed the growth in the lending book. The balance sheet size of Global Asset Management remained relatively stable at CHF 15 billion.

Balance sheet positions disclosed in this section represent year-end positions. Intra-quarter balance sheet positions may be different.

 è 

Refer to the table “FINMA leverage ratio calculation” in the “Capital management” section of this report for our average month-end balance sheet size for the fourth quarter of 2011 and 2010

Lending and borrowing

Lending (including cash and balances with central banks)

Cash and balances with central banks was CHF 41 billion on 31 December 2011, an increase of CHF 14 billion from the prior year-end. Interbank lending rose by CHF 6 billion to CHF 23 billion, mainly on higher short-term lending activities by the Investment Bank. Loans to customers increased by a net CHF 4 billion to CHF 267 billion, predominantly in our wealth management businesses, which contributed a CHF 14 billion volume growth across several products, including fixed term, Lombard and call loans as well as LIBOR-based mortgages. This increase was partly offset by the continued sale of our Investment Bank’s residual risk positions of approximately CHF 10 billion.

 è 

Refer to the “Risk, treasury and capital management” section for more information

Borrowing

Overall, our unsecured funding remained relatively stable, declining by CHF 3 billion to CHF 602 billion, however with some shifts in products.

Reduced balances were recorded in the following categories: (i) financial liabilities designated at fair value with a decrease of CHF 12 billion to CHF 89 billion on 31 December 2011 on lower valuations of equity-linked notes issued and to a lesser extent on maturities of credit-linked notes issued; (ii) short-term interbank borrowings (Due to banks), which was CHF 30 billion on 31 December 2011, were down CHF 11 billion from 31 December 2010

due to lower bank borrowings by the Investment Bank; and (iii) long-term debt declined CHF 5 billion to CHF 69 billion, as maturing senior bonds and lower tier 2 subordinated bonds outweighed new covered bond issuances.

These declines were almost offset by higher client deposits (Due to customers) and increased money market paper issuances. Client deposits amounted to CHF 342 billion on 31 December 2011, a net increase of CHF 10 billion compared with 31 December 2010 due to cash deposits inflows in our wealth management and retail businesses of CHF 23 billion mainly in current, savings and personal accounts, partly offset by lower wholesale client deposits in the Investment Bank of CHF 11 billion. Money market paper issued was CHF 71 billion at year-end 2011, an increase of CHF 15 billion from the prior year-end, mainly due to a higher level of outstanding commercial paper and increased issuance of yield enhancement products for our wealth management clients.

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Refer to the “Liquidity and funding management” section for more information on long-term debt issuance

Trading portfolio

Trading portfolio assets dropped by CHF 47 billion to stand at CHF 182 billion on 31 December 2011. The Investment Bank reduced certain debt instruments and increased liquid collateral trading investments. The following products were reduced: CHF 20 billion of money market papers mainly in Swiss and Japanese government bills, CHF 12 billion of corporate and bank debt instruments and CHF 10 billion of equity instruments, mainly due to lower valuations on equity-linked notes issued hedges.

Reverse repurchase agreements and cash collateral on securities borrowed

Cash collateral on securities borrowed and reverse repurchase agreements increased by CHF 67 billion to CHF 272 billion, mainly due to the aforementioned shift from trading portfolio assets and general higher trading activities in the Investment Bank.

Replacement values

The positive and the negative replacement values of derivative instruments rose by similar amounts on both sides of the balance sheet, increasing by CHF 85 billion (21%) and CHF 80 billion

 

 

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(20%), respectively, and ending 2011 at CHF 487 billion and CHF 473 billion, respectively. Increases in positive replacement values occurred mainly in interest rate contracts, which rose by CHF 92 billion due to a flattening of the interest yield curves, and credit derivative contracts, which rose by CHF 11 billion due to a general widening of credit spreads. These increases were partially offset by lower foreign exchange contracts, which declined by CHF 16 billion, mainly due to currency movements.

Financial investments available-for-sale

Financial investments available-for-sale declined by CHF 22 billion to CHF 53 billion in 2011, primarily reflecting the sale of our strategic investment portfolio in the third quarter of 2011.

Other assets / other liabilities

Prime brokerage receivables declined by CHF 10 billion to CHF 6 billion, mainly due to continued client concerns related to the eurozone and other uncertainties. Cash collateral payables on derivatives increased by CHF 8 billion on higher current accounts arising from over-the-counter derivatives.

Equity

On 31 December 2011, equity attributable to UBS shareholders was CHF 53.4 billion, representing an increase of CHF 6.6 billion compared with 31 December 2010. This increase reflected (i) annual net profit of CHF 4.2 billion; (ii) net positive effects recognized in equity of CHF 2.7 billion related to fair value gains of CHF 1.5 billion on interest rate swaps designated as cash flow hedges, currency translation effects of CHF 0.7 billion and fair value gains of CHF 0.5 billion on financial investments available-for-sale; and (iii) a net increase of CHF 0.2 billion in share premium, mainly related to equity compensation plans. These increases were partially offset by net treasury share repurchases of CHF 0.5 billion. Equity attributable to non-controlling interests decreased by CHF 0.6 billion to CHF 4.4 billion, mainly related to the redemption of trust preferred securities.

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Refer to the “Statement of changes in equity” in the “Financial information” section, and to “Comprehensive income attributable to UBS shareholders” in the “UBS results” section of this report for more information

    

 

 

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Off-balance sheet

 

Off-balance sheet arrangements

In the normal course of business, we enter into transactions that are not recognized on the balance sheet in accordance with International Financial Reporting Standards (IFRS) because we have either transferred or have not assumed the related risks and rewards (financial assets), and/or because we did not become party to the contractual provisions of the financial instruments. These off-balance sheet arrangements are transacted to either meet the financial needs of clients or offer investment opportunities through entities that are not controlled by us. These transactions include derivative instruments, guarantees and similar arrangements, retained or contingent interest in assets transferred to non-consolidated entities and obligations and liabilities (including contingent obligations and liabilities) from retained interests in non-consolidated entities.

When we, through these arrangements, incur an obligation or become entitled to an asset, we recognize them on the balance sheet. It should be noted that in certain instances the amount recognized on the balance sheet does not represent the full gain or loss potential inherent in such arrangements.

We continuously evaluate whether triggering events require reconsideration of the consolidation conclusions made at the inception of our involvement with special purpose entities (SPE). As of 31 December 2011, there were no holdings which required reconsideration of the consolidation assessment.

Refer to “Note 1 a) 3) Subsidiaries” and “Note 1 a) 5) Recognition and derecognition of financial instruments” in the “Financial information” section of this report for more information on accounting policies regarding consolidation and deconsolidation of subsidiaries, including SPE, and recognition and derecognition of financial instruments, respectively.

The following paragraphs discuss several distinct areas of off-balance sheet arrangements. Additional relevant off-balance sheet information is primarily provided in “Note 21 Provisions and contingent liabilities”, “Note 23 Derivative instruments and hedge accounting” and “Note 25 Operating lease commitments” in the “Financial information” section of this report.

Risk disclosures, including our involvement with off-balance sheet vehicles

Refer to the “Risk, treasury and capital management” section of this report for comprehensive liquidity, market and credit risk information related to risk positions, including our exposure to off-balance sheet involvements.

Non-consolidated securitization vehicles and collateralized debt obligations

Our involvement (in the form of purchased or retained interests or derivatives) in non-consolidated securitization vehicles and collateralized

debt obligations (CDO) is outlined within the table on the following page under the column “Involvements in non-consolidated SPE held by UBS”. As of 31 December 2011, the carrying value of our purchased and retained interests relating to non-consolidated SPE and CDO totaled CHF 10.7 billion, of which CHF 7.1 billion was held inTrading portfolio assets and measured at fair value and CHF 3.6 billion was held at amortized cost withinLoans. In addition, we had involvements in SPE in the form of netNegative replacement values, mainly interest rate swaps and credit default swaps, of CHF 0.6 billion as of 31 December 2011. The total pool of assets held by these non-consolidated investment vehicles in which UBS has involvement are reflected in the column “Total SPE assets”. These total SPE assets represent the total size and exposure of the SPE and are not indicative of our risk of loss. Our maximum loss potential is generally limited to our involvements in the non-consolidated SPE.

During 2011 we sponsored the creation of a limited number of special purpose entities that principally facilitated the securitization of commercial mortgage loans. These securitization transactions generally involved the transfer of assets into a trust or corporation, which in turn issued beneficial interests in the form of securities. Financial assets transferred to such trusts and corporations are no longer reported in our consolidated financial statements once the accounting requirements for derecognition are met, including the transfer of substantially all of the risks and rewards related to such assets. UBS retained certain involvements in these special purpose entities, which are included in the disclosure on the next page. UBS did not consolidate these special purpose entities as of 31 December 2011 as we did not control them.

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Refer to “Note la) 12) Securitization structures set up by UBS” in the “Financial information” section of this report for more information on accounting policies regarding securitization vehicles established by UBS

 è 

Refer to the securitization disclosures in the “Basel 2.5 Pillar 3” section of this report for a more comprehensive overview of our securitization activities

In addition to our retained involvement in 2011 securitization activities, we also continue to hold involvement in earlier securitization issuances, mainly legacy positions, which were originated by UBS or by third-parties. The volume and size of these positions, a majority of which are linked to the US mortgage market have been further reduced as of 31 December 2011 when compared with the prior year.

Our involvement in non-consolidated securitization vehicles and collateralized debt obligations disclosed in this section are typically managed on a portfolio basis alongside hedges and other offsetting financial instruments. The numbers presented do not include these offsetting factors.

Purchased and retained trading portfolio assets included in the table on the next page exclude residential and commercial mortgage-backed

 

 

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securities which are backed by a US government agency or instrumentality or US government-sponsored enterprise (for example the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation). These positions are excluded due to the comprehensive involvement of the US government in these organizations and their significantly lower risk profile.

Loans held at amortized cost included in the table below are mainly comprised of student loan auction rate securities, to the extent these are not backed by a US government agency or US government sponsored enterprise, as well as assets which were previouslyHeld for trading and later reclassified toLoans and receivables, including monoline-protected assets, US reference linked notes and other assets. Refer to “Note 28b Reclassified financial assets” in the “Financial information” section of this report for further information on reclassified financial assets.

The numbers outlined in the table below deviate from the securitization positions presented in the “Basel 2.5 Pillar 3” section of this report, primarily due to: (i) different scopes, mainly exclusion of certain government-backed and synthetic securitization transactions from the table below, (ii) a different measurement

basis in certain cases, IFRS carrying value within the table below compared with net exposure amount at default for Basel 2.5 Pillar 3 disclosures, and (iii) different classification of originated and sponsored activities. “Originated by UBS” amounts presented below include both securitization activities which we originated and those in which we acted as the lead manager for the transaction (i.e. sponsored). For Basel 2.5 Pillar 3 disclosures, originated and sponsored activities are presented separately.

Liquidity facilities and similar obligations

On 31 December 2011 and 2010, we had no significant exposure through liquidity facilities and guarantees to structured investment vehicles, conduits and other similar types of SPE. Losses resulting from such obligations were not significant in 2011 and 2010.

Support to non-consolidated investment funds

In the ordinary course of business, we issue investment certificates to third parties that are linked to the performance of non-consolidated investment funds. Such investment funds are originated either by us or by third parties. For hedging purposes, we generally invest in the funds to which our obligations from the certificates are

 

Non-consolidated securitization vehicles and collateralized debt obligations

 

CHF billion

  Involvements in non-consolidated SPE held by UBS   Total SPE assets2 

 

  Purchased and
retained interests
held by UBS1
   Derivatives held by UBS             
As of 31 December 2011  Carrying value   Fair value  Nominal value   

Original principal

outstanding

   

Current principal

outstanding

   

Delinquency

amounts

 
Originated by UBS           
                              
CDO           
                              
Residential mortgage   0.0     0.0    0.7     9.6     3.2     0.0  
                              
Commercial mortgage   0.4     0.0    1.2     7.1     5.3     0.0  
                              
Other ABS   0.1     0.0    0.0     7.8     7.4     0.0  
                              
Securitizations           
                              
Residential mortgage   0.0     0.0    1.3     19.9     4.0     1.1  
                              
Commercial mortgage   0.2     0.0    0.0     61.1     42.9     3.2  
                              
Other ABS   0.0     0.0    0.0     1.2     0.5     0.1  
                              
Total   0.7     0.0    3.2     106.7     63.3     4.4  
                              
Not originated by UBS           
                              
CDO           
                              
Residential mortgage   0.4     0.0    0.0     39.9     18.1     0.3  
                              
Commercial mortgage   1.4     0.0    0.0     79.4     75.9     0.3  
                              
Other ABS   1.7     0.1    0.9     49.8     52.7     0.1  
                              
Securitizations           
                              
Residential mortgage   0.9     (0.7  2.6     427.5     105.0     23.5  
                              
Commercial mortgage   3.2     0.0    0.4     1,007.3     622.5     54.7  
                              
Other ABS   2.5     0.0    0.0     397.7     191.8     4.3  
                              
Total   10.0     (0.6  3.9     2,001.6     1,066.0     83.2  
                              

1  Includes loans and receivables measured at amortized cost in the amount of CHF 0.1 billion originated by UBS and CHF 3.5 billion not originated by UBS as well as trading assets measured at fair value in the amount of CHF 0.6 billion originated by UBS and CHF 6.5 billion not originated by UBS.  2  “Total SPE assets” includes information which UBS could gather after making exhaustive efforts but excludes data which UBS was unable to obtain (in sufficient quality), especially for structures originated by third parties.

 

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linked. Risks resulting from these contracts are considered minimal, as the full performance of the funds, whether positive or negative, is passed on to third parties.

In a limited number of cases and primarily stemming from the financial markets crisis, UBS has provided support to certain non-consolidated investment funds in the form of collateralized financing, direct acquisition of fund units and purchases of assets from the funds. These funds are managed in our wealth and asset management businesses, and support was provided in cases where there were regulatory requirements, legal requirements or other exceptional circumstances. Throughout 2011 we have continued to reduce our positions in these acquired fund units or assets, and as of 31 December 2011 the carrying value of fund units acquired and assets purchased from such funds totaled CHF 0.3 billion.

Direct acquisitions of fund units were not material in 2011. Purchases of assets from the funds that we manage and guarantees granted to third parties in the context of such non-consolidated funds were also not material. Collateralized financing provided in the ordinary course of business to non-consolidated investment funds was CHF 0.7 billion as of 31 December 2011. Net losses incurred on fund units, which are generally accounted as financial investments available-for-sale, were not material in 2011.

In accordance with standard industry practice, our wealth and asset management businesses occasionally also provide short-term funding facilities to certain investment funds to cover timing gaps in the redemption and subscription processes. These facilities did not result in any losses in 2011.

Guarantees and similar obligations

In the normal course of business, we issue various forms of guarantees, commitments to extend credit, standby and other letters of credit to support our clients, commitments to enter into forward starting transactions, note issuance facilities and revolving underwriting facilities. With the exception of related premiums, generally these guarantees and similar obligations are kept as off-balance sheet items unless a provision to cover probable losses is required.

On 31 December 2011, the exposure to credit risk (gross values less sub-participations) for credit guarantees and similar instruments was CHF 17.4 billion compared with CHF 15.4 billion as of 31 December 2010. Fee income from issuing guarantees was not significant to total revenues in 2011.

Guarantees represent irrevocable assurances, subject to the satisfaction of certain conditions, that we will make payment in the event that clients fail to fulfill their obligations to third parties. We also enter into commitments to extend credit in the form of credit lines that are available to secure the liquidity needs of clients. The majority of these unutilized credit lines range in maturity from one month to five years. If customers fail to meet their obligations, our maximum exposure to credit risk is the contractual amount of these instruments. The risk is similar to the risk involved in extending loan facilities and is subject to the same risk management and control

framework. For the year ended 31 December 2011, we recognized net credit loss recoveries of CHF 22 million, compared with net credit loss expenses of CHF 43 million for the year ended 31 December 2010, related to obligations incurred for guarantees and loan commitments. Provisions recognized for guarantees and loan commitments were CHF 93 million as of 31 December 2011, and CHF 130 million as of 31 December 2010.

For certain obligations, we enter into partial sub-participations to mitigate various risks from guarantees and loan commitments. A sub-participation is an agreement by another party to take a share of the loss in the event that the obligation is not fulfilled by the obligor and, where applicable, to fund a part of the credit facility. We retain the contractual relationship with the obligor, and the sub-participant has only an indirect relationship. We will only enter into sub-participation agreements with banks to which we ascribe a credit rating equal to or better than that of the obligor.

Furthermore, we provide representations, warranties and indemnifications to third parties in the normal course of business.

Clearinghouse and exchange memberships

We are a member of numerous securities and derivative exchanges and clearinghouses. In connection with some of those memberships, we may be required to pay a share of the financial obligations of another member who defaults, or otherwise be exposed to additional financial obligations as a result. While the membership rules vary, obligations generally would arise only if the exchange or clearinghouse had exhausted its resources. We consider the probability of a material loss due to such obligations to be remote.

Swiss deposit insurance

Swiss banking law and the deposit insurance system require Swiss banks and securities dealers to jointly guarantee an amount of up to CHF 6 billion for privileged client deposits in the event that a Swiss bank or securities dealer becomes insolvent. For the period from 1 July 2011 to 30 June 2012, the Swiss Financial Market Supervisory Authority (FINMA) estimates our share in the deposit insurance system to be CHF 1.0 billion. The deposit insurance is a guarantee and exposes us to additional risk. This is not reflected in the table on the following page due to its unique characteristics. As of 31 December 2011, we consider the probability of a material loss from our obligation to be remote.

Underwriting commitments

Gross equity underwriting commitments on 31 December 2011 and 31 December 2010 amounted to CHF 1.1 billion and CHF 0.4 billion, respectively. Gross debt and private equity underwriting commitments on 31 December 2011 and 31 December 2010 were not material.

 

 

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Financial instruments not recognized on the balance sheet

 

The table below shows the maximum irrevocable amount of guarantees, commitments and forward starting transactions.

 

 

  31.12.11   31.12.10 
CHF million  Gross   

Sub-

participations

  Net   Gross  

Sub-

participations

  Net 
Guarantees         
                            
Credit guarantees and similar instruments   8,671     (315  8,356     8,612    (401  8,212  
                            
Performance guarantees and similar instruments   3,337     (493  2,845     3,362    (506  2,856  
                            
Documentary credits   6,897     (737  6,160     4,561    (255  4,306  
                            
Total guarantees   18,905     (1,545  17,360     16,535    (1,162  15,374  
                            
Commitments         
                            
Loan commitments   58,192     (1,640  56,552     56,851    (1,475  55,376  
                            
Underwriting commitments   1,160     (278  882     404    (196  208  
                            
Total commitments   59,352     (1,918  57,434     57,255    (1,671  55,584  
                            
Forward starting transactions1         
                            
Reverse repurchase agreements   27,113        39,036    
                            
Securities borrowing agreements   502        454    
                            
Repurchase agreements   21,134        22,468    
                            
Securities lending agreements   0        02   
                            

1  Cash to be paid in the future by either UBS or the counterparty.  2  In 2011, we corrected the value presented on the line securities lending agreements by CHF 783 million.

 

Contractual obligations

The table below includes contractual obligations by period as of 31 December 2011.

All contracts included in this table, with the exception of purchase obligations (those in which we are committed to purchasing determined volumes of goods and services), are either recognized as liabilities on our balance sheet or, in the case of operating leases, disclosed in “Note 25 Operating lease commitments” in the “Financial information” section of this report.

The following liabilities are recognized on the balance sheet and are excluded from the table: (i) provisions (as disclosed in “Note 21 Provisions and contingent liabilities” in the “Financial information” section of this report); (ii) current and deferred tax liabilities (refer to “Note 22 Income taxes” in the “Financial information” section of this report for more information); (iii) liabilities to employees for equity participation plans; (iv) settlement and clearing accounts; and (v) amounts due to banks and customers.

Within purchase obligations, the obligation to employees under mandatory notice periods is excluded (i.e. the period in which we must pay contractually-agreed salaries to employees leaving the firm).

 

Contractual obligations

 

 

  Payment due by period 
CHF million  < 1 year   1–3 years   3–5 years   > 5 years 
Long-term debt obligations   31,315     45,073     28,041     53,793  
                     
Finance lease obligations   46     30      
                     
Operating lease obligations   819     1,332     977     2,591  
                     
Purchase obligations   1,010     827     199     3  
                     
Other liabilities   492     2     2     2  
                     
Total   33,682     47,264     29,219     56,389  
                     

 

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UBS results

 

Cash flows

As a global financial institution, our cash flows are complex and bear little relation to our net earnings and net assets. Consequently, we believe that traditional cash flow analysis is less meaningful in evaluating our liquidity position than the liquidity, funding and capital management polices described within the “Risk, treasury and capital management” section of this report. Cash flow analysis may, however, be helpful in highlighting certain macro trends and strategic initiatives in our businesses.

With regard to the cash flow activities described below, refer to the “Statement of cash flows” in the “Financial information” section of this report for more information. In 2011, we have refined our definition of cash and cash equivalents to restrict it to balances with an original maturity of three months or less. Prior period amounts have been restated.

 è 

Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Financial information” section of this report for more information

2011

As of 31 December 2011, cash and cash equivalents totaled CHF 85.6 billion, an increase of CHF 5.7 billion from 31 December 2010.

Operating activities

For the year ended 31 December 2011, net cash flows used in operating activities were CHF 14.2 billion compared with net cash flow generated from operating activities of CHF 13.4 billion in 2010. Net operating cash flow used (before changes in operating assets and liabilities and income taxes paid, net of refunds) totaled CHF 0.7 billion in 2011, compared with net cash flow generated in 2010 of CHF 8.8 billion.

In 2011, net cash of CHF 47.3 billion was utilized by an overall

increase in operating assets. This cash consumption was mainly due to an increase in secured collateral trading positions (reverse repurchase agreements and cash collateral on securities borrowed) of CHF 67.0 billion and an increase in net due from/to banks of CHF 14.3 billion. These outflows were partially offset by cash inflows from operating assets of CHF 34.0 billion resulting from lower net trading portfolio, net replacement values and financial assets designated at fair value as well as reduced net loans/due to customers and accrued income, prepaid expenses and other assets including prime brokerage activities.

Net cash inflows of CHF 33.8 billion resulted from an overall increase in operating liabilities including net payments for income taxes, mainly reflecting an increase in repurchase agreements and cash collateral on securities lent (secured collateral trading) of CHF 29.1 billion.

Investing activities

Net cash flow generated from investing activities was CHF 19.4 billion compared with CHF 4.1 billion in 2010. The 2011 cash inflow primarily reflected the net divestment of financial investments available-for-sale of CHF 20.3 billion, which included CHF 14.2 billion from the sale of our strategic investment portfolio.

Financing activities

Net cash flow from UBS’s funding activities was CHF 2.7 billion, reflecting net cash inflow from short-term debt issuances of CHF 15.3 billion, offset by cash outflows for the net redemption of long-term debt (repayments less issuances) of CHF 10.0 billion, net acquisition of treasury shares and own equity derivative activity of CHF 1.9 billion and redemptions and dividends paid on preferred securities reflected in non-controlling interests of CHF 0.7 billion. In 2010, financing activities generated net cash inflows of CHF 1.8 billion.

 

 

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2010

As of 31 December 2010, cash and cash equivalents increased to CHF 79.9 billion, CHF 7.0 billion higher than CHF 72.9 billion at the end of 2009.

Operating activities

Operating activities generated a cash inflow of CHF 13.4 billion in 2010 compared with a cash inflow of CHF 86.7 billion in 2009. Operating cash inflows (before changes in operating assets and liabilities and income taxes paid, net of refunds) totaled CHF 8.8 billion in 2010, a decrease of CHF 1.0 billion from 2009. Net profit improved CHF 10.0 billion compared with 2009.

Cash inflow of CHF 3.8 billion was generated by the net decrease in operating assets and cash inflow of CHF 1.3 billion was generated from the net increase in operating liabilities. Net payments to tax authorities related to income taxes were CHF 0.5 billion in 2010, almost unchanged from the previous year.

Investing activities

Net cash flow from investing activities was CHF 4.1 billion compared with cash flow used in investing activities of CHF 78.8 billion in 2009.

The net divestment of financial investments available-for-sale was CHF 4.2 billion.

Financing activities

In 2010, financing activities generated net cash inflows of CHF 1.8 billion. This reflected the cash outflow for redemptions and dividends paid on preferred securities reflected in non-controlling interests of CHF 2.1 billion, the issuance of CHF 78.4 billion of long-term debt and long-term debt repayments that totaled CHF 77.5 billion. Net short-term debt issued generated a net cash inflow of CHF 4.5 billion. In 2009, UBS had a net cash outflow of CHF 54.2 billion from financing activities.

 

 

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Financial and operating performance

Wealth Management & Swiss Bank

 

Wealth Management & Swiss Bank

Business division reporting

 

 

  As of or for the year ended  % change from 
CHF million, except where indicated  31.12.11  31.12.10  31.12.09  31.12.10 
Net interest income   4,296    4,159    4,533    3  
                  
Net fee and commission income   5,537    6,142    6,259    (10
                  
Net trading income   1,211    895    819    35  
                  
Other income   7761   94    (88  726  
                  
Income   11,8201   11,291    11,523    5  
                  
Credit loss (expense) / recovery   (90  (64  (133  41  
                  
Total operating income   11,7301   11,226    11,390    4  
                  
Personnel expenses   4,924    4,778    5,197    3  
                  
General and administrative expenses   2,026    2,101    2,017    (4
                  
Services (to) / from other business divisions   (152  (61  (90  (149
                  
Depreciation of property and equipment   300    309    289    (3
                  
Amortization of intangible assets   37    19    67    95  
                  
Total operating expenses   7,1352   7,147    7,480    0  
                  
Business division performance before tax   4,5961   4,080    3,910    13  
                  
Key performance indicators3     
                  
Pre-tax profit growth (%)   12.6    4.3    (35.0 
                  
Cost / income ratio (%)   60.4    63.3    64.9   
                  
Additional information     
                  
Average attributed equity (CHF billion)4   10.0    9.0    9.0    11  
                  
Return on attributed equity (RoaE) (%)   46.0    45.3    43.4   
                  
BIS risk-weighted assets, Basel II (CHF billion)5   41.8    43.4    48.6    (4
                  
BIS risk-weighted assets, Basel 2.5 (CHF billion)5   41.8    N/A    N/A   
                  
Return on risk-weighted assets, Basel II, gross (%)5   28.1    24.3    21.7   
                  
Goodwill and intangible assets (CHF billion)   1.4    1.5    1.6    (7
                  
Invested assets (CHF billion)   883    904    960    (2
                  
Client assets (CHF billion)   1,723    1,799    1,844    (4
                  
Loans, gross (CHF billion)   210.4    201.9    197.2    4  
                  
Due to customers (CHF billion)   288.1    268.5    282.7    7  
                  
Personnel (full-time equivalents)   27,334    27,752    27,548    (2
                  

  1   Includes revenues from the sale of our strategic investment portfolio of CHF 722 million.  2   Operating expenses include restructuring charges of CHF 114 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information.  3   For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report.  4   Refer to the “Capital management” section of this report for more information about the equity attribution framework.  5    Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital management” section of this report for more information.

 

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Financial and operating performance

 

Wealth Management

Business unit reporting

 

 

  As of or for the year ended  % change from 
CHF million, except where indicated  31.12.11  31.12.10  31.12.09  31.12.10 
Net interest income   1,968    1,737    1,853    13  
                  
Net fee and commission income   4,363    4,964    5,137    (12
                  
Net trading income   878    647    625    36  
                  
Other income   4251   (3  (189 
                  
Income   7,6341   7,345    7,427    4  
                  
Credit loss (expense) / recovery   11    11    45    0  
                  
Total operating income   7,6451   7,356    7,471    4  
                  
Personnel expenses   3,258    3,153    3,360    3  
                  
General and administrative expenses   1,192    1,264    1,182    (6
                  
Services (to) / from other business divisions   318    449    428    (29
                  
Depreciation of property and equipment   165    163    154    1  
                  
Amortization of intangible assets   37    19    67    95  
                  
Total operating expenses   4,9692   5,049    5,191    (2
                  
Business division performance before tax   2,6761   2,308    2,280    16  
                  
Key performance indicators3     
                  
Pre-tax profit growth (%)   15.9    1.2    (37.2 
                  
Cost/ income ratio (%)   65.1    68.7    69.9   
                  
Net new money (CHF billion)4   23.5    (12.1  (87.1 
                  
Gross margin on invested assets (bps)5   101    92    91    10  
                  
Swiss wealth management     
                  
Income   1,585    1,543    1,488    3  
                  
Net new money (CHF billion)4   1.1    0.8    (7.2 
                  
Invested assets (CHF billion)   126    137    140    (8
                  
Gross margin on invested assets (bps)   121    112    110    8  
                  
International wealth management     
                  
Income   6,049    5,802    5,939    4  
                  
Net new money (CHF billion)4   22.4    (12.9  (79.9 
                  
Invested assets (CHF billion)   624    631    685    (1
                  
Gross margin on invested assets (bps)5   97    88    88    10  
                  
Additional information     
                  
Average attributed equity (CHF billion)6   5.0    4.4    4.4    14  
                  
Return on attributed equity (RoaE) (%)   53.5    52.5    51.8   
                  
BIS risk-weighted assets, Basel II (CHF billion)7   16.6    16.9    17.9    (2
                  
BIS risk-weighted assets, Basel 2.5 (CHF billion)7   16.6    N/A    N/A   
                  
Return on risk-weighted assets, Basel II, gross (%)7   45.7    41.4    37.4   
                  
Goodwill and intangible assets (CHF billion)   1.4    1.5    1.6    (7
                  
Invested assets (CHF billion)   750    768    825    (2
                  
Client assets (CHF billion)   875    920    1,005    (5
                  
Loans, gross (CHF billion)   75.1    67.1    61.9    12  
                  
Due to customers (CHF billion)   170.2    156.8    182.6    9  
                  
Personnel (full-time equivalents)   15,904    15,663    15,408    2  
                  
Client advisors (full-time equivalents)   4,202    4,172    4,286    1  
                  

1  Includes revenues from the sale of our strategic investment portfolio: Wealth Management CHF 433 million, of which CHF 79 million relate to Swiss wealth management and CHF 354 million relate to International wealth management.  2  Operating expenses include restructuring charges of CHF 82 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information.  3  For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report.  4  Excludes interest and dividend income.  5  Excludes any effect on profit or loss from a property fund (2011: loss of 22 million, 2010: loss of CHF 45 million, 2009: loss of CHF 155 million).  6  Refer to the “Capital management” section of this report for more information about the equity attribution framework.  7  Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital management” section of this report for more information.

 

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Business performance

 

2011

Results

Pre-tax profit was CHF 2,676 million in 2011 compared with CHF 2,308 million in 2010, and included a gain of CHF 433 million from the sale of our strategic investment portfolio and CHF 82 million of restructuring charges associated with our cost reduction program. When adjusted for these two items, pre-tax profit was CHF 2,325 million, slightly up from the previous year as adverse currency effects and reduced client activity were more than offset by ongoing cost management.

 è 

Refer to the “Certain items affecting our results in 2011” sidebar for more information on our cost reduction program and the sale of our strategic investment portfolio

Operating income

Operating income was CHF 7,645 million compared with CHF 7,356 million. When adjusted for the sale of our strategic investment portfolio, total operating income declined 2% to CHF 7,212 million.

Net interest income increased 13% which included higher treasury-related income, partially due to interest income stemming from the strategic investment portfolio (which was acquired in late 2010) and an adjustment to the allocation of treasury-related income between Wealth Management and Retail & Corporate. Further, net interest income benefited from 10% higher average lending volumes. This was offset by margin pressure as a result of low market interest rates.

Net fee and commission income declined 12%. This was mainly due to lower asset-based fees, reflecting a CHF 44 billion lower average invested asset base, primarily as a result of the strengthening Swiss franc and negative equity market performance. A deterioration in client activity, primarily in the second half of the year, impacted fee income. Trading income increased 36%, due to higher income linked to foreign exchange and precious metal client trading activities as well as changes in the revenue-sharing agreement related to the Investment Products & Services unit and higher treasury-related revenues. Other income was CHF 425 million in 2011 due to the abovementioned sale of our strategic investment portfolio.

Operating expenses

Operating expenses were down 2% from the prior year, or 3% excluding restructuring charges associated with our cost reduction program.

Personnel expenses increased 3% compared with the prior year. Excluding restructuring costs, personnel expenses were up 1%, primarily reflecting a 4% increase in average headcount, which was partially offset by lower bonus accruals. General and administrative expenses were CHF 1,192 million compared with CHF 1,264 million in 2010, which included a CHF 40 million litigation provision and a CHF 40 million charge to reimburse the Swiss government for costs incurred in connection with the US crossborder matter. Charges for services from other business divisions were down significantly to CHF 318 million from CHF 449 million, mainly due to higher charges to other businesses in relation to the Investment Products & Services unit. Depreciation was CHF 165 million compared with CHF 163 million one year earlier. Amortization of intangible assets was CHF 37 million, up from CHF 19 million in 2010, mainly due to the impairment of intangible assets related to a past acquisition in the UK.

Development of invested assets

Net new money

Net new money improved significantly, with net inflows of CHF 23.5 billion compared with net outflows of CHF 12.1 billion in 2010, due to improvements in all regions and client segments. International wealth management net new money was CHF 22.4 billion compared with outflows of CHF 12.9 billion in the prior year. The strongest net inflows were recorded in Asia Pacific and emerging markets as well as globally from ultra high net worth clients. Europe reported net outflows, mainly related to the offshore business with countries neighboring Switzerland partly offset by net inflows from the European onshore business. Swiss wealth management reported net inflows of CHF 1.1 billion in 2011 compared with CHF 0.8 billion net inflows the year before.

Invested assets

Invested assets were CHF 750 billion on 31 December 2011, a decrease of CHF 18 billion from 31 December 2010. Negative equity market performance as well as adverse currency effects, mainly resulting from a 3% decline in the value of the euro against the Swiss franc, more than offset net new money inflows and positive bond market performance.

Gross margin on invested assets

The gross margin on invested assets was 101 basis points. When adjusted for the abovementioned sale of our strategic investment portfolio, the gross margin was 96 basis points, an improvement of 4 basis points from the prior year. The gross margin calculation excludes any effect on profit or loss from a property fund.

 

 

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2010

Results

In 2010, pre-tax profit increased 1% to CHF 2,308 million from CHF 2,280 million in 2009, mainly due to a 3% decrease in operating expenses. Operating income was down 2%, and was negatively affected by low market interest rates and the strengthening of the Swiss franc against major currencies.

Operating income

Total operating income was CHF 7,356 million, down 2% from CHF 7,471 million one year earlier. Interest income was down 6% due to pressure from the low interest rate environment and the decrease in value of the euro and US dollar against the Swiss franc. Fee income decreased 3% primarily due to lower asset-based fees, reflecting a 4% lower average asset base. Lower interest income was partly offset by a shift of treasury-related revenues from Retail & Corporate to Wealth Management in the second quarter of 2010, impacting interest and trading income. Other income improved from negative CHF 189 million in 2009 to negative CHF 3 million in 2010 as CHF 155 million of revaluation adjustments on a property fund were included in 2009. Credit loss recoveries were CHF 11 million in 2010, down from CHF 45 million in 2009.

Operating expenses

Operating expenses declined 3% to CHF 5,049 million from CHF 5,191 million. Personnel expenses decreased 6% reflecting a reduction of average personnel levels by 9% and restructuring expenses of CHF 190 million in 2009. General and administrative expenses, at CHF 1,264 million, were up CHF 82 million from CHF 1,182 million a year earlier, mainly due to a CHF 40 million charge to reimburse the Swiss government for costs incurred in connection with the US cross-border matter, CHF 40 million litigation provision, and higher sponsorship and branding costs related to the global re-launch of the UBS brand. Charges for services from other business divisions, at CHF 449 million in 2010, were slightly up from CHF 428 million in the previous year. Depreciation was CHF 163 million compared with CHF 154 million a

year earlier. Amortization of intangible assets was CHF 19 million, down from CHF 67 million, mainly reflecting the impairment of intangible assets related to invested asset outflows in UBS (Bahamas) Ltd. in 2009.

 è 

Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of our Annual Report 2010 for more information on allocation of additional Corporate Center costs to the business divisions in 2010

Development of invested assets

Net new money

During 2010, all regions and client segments saw an improvement in net new money as net outflows declined to CHF 12.1 billion from CHF 87.1 billion in 2009. International wealth management net new money outflows declined significantly to CHF 12.9 billion from CHF 79.9 billion. While Europe saw ongoing net outflows, partially due to discussions regarding tax treaties, net inflows were recorded in the Asia Pacific region as well as globally from ultra high net worth clients. Swiss wealth management reported net inflows of CHF 0.8 billion in 2010 compared with CHF 7.2 billion net outflows the year before. Net new money for 2010 included inflows of CHF 3.7 billion resulting from transfers of Investment Bank clients to Wealth Management, as part of the Global Family Office initiative.

Invested assets

Invested assets were CHF 768 billion on 31 December 2010, a decrease of CHF 57 billion from 31 December 2009, as positive equity market performance was more than offset by adverse currency effects including a 16% decline in value of the euro and an 11% decline in value of the US dollar against the Swiss franc, and net new money outflows in 2010. In Wealth Management, 31% of invested assets were denominated in euro and 31% in US dollars at the end of 2010.

Gross margin on invested assets

The gross margin on invested assets increased 1 basis point to 92 basis points, reflecting 3% lower income (excluding any effect on profit or loss from a property fund), compared with a 4% decline in average invested assets.

 

 

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Financial and operating performance

Wealth Management & Swiss Bank

Retail & Corporate

Business unit reporting

 

 

  As of or for the year ended  % change from 
CHF million, except where indicated  31.12.11  31.12.10  31.12.09  31.12.10 
Net interest income   2,328    2,422    2,681    (4
                  
Net fee and commission income   1,175    1,178    1,121    0  
                  
Net trading income   333    249    194    34  
                  
Other income   3501   97    100    261  
                  
Income   4,1861   3,946    4,096    6  
                  
Credit loss (expense) / recovery   (101  (76  (178  33  
                  
Total operating income   4,0851   3,870    3,918    6  
                  
Personnel expenses   1,666    1,625    1,836    3  
                  
General and administrative expenses   834    836    835    0  
                  
Services (to) / from other business divisions   (470  (509  (518  8  
                  
Depreciation of property and equipment   136    146    136    (7
                  
Amortization of intangible assets   0    0    0   
                  
Total operating expenses   2,1662   2,098    2,289    3  
                  
Business division performance before tax   1,9191   1,772    1,629    8  
                  
Key performance indicators3     
                  
Pre-tax profit growth (%)   8.3    8.8    (31.6 
                  
Cost / income ratio (%)   51.7    53.2    55.9   
                  
Impaired loans portfolio as a % of total loans portfolio, gross (%)4   0.7    0.9    1.1   
                  
Additional information     
                  
Average attributed equity (CHF billion)5   5.0    4.6    4.6    9  
                  
Return on attributed equity (RoaE) (%)   38.4    38.5    35.4   
                  
BIS risk-weighted assets, Basel II (CHF billion)6   25.2    26.5    30.8    (5
                  
BIS risk-weighted assets, Basel 2.5 (CHF billion)6   25.2    N/A    N/A   
                  
Return on risk-weighted assets, Basel II, gross (%)6   16.5    13.7    12.3   
                  
Goodwill and intangible assets (CHF billion)   0.0    0.0    0.0   
                  
Invested assets (CHF billion)   134    136    135    (1
                  
Client assets (CHF billion)   848    879    840    (4
                  
Loans, gross (CHF billion)   135.3    134.8    135.2    0  
                  
Due to customers (CHF billion)   117.9    111.7    100.1    6  
                  
Personnel (full-time equivalents)   11,430    12,089    12,140    (5
                  

1  Includes revenues from the sale of our strategic investment portfolio of CHF 289 million.  2  Operating expenses include restructuring charges of CHF 32 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information.  3  For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report.  4  Refer to the “Risk management and control” section of this report for more information on impairment ratios.  5  Refer to the “Capital management” section of this report for more information about the equity attribution framework.  6  Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital management” section of this report for more information.

 

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Business performance

 

2011

Results

Pre-tax profit for 2011 was CHF 1,919 million, and included a CHF 289 million gain on the sale of our strategic investment portfolio as well as CHF 32 million in restructuring charges associated with our cost reduction program. When adjusted for these two items, pre-tax profit was CHF 1,662 million, down from CHF 1,772 million in 2010, primarily as a result of lower interest income caused by the ongoing low interest rate environment.

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Refer to the “Certain items affecting our results in 2011” sidebar in this section of this report for more information on our cost reduction program and the sale of our strategic investment portfolio

Operating income

Total operating income increased to CHF 4,085 million from CHF 3,870 million, and included the above mentioned sale of our strategic investment portfolio. When adjusted for this gain, operating income was CHF 3,796 million, down 2% from the previous year.

Net interest income decreased 4% from the prior period, primarily due to a significant decline in the deposit margin as a result of low market interest rates, which more than offset growth of deposit volumes. In addition, net interest income was impacted by an adjustment to the allocation of treasury-related income between Wealth Management and Retail & Corporate. Low market interest rates also impacted income from our replication portfolio, resulting in lower net interest income. These effects more than offset higher interest income derived from the strategic investment portfolio which was acquired in late 2010. Net fee and commission income was CHF 1,175 million, virtually unchanged from CHF 1,178 million in 2010, as lower fees related to investment

funds were mostly offset by higher credit related fees and increased transaction-based revenues. Net trading income increased to CHF 333 million from CHF 249 million, mainly reflected higher treasury-related income and higher foreign exchange income linked to client trading activities. Other income was CHF 350 million compared with CHF 97 million in 2010 due to the above mentioned sale of our strategic investment portfolio. Credit loss expenses were CHF 101 million in 2011 compared with CHF 76 million in 2010. This was mostly due to a CHF 82 million increase in collective loan loss allowances, which were booked mainly in the third quarter of 2011.

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Refer to the “Interest rate and currency management” section of this report for more information on our replication portfolio

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Refer to “Note 1a) 11) Allowance and provision for credit losses” in the “Financial information” section of this report section for more information on collective loan loss allowances

Operating expenses

Operating expenses were CHF 2,166 million compared with CHF 2,098 million, partially impacted by the above mentioned restructuring charges. Excluding these charges, operating expenses increased by 2%. Personnel expenses increased to CHF 1,666 million from CHF 1,625 million. Excluding restructuring charges, personnel expenses were CHF 1,637 million, broadly unchanged from 2010 as salary increases were mostly offset by a 4% reduction in average personnel during 2011 and lower variable compensation accruals compared with 2010. General and administrative expenses were CHF 834 million compared with CHF 836 million in 2010. Net charges to other business divisions were CHF 470 million, down 8% from CHF 509 million the previous year, mainly due to a refinement of internal cost allocations reflecting a review of service level agreements and allocations between Retail & Corporate, Wealth Management and other parts of the organization. Depreciation was CHF 136 million compared with CHF 146 million.

 

 

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Wealth Management & Swiss Bank

 

2010

Results

In 2010, pre-tax profit increased 9% to CHF 1,772 million compared with CHF 1,629 million in 2009, mainly due to an 8% decrease in operating expenses. Operating income was slightly lower compared with the previous year as reduced interest income was only partly offset by lower credit loss expenses.

Operating income

Total operating income in 2010 was CHF 3,870 million, down 1% from CHF 3,918 million a year earlier. Interest income was down 10%, mainly as low market interest rates continued to exert downward pressure on interest margins. In addition, interest income decreased as approximately 30% of treasury related revenues were allocated from Retail & Corporate to Wealth Management starting in the second quarter of 2010. These effects were only partially compensated by higher volumes in certain products and improved margins on new mortgage loans. Fee and commission income

increased 5% to CHF 1,178 million from CHF 1,121 million, partly reflecting pricing initiatives initiated in 2010. Trading income increased from CHF 194 million to CHF 249 million, largely due to higher treasury related income. Net credit loss expenses were CHF 76 million in 2010, a decline of CHF 102 million.

Operating expenses

Operating expenses declined 8% to CHF 2,098 million from CHF 2,289 million due to cost-cutting measures initiated in 2009. Personnel expenses decreased 11%, reflecting a 4% reduction in average personnel levels and related restructuring expenses in 2009. General and administrative expenses were stable at CHF 836 million. Net charges to other business divisions were down 2% to CHF 509 million from CHF 518 million the previous year, largely due to business realignments between Wealth Management and Retail & Corporate. Depreciation was CHF 146 million compared with CHF 136 million.

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Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of our Annual Report 2010 for more information on allocation of additional Corporate Center costs to the business divisions in 2010

 

 

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Wealth Management Americas

Business division reporting

 

 

  As of or for the year ended  % change from 
CHF million, except where indicated  31.12.11  31.12.10  31.12.09  31.12.10 
Net interest income   729    695    800    5  
                  
Net fee and commission income   4,018    4,244    3,948    (5
                  
Net trading income   450    570    763    (21
                  
Other income   103    56    36    84  
                  
Income   5,300    5,565    5,546    (5
                  
Credit loss (expense) / recovery   (6  (1  3    (500
                  
Total operating income   5,295    5,564    5,550    (5
                  
Personnel expenses   3,840    4,225    4,231    (9
                  

Financial advisor compensation1

   1,982    2,068    1,828    (4
                  

Compensation commitments and advances related to recruited financial advisors2

   536    599    599    (11
                  

Salaries and other personnel costs

   1,322    1,558    1,804    (15
                  
General and administrative expenses   783    1,223    1,017    (36
                  
Services (to) / from other business divisions   (9  (6  4    (50
                  
Depreciation of property and equipment   99    198    170    (50
                  
Impairment of goodwill   0    0    34   
                  
Amortization of intangible assets   48    55    62    (13
                  
Total operating expenses   4,7603   5,694    5,518    (16
                  
Business division performance before tax   534    (130  32   
                  
Key performance indicators4     
                  
Pre-tax profit growth (%)5   N/A    N/A    N/A   
                  
Cost / income ratio (%)   89.8    102.3    99.5   
                  
Net new money (CHF billion)6   12.1    (6.1  (11.6 
                  
Net new money including interest and dividend income (CHF billion)7   30.4    13.0    8.7