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AMNA Ubs

Filed: 12 Mar 15, 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, 2014

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 Group AG

UBS AG

(Exact Name of Registrants as Specified in Their Respective Charters)

Switzerland

(Jurisdiction of Incorporation or Organization)

 

UBS Group AG UBS AG

Bahnhofstrasse 45, CH-8001 Zurich,

Switzerland

 

Bahnhofstrasse 45, CH-8001 Zurich,

Switzerland and

(Address of Principal Executive Office) 

Aeschenvorstadt 1, CH-4051 Basel,

Switzerland

 (Address of Principal Executive Offices)

David Kelly

677 Washington Boulevard

Stamford, CT 06901

Telephone: (203) 719-3000

(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 issuer’s classes of capital or common stock as of

31 December 2014:

 

UBS Group AG UBS AG

Ordinary shares, par value CHF 0.10 per share:

3,629,256,587 ordinary shares

 

Ordinary shares, par value CHF 0.10 per share:

3,842,445,658 ordinary shares

(including 87,871,737 treasury shares) (including 2,115,255 treasury shares)

Indicate by check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.

 

UBS Group AG UBS AG
Yes  ¨            No  þ Yes  þ            No  ¨

If this report is an annual or transition report, indicate by check mark if the registrants are 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 Registrants (1) have 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 Registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days.

Yes  þ             No  ¨

Indicate by check mark whether the registrants have submitted electronically and posted on their 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 registrants were 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):

UBS Group AG

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

UBS AG

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

Indicate by check mark which basis of accounting the registrants have 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 registrants have elected to follow.

 

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Item 17  ¨             Item 18  ¨

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

Yes  ¨            No  þ

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

UBS Group AG

 

Title of each class

  

Name of each exchange on

which registered

Ordinary Shares (par value of CHF 0.10 each)  New York Stock Exchange

UBS AG

 

Title of each class

  

Name of each exchange on

which registered

$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*
E-TRACS Linked to the UBS Bloomberg CMCI Food Total Return due April 5, 2038  NYSE Arca
E-TRACS Linked to the UBS Bloomberg CMCI Agriculture Total Return due April 5, 2038  NYSE Arca
E-TRACS Linked to the UBS Bloomberg CMCI Energy Total Return due April 5, 2038  NYSE Arca
E-TRACS Linked to the UBS Bloomberg CMCI Total Return due April 5, 2038  NYSE Arca
E-TRACS Linked to the UBS Bloomberg CMCI Gold Total Return due April 5, 2038  NYSE Arca
E-TRACS Linked to the UBS Bloomberg CMCI Industrial Metals Total Return due April 5, 2038  NYSE Arca
E-TRACS Linked to the UBS Bloomberg CMCI Livestock Total Return due April 5, 2038  NYSE Arca
E-TRACS Linked to the UBS Bloomberg CMCI Silver Total Return due April 5, 2038  NYSE Arca
E-TRACS Long Platinum Linked to the UBS Bloomberg CMCI Platinum Total Return due May 14, 2018  NYSE Arca

 

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E-TRACS Linked to the S&P 500 Gold Hedged Index due January 30, 2040  NYSE Arca
E-TRACS Linked to the Bloomberg Commodity Index Total ReturnSM due October 31, 2039  NYSE Arca
E-TRACS Linked to the Alerian MLP Infrastructure Index due April 2, 2040  NYSE Arca
1xMonthly Short E-TRACS Linked to the Alerian MLP Infrastructure Total Return Index due October 1, 2040  NYSE Arca
2xMonthly Leveraged Long E-TRACS Linked to the Alerian MLP Infrastructure Index due July 9, 2040  NYSE Arca
E-TRACS Linked to the Alerian Natural Gas MLP Index due July 9, 2040  NYSE Arca
E-TRACS Linked to the Wells Fargo® MLP Index due October 29, 2040  NYSE Arca
E-TRACS Daily Long-Short VIX ETN due November 30, 2040  NYSE Arca
E-TRACS Linked to the Wells Fargo® Business Development Company Index due April 26, 2041  NYSE Arca
2×Leveraged Long E-TRACS Linked to the Wells Fargo® Business Development Company Index due May 24, 2041  NYSE Arca
ETRACS Monthly Pay 2xLeveraged Dow Jones International Real Estate ETN due March 19, 2042  NYSE Arca
ETRACS Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN due May 22, 2042  NYSE Arca
ETRACS Monthly Pay 2xLeveraged S&P Dividend ETN due May 22, 2042  NYSE Arca
ETRACS Alerian MLP Index ETN due July 18, 2042  NYSE Arca
ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN due October 16, 2042  NYSE Arca
ETRACS Diversified High Income ETN due September 18, 2043  NYSE Arca
ETRACS Monthly Pay 2xLeveraged Diversified High Income ETN due November 12, 2043  NYSE Arca
ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN due December 10, 2043  NYSE Arca
ETRACS Monthly Reset 2xLeveraged S&P 500® Total Return ETN due March 25, 2044  NYSE Arca
ETRACS Wells Fargo MLP Ex-Energy ETN due June 10, 2044  NYSE Arca
ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN due June 24, 2044  NYSE Arca
ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN due September 30, 2044  NYSE Arca
ETRACS S&P 500 VEQTOR Switch ETN due December 2, 2044  NYSE Arca

 

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ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN due February 6, 2045  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: (i) the degree to which UBS is successful in executing its announced strategic plans, including its cost reduction and efficiency initiatives and its planned further reduction in its Basel IIIrisk-weighted assets (RWA) and leverage ratio denominator (LRD); (ii) 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; (iii) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings, or arising from requirements for bail-in debt or loss-absorbing capital; (iv) changes in or the implementation of financial legislation and regulation in Switzerland, the US, the UK and other financial centers that may impose more stringent capital (including leverage ratio), liquidity and funding requirements, incremental tax requirements, additional levies, limitations on permitted activities, constraints on remuneration or other measures; (v) uncertainty as to when and to what degree the Swiss Financial Market Supervisory Authority (FINMA) will approve reductions to the incremental RWA resulting from the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA, or will approve a limited reduction of capital requirements due to measures to reduce resolvability risk; (vi) the degree to which UBS is successful in executing the announced creation of a new Swiss banking subsidiary and a US intermediate holding company, the squeeze-out to complete the establishment of a holding company for the UBS Group, changes in the operating model of UBS Limited and other changes which UBS may make in its legal entity structure and operating model, including the possible consequences of such changes, and the potential need to make other changes to the legal structure or booking model of UBS Group in response to legal and regulatory requirements, including capital requirements, resolvability requirements and proposals in Switzerland and other countries for mandatory structural reform of banks; (vii) 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; (viii) the liability to which UBS may be exposed, or possible constraints or sanctions that regulatory authorities might impose on UBS, due to litigation, contractual claims and regulatory investigations; (ix) the effects on UBS’s cross-border banking business of tax or regulatory developments and of possible changes in UBS’s policies and practices relating to this business; (x) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, support and control its businesses, which may be affected by competitive factors including differences in compensation practices; (xi) changes in accounting or tax standards or policies, and determinations or interpretations affecting the recognition of gain or loss, the valuation of goodwill, the recognition of deferred tax assets and other matters; (xii) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (xiii) whether UBS will be successful in keeping pace with competitors in updating its technology, particularly in trading businesses; (xiv) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures; and (xv) the effect that these or other factors or unanticipated events may have on our reputation and the additional consequences that this may have on our business and performance. The sequence in which the factors above are presented is not indicative of their likelihood of occurrence or the potential magnitude of their consequences. 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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Cross-reference table

Set forth below are the respective items of SEC Form 20-F, and the locations in this document where the corresponding information can be found.

 

  

Annual Report refers to the Annual Report 2014 of UBS Group AG and UBS AG annexed hereto, which forms an integral part hereof.

 

  

Supplementrefers to certain supplemental information contained in this forepart of the Form 20-F, starting on page 11 following the cross-reference table.

 

  

Financial Statementsrefers to the consolidated financial statements of either UBS Group or UBS AG, or both, depending upon the context, contained in the Annual Report

In the cross-reference table below, page numbers refer to either the Annual Report or the Supplement, as noted.

Please see page 19 of the Annual Report for definitions of terms used in this Form 20-F relating to UBS.

 

Form 20-F item

  

Response or location in this filing

Item 1. Identity of Directors, Senior Management and Advisors.  Not applicable
Item 2. Offer Statistics and Expected Timetable.  Not applicable
Item 3. Key Information  
A – Selected Financial Data  

Annual Report,Selected Financial Data (766-770 and 788-792) andStatement of changes in equity (398-401 and 558-561)

 

The exchange rate for the Swiss franc as reported by the Federal Reserve System (H.10 Weekly) on 6 March 2015 was CHF 0.9846 per USD 1. See page 766 of the Annual Report for additional exchange rate information.

B – Capitalization and Indebtedness.  Not applicable
C – Reasons for the Offer and Use of Proceeds.  Not applicable
D – Risk Factors.  Annual Report, Risk Factors (63-78)
Item 4. Information on the Company.
A – History and Development of the Company  

1-3: Annual Report,Corporate information (6)

 

4: Annual Report,The making of UBS (14-16) andOur strategy (39-42)

 

5-7: Not applicable

B – Business Overview.  

1, 2, 5 and 7: Annual Report, pages 8-9 and 46-62, Note 2a to each set of Financial Statements (Segment reporting)(426-429 and 587-590), and Note 2b to each set of Financial Statements (Segment reporting by geographic location)(430 and 591)

 

3:Seasonal characteristics(44)

 

4: Not applicable

 

6: None

 

8:Regulation and supervision andRegulatory and legal developments (30-38)

 

Supplement (11)

C – Organizational Structure.  Annual Report,UBS and its businesses(8-9),Note 30 to each set of Financial Statements (Interests in subsidiaries and other entities)(527-536 and 691-699)
D – Property, Plant and Equipment.  Annual Report,Property, plant and equipment(771 and 793),Note 16 to each set of Financial Statements (Property and equipment) (452 and 613),Note 33(a) to each set of Financial Statements,Operating lease commitments(539 and 703),Information

 

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  required by industry guide 3 (772-785 and 794-807) and Selected financial data(766-770 and788-792).
Item 4A. Unresolved Staff Comments.  None.
Item 5. Operating and Financial Review and Prospects.
A – Operating Results.  Annual Report,UBS Group AG key figures(5), Measurement of performance(43-45), Group performance(88-112),operating results by business division (113-153),Currency management(244), Our global presence subjects us to risk from currency fluctuations(73), Current market climate and industry drivers(26-29) and Regulatory and legal developments(33-38)
B – Liquidity and Capital Resources.  

Annual Report,Liquidity and funding management(235-243), Capital management(245-280), Note 25a to each set of Financial Statements (Restricted financial assets)(492 and 654),Currency management(244),Note 20 to each set of Financial Statements (Financial liabilities designated at fair value)(456-457 and 618-619) and Note 21 to each set of Financial Statements (Debt issued held at amortized cost) (457-458 and 619-620)

 

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.

C—Research and Development, Patents and Licenses, etc.  Not applicable
D—Trend Information.  Annual Report,Current market climate and industry drivers(26-29)
E—Off-Balance Sheet Arrangements.  Annual Report,Off-balance sheet(109-111),Note 25 to each set of Financial Statements (Restricted and transferred financial assets) (492-495 and 656-659) and Note 33(a) to each set of Financial Statements (Operating lease commitments)(539 and 703)
F—Tabular Disclosure of Contractual Obligations.  Annual Report,Contractual obligations(110-111)
Item 6. Directors, Senior Management and Employees.
A – Directors and Senior Management.  

1, 2 and 3: Annual Report, 292-298 and 303-308

 

4. 5: None

B – Compensation.  

1: Annual Report, 338-381, Note 29 to each set of Financial Statements (Equity participation and other compensation plans) (517-526 and 681-690) and Note 34 to each set of Financial Statements (Related parties) (540-542 and 704-706)

 

2: Annual Report, Note 28 to each set of Financial Statements (Pension and other post-employment benefit plans)(502-516 and 666-680)

C – Board practices.  

1: Annual Report, 292-312

 

2: Annual Report, 345-381, and Note 34 to each set of Financial Statements (Related parties) (540-542 and 704-706)

 

3: Annual Report,Audit committee (299-300) andHuman Resources and Compensation Committee(300)

D—Employees.  Annual Report, Our employees(331-337)
E—Share Ownership.  Annual Report, 377-380, Note 29 to each set of Financial Statements (Equity participation and other compensation plan) (517-526 and 681-690) and “Equity holdings of key management personnel” in Note 34 to each set of Financial Statements (Related parties)(540-542 and 704-706)
Item 7. Major Shareholders and Related Party Transactions.
A—Major Shareholders.  

Annual Report,Group structure and shareholders (284-285)Capital structure (286-289) andVoting rights, restrictions and representation (290)

 

The number of shares of UBS Group AG held by the respective shareholders listed on page 285 of the Annual Report as holding 3% or more of total share capital is as follows:

 

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Shareholder

  

Number of shares
held

 

Chase Nominees Ltd., London

   336,292,171  

GIC Private Limited, Singapore

   245,517,417  

DTC (Cede & Co.), New York

   214,152,040  

Nortrust Nominees Ltd., London

   130,915,291  

 

  The number of shares of UBS AG held by UBS Group AG as of 31 December 2014 was 3,716,910,207 shares.
B—Related Party Transactions.  

Annual Report,Loans(356), Loans granted to GEB members on 31 December 2014/2013(381), Loans granted to BoD members on 31 December 2014/2013 (381),and Note 34 to each set of Financial Statements (Related parties)(540-542 and 704-706)

 

The loans disclosed in such sections (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
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 22 to each set of Financial Statements (Provisions and contingent liabilities) (458-468 and 621-631).

 

For developments during the year, please see also Note 14 (Provisions and contingent liabilities), in the Financial Information section in our respective quarterly reports for the First, Second and Third Quarters 2014, filed on Forms 6-K dated May 6, 2014, July 29, 2014 and October 28, 2014, respectively; as well as Note 12 (Provisions and contingent liabilities), in the Financial Information section in our quarterly report for the Fourth Quarter 2014, filed on Form 6-K dated February 10, 2015. The Notes in each such Quarterly Report speak only as of their respective dates.

 

8: Annual Report, Distributions to shareholders(289)

B—Significant Changes.  Annual Report, Note 1 to each set of Financial Statements (Summary of significant accounting policies)(405-425 and 565-586), Note 2a to each set of Financial Statements (Segment reporting) (426-429 and 587-590) and Note 37 to each set of Financial Statements (Events after the reporting period)(545 and 709)
Item 9. The Offer and Listing.  
A – Offer and Listing Details.  

1,2,3,5,6,7: Not applicable

 

4: Annual Report,Stock exchange prices(280)

B—Plan of Distribution.  Not applicable
C—Markets.  Annual Report,Listing of UBS shares (279)
D—Selling Shareholders.  Not applicable
E—Dilution.  Not applicable
F—Expenses of the Issue.  Not applicable
Item 10. Additional Information.  
A—Share Capital.  Not applicable
B—Memorandum and Articles of Association.  

Annual Report,Elections and terms of office (299),Capital structure(286-289), Organizational principles and structure(299-301) andShareholders’ participation rights (290-291)

 

Supplement, 12

C—Material Contracts.  The Terms & Conditions of the series of loss-absorbing tier 2 notes issued on 22 May 2013, 13 February 2014 and 15 May 2014 are exhibits 4.1, 4.2 and 4.3 to this

 

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Form 20-F, respectively. The Terms and Conditions of three series of additional Tier 1 notes issued 19 February 2015 are exhibits 4.4, 4.5 and 4.6 to this Form 20-F, and the Terms and Conditions of additional Tier 1 instruments to be issued pursuant to the Deferred Capital Contingent Plan 2014/15 is exhibit 4.7 to this Form 20-F. These notes are described underTier 1 capital andTier 2 capital on pages 252-253 of the Annual Report, underDeferred Contingent Capital Plan on page 370 of the Annual Report and in Note 37 to the UBS Group AG Financial Statements (Events after the reporting period) (545).

 

The Non-Prosecution Agreement that UBS entered into with the US Department of Justice on December 18, 2012, is exhibit 4.8 to the Form 20-F, and the agreement extending the term thereof is exhibit 4.9 to this Form 20-F. These agreements are described in paragraph 7 of Note 22b to each set of Financial Statements (Litigation, regulatory and similar matters) (465-467 and 627-629).

D—Exchange Controls.  There are no restrictions under the Articles of Association of UBS Group AG or Swiss law, as 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.  Supplement, 17-20
F—Dividends and Paying Agents.  Not applicable
G—Statement by Experts.  Not applicable
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 atwww.ubs.com/investors.
I—Subsidiary Information.  Not applicable
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
(a) Quantitative Information About Market Risk.  Annual Report,Market risk(206-222)
(b) Qualitative Information About Market Risk.  Annual Report,Market risk(206-222)
(c) Interim Periods.  Not applicable.
Item 12. Description of Securities Other than Equity Securities.
A – Debt Securities  Not applicable.
B – Warrants and Rights  Not applicable.
C – Other Securities  Not applicable.
D – American Depositary Shares  Not applicable.
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.  None
Item 15. Controls and Procedures.

(a)    Disclosure Controls and Procedures

  Annual Report,US disclosure requirements(314),and Exhibit 12 to this Form 20-F.

 

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(b) Management’s Annual Report on Internal Control over Financial Reporting  Annual Report,Management’s reports on internal control over financial reporting (389 and 549)
(c) Attestation Report of the Registered Public Accounting Form  Annual Report,Reports of independent registered public accounting firm on internal control over financial reporting (390-391 and 550-551)
(d) Changes in Internal Control over Financial Reporting  None
Item 15T. Controls and Procedures.  Not applicable
Item 16A. Audit Committee Financial Expert.  Annual Report,Audit Committee(299-300) andCorporate governance(282-283)
Item 16B. Code of Ethics.  There was no substantive amendment to the Code of Business Conduct and Ethics (the “Code”) in 2014. No waiver from any provision of the Code was granted to any employee in 2014. The Code is published on our website underhttp://www.ubs.com/1/e/investors/corporategovernance/business_conduct.html.
Item 16C. Principal Accountant Fees and Services.  

Annual Report,Auditors(311)

 

None of the non-audit services so disclosed 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.  Annual Report,Treasury share activities(278)
Item 16F. Changes in Registrant’s Certifying Accountant.  Not applicable
Item 16G. Corporate Governance.  Annual Report,Corporate governance (282-283)
Item 17. Financial Statements.  Not applicable
Item 18. Financial Statements.  Annual Report, Financial Statements and the Notes to the Financial Statements (384-547 and 549-723)
Item 19. Exhibits  Supplement, 20-21

Supplemental information

 

Item 4.Information on the Company

B – Business Overview

Disclosure Pursuant To Section 219 of the Iran Threat Reduction And Syrian Human Rights Act

Section 219 of the U.S. Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) added new Section 13(r) to the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) requiring each SEC reporting issuer to disclose in its annual and, if applicable, quarterly reports whether it or any of its affiliates have knowingly engaged in certain activities, transactions or dealings relating to Iran or with the Government of Iran or certain designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the period covered by the report. The required disclosure includes disclosure of activities not prohibited by U.S. or other law

 

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even if conducted outside the U.S. by non-U.S. affiliates in compliance with local law. Pursuant to Section 13(r) of the Exchange Act, we note the following for the period covered by this annual report:

UBS has a Group Sanctions Policy that prohibits transactions involving sanctioned countries, including Iran, and sanctioned individuals and entities. However, UBS maintains one account involving the Iranian government under the auspices of the United Nations in Geneva after agreeing with the Swiss government that it would do so only under certain conditions. These conditions include that payments involving the account must: (1) be made within Switzerland; (2) be consistent with paying rent, salaries, telephone and other expenses necessary for its operations in Geneva; and (3) not involve any Specially Designated Nationals blocked or otherwise restricted under U.S. or Swiss law. In 2014, the gross revenues for this UN related account were approximately USD 9,697 which were generated by fees charged to the account; the net profit was approximately USD 6,704 after deductions were taken for UBS internal costs for maintaining the account. UBS AG intends to continue maintaining this account pursuant to the conditions it has established and consistent with its Group Sanctions Policy.

As previously reported, there were also certain outstanding trade finance arrangements that had been issued on behalf of Swiss client exporters in favor of their Iranian counterparties, which involve four Iranian designated banks (WMD). At the time these trade finance arrangements were initiated in or about 2000, none of the Iran banks involved were WMD-designated. In February 2012 UBS ceased accepting payments on these outstanding export trade finance arrangements and worked with the Swiss government who insured these contracts (Swiss Export Risk Insurance “SERV”). On December 21, 2012, UBS and the SERV entered into certain Transfer and Assignment Agreements under which SERV purchased all of UBS’s remaining receivables under or in connection with Iran-related export finance transactions. Hence, the SERV is the sole beneficiary of said receivables. Contractually UBS remains creditor and thus accordingly it is not yet in the position to write off these receivables. There was no financial activity involving Iran in connection with these trade finance arrangements in 2014.

In connection with these trade finance arrangements, UBS has maintained one existing account relationship with an Iranian bank that is currently WMD designated. This account was established prior to the U.S. designation and maintained due to the existing trade finance arrangements. In 2007, following the designation of the bank pursuant to sanctions issued by the U.S., UN and Switzerland, the account was blocked under Swiss law and has remained blocked since then. Client assets as of December 2014 were USD 3,189. We intend to terminate these legacy arrangements and relationships in accordance with the nature of these instruments and applicable law. As there have been no transactions involving this account in 2014 other than general account fees, there are no gross profits/net revenues to report for 2014.

In 1993, a non-Iranian individual opened a private banking relationship at a predecessor institution of UBS AG in Switzerland. In 2001, this individual was designated under Executive Order 13224. In 2001, the individual’s accounts at UBS AG were blocked by order of the Swiss authorities. The Swiss authorities lifted the blocking of the individual’s UBS accounts in October 2012, and the US authorities lifted the blocking in 2014. UBS AG froze the client’s remaining account in 2012 and has taken steps to exit this client relationship in a matter consistent with applicable law. In 2014, the gross revenues for this client relationship were approximately USD -2,775 and the net loss was approximately USD -3,904.

 

Item 10.Additional Information.

B—Memorandum and Articles of Association.

Please see the Articles of Association of UBS Group AG and of UBS AG (Exhibits 1.1 and 1.2, respectively, to this Form 20-F) and the Organization Regulations of UBS Group AG and UBS AG (Exhibit 1.3 to this Form 20-F).

 

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Set forth below is a summary of the material provisions of the Articles of Association of UBS Group AG, 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 Articles of Association of UBS AG are substantially similar to the Articles of UBS Group AG, so the following description applies equally to UBS AG.

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 of shares;

 

  

An increase in authorized or contingent capital or the creation of reserve capital in accordance with Swiss banking law;

 

  

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.

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 to the shareholders that a dividend be paid out. 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 statute 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, Computershare, 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.

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

 

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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

UBS Group AG is registered as a corporation in the commercial register of Canton Zurich under the registration number CHE-395.345.924 and has its registered office in Zurich, Switzerland. The business purpose of UBS Group AG, as set forth in its Articles, is the acquisition, holding, administration and sale of direct and indirect participations in enterprises of any kind, in particular in the areas of banking, financial, advisory, trading and service activities in Switzerland and abroad. UBS Group may establish enterprises of any kind in Switzerland and abroad, hold equity interests in these companies, and conduct their management. UBS Group is authorized to acquire, mortgage and sell real estate and building rights in Switzerland and abroad. UBS Group may provide loans, guarantees and other types of financing and securities for group companies and borrow and invest capital on the money and capital markets.

UBS AG is registered as a corporation in the commercial registers of Canton Zurich and Canton Basle-City under the registration number CHE-101.329.561 and has registered offices in Zurich and Basel, Switzerland. The business purpose of UBS AG, as set forth in its Articles of Association, 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.

Mandatory Tender Offer

Under the Swiss Stock Exchange Act, shareholders and shareholders acting in concert with third parties who acquire more than 33 1/3% of the voting rights of a Swiss listed 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.

 

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Other

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

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 UBS 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 UBS ordinary shares should consult its tax advisor with regard to the U.S. federal income tax treatment of an investment in the ordinary shares.

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

 

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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.

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.

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 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

 

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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 that constitute qualified dividend income will be taxable to the holder at a maximum rate of 20%, 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 20% 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.

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

 

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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 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.

 

Item 19.Exhibits.

 

Exhibit
number

 

Description

1.1 Articles of Association of UBS Group AG dated 10 February 2015.
1.2 Articles of Association of UBS AG (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed May 19, 2014).
1.3 Organization Regulations of UBS Group AG and UBS AG dated 26 November 2014.
2(b) Instruments defining the rights of the holders of long-term debt issued by UBS Group 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 Terms and Conditions of Tier 2 Subordinated Notes of UBS AG due 2023, issued 22 May 2013. (Incorporated by reference to Exhibit 4.2 to UBS AG’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013)
4.2 Terms and Conditions of Tier 2 Subordinated Notes of UBS AG due 12 February 2026, issued 13 February 2014. (Incorporated by reference to Exhibit 4.3 to UBS AG’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013)
4.3 Terms and Conditions of Tier 2 Subordinated Notes of UBS AG due 2024, issued 15 May 2014.
4.4 Terms and Conditions of USD 1.25 billion 7% Tier 1 Subordinated Notes issued by UBS Group AG on 19 February 2015.
4.5 Terms and Conditions of USD 1.25 billion 7.125% Tier 1 Subordinated Notes issued by UBS Group AG on 19 February 2015.

 

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4.6

  Terms and Conditions of EUR 1 billion 5.75% Tier 1 Subordinated Notes issued by UBS Group AG on 19 February 2015.

4.7

  Terms and Conditions of additional Tier 1 capital instruments to be issued pursuant to the Deferred Contingent Capital Plan 2014/15.

4.8

  Non-Prosecution Agreement dated 18 December 2012 between UBS AG and the U.S. Department of Justice, Criminal Division, Fraud Section. (Incorporated by reference to Exhibit 4.3 to UBS AG’s Annual Report on Form 20-F for the fiscal year ended December 31, 2012)

4.9

  Agreement dated October 20, 2014, extending the term of the Non-Prosecution Agreement between UBS AG and the U.S. Department of Justice, Criminal Division, Fraud Section.

7

  Statement regarding ratio of earnings to fixed charges.

8

  Significant Subsidiaries of UBS Group AG.
  Please see Note 30 to each set of Financial Statements (Interests in subsidiaries and other entities), on pages 527-536 and 691-699 of the Annual Report.

10

  Notice pursuant to Regulation BTR.*

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).

15.1

  Consent of Ernst & Young Ltd. with respect to UBS Group AG

15.2

  Consent of Ernst & Young Ltd. with respect to UBS AG

 

*From the close of business on November 7, 2014 through November 28, 2014 (the “Blackout Period”) there was a blackout under the three 401(k) plans maintained by UBS AG. This was imposed for administrative purposes, to facilitate the tender of the UBS AG shares held by the plans in the exchange offer for shares of UBS Group AG. Starting October 14, 2014 and running throughout the Blackout Period, Board members and executive officers were bound by their public undertakings to tender their holdings of UBS AG shares in the exchange offer. As a result of that pre-existing undertaking, no separate blackout notice to those individuals was given. From the time the undertakings were made and through the end of the Blackout Period there were no transactions in UBS AG shares by any of the Board members or executive officers.

 

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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 Group AG

    /s/    Sergio Ermotti

Name: Sergio Ermotti
Title: Group Chief Executive Officer

    /s/    Tom Naratil

Name: Tom Naratil
Title: Group Chief Financial Officer
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 13, 2015

 

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INDEX TO EXHIBITS

 

Exhibit
number

 

Description

1.1 Articles of Association of UBS Group AG dated 10 February 2015.
1.2 Articles of Association of UBS AG (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed May 19, 2014).
1.3 Organization Regulations of UBS Group AG and UBS AG dated 26 November 2014.
2(b) Instruments defining the rights of the holders of long-term debt issued by UBS Group 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 Terms and Conditions of Tier 2 Subordinated Notes of UBS AG due 2023, issued 22 May 2013. (Incorporated by reference to Exhibit 4.2 to UBS AG’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013)
4.2 Terms and Conditions of Tier 2 Subordinated Notes of UBS AG due 12 February 2026, issued 13 February 2014. (Incorporated by reference to Exhibit 4.3 to UBS AG’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013)
4.3 Terms and Conditions of Tier 2 Subordinated Notes of UBS AG due 2024, issued 15 May 2014.
4.4 Terms and Conditions of USD 1.25 billion 7% Tier 1 Subordinated Notes issued by UBS Group AG on 19 February 2015.
4.5 Terms and Conditions of USD 1.25 billion 7.125% Tier 1 Subordinated Notes issued by UBS Group AG on 19 February 2015.
4.6 Terms and Conditions of EUR 1 billion 5.75% Tier 1 Subordinated Notes issued by UBS Group AG on 19 February 2015.
4.7 Terms and Conditions of additional Tier 1 capital instruments to be issued pursuant to the Deferred Contingent Capital Plan 2014/15.
4.8 Non-Prosecution Agreement dated 18 December 2012 between UBS AG and the U.S. Department of Justice, Criminal Division, Fraud Section. (Incorporated by reference to Exhibit 4.3 to UBS AG’s Annual Report onForm 20-F for the fiscal year ended December 31, 2012)
4.9 Agreement dated October 20, 2014, extending the term of the Non-Prosecution Agreement between UBS AG and the U.S. Department of Justice, Criminal Division, Fraud Section.
7 Statement regarding ratio of earnings to fixed charges.

 

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8  Significant Subsidiaries of UBS Group AG.
  Please see Note 30 to each set of Financial Statements (Interests in subsidiaries and other entities), on pages 527-536 and 691-699 of the Annual Report.
10  Notice pursuant to Regulation BTR.*
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).
15.1  Consent of Ernst & Young Ltd. with respect to UBS Group AG
15.2  Consent of Ernst & Young Ltd. with respect to UBS AG

 

*From the close of business on November 7, 2014 through November 28, 2014 (the “Blackout Period”) there was a blackout under the three 401(k) plans maintained by UBS AG. This was imposed for administrative purposes, to facilitate the tender of the UBS AG shares held by the plans in the exchange offer for shares of UBS Group AG. Starting October 14, 2014 and running throughout the Blackout Period, Board members and executive officers were bound by their public undertakings to tender their holdings of UBS AG shares in the exchange offer. As a result of that pre-existing undertaking, no separate blackout notice to those individuals was given. From the time the undertakings were made and through the end of the Blackout Period there were no transactions in UBS AG shares by any of the Board members or executive officers.

 

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LOGO

 Annual Report 2014  

 

LOGO

 

UBS Group AG /UBS AG

Form 20-F2014


Table of Contents

 

 

 

 


Table of Contents

  Contents

 

    
    
    
    
    
    
4.

Risk, treasury and

capital management

158Implementation of EDTF recommendations
166Key developments
168Risk management and control
235Treasury management
245Capital management
5.

Corporate governance, responsibility

and compensation

282Corporate governance
315Corporate responsibility
331Our employees
338Compensation
6.

Financial

information

389UBS Group AG consolidated financial statements
549UBS AG consolidated financial statements
725UBS Group AG standalone financial statements
745UBS AG standalone financial statements
765UBS Group AG consolidated supplemental disclosures required under SEC regulations
787UBS AG consolidated supplemental disclosures required under SEC regulations
809UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations
Appendix
861Abbreviations frequently used in our financial reports
862Information sources
863Cautionary statement
 


Table of Contents

Annual Report 2014

Letter to shareholders

 

Dear shareholders,

 

In 2014, we delivered net profit attributable to shareholders of CHF 3.5 billion, a 9% increase on the prior year. At the same time, we continued to reduce risk-weighted assets (RWA) and improve our leverage ratio, and we maintained the best fully applied Basel III common equity tier 1 (CET1) capital ratio in our peer group of large global banks, ending the year at 13.4%.

We owe thanks to our employees for their continued dedication and hard work in providing superior advice and services to our clients daily. This enabled us to deliver on our commitment of attractive returns to our shareholders. As previously announced, we are proposing an ordinary dividend of CHF 0.50 per share for the financial year 2014, an increase of 100% on the prior year and a payout ratio of 55%1 of reported net profit, which is in line with our commitment to attractive shareholder returns. In addition, reflecting progress in the establishment of the new Group holding company, including the successful completion of the share-for-share exchange offer, we fully accrued a supplementary capital return of CHF 0.25 per share in the fourth quarter of 2014. Subject to shareholder approval at the forthcoming Annual General Meeting (AGM), UBS Group AG intends to pay this one-time supplementary capital return upon successful completion of the squeeze-out procedure.

In 2014, we achieved the key strategic targets we set out in 2011 and 2012. Since the end of 2011, we have reduced RWA by over CHF 160 billion, particularly in the Corporate Center – Non-core and Legacy Portfolio, and added almost 700 basis points to our fully applied Basel III CET1 capital ratio, surpassing our long-stated target of 13%. Furthermore, our Investment Bank today is less complex and delivers more consistent underlying returns.

Now that we have completed our strategic transformation, we will concentrate all our efforts on executing our strategy to unlock our firm’s full potential. Our strategy centers on our leading wealth management businesses and our premier universal bank in Switzerland, enhanced by our strong asset manager and investment bank.

As we expected, markets and the macroeconomic environment during 2014 were influenced by heightened geopolitical tensions in eastern Europe and the Middle East. Economic conditions in

leading developed economies differed greatly. This was reflected in increasingly divergent central bank policies, as respective central bank actions fueled ongoing appreciation of the US dollar while weakening the euro and yen. At the same time, a sharp fall in commodity prices in the latter half of the year contributed to muted inflation expectations and to an increase in volatility, adversely influencing client confidence and activity levels. Client risk appetite remained subdued. All our business divisions demonstrated resilience and their commitment to clients in this challenging environment, while delivering solid underlying performances.

InWealth Management, adjusted2 profit before tax was up 4% on the prior year to CHF 2.5 billion, as the business attracted net new money, drove high-quality revenues and managed costs carefully. It was another record-breaking year forWealth Management Americas, with operating income, loan balances, financial advisor productivity, invested assets and adjusted2 profit before tax reaching all-time highs. Despite elevated charges for litigation, regulatory and similar matters, the business delivered USD 1 billion in adjusted2 profit before tax for the second year in a row. InRetail & Corporate,2014 was the best year for new Swiss retail client acquisition since 2008. The business also achieved all of its targets and grew adjusted2 profit before tax 4%.Global Asset Management delivered over CHF 0.5 billion in adjusted2 profit before tax and a substantial turnaround in net new money, attracting almost CHF 23 billion excluding money market flows, supported by greater engagement and collaboration with our wealth management businesses. Client focus and resource efficiency remained important drivers of ourInvestment Bank’s success. In particular, our strategic efforts to grow Corporate Client Solutions bore fruit, with revenues up 8% year on year. We achieved net cost reductions inCorporate Center,while reducing operational risks, strengthening controls and making progress with our resolution and recovery plans through the establishment of our Group holding company.

We are also pleased by the significant external recognition our businesses’ achievements received during 2014 and into 2015. UBS was confirmed as the largest wealth manager in the world in Scorpio Partnership’s influential Global Private Banking Benchmark 20143. In Euromoney’s Private Banking Survey 2015, we

 

 

1  Ordinary dividend per share as a percentage of diluted earnings per share.  2  Please refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results.  3  The Scorpio Partnership Private Banking Benchmark 2014 – banks with assets under management of over USD 1 trillion.

 

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LOGOLOGO
Axel A. WeberSergio P. Ermotti

Chairman of the Board of Directors

Group Chief Executive Officer

 

received five global awards and were acknowledged as the firm offering the best private banking services in Switzerland, western Europe and Asia. Reflecting our standing as a leading brokerage house and research provider, we took top position in several categories in the annual pan-European Thomson Reuters Extel Survey, including Leading Pan-European Equity House for the 11th consecutive year. Other accolades included being named Equity Derivatives House of the Year by International Financing Review and Most Innovative Bank for M&A by The Banker.

Looking ahead to our 2015 AGM on May 7, in addition to votes on existing members of the Board standing forre-election, shareholders will have the opportunity to approve Jes Staley’s nomination to the Board. We believe his professional expertise would strengthen the UBS Board of Directors further. This year’s AGM will be the first time our shareholders have the opportunity to make binding decisions regarding remuneration for the Board of

Directors and Group Executive Board, in addition to the existing advisory vote on our Compensation Report. In relation to compensation, we have a stringent performance award framework which has remained broadly consistent for the past three years. Our robust compensation model fosters accountability by rewarding actions that help our firm achieve its medium and long-term goals and deliver attractive and sustainable returns for our shareholders. Overall, the firm’s performance award pool for 2014 was CHF 3.1 billion, 5% lower than in 2013, weighing our strong performance against the effects of charges for provisions for litigation, regulatory and similar matters.

For many years, we have been helping our clients invest sustainably and responsibly. In 2014, we launched UBS and Society, an initiative combining all our activities and capabilities in sustainable investing and philanthropy, as well as our firm’s interaction with the wider community. We also published details of our environmental

 

 

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Annual Report 2014

Letter to shareholders

 

and social risk policy framework in a single, comprehensive document. This guides us in identifying and dealing with environmental and social risks arising from client and supplier relationships. We aim to be a responsible corporate citizen and are therefore honored by the external recognition our efforts have received. We were named in the top three in our industry for 2014 in RobecoSAM’s Corporate Sustainability Assessment, and we were rated best in class in the 2014 Dow Jones Sustainability Indices, the FTSE4Good Index Series and the CDP Climate Performance Leadership Index. We also received the American Foreign Policy Association 2014

Corporate Social Responsibility award in acknowledgment of our firm’s support of projects focusing on education and entrepreneurship in communities around the world.

Finally, we would like to take this opportunity to thank both our shareholders and our clients for the continued trust they place in us. We are confident that by striving for excellence and putting our clients at the center of everything we do, we can grow our business profitably and continue delivering attractive returns to shareholders.

13 March 2015

Yours sincerely,

UBS

 

LOGO

 

LOGO

 

Axel A. Weber

Sergio P. Ermotti

Chairman of the
Board of Directors

Group Chief Executive Officer

 

 

 

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UBS Group AG key figures1

 

 

As of or for the year ended 
CHF million, except where indicated31.12.14 31.12.13 31.12.12 
Group results
                
Operating income 28,027   27,732   25,423  
                
Operating expenses 25,567   24,461   27,216  
                
Operating profit/(loss) before tax 2,461   3,272   (1,794
                
Net profit/(loss) attributable to UBS Group AG shareholders 3,466   3,172   (2,480
                
Diluted earnings per share (CHF)2 0.91   0.83   (0.66
                
Key performance indicators3
                
Profitability
                
Return on equity (RoE) (%) 7.0   6.7   (5.1
                
Return on assets, gross (%) 2.8   2.5   1.9  
                
Cost/income ratio (%) 91.0   88.0   106.6  
                
Growth
                
Net profit growth (%) 9.3  
                
Net new money growth for combined wealth management businesses (%) 2.5   3.4   3.2  
                
Resources
                
Common equity tier 1 capital ratio (fully applied, %)4 13.4   12.8   9.8  
                
Swiss SRB leverage ratio (phase-in, %) 5.4   4.7   3.6  
                
Additional information
                
Profitability
                
Return on tangible equity (%)5 8.2   8.0   1.6  
            ��   
Return on risk-weighted assets, gross (%)6 12.4   11.4   12.0  
                
Resources
                
Total assets 1,062,478   1,013,355   1,259,797  
                
Equity attributable to UBS Group AG shareholders 50,608   48,002   45,949  
                
Common equity tier 1 capital (fully applied)4 28,941   28,908   25,182  
                
Common equity tier 1 capital (phase-in)4 42,863   42,179   40,032  
                
Risk-weighted assets (fully applied)4 216,462   225,153   258,113  
                
Risk-weighted assets (phase-in)4 220,877   228,557   261,800  
                
Common equity tier 1 capital ratio (phase-in, %)4 19.4   18.5   15.3  
                
Total capital ratio (fully applied, %)4 18.9   15.4   11.4  
                
Total capital ratio (phase-in, %)4 25.5   22.2   18.9  
                
Swiss SRB leverage ratio (fully applied, %) 4.1   3.4   2.4  
                
Swiss SRB leverage ratio denominator (fully applied)7 997,822   1,015,306   1,206,214  
                
Swiss SRB leverage ratio denominator (phase-in)7 1,004,869   1,022,924   1,216,561  
                
Other
                
Invested assets (CHF billion)8 2,734   2,390   2,230  
                
Personnel (full-time equivalents) 60,155   60,205   62,628  
                
Market capitalization9 63,526   65,007   54,729  
                
Total book value per share (CHF)9 13.94   12.74   12.26  
                
Tangible book value per share (CHF)9 12.14   11.07   10.54  
                

1  Represents information for UBS Group AG (consolidated). Comparative information is the same as previously reported for UBS AG (consolidated) as UBS Group AG (consolidated) is considered to be the continuation of UBS AG (consolidated). Refer to the “UBS Group – Changes to our legal structure” section and to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information.  2  Refer to “Note 9 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report for more information.  3  Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators.  4  Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRB). Refer to the “Capital management” section of this report for more information.  5  Net profit/(loss) attributable to UBS Group AG shareholders before amortization and impairment of goodwill and intangible assets (annualized as applicable)/average equity attributable to UBS Group AG shareholders less average goodwill and intangible assets. Goodwill and intangible assets used in the calculation of tangible equity attributable to UBS Group AG shareholders as of 31 December 2014 have been adjusted to reflect the non-controlling interests in UBS AG as of that date.  6  Based on phase-in Basel III risk-weighted assets.  7  The leverage ratio denominator is also referred to as “total adjusted exposure” and is calculated in accordance with Swiss SRB leverage ratio requirements. Data represent the average of the total adjusted exposure at the end of the three months preceding the end of the reporting period. Refer to the “Capital management” section of this report for more information.  8  Group invested assets includes invested assets for Retail & Corporate.  9  Refer to the “UBS shares” section of this report for more information.

 

 

The 2014 results and the balance sheet in this report differ from those presented in our fourth quarter 2014 report issued on 10 February 2015. The net impact of adjustments made subsequent to the publication of the unaudited fourth quarter 2014 financial report on net profit attributable to UBS Group AG shareholders was a loss of CHF 105 million, which decreased basic and diluted earnings per share by CHF 0.03.

 

è  Refer to “Note 37 Events after the reporting period” in the “Financial information” section of this report for more information

     
     

 

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Annual Report 2014

 

LOGO

Corporate information

 

UBS Group AG is incorporated and domiciled in Switzerland and operates under the Swiss Code of Obligations as an Aktiengesellschaft, a stock corporation. Its registered office is at Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 11 11, and its corporate identification number is CHE-395.345.924. UBS Group AG was incorporated on 10 June 2014 and was established in 2014 as the holding company of the UBS Group. UBS Group AG shares are listed on the SIX Swiss Exchange and on the New York

Stock Exchange (ISIN: CH0244767585; CUSIP: H42097107).

 

UBS AG is incorporated and domiciled in Switzerland and operates under the Swiss Code of Obligations as an Aktiengesellschaft, a stock corporation. The addresses and telephone numbers of the two registered offices of UBS AG are: Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 11 11; and Aeschenvorstadt 1,

CH-4051 Basel, Switzerland, phone +41-61-288 50 50. The corporate identification number is CHE-101.329.561. UBS AG is a bank and the main operating company of the UBS Group. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS AG. UBS AG shares are currently listed on the SIX Swiss Exchange (ISIN: CH0024899483).

 

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Contacts

Switchboards

For all general enquiries.

 

Zurich +41-44-234 1111

London +44-20-7568 0000

New York +1-212-821 3000

Hong Kong +852-2971 8888

www.ubs.com/contact

 

Investor Relations

UBS’s Investor Relations team supports institutional, professional and retail investors from our offices in Zurich and New York.

 

UBS Group AG, Investor Relations

P.O. Box, CH-8098 Zurich, Switzerland

 

investorrelations@ubs.com

www.ubs.com/investors

 

Hotline Zurich +41-44-234 4100

Hotline New York +1-212-882 5734

Fax (Zurich) +41-44-234 3415

Media Relations

UBS’s Media Relations team supports global media and journalists from offices in Zurich, London, New York and Hong Kong.

 

www.ubs.com/media

 

Zurich +41-44-234 8500

mediarelations@ubs.com

 

London +44-20-7567 4714

ubs-media-relations@ubs.com

 

New York +1-212-882 5857

mediarelations-ny@ubs.com

 

Hong Kong +852-2971 8200

sh-mediarelations-ap@ubs.com

 

Office of the Company Secretary

The Company Secretary receives enquiries on

compensation and related issues addressed to

members of the Board of Directors.

 

UBS Group AG, Office of the Company Secretary

P.O. Box, CH-8098 Zurich, Switzerland

 

sh-company-secretary@ubs.com

 

Hotline +41-44-235 6652

Fax +41-44-235 8220

Shareholder Services

UBS’s Shareholder Services team, a unit of the Company Secretary office, is responsible for the registration of the global registered shares.

 

UBS Group AG, Shareholder Services

P.O. Box, CH-8098 Zurich, Switzerland

 

sh-shareholder-services@ubs.com

 

Hotline +41-44-235 6652

Fax +41-44-235 8220

 

US Transfer Agent

For global registered share-related enquiries in the US.

 

Computershare Trust Company NA

P.O. Box 30170

College Station

TX 77842-3170, USA

 

Shareholder online enquiries:

https://www-us.computershare.com/

investor/Contact

 

Shareholder website:

www.computershare.com/investor

 

Calls from the US +1-866-305-9566

Calls from outside

the US +1-781-575-2623

TDD for hearing impaired

+1-800-231-5469

 

TDD Foreign Shareholders

+1-201-680-6610

 

Corporate calendar UBS Group AGImprint

Publication of the first quarter 2015 report:

 

Tuesday, 5 May 2015

 

Publisher: UBS Group AG, Zurich, Switzerland | www.ubs.com

Language: English

 

© UBS 2015. The key symbol and UBS are among the registered and
unregistered trademarks of UBS. All rights reserved.

Annual General Meeting1:

 

Thursday, 7 May 2015

 

Publication of the second quarter 2015 report:    

 

Tuesday, 28 July 2015

 

Publication of the third quarter 2015 report:

 

Tuesday, 3 November 2015

 

1  The Annual General Meeting of UBS AG shareholders will also take place on Thursday, 7 May 2015.

 

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Annual Report 2014

 

UBS and its businesses

We are committed to providing private, institutional and corporate clients worldwide, as well as retail clients in Switzerland with superior financial advice and solutions while generating attractive and sustainable returns for shareholders. Our strategy centers on our Wealth Management and Wealth Management Americas businesses and our leading universal bank in Switzerland, complemented by our Global Asset Management business and our Investment Bank. These businesses share three key characteristics: they benefit from a strong competitive position in their targeted markets, are capital-efficient, and offer a superior structural growth and profitability outlook. Our strategy builds on the strengths of all of our businesses and focuses our efforts on areas in which we excel, while seeking to capitalize on the compelling growth prospects in the businesses and regions in which we operate. Capital strength is the foundation of our success. The operational structure of the Group is comprised of the Corporate Center and five business divisions: Wealth Management, Wealth Management Americas, Retail & Corporate, Global Asset Management and the Investment Bank.

 

Wealth Management

Wealth Management provides comprehensive financial services to wealthy private clients around the world – except those served by Wealth Management Americas. UBS is a global firm with global capabilities, and Wealth Management clients benefit from the full spectrum of UBS’s global resources, ranging from investment management solutions to wealth planning and corporate finance advice, as well as a wide range of specific offerings. Its guided architecture model gives clients access to a wide range of products from third-party providers that complement our own products.

Wealth Management Americas

Wealth Management Americas is one of the leading wealth managers in the Americas in terms of financial advisor productivity and invested assets. It provides advice-based solutions and banking services 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 and Canadian business as well as international business booked in the US.

Retail & Corporate

Retail & Corporate provides comprehensive financial products and services to its retail, corporate and institutional clients in Switzerland, maintaining a leading position in these client segments and embedding its offering in a multi-channel approach. The retail and corporate business constitutes a central building block of UBS’s universal bank delivery model in Switzerland, supporting 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, it leverages the cross-selling potential of products and services provided by its asset-gathering and investment banking businesses. In addition, we manage a substantial part of UBS’s Swiss infrastructure and Swiss banking products platform, which are both leveraged across the Group.

 

 

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Global Asset Management

Global Asset Management is a large-scale asset manager with well diversified businesses across regions and client segments. It serves third-party institutional and wholesale clients, as well as clients of UBS’s wealth management businesses with a broad range of investment capabilities and styles across all major traditional and alternative asset classes. Complementing the investment offering, the fund services unit provides fund administration services for UBS and third-party funds.

Investment Bank

The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovative solutions, execution and comprehensive access to the world’s capital markets. We offer advisory services and access to international capital markets, and provide comprehensive cross-asset research, along with access to equities, foreign exchange, precious metals and selected rates and credit markets, through our business units, Corporate Client Solutions and Investor Client Services. The Investment Bank is an active participant in capital markets flow activities, including sales, trading and market-making across a range of securities.

Corporate Center

Corporate Center is comprised of Core Functions and Non-core and Legacy Portfolio. Core Functions include Group-wide control functions such as finance (including treasury services such as liquidity, funding, balance sheet and capital management), risk control (including compliance) and legal. In addition, Core Functions provide all logistics and support services, including operations, information technology, human resources, regulatory relations and strategic initiatives, communications and branding, corporate services, physical security, information security as well as outsourcing, nearshoring and offshoring. Non-core and Legacy Portfolio is comprised of the non-core businesses and legacy positions that were part of the Investment Bank prior to its restructuring.

As of 1 January 2015, Corporate Center – Core Functions was reorganized into two new components, Corporate Center – Services and Corporate Center – Group Asset and Liability Management (Group ALM).

 

 

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Annual Report 2014

 

Our Board of Directors

 

 

LOGO

The Board of Directors (BoD) of UBS Group AG and UBS AG, each under the leadership of the Chairman, decides on the strategy of the Group upon recommendation of the Group Chief Executive Officer (Group CEO), exercises ultimate supervision over senior management and appoints all Group Executive Board (GEB) members. The BoD also approves all financial statements for issue and proposes the Chairman, who in turn is elected by the shareholders at the general shareholders meeting. In addition, shareholders elect each member of the BoD individually, as well as the members of the Human Resources and Compensation Committee. The BoD in turn appoints one or more Vice Chairmen, a Senior Independent Director, the members of the BoD committees other than the HRCC, and their respective Chairpersons, and the Company Secretary. In 2014, our BoD met the standards of the Organization Regulations for the percentage of directors that are considered independent.

 

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LOGO

1  Axel A. Weber Chairman of the Board of Directors/Chairperson of the Corporate Culture and Responsibility Committee/Chairperson of the Governance and Nominating Committee  2  William G. Parrett Chairperson of the Audit Committee/member of the Corporate Culture and Responsibility Committee  3  Reto Francioni Member of the Corporate Culture and Responsibility Committee/member of the Human Resources and Compensation Committee  4  Isabelle Romy Member of the Audit Committee/member of the Governance and Nominating Committee  5  Ann F. Godbehere Chairperson of the Human Resources and Compensation Committee/member of the Audit Committee  6  Beatrice Weder di Mauro Member of the Audit Committee/member of the Risk Committee  7  Joseph Yam Member of the Corporate Culture and Responsibility Committee/member of the Risk Committee  8  Axel P. Lehmann Member of the Risk Committee  9  Helmut PankeMember of the Human Resources and Compensation Committee/member of the Risk Committee  10  David Sidwell Senior Independent Director/Chairperson of the Risk Committee/member of the Governance and Nominating Committee  11  Michel Demaré Independent Vice Chairman/member of the Audit Committee/member of the Governance and Nominating Committee/member of the Human Resources and Compensation Committee

 

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Annual Report 2014

 

Our Group Executive Board

 

 

LOGO

 

UBS Group AG and UBS AG operate under a strict dual board structure, and therefore the BoD delegates the management of the business to the Group Executive Board (GEB). Under the leadership of the Group Chief Executive Officer, the Group Executive Board has executive management responsibility for the UBS Group and its businesses. It assumes overall responsibility for the development of the Group and business division strategies and the implementation of approved strategies.

LOGO         

 

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LOGO

 

 è To read the full biographies of our Board members, visitwww.ubs.com/gebor refer to “Group Executive Board” in the “Corporate governance” section of this report
 

 

1  Sergio P. Ermotti Group Chief Executive Officer  2  Lukas Gähwiler President Retail & Corporate and President Switzerland  3  Markus U. Diethelm Group General Counsel  4  Philip J. Lofts Group Chief Risk Officer  5  Tom Naratil Group Chief Financial Officer and Group Chief Operating Officer  6  Andrea Orcel President Investment Bank  7  Robert J. McCann President Wealth Management Americas and President Americas  8  Chi-Won Yoon President Asia Pacific  9  Jürg Zeltner President Wealth Management  10  Ulrich Körner President Global Asset Management and President Europe, Middle East and Africa

 

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Annual Report 2014

 

The making of UBS

 

UBS has played a pivotal role in the development and growth of Switzerland’s banking tradition since the firm’s origins in the mid-19th century.

The origins of the banking industry in Switzerland can be traced back to 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 UBS’s Investment Bank was built, commenced operations in 1946.

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

 

 

LOGO

 

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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 largest 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. UBS has established a strong footprint in the Asia Pacific region and emerging markets based on a presence in many of these countries going back decades.

In 2007, the effects of the global financial crisis started to be felt across the financial industry. This crisis had its origins in the securitized financial product business linked to the US residential real estate market. Between the third quarter of 2007 and the

 

 

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Annual Report 2014

 

fourth quarter of 2009, we incurred significant losses on these assets. We responded with decisive action designed to reduce risk exposures and stabilize our businesses, including raising capital on multiple occasions. More recently, we continued to improve the firm’s capital strength to meet new and enhanced industry-wide regulatory requirements. Our position as one of the world’s best-capitalized banks, together with our stable funding and sound liquidity positions, provides us with a solid foundation for our success.

In 2012, the year of our 150th anniversary, we accelerated our strategic transformation of the firm to create a business model that is better adapted to the new regulatory and market circumstances

and that we believe will result in more consistent and high-quality returns. In 2013, we further advanced the execution of our strategic transformation and by the end of 2014, we completed our strategic transformation process. We have further reduced risk-weighted assets, improved our leverage ratio and maintained the best fully applied Basel III CET1 capital ratio in our peer group of large global banks. We will continue to execute our strategy in order to achieve the firm’s long-term success and to deliver sustainable returns for our shareholders.

 è Refer towww.ubs.com/history for more information on UBS’s history of more than 150 years
 

 

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UBS Group –

Changes to our

legal structure

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Table of Contents

UBS Group – Changes to our legal structure

The new legal structure of UBS Group

 

The new legal structure of UBS Group

 

During 2014, we established UBS Group AG as the holding company of UBS Group. This change is intended, along with other measures already announced, to substantially improve the resolvability of UBS Group in response to evolving too big to fail (TBTF) regulatory requirements.

UBS Group AG was incorporated on 10 June 2014 as a wholly owned subsidiary of UBS AG. On 29 September 2014, UBS Group AG launched an offer to acquire all the issued ordinary shares of

UBS AG in exchange for registered shares of UBS Group AG on a one-for-one basis. Following the exchange offer and subsequent private exchanges on a one-for-one basis with various shareholders and banks in Switzerland and elsewhere outside the United States, UBS Group AG acquired 96.68% of UBS AG shares by 31 December 2014.

UBS Group AG has filed a request with the Commercial Court of the Canton of Zurich for a procedure under article 33 of the

 

 

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UBS Group – Changes to our legal structure

 

Swiss Stock Exchanges and Securities Trading Act (the “SESTA procedure”). If the SESTA procedure is successful, the shares of the remaining minority shareholders of UBS AG will be automatically exchanged for UBS Group AG shares, and UBS Group AG will become the 100% owner of UBS AG. The timing and success of the SESTA procedure are dependent on the court. We currently expect that the SESTA procedure will be completed in the second half of 2015.

UBS Group AG may continue to acquire additional UBS AG shares using any method permitted under applicable law, including purchases of UBS AG shares or share equivalents or exchanges of UBS AG shares with UBS Group AG shares on a one for one basis.

After the squeeze-out process is completed, we expect to pay a supplementary capital return of CHF 0.25 per share to shareholders of UBS Group AG.

UBS Group AG shares have been listed on the SIX Swiss Exchange (SIX) (Ticker symbol: UBSG) since 28 November 2014 and also began regular-way trading on the New York Stock Exchange (NYSE) (Ticker symbol: UBS) on the same date. UBS AG shares were delisted from the NYSE on 17 January 2015. UBS AG shares will also be delisted from SIX upon completion of the squeeze-out process.

The changes to our legal structure do not affect our strategy, our business and the way we serve our clients. They also have no material effect on the organization, processes, roles and responsibilities with respect to how UBS is managed and governed. UBS Group AG’s Board of Directors and Group Executive Board have the same members as UBS AG’s Board of Directors and Group Executive Board, respectively.

 

 

Terms used in this report, unless the context requires otherwise

 

 “UBS,” “UBS Group,” “UBS Group AG (consolidated),”        UBS Group AG and its consolidated subsidiaries
 “Group,” “the Group,” “we,” “us” and “our” 
 “UBS AG (consolidated)”UBS AG and its consolidated subsidiaries
 “UBS Group AG” and “UBS Group AG (standalone)”UBS Group AG on a standalone basis
 “UBS AG” and “UBS AG (standalone)”UBS AG on a standalone basis

 

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The new legal structure of UBS Group

 

Transaction overview

 

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Key steps in the Group reorganization

 

 

On 10 June 2014, the new entity UBS Group AG was incorporated as a stock corporation (Aktiengesellschaft) under Swiss law and as a wholly owned subsidiary of UBS AG with a registered domicile in Zurich.

 

On 29 September 2014, UBS Group AG launched an offer to acquire all issued ordinary shares of UBS AG in exchange for registered shares of UBS Group AG on a one-for-one basis (the exchange offer). During the initial offer period from 14 October to 20 November 2014, 90.40% of all issued UBS AG shares were tendered.

 

On 26 November 2014, the capital increase in connection with the first settlement of the exchange offer was approved by UBS AG, the sole shareholder of UBS Group AG at the time.

 

On 28 November 2014, the first settlement of the exchange offer was carried out and UBS Group AG became the holding company of UBS Group and the parent company of UBS AG. UBS Group AG shares started trading on the SIX and also began regular-way trading on the NYSE on the same date.

 

A subsequent offer period was provided from 26 November to 10 December 2014.

 

Following the exchange offer and subsequent private exchanges on a one-for-one basis with various shareholders and banks in Switzerland and elsewhere outside the United States, UBS Group AG held 96.68% of UBS AG shares by 31 December 2014.

 

Further private exchanges have reduced the amount of outstanding UBS AG shares by 17.1 million and as a result UBS Group held 97.29% of UBS AG shares by 6 March 2015.

 è Refer to the “UBS shares” section of this report for more information on our shares

Transfer of deferred compensation plans

As part of the Group’s reorganization, in the fourth quarter of 2014, UBS Group AG assumed obligations of UBS AG as grantor in connection with outstanding awards under employee share, option, notional fund and deferred cash plans. At the same time, UBS Group AG acquired the beneficial ownership of the financial assets and 90.5 million treasury shares of UBS Group AG held to hedge the economic exposure arising from these plans.

Obligations relating to these deferred compensation plans’ awards, which are required to be, and have been, granted by a separate UBS subsidiary or local employing UBS AG branches, have not been assumed by UBS Group AG and will continue on this basis. Furthermore, obligations related to other compensation vehicles, such as defined benefit pension plans and other local awards, have not been assumed by UBS Group AG and are retained by the relevant employing and/or sponsoring subsidiaries or UBS AG branches.

 

 

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Comparison UBS Group AG (consolidated) vs. UBS AG (consolidated)

 

The consolidated assets and liabilities of the Group were not affected by the transaction. No cash offer was made for UBS AG shares and therefore no cash proceeds have resulted from the issue of the UBS Group AG shares in connection with the exchange offer.

The table on the next page shows the differences between UBS Group AG (consolidated) and UBS AG (consolidated) financial, capital and liquidity and funding information as of or for the period ended 31 December 2014. These differences are recorded in Corporate Center – Core Functions and relate to the following:

 

Assets, liabilities, operating income, operating expenses and operating profit before tax relating to UBS Group AG are reflected in the consolidated financial statements of UBS Group AG but not of UBS AG. UBS AG’s assets, liabilities, operating income, and operating expenses related to transactions with UBS Group AG are not subject to elimination in the UBS AG (consolidated) financial statements, but are eliminated in the UBS Group AG (consolidated) financial statements.

 

The accounting policies applied under International Financial Reporting Standards (IFRS) in both financial statements are identical. However, there are differences in equity and net profit, as a small portion of UBS AG shares is still held by shareholders with non-controlling interests (NCI) and due to different presentation requirements related to preferred notes issued by UBS AG.

 

Total equity of UBS Group AG consolidated includes NCI in UBS AG. Most of the difference of CHF 1,500 million in equity attributable to shareholders between the consolidated equity of

  

UBS Group AG and UBS AG relates to these NCI. Net profit attributable to non-exchanged UBS AG shares since 26 November 2014 is presented as net profit attributable to NCI in the consolidated income statement of UBS Group AG.

 

Preferred notes issued by UBS AG of CHF 2,013 million are presented in the consolidated UBS Group AG balance sheet as equity attributable to NCI, while in the consolidated UBS AG balance sheet these preferred notes are required to be presented as equity attributable to preferred noteholders. For 2014, the consolidated financial statements of UBS Group AG and UBS AG reflect the same net profit attributable to preferred noteholders as no additional profit has been attributed to preferred noteholders following the date upon which UBS Group AG became the holding company of the Group.

 

Most of the differences of CHF 1,864 million and CHF 451 million in common equity tier 1 and total capital, respectively, were due to compensation-related regulatory capital accruals, liabilities and capital instruments which are reflected on the level of UBS Group AG, following the transfer of the grantor function for the Group’s employee deferred compensation plans during the fourth quarter of 2014. Respective charges to consolidated UBS AG common equity tier 1 and total capital will be made over the service period of the corresponding compensation awards.

 

 

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Regulatory and legal developments

 

Comparison UBS Group AG (consolidated) versus UBS AG (consolidated)

 

 

As of or for the year ended 31.12.14 
CHF million, except where indicatedUBS Group AG
(consolidated)
 UBS AG
(consolidated)
 Difference
(absolute)
 Difference
(%)
 
Income statement
                    
Operating income 28,027   28,026   1   0  
                    
Operating expenses 25,567   25,557   10   0  
                    
Operating profit/(loss) before tax 2,461   2,469   (8 0  
                    
Net profit/(loss) 3,640   3,649   (9 0  
                    

of which: net profit/(loss) attributable to shareholders

 3,466   3,502   (36 (1
                    

of which: net profit/(loss) attributable to preferred noteholders

 142   142   0   0  
                    

of which: net profit/(loss) attributable to non-controlling interests

 32   5   27   540  
                    
Balance sheet
                    
Total assets 1,062,478   1,062,327   151   0  
                    
Total liabilities 1,008,110   1,008,162   (52 0  
                    
Total equity 54,368   54,165   203   0  
                    

of which: equity attributable to shareholders

 50,608   52,108   (1,500 (3
                    

of which: equity attributable to preferred noteholders

 0   2,013   (2,013 (100
                    

of which: equity attributable to non-controlling interests

 3,760   45   3,715  
                    
Capital information (fully applied)
                    
Common equity tier 1 capital 28,941   30,805   (1,864 (6
                    
Total capital 40,806   41,257   (451 (1
                    
Risk-weighted assets 216,462   217,158   (696 0  
                    
Swiss SRB leverage ratio denominator 997,822   999,124   (1,301 0  
                    
Common equity tier 1 capital ratio (%) 13.4   14.2   (0.8
                    
Total capital ratio (%) 18.9   19.0   (0.1
                    
Swiss SRB leverage ratio (%) 4.1   4.1   0.0  
                    
Liquidity and funding
                    
Liquidity coverage ratio (pro-forma, %) 123   123   0  
                    
Net stable funding ratio (pro-forma, %) 106   106   0  
                    
Share information
                    
Shares issued (number of shares) 3,717,128,324   3,844,560,913   (127,432,589 (3
                    
Shares outstanding (number of shares) 3,629,256,587   3,842,445,658   (213,189,071 (6
                    
Diluted earnings per share (CHF) 0.91   0.91   0.00   0  
                    
Tangible book value per share (CHF) 12.14   11.80   0.34   3  
                    

 

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External reporting concept

 

General requirements

Our external reporting requirements and the scope of our external reports are defined by general accounting law and principles, relevant stock and debt listing rules, specific legal and regulatory requirements, as well as by our own financial reporting policies. As a global firm with shares listed both on the SIX and the NYSE, we have to prepare and publish consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) at least on a half-yearly basis. Additionally, statutory financial statements need to be prepared annually as the basis for the tax return, the appropriation of retained earnings and a potential distribution of dividends or capital contribution reserves, subject to approval at the Annual General Meeting (AGM). Management’s discussion and analysis (MD&A) complements our annual financial statements by providing information on (i) our strategy and the operating environment in which we operate, (ii) the financial and operating performance

of our business divisions and Corporate Center, (iii) our risk, treasury and capital management and (iv) our corporate governance, corporate responsibility framework and compensation frameworks.

Our Annual Reports and Form 20-F

To give shareholders as well as other stakeholders access to information on UBS Group AG and on UBS AG, both in a combined manner and separately, we publish three distinct documents onwww.ubs.com/investors:

 

A combined Annual Report providing all relevant and required disclosures for both UBS Group AG and UBS AG, which is also the basis for our combined Form 20-F filing;

 

An Annual Report for UBS Group AG only and

 

An Annual Report for UBS AG only, consisting of financial information related to UBS AG only, complemented by MD&A on a UBS Group level.

 

 

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Regulatory and legal developments

 

Future structural changes

 

UBS continues to implement additional measures to substantially improve the Group’s resolvability in response to too big to fail (TBTF) requirements in Switzerland and other countries in which the Group operates. In Switzerland, we are progressing toward the transfer of our Retail & Corporate business division and the Swiss-booked business of our Wealth Management business division into UBS Switzerland AG by mid-2015. Pursuant to the Swiss Merger Act, we will transfer all relevant assets, liabilities and contracts of clients of the Retail & Corporate business and the Swiss-booked clients of the Wealth Management business. Under the Swiss Merger Act, UBS AG will retain joint liability for obligations existing on the date of the transfer that are transferred to UBS Switzerland AG. UBS Switzerland AG will contractually assume joint liability for contractual obligations of UBS AG existing on the date of transfer. Neither UBS AG nor UBS Switzerland AG will have joint liability for new obligations incurred by the other after the effective date of the asset transfer.

To comply with new rules for foreign banks in the US under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), by 1 July 2016 we will designate an intermediate holding company that will own all of our US operations except US branches of UBS AG. In the UK, we have begun to implement a revised business and operating model for UBS Limited, which will enable UBS Limited to bear and retain a larger proportion of the risk and reward in its business activities.

Our strategy, our business and the way we serve our clients are not affected by these changes. These plans do not require UBS to raise additional common equity capital and are not expected to materially affect the firm’s capital-generating capability.

We are confident that the establishment of UBS Group AG as the holding company of the Group along with our other announced measures will substantially enhance the resolvability of the Group. We expect that the Group will qualify for a rebate on the progressive buffer capital requirements, which should result in lower overall capital requirements. The Swiss Financial Market Supervisory Authority (FINMA) has confirmed that our proposed measures are in principle suitable to warrant a rebate, although the amount and timing will depend on the actual execution of these measures and can therefore only be specified once all measures are implemented.

We may consider further changes to the Group’s legal structure in response to regulatory requirements, including to further improve the resolvability of the Group, to respond to capital requirements, to seek any reduction in capital requirements to which the Group may be entitled, and to meet any other regulatory requirements regarding our legal structure. Such changes may include the transfer of operating subsidiaries of UBS AG to become direct subsidiaries of UBS Group AG, the transfer of shared service and support functions to service companies and adjustments to the booking entity or location of products and services. These structural changes are being discussed on an ongoing basis with FINMA and other regulatory authorities and remain subject to a number of uncertainties that may affect their feasibility, scope or timing.

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

 

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Operating

environment

and strategy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Signposts

Throughout the Annual Report, signposts that are displayed at the beginning of a section, table or chart –Audited |EDTF |Pillar 3 | – indicate that those items have been audited, have addressed the recommendations of the Enhanced Disclosure Task Force, or are Basel Pillar 3 disclosure requirements, respectively. A “triangle” symbol –ppp – indicates the end of the signpost.

 

 


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Operating environment and strategy

Current market climate and industry drivers

 

Current market climate and industry drivers

The overall global economic climate improved modestly in 2014, but the business environment remained demanding for the financial services industry. Profitability was curbed by lackluster market conditions with low interest rates and muted client activity, amid an increasingly complex operating environment also driven by the expansion of regulatory requirements.

 

Global economic and market climate

Global economies recovered moderately over the course of 2014. However, the pace of the recovery remained slow in most parts of the world and was marked by distinct divergence. Whereas the US and the UK experienced stronger rates of growth with improving labor markets, economies in continental Europe remained anemic and Japan relapsed into a recession in mid-2014. Among key emerging markets, the still solid growth in China slowed due to the ongoing real estate market downturn, Russia slipped into a recession and Brazil’s economy stagnated.

In many advanced economies, growth remained constrained by high levels of public and private debt. Fiscal austerity policies, even if less intense than in prior years, continued to pose headwinds, as did concerns with regard to the stability of the banking sector, particularly in the eurozone. Geopolitical uncertainty, doubts about the pace of reforms in emerging economies, and falling oil and commodity prices further restrained economic activity in a number of economies.

Despite such mixed growth, global equity markets rallied to all-time highs, supported by strong liquidity, mostly due to quantitative easing and high levels of corporate profitability, notably in the US. Global fixed income markets were supported by expansive monetary policies, low or falling inflation, and subdued global economic activity. However, by the second half of 2014, market volatility was fuelled by concerns about a potential end to unconventional monetary policy measures in the US and its consequences domestically and, especially, internationally. Most notably, the stronger US economic recovery and market expectations for divergent monetary policies between the US and Europe or Japan resulted in a strong appreciation of the US dollar.

The momentum of economic activity in the US improved during 2014, with the recovery becoming more broad-based, supported by an improving labor market and recovering consumer and investor confidence. Wage inflation accelerated modestly and falling energy prices kept inflation low, helping to lift household purchasing power. Against this background, the Board of Governors of the Federal Reserve System (Federal Reserve) decided to gradually taper its asset purchase program, concluding its third round of quantitative easing in October 2014.

The Japanese economy suffered from a consumption tax increase in April 2014, which stifled domestic demand, softened

capital expenditures and set off a two-quarter recession around mid-year. The Bank of Japan responded with a further round of monetary easing. Consequently, the yen remained weak on global foreign exchange markets during 2014, but inflation remained below the central bank’s 2% target.

The recovery in the eurozone remained asymmetrical and fragile, with growth insufficient to bring down unemployment. Falling energy and food prices, alongside considerable weakness in the eurozone, resulted in falling inflation and ultimately deflation by the end of the year. Economic activity remained weak in France and Italy throughout 2014, while Spain achieved a positive growth rate in 2014. Germany’s economy slowed down around mid-year, likely due to concerns about the impact of tighter sanctions against Russia as a result of an escalation of the conflict in Ukraine.

Faced with the prospect of inflation sliding significantly below target, the European Central Bank (ECB) introduced negative deposit rates and launched an asset-backed security (ABS) and covered-bond purchase program in June. Later, the ECB announced a program of asset purchases (quantitative easing). The ECB also carried out a comprehensive assessment of the largest banks in the eurozone, consisting of an asset quality review and stress tests. The results of this assessment, which also marked the formal starting point of the Single Supervisory Mechanism as an

 

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important pillar of the European Banking Union, should help strengthen confidence in the European banking system.

Contrary to most European countries, Switzerland experienced another year of solid growth in 2014, supported by robust domestic demand and a strong housing market on the back of low interest rates. Nevertheless, inflation remained well below the Swiss National Bank’s target of 2% during 2014.

Emerging economies posted highly inconsistent economic activity, with some countries benefiting from improving growth in advanced economies, while others were negatively impacted by weakening consumer and investor confidence, as well as falling commodity prices. Russia slipped into a recession in late-2014, as a result of international sanctions stemming from the Ukraine conflict, and plunging oil prices. Weak commodity prices also slowed growth in Brazil. China’s economy still grew solidly in 2014, despite the onset of a recession in its real estate market, which was the key catalyst for the global decline in prices for basic materials and commodities. Financial markets in the emerging world experienced volatility in 2014, given slowing growth, a strong US dollar and concerns about the impact of a pending normalization of US monetary policy, as well as geopolitical uncertainties.

Economic and market outlook for 2015

Overall, we expect lower oil prices as well as favorable financial and monetary policy conditions to give momentum to a global economic recovery in 2015. Global growth should pick up slightly in 2015, underpinned by an acceleration in the US and modest recoveries in Japan and Europe. The eurozone should benefit from a weaker euro and lower oil prices, although the strength of the recovery may prove uneven across the region and sensitive to local political climate. The pace of UK economic growth should remain solid, while the Swiss economy is facing the challenge of a stronger currency and is expected to slow as a result. Among emerging economies, China’s growth is expected to slip just below 7%, if the real estate recession in the country persists. A modest upturn in global trade should benefit net exports in Asian emerging countries, while Russia’s economy is likely to continue experiencing the impacts of international sanctions and low oil prices.

 è Refer to the “Impact of Swiss National Bank actions” sidebar in the “Current market climate and industry drivers” section of this report for more information on the effect of Swiss National Bank actions effective January 2015

Industry drivers

The operating environment for the financial services industry remained demanding over the course of 2014, reflecting challenging market conditions, continued headwinds due to the expansion of the regulatory requirements, and a subdued macroeconomic and market environment, among other reasons. All of these put pressure on revenue growth.

Far-reaching regulatory reform proposals close to finalization

During 2014, regulators and legislators continued to require financial services firms to become simpler, more transparent and more resilient. Against this backdrop, far-reaching regulatory initiatives, such as MiFID II/MiFIR and the Bank Recovery and Resolution Directive in the European Union (EU), and cross-border requirements for securities-based swap dealers in the US, were progressed substantially or finalized. Additionally, further steps were taken toward finalizing the Basel III capital and liquidity framework, with the Basel Committee on Banking Supervision (BCBS) issuing global standards related to the calculation of the leverage ratio denominator and the final framework for the Net Stable Funding Ratio to address banks’ long-term liquidity risks.

Regulators also addressed TBTF by taking actions intended to ensure that large, global financial services institutions can be resolved without causing a systemic disruption to the financial system or requiring capital support from the taxpayer. The Financial Stability Board (FSB) proposed to introduce global standards for “total loss absorbing capacity” (TLAC). With this requirement, the FSB aims to ensure that global systemically important banks have adequate loss-absorbing capacity to enable an orderly wind-down. The FSB proposed that a minimum Pillar 1 TLAC requirement be set within the range of 16% to 20% of risk-weighted assets (RWA) and at least twice the Basel III tier 1 leverage ratio requirement. To support cross-border resolution, the FSB, jointly with the industry, also developed a resolution stay protocol. This protocol imposes a stay on cross-default and early termination rights under standard derivatives contracts of the International Swaps and Derivatives Association (ISDA) between banks should one of them become subject to resolution action in its jurisdiction. The underlying purpose of this agreement is to give regulators sufficient time to facilitate an orderly resolution of a troubled bank. Eighteen major banks, including UBS, have adopted the protocol.

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

Spotlight lingers on bank capitalization and balance sheets

In order to further increase trust in the banking sector, regulators focused on the quality of banks’ balance sheets and the calculation of embedded risks, as well as increasing capital requirements, such as the enhanced leverage ratio requirements for US top-tier bank holding companies.

The ECB conducted a comprehensive review of balance sheets and risk profiles of 130 European banks. The review consisted of three elements: (i) a quantitative and qualitative supervisory assessment of key risks, including liquidity, leverage and funding; (ii) a review of the banks’ asset quality, including the accuracy of asset and collateral valuations and adequacy of related provisions, aiming to enhance the transparency of banks’ exposures and (iii) a stress test to examine the resilience of banks’ balance sheets to

 

 

 

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Current market climate and industry drivers

 

stress scenarios. In this review, banks were measured against a capital threshold of 8% based on Capital Requirements Directive IV definitions. The comprehensive assessment identified a capital shortfall of EUR 25 billion for 25 banks at the end of 2013. Twelve of those 25 banks covered their shortfall during 2014, and the remaining banks were given up to nine months to close the identified gap. The comprehensive assessment also showed that in a severe scenario, as defined by the ECB, the banks’ median CET1 capital ratio decreased by approximately four percentage points from 12.4% to 8.3%. UBS Luxembourg SA was reviewed by the ECB and passed the comprehensive assessment successfully.

Similar stress testing exercises were conducted in the UK and the US. The Bank of England concluded that the resilience of the banking system in the UK had improved significantly since the capital shortfall assessment in 2013. The Bank of England’s stress test results, and banks’ capital plans, indicated that the banking system has the capacity to maintain its core functions in a stress scenario, and that no system-wide macro-prudential actions were needed. The Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) showed that US firms had substantially increased their capital since the first tests in 2009, with the aggregate tier 1 common equity ratio more than doubling from 5.5% to 11.6%.

Further to the above reviews, policymakers focused increasingly on transparency with regard to the risks that banks hold on their balance sheets. As a result, attention shifted to unweighted capital ratios and to the way banks calculate the risks on their balance sheets. In this context, the BCBS revised the standardized approach to calculating credit risk, such as by relying less on external credit ratings and the scope of national discretion or by strengthening the link between the standardized and the internal risk-based approach.

Increased focus on costs to compensate for subdued revenues

In 2014, raising income levels remained a challenging task for the financial services industry. Growth constraints imposed by the expansion of regulatory requirements were compounded by demanding market conditions and various uncertainties arising from, among other things, political tensions in Eastern Europe and the Middle East and policy divergence among major central

banks. These factors reduced investors’ risk appetites, leading to subdued volumes and increased volatility. In addition, the continued low-interest rate environment and flat yield curves added pressure on net interest margins and revenues.

As a result of this unfavorable revenue environment, and also to offset rising regulatory costs, the industry further intensified its efforts to increase operational efficiency and realign cost structures to match subdued revenue levels.

Continued need to update digital capabilities

In 2014, the financial industry progressed in adapting to the rapidly changing digital reality. However, constant innovation is necessary in this area, in order to meet evolving client expectations with regard to personalization, convenience and transparency, and to master the challenge of new market participants and the latest trends in financial technology services and products, such as digital currencies, mobile payments and robo-advisory services. It is equally important to anticipate the rise of non-traditional financing options, such as crowd funding and peer-to-peer funding. The established financial industry has therefore intensified its efforts to enhance its digital capabilities to address these challenges, for example by introducing more sophisticated and customized online services, or by more closely embedding social media into its client-facing activities, in order to further strengthen individual customer relationships.

A further challenge for the financial services industry, also resulting from increased digitalization, is cyber-crime. The risks associated with cyber-crime not only commanded increased awareness and investment from the financial services industry, but also attracted close attention from regulators in 2014. A number of regulators in the US, notably the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission (SEC), have been delving into the topic to identify cyber-security risks inherent in financial institutions and to assess the financial industry’s current practices and overall resilience. Furthermore, the US Congress has taken a keen interest in cyber-security and the financial industry may see additional legislation in this area as a result. The EU, for its part, has made the mitigation of cyber-risk a priority in its work program for 2015, which is also likely to be followed by new legislation.

 

 

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EDTF | Impact of Swiss National Bank actions

 

On 15 January 2015, the Swiss National Bank (SNB) discontinued the minimum targeted exchange rate for the Swiss franc versus the euro, which had been in place since September 2011. At the same time, the SNB lowered the interest rate on deposit account balances at the SNB that exceed a given exemption threshold by 50 basis points to negative 0.75%. It also moved the target range for three-month LIBOR to between negative 1.25% and negative 0.25% (previously negative 0.75% to positive 0.25%). These decisions resulted in a considerable strengthening of the Swiss franc against the euro, US dollar, British pound, Japanese yen and several other currencies, as well as a reduction in Swiss franc interest rates. As of 28 February 2015, the Swiss franc exchange rate was 0.95 to the US dollar, 1.07 to the euro, 1.47 to the British pound and 0.80 to 100 Japanese yen. Volatility levels in foreign currency exchange and interest rates also increased.

A significant portion of the equity of UBS’s foreign operations is denominated in US dollars, euros, British pounds and other foreign currencies. The appreciation of the Swiss franc would have led to an estimated decline in total equity of approximately CHF 1.2 billion or 2% when applying currency translation rates as of 28 February 2015 to the reported balances as of 31 December 2014. This includes a reduction in recognized deferred tax assets, mainly related to the US, of approximately CHF 0.4 billion (of which CHF 0.2 billion relates to temporary differences deferred tax assets), which would be recognized in Other comprehensive income.

Similarly, a significant portion of our Basel III risk-weighted assets (RWA) are denominated in US dollars, euros, British pounds and other foreign currencies. Group Asset and Liability Management (Group ALM) is mandated with the task of minimizing adverse effects from changes in currency rates on our fully applied CET1 capital and capital ratios. The Group Asset and Liability Management Committee (Group ALCO), a committee of the UBS Group Executive Board, can adjust the currency mix in capital, within limits set by the Board of Directors, to balance the effect of foreign exchange movements on the fully applied CET1 capital and capital ratio. As the proportion of RWA denominated in foreign currencies outweighs the capital in these currencies, the significant appreciation of the Swiss franc against these currencies benefited our Basel III capital ratios. On a fully applied basis for Swiss systemically relevant banks (SRB), we would have experienced the following approximate declines in our capital and RWA balances when applying currency translation rates as of 28 February 2015 to the reported balances as of 31 December 2014: CHF 0.5 billion or 2% in fully applied common equity tier 1 (CET1) capital, CHF 0.8 billion or 2% in fully applied total capital, CHF 5.8 billion or 3% in fully applied RWA and CHF 45.1 billion or 5% in the fully applied leverage ratio denominator.

Consequently, based solely on foreign exchange movements, we estimate that our fully applied Swiss SRB CET1 capital ratio would have increased by approximately 10 basis points and the fully applied leverage ratio would have

improved by approximately 10 basis points. In aggregate, UBS did not experience negative revenues in its trading businesses in connection with the SNB announcement.

However, the portion of our operating income denominated in non-Swiss franc currencies is greater than the portion of operating expenses denominated in non-Swiss franc currencies. Therefore, appreciation of the Swiss franc against other currencies generally has an adverse effect on our earnings in the absence of any mitigating actions.

In addition to the estimated effects from changes in foreign currency exchange rates, our equity and capital are affected by changes in interest rates. In particular, the calculation of our net defined benefit assets and liabilities is sensitive to the assumptions applied. Specifically, the changes in applicable discount rate and interest rate related assumptions for our Swiss pension plan during January and February would have reduced our equity and fully applied Swiss SRB CET1 capital by around CHF 0.7 billion. Also, the persistently low interest rate environment would continue to have an adverse effect on our replication portfolios, and our net interest income would further decrease.

Furthermore, the stronger Swiss franc may have a negative impact on the Swiss economy, which, given its reliance on exports, could impact some of the counterparties within our domestic lending portfolio and lead to an increase in the level of credit loss expenses in future periods.p

 

 

 

 

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Regulation and supervision

The Swiss Financial Market Supervisory Authority (FINMA) is UBS’s home country regulator and consolidated supervisor. As a financial services provider with a global footprint, we are also regulated and supervised by the relevant authorities in each of the jurisdictions in which we conduct business. The following sections summarize the key regulatory requirements and supervision of our business in Switzerland as well as in the US and the UK, our next two largest areas of operation.

 

Regulation and supervision in Switzerland

The Swiss Federal Law on Banks and Savings Banks of 8 November 1934, as amended (Banking Act), and the related Swiss Federal Ordinance on Banks and Savings Banks of 17 May 1972, as amended (Banking Ordinance), impose certain requirements on UBS as a group under provisions on consolidated supervision of financial groups and conglomerates. These requirements include provisions on capital, liquidity, risk concentration and organizational requirements.

UBS AG, which is currently UBS Group AG’s only subsidiary, is a fully licensed Swiss bank and securities dealer under the Banking Act. We may engage in a full range of financial services activities in Switzerland and abroad, including retail banking, commercial banking, investment banking and asset management. The Banking Act, Banking Ordinance and the Financial Market Supervision Act of 22 June 2007, as amended, establish a framework for supervision by FINMA, empowering it to issue its own ordinances and circulars, which contribute to shaping the Swiss legal and regulatory framework for banks.

 è Refer to the “UBS Group – Changes to our legal structure” section for more information on the establishment of UBS Group AG

Swiss banks have to comply with the Basel III accord, as implemented by Switzerland. Furthermore, the Swiss Parliament amended the legal framework for banks to address the lessons learned from the financial crisis and, in particular, the too big to fail issue. The amended sections are applicable to the largest Swiss banks, including UBS, due to our size, complexity, organization and business activities, as well as our importance to the financial system. These provisions contain specific, more stringent, capital and liquidity requirements and provisions to ensure that systemically relevant functions can be maintained in case of insolvency. In addition, and in line with global requirements, we are required to produce and update recovery plans and resolution planning materials aimed at increasing the firm’s resilience in the case of a crisis, and to provide FINMA and other regulators with information on how the firm could be resolved in the event of an unsuccessful recovery. During 2014, UBS has made significant progress in improving its resolvability via changes to its legal structure.

 è Refer to the “Capital management” and “Liquidity management” sections of this report for more information on capital and liquidity requirements
 è Refer to the “UBS Group – Changes to our legal structure” section for more information on the establishment of UBS Group AG

The Federal Act of 10 October 1997 on the Prevention of Money Laundering in the Financial Sector defines a common standard for due diligence obligations to prevent money laundering for the whole financial sector.

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. FINMA, as supervisory authority for investment funds in Switzerland, is responsible for the authorization and supervision of the institutions and investment funds subject to its control.

As a securities broker and issuer of shares listed in Switzerland, we are governed by the Federal Act on Stock Exchanges and Securities Trading of 24 March 1995. FINMA is the competent supervisory authority with respect to securities broking.

FINMA fulfills its statutory supervisory responsibilities through licensing, regulation, monitoring and enforcement. Generally, prudential supervision in Switzerland is based on a division of tasks between FINMA and authorized audit firms. Under this two-tier supervisory system, FINMA has responsibility for overall supervision and enforcement measures while the authorized audit firms carry out official duties on behalf of FINMA. The responsibilities of external auditors encompass the audit of financial statements, the risk-based assessment of banks’ compliance with prudential requirements and on-site audits.

FINMA is the resolution authority for Swiss banks and securities dealers. FINMA may open resolution or insolvency proceedings if it determines that a bank has reached the point of impending insolvency. Under Swiss law, all assets and liabilities of a bank fall into the FINMA resolution proceedings, irrespective of where they are located. Statutory FINMA resolution tools include transferring activities of the bank to a bridge entity or the conversion of debt into equity. Any such measure would need to comply with statutory safeguards, including the requirement to ensure creditors are not worse off than in liquidation and the equal treatment of creditors.

 

 

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As UBS Group is considered a Swiss systemically relevant bank, we are subject to more rigorous supervision than most other banks. We are directly supervised by the FINMA group “Supervision of UBS,” which is supported by teams specifically monitoring investment banking activities, risk management and legal matters as well as solvency and capital aspects. FINMA’s supervisory tools include meetings with management at the group and divisional level, reporting requirements encompassing control and business areas, on-site reviews in Switzerland and abroad, and exchanges with internal audit and host supervisors in other jurisdictions. In recent years, FINMA has implemented the recommendations issued by the Financial Stability Board and the Basel Committee on Banking Supervision, and complemented the Supervisory College, established in 1998 with the UK Financial Services Authority (FSA) and the Federal Reserve Bank of New York (FRBNY) to promote supervisory cooperation and coordination, with a General Supervisory College – including more than a dozen of UBS’s host regulatory agencies – and a Crisis Management College, which is also attended by representatives from the Swiss National Bank (SNB) and the Bank of England.

The SNB contributes to the stability of the financial system through macro-prudential measures and monetary policy, while also providing liquidity to the banking system. It does not exercise any banking supervision authority and is not responsible for enforcing banking legislation, but works together with FINMA, in particular with respect to regulation of Swiss systemically relevant banks. The SNB may also carry out its own enquiries and request information directly from the banks. In addition, the SNB is tasked by Parliament with the designation of Swiss systemically relevant banks and their systemically relevant functions in Switzerland. Currently, UBS, Credit Suisse, Zürcher Kantonalbank and Raiffeisen are required to comply with specific Swiss rules for systemically relevant banks.

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

Regulation and supervision in the US

Our operations in the US are subject to a variety of regulatory regimes. UBS maintains branches and representative offices in several states, including Connecticut, Illinois, New York, California and Florida. These branches are licensed either by the Office of the Comptroller of the Currency (OCC) or the state banking authority of the state in which the branch is located. The representative offices are licensed as loan production offices by the OCC. Each US branch and representative office is subject to regulation and supervision, including on-site examination by its federal banking authority or its licensing state and by the Federal Reserve. We are subject to oversight regulation and supervision by the Federal Reserve under various laws because we maintain branches in the US. These include the International Banking Act of 1978, the Federal Reserve Act of 1913 and the Bank Holding Company Act of 1956 (BHCA), each as amended, and related regulations. On 10 April 2000, UBS was designated a financial holding company

under the BHCA, as amended by the Gramm-Leach-Bliley Act of 1999. Financial holding companies may engage in a broader spectrum of activities than holding companies of US banks or foreign banking organizations that are not financial holding companies. These activities include expanded authority to underwrite and deal in securities and commodities and to make merchant banking investments in commercial and real estate entities.

We also maintain state and federally-chartered trust companies and a Federal Deposit Insurance Corporation (FDIC)-insured depository institution subsidiary, which are licensed and regulated by state regulators or the OCC. Only the deposits of UBS Bank USA, headquartered in the state of Utah, are insured by the FDIC. The regulation of our US branches and subsidiaries imposes activity and prudential restrictions on the business and operations of those branches and subsidiaries, including limits on extensions of credit to a single borrower and on transactions with affiliates.

To maintain our financial holding company status, (i) the Group, our federally-chartered trust company (Federal Trust Company) subsidiary and UBS Bank USA are required to meet certain capital ratios, (ii) our US branches, our Federal Trust Company, and UBS Bank USA are required to maintain certain examination ratings, and (iii) UBS Bank USA is required to maintain a rating of at least “satisfactory” under the Community Reinvestment Act of 1977.

The licensing authority of each state-licensed US branch may, in certain circumstances, take possession of the business and property of UBS located in the state of the UBS offices it licenses. Such circumstances generally include violations of law, unsafe business practices and insolvency. As long as we maintain one or more federal branches licensed by the OCC, the OCC also has the authority to take possession of all the US operations of UBS under broadly similar circumstances, as well as in the event that a judgment against a federally licensed branch remains unsatisfied. 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 OCC 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.

A major focus of US governmental policy relating to financial institutions in recent years has been combating money laundering and terrorist financing. Regulations applicable to UBS and our subsidiaries require the maintenance of effective policies, procedures and controls to detect, prevent and report money laundering and terrorist financing, and to verify the identity of our clients. As a result, failure to maintain and implement adequate programs to prevent money laundering and terrorist financing could result in significant legal and reputational risk.

In the US, UBS Financial Services Inc. and UBS Securities LLC, as well as our other US-registered broker-dealer subsidiaries, are subject to laws and regulations that cover all aspects of the securities

 

 

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and futures business, including sales and trading practices, use and safekeeping of clients’ funds and securities, capital requirements, record-keeping, financing of clients’ purchases of securities and other assets, 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 Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Each entity is also regulated by some or all of the following: the New York Stock Exchange (NYSE), the Municipal Securities Rulemaking Board, the US Department of the Treasury, the Commodities Futures Trading Commission (CFTC) 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 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.

UBS Global Asset Management (Americas) Inc. and our other US-registered investment adviser entities, are subject to regulations that cover all aspects of the investment advisory business and are regulated primarily by the SEC. Some of these entities are also registered as commodity trading advisers (CTA) and/or commodity pool operators (CPO) and in connection with their activities as CTA and/or CPO are regulated by the CFTC. To the extent these entities manage plan assets of employee benefit plans subject to the Employee Retirement Income Security Act of 1974, their activities are subject to regulation by the US Department of Labor.

 è Refer to the “Regulatory and legal 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 two bodies: the Prudential Regulation Authority (PRA), newly established as an affiliated authority of the Bank of England, and the Financial Conduct Authority (FCA). The PRA’s main objective relating to the banking sector is to promote the safety and soundness of UK-regulated financial firms. The FCA is responsible for securing an appropriate degree of consumer protection, protecting the integrity of the UK financial system and promoting effective competition in the interest of consumers.

The PRA and FCA operate a risk-based approach to supervision and have a wide variety of supervisory tools available to them, 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, information technology specialists, lawyers or other consultants as appropriate. The UK regulators also have a wide set of sanctions at their disposal, which may be imposed under the Financial Services and Markets Act (FSMA).

Some of our subsidiaries and affiliates are also regulated by the London Stock Exchange and other UK securities and commodities exchanges of which they 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 and liquidity adequacy standards, client protection requirements and conduct of business rules (such as the Markets in Financial Instruments Directive I). These directives apply throughout the EU and are reflected in the regulatory regimes of the various member states.

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

 

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Regulatory and legal developments

In 2014, several important international regulatory and legal initiatives advanced or came into force. Key developments included the finalization of the Markets in Financial Instruments Directive (MiFID) II and the Bank Recovery and Resolution Directive, as well as the publication of proposals for Total Loss Absorbing Capacity (TLAC) by the Financial Stability Board (FSB).

 

Key developments in Switzerland

Swiss Federal Council publishes concept for new article on immigration

In February 2014, Swiss cantons and voters accepted an initiative against “mass immigration” and the Swiss Federal Council published its concept for implementing the new article of the Federal Constitution on immigration in June. Key elements of the concept are quantitative limits and quotas, defined by the Federal Council on an annual basis, becoming effective as of February 2017. The Federal Council drafted an implementation law in February 2015. The Federal Council will start its negotiations with the European Union (EU) on the amendment of the Swiss-EU bilateral agreement on the free movement of persons. The extent to which UBS could be impacted, such as in its recruitment of foreign nationals to work in Switzerland or due to effects on Swiss corporate clients and the Swiss economy, will depend on the final implementation of the initiative in Swiss law and the outcome of negotiations with the EU.

Swiss Federal Council issues drafts of Federal Financial Services Act and Financial Institutions Act

In June 2014, the Swiss Federal Council issued drafts of a Federal Financial Services Act (FFSA) and Financial Institutions Act (FinIA). The FFSA would govern the relationship between financial intermediaries and their clients for all financial products and includes provisions on matters such as (i) the provision of financial services subject to the obligation to publish a prospectus, (ii) the obligation to provide clients with a simple, comprehensible basic information sheet, (iii) the distribution of the corresponding code of conduct at points of sale (i.e., the obligations to provide information and conduct research) and (iv) legal enforcement. According to the Federal Council, the FFSA would support the creation of uniform competitive conditions for financial intermediaries and improve client protection. With the FinIA, the Federal Council proposes to provide for the supervision of all financial service providers that operate an asset management business under a single law. The published draft of the FinIA would (i) require licensing of managers of individual client assets and managers of Swiss occupational benefits schemes and (ii) require the introduction of a tax compliance rule that requires new assets to be inspected before acceptance. The latter requirement applies to all countries that have not signed an agreement for the automatic exchange of

information with Switzerland. The Federal Council initiated a consultation that ran until 17 October 2014 for both items of legislation. The nature and extent of the impact on UBS will remain difficult to assess until the Federal Council presents its final draft to the Swiss Parliament, which is expected to take place in 2015.

Swiss Federal Council submits Financial Market Infrastructure Act

In September 2014, the Swiss Federal Council submitted to the Swiss parliament the Financial Market Infrastructure Act (FMIA). The FMIA would make substantial changes to the regulation of financial market infrastructure in Switzerland and would implement the G20 commitments on OTC derivatives in Switzerland, including (i) mandating clearing via a central counterparty, (ii) transaction reporting to a trade repository, (iii) risk mitigation measures and (iv) mandatory trading of derivatives on a stock exchange or another trading facility once this has also been introduced in partner states, such as the EU, the US and APAC jurisdictions. FMIA would also (i) introduce new licensing requirements for stock exchanges, multilateral trading facilities, central counterparties, central depositaries, trade repositories and payment systems, (ii) impose transparency requirements for multilateral and organized trading facilities and (iii) establish a basis for regulating high-frequency trading, should this be deemed necessary. FMIA is intended to make Swiss regulation of OTC derivatives equivalent to the European Market Infrastructure Regulation and to achieve compliance with international standards. An equivalence determination by the EU would allow Swiss companies to benefit from intra-group exemptions provided by EU regulation and otherwise provide a more level playing field with EU peers. Without such exemptions, costly clearing and margin requirements would apply.

FINMA publishes leverage ratio and revised disclosure circulars, and further guidance on RWA calculations

In November 2014, the Swiss Financial Market Supervisory Authority (FINMA) published a new circular on the leverage ratio and a revised circular on disclosure. The new FINMA Circular “Leverage ratio – banks” covers the calculation rules for the leverage ratio in Switzerland. For Swiss systemically relevant banks (SRB), the new circular revises the way the leverage ratio denominator (LRD) is calculated in order to be aligned with the rules issued by the Bank for International Settlements (BIS) in January 2014. This change became effective on 1 January 2015. We are using a

 

 

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one-year transition period, under which the existing Swiss SRB definition may still be used, but we are required to disclose both leverage ratios (based on existing Swiss SRB rules as well as on the BIS Basel III rules) starting with our first quarter 2015 reporting. The current minimum leverage ratio requirement as a percentage of the risk-based capital ratio requirement (excluding the counter-cyclical buffer requirement) remains unchanged for Swiss SRB.

The Basel III rules also require disclosure of the leverage ratio and liquidity coverage ratio (LCR) as of 2015. These disclosure requirements are included in the revised FINMA Circular “Disclosure – banks,” which came into force on 1 January 2015.

During 2012, FINMA began requiring banks using the internal ratings-based (IRB) approach to apply a bank-specific IRB multiplier when calculating risk-weighted assets (RWA) for owner-occupied Swiss residential mortgages. This multiplier is applied to new and renewed mortgages. The entire owner-occupied Swiss residential mortgage portfolio is subject to this multiplier, which is being phased in through 2019. FINMA has notified us that the RWA increase will be extended to Swiss income-producing residential and commercial real estate from the first quarter of 2015, with a phased implementation through 2019. FINMA also announced that the RWA levels of other asset classes are to be reviewed. We understand these reviews to be in anticipation of the Basel Committee on Banking Supervision (BCBS) expected prudential reforms (e.g., reduction in the variability of capital ratios or capital floors).

Swiss Federal Council mandates the Brunetti group to develop Swiss financial market strategy

In December 2014, senior experts representing the private sector, authorities and academia (the Brunetti group) appointed by the Swiss Federal Council and mandated to further develop the strategy of Switzerland’s Financial market, published its final report. The Brunetti group made recommendations with regard to (i) safeguarding systemic stability/TBTF, (ii) preserving market access, (iii) improving the tax environment and (iv) efficient organization of regulatory processes. The Brunetti group stated that the Swiss TBTF approach compares favorably with the approaches of other countries and therefore no reorientation of the prevailing regulatory model is necessary. Although an international comparative analysis has confirmed that the Swiss regulatory model is, in principle, suitable to address the TBTF problem, the Brunetti group argued that certain adjustments in the model are necessary to eliminate the implicit government guarantee in the long term. The Brunetti group’s work on the TBTF regime served as the basis for the Swiss Federal Council’s review report on the Swiss TBTF law that was presented to the Swiss parliament in February 2015. In its report, the Swiss Federal Council confirmed the findings of the Brunetti group and mandated the Federal Department of Finance to set up a working group with representatives of FINMA and SNB that is expected to submit proposals to the Swiss government by the end of 2015. The Brunetti group also emphasized the importance of Swiss financial services providers’ access to foreign markets with a view to maintaining the competitiveness of the

Swiss financial center. Following a recommendation made by the Brunetti group, the Swiss Federal Council submitted a draft law on 17 December 2014 for consultation, proposing to move towards a “paying agent” principle for Swiss withholding tax. The Brunetti group also analyzed the Swiss regulatory and supervisory processes and proposed various improvements, including that the institutionalized dialogue among governmental authorities, market participants and research be expanded.

Key developments in the European Union

EC proposes structural measures to improve resilience of EU credit institutions

In January 2014, the European Commission (EC) proposed a regulation on “Structural measures improving the resilience of EU credit institutions.” It includes two main measures: (i) a ban on proprietary trading and investments in hedge funds and (ii) an additional potential separation of certain trading activities, including market-making, “risky securitization” and complex derivatives, which will not be mandatory, but rather based on supervisory discretion. Overall, there is a material degree of supervisory discretion in the application of the proposed requirements, particularly in relation to the separation of trading and investment banking activities. Potential derogations from the separation requirements are available for jurisdictions with equivalent legislation. The European Parliament and Council of the EU are currently reviewing the EC proposal. While neither has yet finalized its position, changes to the proposals during the political negotiations are likely. In light of this, it is unclear at this stage whether, and to what extent, UBS branches and entities, in particular UBS AG London branch and UBS Limited, will be impacted.

EU remuneration rules under Capital Requirements Directive come into effect

Also at the beginning of 2014, EU-wide remuneration rules came into effect under Capital Requirements Directive IV (CRD IV). The rules include provisions on the amount and form of variable remuneration that may be paid to employees identified as material risk takers, as defined by the European Banking Authority (EBA). A key element of the rules is the introduction of a maximum ratio of 1:1 for variable to fixed remuneration (bonus cap). The cap may be increased to 2:1 with shareholders’ consent. These restrictions apply to material risk takers at all banks active in the EU, including UBS. As a non-EU headquartered firm, UBS is required to apply these restrictions to material risk takers employed by EU subsidiaries or branches, but not globally. Further regulatory attention to the topic of remuneration is expected. The EBA is due to review the Committee of European Banking Supervisors’ guidelines on remuneration in the first half of 2015.

Economic and Financial Affairs Council (ECOFIN) agreement on EU-FTT postponed to 2015

Despite the commitment made by the 11 participating EU member states, no agreement on the EU Financial Transaction Tax was

 

 

 

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reached in 2014. There is still divergence among participating member states on the design of the EU-FTT, including the rate, scope, possible exemptions, territorial application and collection mechanism. A statement issued at the December 2014 ECOFIN meeting said that the 11 participating member states will continue to work on reaching agreement in the first half of 2015, with the aim of introducing an EU-FTT in January 2016. The tax would be based on equities and certain derivatives, but no agreement on the definition has yet been reached.

MiFID II and MiFIR enter into force

In July 2014, the EU Markets in Financial Instruments Directive II and Regulation package (MiFID II/MiFIR) entered into force. The majority of the requirements relating to investor protection, trading issues and third country market access will apply to firms only from January 2017, although there are transitional provisions in several areas. However, level 2 legislation on MiFID II/MiFIR has been under discussion since May 2014, when the European Securities and Markets Authority (ESMA) published a consultation paper on its proposed technical advice to the European Commission on delegated acts, as well as a first discussion paper on proposed draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) under MiFID II/MiFIR. The papers covered categories of investor protection, transparency, data publication, market data reporting, microstructural issues (including algorithmic and high-frequency trading), requirements applying to trading venues, commodity derivatives, portfolio compression and post-trade issues. In mid-December 2014, ESMA issued its final report on the technical advice taking into account industry feedback received in the summer consultation, and asked for further views on the RTS through a related follow-up consultation paper. A further Level 2 consultation was issued in 2015. MiFID II/MiFIR will affect many areas of UBS’s business, including the Investment Bank, Wealth Management and Global Asset Management. An assessment of the potential impact and the development of implementation measures are ongoing.

UK PRA publishes Policy Statement and Supervisory Statement on its approach to supervising international banks

In September 2014, the Prudential Regulation Authority (PRA) published a Policy Statement and Supervisory Statement. In summary, the PRA’s approach, which applies to both existing and new branches, is centered on an assessment of (i) the equivalence of the home state’s supervision of the whole firm, (ii) the branch’s UK activities and (iii) the level of assurance the PRA gains from the home state supervisor (HSS) over resolution. Where the PRA is satisfied on these matters, it will also need to have a clear and agreed division of prudential supervisory responsibilities with the HSS. Where the PRA is not satisfied, it will consider the most appropriate course of action, which could include refusing authorization of a new branch or cancelling authorization of an existing branch (requiring the non-European Economic Area (EEA) firm to exit the UK market or to establish a UK subsidiary). For existing

non-EEA branches, the PRA will focus its supervision on understanding whether the branch undertakes critical economic functions and on working with the HSS to gain adequate assurance that these functions could be resolved in line with the PRA’s objectives. The PRA policy is applicable to UBS Limited and UBS AG London Branch and could have implications for the nature of business and the legal structure of UBS’s UK operations. However, additional guidance from the PRA will be required to more accurately assess the impact.

Operational start of SSM – milestone in the implementation of the EBU

The implementation of the European Banking Union (EBU) passed a milestone with the operational start of the Single Supervisory Mechanism (SSM) on 4 November 2014. Now the ECB directly supervises 120 significant banks in the eurozone, representing 82% of total banking assets in the euro area. UBS Luxembourg SA is one of the banks in the SSM. Prior to the start of the SSM, the ECB had published the results of a comprehensive assessment on 26 October 2014. UBS Luxembourg SA successfully passed the comprehensive assessment. The SSM is one of the two pillars of the EU banking union, along with the Single Resolution Mechanism (SRM). Key elements of the SRM include the establishment of a Single Resolution Board (SRB) and a Single Resolution Fund (SRF). Significant banks that are subject to direct ECB supervision under the SSM and cross-border banks would be resolved by the SRB. The SRM entered into force on 1 January 2015, at which time the SRB became fully operational, while the resolution function of the SRM and the bail-in tool will apply as of 1 January 2016, in line with the EU Bank Recovery and Resolution Directive (BRRD). UBS Luxembourg SA would be subject to resolution by the Single Resolution Board should a resolution become necessary.

 è Refer to the “Current market climate and industry drivers” section in this report for more information on the ECB’s comprehensive assessment of banks

BRRD comes into force in the EU

Another important development was the finalization of the BRRD that came into force in July 2014. The BRRD seeks to achieve a harmonized approach to the recovery and resolution of banks in the EU and broadly covers measures relating to recovery and resolution planning, early intervention powers for authorities and resolution tools should a bank fail or be deemed likely to fail. The majority of the BRRD applies from 1 January 2015 and the bail-in tool will apply from 1 January 2016. UBS’s EU subsidiaries will be subject to the requirements of the BRRD, while EU member states have the right to apply the provisions of the BRRD to UBS’s EU-based branches in certain circumstances. The overall impact is difficult to assess at this stage, as the EU resolution authorities have broad discretion in setting some of the key requirements of the BRRD, and many technical standards and guidelines are yet to be finalized.

 

 

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Key developments in the US

SEC approves final rule on cross-border requirements for securities-based swap dealers

In June 2014, the Securities and Exchange Commission (SEC) approved a final rule addressing certain cross-border requirements for securities-based swap dealers, including definitions of certain key terms, activities that count toward determining whether an entity is required to register, procedures for substituted compliance applications and an anti-fraud rule. The SEC expects to address other aspects of its 2013 proposed framework for cross-border application of its securities-based swap rules in future rulemakings. No deadline for registering as a securities-based swap dealer was contained in the final rule. We anticipate registering UBS AG as a securities-based swap dealer when registration requirements become effective.

FDIC and Federal Reserve feedback on 2013 resolution plans of first-wave filers

In August 2014, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve provided feedback on the 2013 resolution plans of first-wave filers (11 large and complex banking organizations, including UBS, that initially filed resolution plans in 2012). The reviews identified shortcomings that will need to be addressed in the 2015 submissions, including assumptions that the agencies regard as unrealistic or inadequately supported, and the failure to make changes in firm structure and practices that would enhance the prospects for orderly resolution. The agencies also indicated that the first-wave filers must make significant progress in addressing the agencies’ concerns before they file their 2015 resolution plans. If a first-wave filer is unable to address the regulators’ concerns, the agencies may find that a plan is not “credible” as required by Dodd-Frank and may take a number of actions, including imposing more stringent capital, leverage, liquidity or other requirements, restricting its US activities or the growth of its US operations, or requiring it to divest assets and operations that affect its resolvability.

CFTC cross-border rules sustained

In September 2014, a US district court granted summary judgment to the CFTC on the basis that the CFTC’s cross-border interpretative guidance and policy statement was not reviewable, as it has not been applied in practice. The CFTC’s cross-border interpretation and policy statement have significant extraterritorial effect and create both uncertainty and significant implementation issues for swap dealers, including UBS. Subsequently, the CFTC extended no-action relief regarding transaction-level requirements: for non-US swap dealers entering into swaps with most non-US persons until 30 September 2015, unless the CFTC decides to take action earlier; for reporting of transactions with non-US persons until 1 December 2015; and for certain inter-affiliate transactions until 31 December 2015.

Federal Reserve, FDIC and OCC impose a liquidity coverage ratio on large banks

In September 2014, the Federal Reserve, the FDIC and the Office

of the Comptroller of the Currency (OCC) issued a rule imposing a liquidity coverage ratio on large banks. Under the final rule, a large bank will be required to continuously maintain enough high-quality liquid assets to cover 100% of its total net cash outflows over a 30-day period of financial stress. The rule will apply to foreign banks that have US bank holding company subsidiaries and similar requirements are expected for foreign banks that do not have a US bank holding company, such as UBS.

Federal Reserve, FDIC and OCC adopt final SLR for banks

Separately, the Federal Reserve, the FDIC and the OCC adopted a final supplementary leverage ratio (SLR) for banks that are subject to the advanced approaches risk-based capital rules. This SLR rule revises the way the denominator of the SLR is calculated in order to align it with BIS rules issued in January 2014. Certain required public disclosures must be made starting in the first quarter of 2015, and the minimum SLR requirements will be effective from 1 January 2018. Earlier in 2014, US regulators approved a final enhanced supplementary leverage ratio requirement for US top-tier bank holding companies (BHC), with more than USD 700 billion in consolidated assets or USD 10 trillion in assets under custody, currently the eight largest US banks. Under this rule, BHCs are required to maintain a Tier 1 capital leverage buffer of at least 2% above the Basel III minimum supplementary leverage ratio requirement of 3%, for a total of 5% (6% for insured depository institutions). UBS is not subject to this requirement.

Federal Reserve issues final rule on due date for large BHC’s capital plans and stress test results

In October 2014, the Federal Reserve issued a final rule adjusting the due date for large BHCs to submit capital plans and stress test results from 5 January to 5 April, beginning with the 2016 cycle. The final rule also adopts, with some adjustments, the limitation on a BHC’s ability to make capital distributions to the extent that its actual net capital issuances are less than the amount indicated in its capital plan. The rule reaffirmed that an intermediate holding company (IHC) formed in anticipation of the IHC rule, such as that of UBS, would not be subject to risk-based capital, liquidity and risk management standards until 1 July 2016, the capital plan rule until the 2017 cycle, and the stress testing rule and Comprehensive Capital Analysis and Review (CCAR) process until the 2018 cycle.

Far-reaching regulatory reform proposals close to completion on the international level

OECD presents a standard for tax information exchange

In February 2014, following a G20 mandate, the Organization for Economic Cooperation and Development (OECD) presented a new single global Standard for Automatic Exchange of Financial Account Information in Tax Matters, the Common Reporting Standard (CRS). In July 2014, the OECD released the full CRS, including the Model Competent Authority Agreement, a commentary, and a CRS schema. The CRS obliges countries and

 

 

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jurisdictions to obtain all financial information from their financial institutions and exchange that information automatically with other jurisdictions, on an annual basis, subject to appropriate safeguards including certain confidentiality requirements and the requirement that information may be used exclusively for the tax purposes foreseen.

At the Global Forum meeting in October 2014, all OECD and G20 countries as well as a majority of financial centers endorsed the new OECD/G20 standard. 58 jurisdictions (early adopters) committed to launch the first automatic exchanges in 2017 and 35 jurisdictions committed to start in 2018.

Upon the OECD revealing the full global standard in July 2014, the EU signaled that it will align its legislation with the new international standard. In October, a political agreement was reached on amending Directive 2011/16/EU on administrative cooperation in the field of direct taxation (DAC), followed by its full endorsement. The revised DAC reproduces the OECD standard at EU level, with first exchange of information expected to take place in 2017, in line with the early adopters. Austria was given one additional year of transition for implementation. The DAC entered into force on 5 January 2015 and will be applicable from 1 January 2016 (except in Austria).

In May 2014, the Swiss Federal Council endorsed the OECD Declaration on Automatic Exchange and in October of that year, the Swiss Federal Council approved the mandates for negotiations on introducing the automatic exchange of information with the EU, the United States and other countries and entered into negotiations with the European Commission. Switzerland committed to launch the first automatic exchanges in 2018, one year after the early adopters. In November 2014, the Federal Council approved a declaration on Switzerland joining the OECD Multilateral Competent Authority Agreement (MCAA), which sets out the conditions for the annual exchange of account information between the competent authorities of two countries, in accordance with the OECD standard. In January 2015, the Swiss Federal Council launched a consultation on the introduction of the automatic exchange of information. The consultation package includes a federal draft law for the implementation of the automatic exchange of information, the ratification of the OECD/Council of Europe administrative assistance convention and the ratification of the MCAA. The consultation runs until 21 April 2015.

BCBS review of risk-based capital framework

The Basel Committee on Banking Supervision (BCBS) issued a discussion paper in 2013 on “The regulatory framework: balancing risk sensitivity, simplicity and comparability” with a number of proposals on how to reform the Basel risk-based capital framework. In 2014, the BCBS published proposals to address excessive variability in risk-weighted asset calculations with the objective of improving consistency and comparability in bank capital ratios.

In October 2014, the BCBS consulted on a revised standardized approach for measuring operational risk capital. With this, the BCBS aims to address certain weaknesses identified in the

existing approaches and to streamline the framework. In November 2014, the BCBS published its report on “Reducing excessive variability in banks’ regulatory capital ratios,” giving an overview of its priorities and next steps. The report addresses three areas: (i) policy measures, which aim to develop prudential proposals to improve the standardized, non-modelled approaches for calculating regulatory capital that will also provide the basis for the use of floors and benchmarks; (ii) disclosure requirements related to risk weights by amending Pillar 3 of the Basel framework and (iii) monitoring in order to ensure proper implementation of risk-weighted asset variability through Hypothetical Portfolio Exercises (HPEs) under the Committee’s Regulatory Consistency Assessment Program (RCAP). In its report the BCBS outlines its objective to finalize key pillars of its framework by the end of 2015, i.e., the standardized approach requirements for credit risk, market risk and operational risk, the capital floor framework, and internal model requirements for credit risk and market risk. In addition, the BCBS confirmed that it is continuing to undertake a longer-term review of the structure of the regulatory capital framework considering whether a more fundamental reform is necessary.

In December 2014, the BCBS published three consultations. One consultation covers the BCBS proposals for revising the standardized approach to credit risk, such as by relying less on external credit ratings, reducing the scope of national discretion or by strengthening the link between the standardized and the IRB approach. One of the key aspects of the current proposal is that the corporate and bank exposures would be based on a limited number of drivers and no longer risk-weighted by reference to their external credit ratings. The second consultation outlines the design of the capital floor framework, which would be based on revised standardized approaches for credit, market and operational risk. The calibration of the floor is outside the scope of the consultation. The third proposal covers the outstanding issues in terms of the fundamental review of the trading book, and sets out a limited set of revisions to the earlier BCBS’s consultation on a proposed market risk framework, which was published for consultation in October 2013.

FSB proposes standards on TLAC

With regard to addressing TBTF, an important development was the publication for consultation of the proposed standards on Total Loss-Absorbing Capacity (TLAC) by the Financial Stability Board (FSB) in November 2014. These standards aim to build up adequate loss-absorbing capacity for global systemically important banks to ensure that an orderly wind-down is possible. The FSB proposes that a minimum Pillar 1 TLAC requirement be set within the range of 16% to 20% of RWA and at least twice the Basel III tier 1 leverage ratio requirement.

BCBS issues revised Pillar 3 disclosure requirements

In January 2015, the BCBS issued revised Pillar 3 disclosure requirements that aim to improve comparability and consistency of disclosures. To this end, the BCBS introduced harmonized templates. These include prescriptive, fixed-form templates for

 

 

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quantitative information that is considered essential for the analysis of a bank’s regulatory capital requirements, as well as templates with a more flexible format for information that is considered meaningful to the market but not central to the analysis of a bank’s regulatory capital adequacy. In addition, banks may accompany the disclosure requirements in each template with a qualitative commentary that explains a bank’s particular circumstances and risk profile. According to the BCBS timeline, banks will be required to publish their first Pillar 3 reports under the revised framework concurrently with their year-end 2016 financial reports. Under the

new requirements, we will be mapping the financial statements into regulatory risk categories and we will present semiannually and annually comprehensive sets of standardized disclosure tables. Amendments to our Pillar 3 reporting will further include the quarterly disclosure of a RWA flow statement in a granularity similar to the one we have so far been disclosing annually. The standardized tables are designed to improve the comparability between banks and are expected to require implementation investment.

 

 

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Our strategy

We are committed to providing our clients with superior financial advice and solutions while generating attractive and sustainable returns for shareholders. Our strategy centers on our leading wealth management businesses and our premier universal bank in Switzerland, enhanced by our strong asset manager and investment bank. These businesses share three key characteristics: they benefit from a strong competitive position in their targeted markets, arecapital-efficient, and offer a superior structural growth and profitability outlook. Our strategy builds on the strengths of all of our businesses and focuses our efforts on areas in which we excel, while seeking to capitalize on the compelling growth prospects in the businesses and regions in which we operate. Capital strength is the foundation of our success.

 

Our strategic transformation

EDTF |In 2011, we laid out three critical objectives for UBS: executing our strategy, delivering for our clients and unlocking our growth potential. We accelerated the execution of our strategy in 2012 and have since made substantial progress focusing our activities on a set of highly synergistic, less capital and balance sheet-intensive businesses dedicated to serving clients and well-positioned to maximize value for shareholders. We have reached our targeted Basel III CET1 capital ratio of 13%, significantly reduced risk-weighted assets and costs, while simultaneously growing our business and enhancing our competitive positioning. We have successfully grown our unrivaled wealth management businesses and transformed our Investment Bank to focus on its traditional strengths in advisory, research, equities, foreign exchange and precious metals. At our Investor Update on 6 May 2014, we provided information on the progress of executing our strategy. By the end of 2014, we completed our strategic transformation process. Through the continued successful execution of our strategy, we believe we can sustain and grow our business and maintain a prudent capital position. While our strategy remains unchanged going forward, we updated and extended several of our annual performance targets, which are outlined in the table at the end of this section.

Achieving greater effectiveness and efficiency is imperative for the success of our strategy. We remain fully committed to achieving the cost reductions announced at the 2014 Investor Update,

with a net cost reduction target of CHF 1.4 billion versus full-year 2013 by the end of 2015, including CHF 1.0 billion in Corporate Center – Core Functions and CHF 0.4 billion in Corporate Center – Non-Core and Legacy Portfolio. After that, we target additional net cost reductions of CHF 0.7 billion as we exit our Non-core and Legacy Portfolio.

Our commitment to a prudent capital position is based on maintaining a fully applied CET1 capital ratio of at least 13% and a post-stress fully applied CET1 capital ratio of at least 10%. From 2014 onwards, our deferred contingent capital plan awards will qualify as additional tier 1 capital under Basel III requirements. Through our compensation programs, we intend to build approximately CHF 2.5 billion in additional tier 1 capital over the next five years, which will eventually replace the high-trigger loss-absorbing capital recognized as tier 2 capital. Additional tier 1 capital is an important component of our future capital structure and we have also started building additional tier 1 capital through external issuance from UBS Group AG. An optimized capital structure enables us to meet regulatory requirements while targeting optimal shareholder returns.

As discussed further above, we continue to adapt our legal structure to improve UBS’s resolvability in response to evolving too big to fail (TBTF) requirements in Switzerland and other countries in which UBS operates. The changes to our legal structure do not affect our strategy, our business and the way we serve our clients.p

 è Refer to the “UBS Group – Changes to our legal structure” section of this report for more information
 

 

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Our strategy

 

Delivering attractive shareholder returns

We are committed to delivering sustainable performance and attractive returns to shareholders. We have delivered progressive capital returns in 2011, 2012 and 2013. In 2014, we achieved our capital ratio target of a fully applied CET1 capital ratio of at least 13% and met our objective of maintaining a post-stress fully applied CET1 capital ratio of at least 10%. Subject to maintaining our CET1 capital ratio target and our objective for the post-stress CET1 capital ratio, we are targeting a total payout ratio of at least 50% of net profit attributable to UBS shareholders.

In line with our dividend policy, we propose a 100% increase in our ordinary dividend to CHF 0.50 per share for the financial year 2014, which will be paid out of capital contribution reserves. The ex-dividend date is expected to be 11 May 2015. In addition, following the successful completion of the squeeze-out procedure, we expect to pay a supplementary capital return of CHF 0.25 per share to be paid to shareholders of UBS Group AG. This supplementary capital return is separate and in addition to the proposed ordinary dividend described above and will also be paid out of capital contribution reserves.

 

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Our annual performance targets

The table below outlines our annual performance targets for the Group, the business divisions and the Corporate Center for 2015 and beyond. These performance targets are based on adjusted results that exclude items that management believes are not

representative of the underlying performance of our businesses, and assume constant foreign currency translation rates, unless otherwise indicated.

 

 

Annual performance targets

 

 

 

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Our strategy

 

 

UBS – leading universal bank in Switzerland

 

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UBS is the pre-eminent universal bank in Switzerland, the only country where we operate and maintain leading positions in all five of our business areas: retail, wealth management, corporate and institutional banking, investment bank services and asset management. We are fully committed to our home market as our leading position in Switzerland is crucial in terms of sustaining our global brand and profit stability. Drawing on our network of around 300 branches and 4,500 client-facing staff, complemented by modern digital banking services and customer service centers, we are able to reach approximately 80% of Swiss wealth and serve one in three households, high net worth individuals and pension funds, more than 120,000 companies, and 85% of banks domiciled in Switzerland. In 2014, Euromoney

efficiently. As a result, we are in an excellent position to meet our clients’ needs with a comprehensive range of banking products and services. Our universal bank model has proven itself to be highly effective and consistently contributes substantially to the Group.

 

Our distribution is based on a multi-channel strategy. We strive to offer a unique client experience, giving clients the choice how to interact with us – via branches, customer service centers or digital channels. Our expanding electronic and mobile banking offering is very well-regarded and we see a steadily rising number of users and client interactions. Client feedback remained excellent with 87% of Apple App Store reviewers

awarding the maximum five stars. Our e-banking service counted over 1.4 million clients, with more than 250,000 using our market-leading personal financial management tool. We received external recognition with the “Master of Swiss Web 2014” award for our e-banking services and the “Master of Swiss Apps 2014” award for our co-operation with SumUp. The Celent Model Bank Award 2014 and Visa’s Contactless & Mobile Award 2014 highlighted our outstanding security solution for e-banking authentication. We will continue building on our position as the leading multi-channel bank in Switzerland and our tradition as innovator in digital services to capture market share and increase efficiency.

acknowledged our pre-eminent position in Switzerland with its prestigious Best Bank in Switzerland award for the third consecutive year.

 

Our universal bank model is central to our success. We differentiate ourselves by leveraging our strengths across all segments. We have a cross-divisional management approach which promotes cross-divisional thinking, enables seamless collaboration across all business areas and allows us to utilize our resources

 

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Measurement of performance

 

Performance measures

Key performance indicators

EDTF |Our key performance indicator (KPI) framework focuses on key drivers of total shareholder return, measured by the dividend yield and price appreciation of our shares. Our senior management reviews the KPI framework on a regular basis by considering prevailing strategy, business conditions and the environment in which we operate. The KPIs are disclosed consistently in our quarterly and annual reporting to facilitate comparison of our performance over the reporting periods.

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 KPIs are taken into account in determining variable compensation.p

 è Refer to the “Compensation” section of this report for more information

EDTF |In addition to KPIs, we disclose our performance targets. These performance targets, which are defined in order to track the achievement of our strategic plan, are based on our KPIs as well as on additional balance sheet and capital management performance measures. p

 è Refer to the “Our strategy” section of this report for more information on performance targets

Changes to our key performance indicators in 2014

EDTF |In 2014, we made certain changes to our KPI framework to further enhance its relevance by reclassifying certain KPIs to “Additional information,” or redefining them to focus on our specific wealth management or retail businesses.

“Return on risk-weighted assets, gross (%)” for the Group is now reported as “Additional information” rather than as a KPI, as we consider this metric less meaningful and relevant than other existing KPIs in measuring Group performance. We also report our “Swiss SRB Basel III common equity tier 1 (CET1) capital ratio (%) (phase-in)” as “Additional information” rather than as a KPI. Our Swiss SRB Basel III CET1 capital ratio on a fully applied basis remains a KPI. At the Group level, we replaced the KPI “Net new money growth (%)” with “Net new money growth for combined wealth management businesses (%),” focusing on net new money generated only by our wealth management businesses, by excluding net new money from Global Asset Management and Retail & Corporate from this measure.

“Recurring income as a % of income (%)” is no longer a Wealth Management Americas KPI, but is instead reported as “Additional information,” consistent with the way this metric is reported in Wealth Management.

We replaced our Retail & Corporate KPI “Net new business volume growth (%)” with “Net new business volume growth for retail business (%),” excluding our corporate and institutional business from this measure as its net new business volume is volatile by nature and therefore provides limited insight. The revised measure better reflects management’s view on our business. As “Additional information,” we also show “Business volume for retail business (CHF billion)” and “Net new business volume for retail business (CHF billion).” “Impaired loan portfolio as a % of total loan portfolio, gross (%)” is no longer a Retail & Corporate KPI, but is instead reported as “Additional information.”

Additionally, we replaced the KPI “Net new money growth (%)” for Global Asset Management with “Net new money growth excluding money market flows (%).” Money market flows are volatile by nature, and metrics excluding these flows therefore provide more focused insight.p

New key performance indicators in 2015

EDTF |In 2015, return on tangible equity (RoTE) will replace return on equity (RoE) as a KPI. RoE will continue to be reported as “Additional information.” In addition, net margin on invested assets for Wealth Management, Wealth Management Americas and Global Asset Management will become a KPI. We will continue to report gross margin on invested assets as a KPI for these business divisions.p

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.

 

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

Of the two, invested assets is a more important measure.

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. Interest and dividend income from invested assets is not counted as net new money inflow. However, in Wealth

 

 

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Management Americas we also show net new money including interest and dividend income in line with historical reporting practice in the US market. The Investment Bank does not track invested assets or net new money.

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 client, add value and generate revenues. Most double-counting arises when mutual funds are managed by Global Asset Management and sold by Wealth Management 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 173 billion of invested assets were double-counted as of 31 December 2014 (CHF 156 billion as of 31 December 2013).

 è Refer to “Note 35 Invested assets and net new money” in the ���Financial information” section of this report for more information

Seasonal characteristics

Our main businesses may show seasonal patterns. 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 may also be impacted by seasonal components, such as lower client activity levels related to the summer and end-of-year holiday seasons, annual income tax payments (which are concentrated in the second quarter in the US) and asset withdrawals that tend to occur in the fourth quarter.

 

 

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EDTF |Pillar 3 | Group/business division key performance indicators

 

Key performance indicatorsDefinitionGroupWealth
Management
Wealth
Management
Americas
Retail &
Corporate
Global Asset
Management
Investment
Bank
Net profit growth (%)Change in net profit attributable to UBS Group AG shareholders from continuing operations between current and comparison periods/net profit attributable to UBS Group AG shareholders from continuing operations of comparison periodl    
                      
Pre-tax profit growth (%)Change in business division performance before tax between current and comparison periods/business division performance before tax of comparison periodl    l    l    l    l    
                      
Cost/income ratio (%)Operating expenses/operating income before credit loss (expense) or recoveryl    l    l    l    l    l    
                      
Return on equity (RoE) (%)Net profit attributable to UBS Group AG shareholders (annualized as applicable)/average equity attributable to UBS Group AG shareholdersl    
                      
Return on attributed equity (RoaE) (%)Business division performance before tax (annualized as applicable)/average attributed equityl    
                      
Return on assets, gross (%)Operating income before credit loss (expense) or recovery (annualized as applicable)/average total assetsl    l    
                      
Swiss SRB leverage ratio (phase-in, %)Swiss SRB Basel III common equity tier 1 capital and loss-absorbing capital/total adjusted exposure (leverage ratio denominator)l    
                      
Swiss SRB Basel III common equity tier 1 capital ratio (fully applied, %)Swiss SRB Basel III common equity tier 1 capital/Swiss SRB Basel III risk-weighted assetsl    
                      
Net new money growth (%)Net new money for the period (annualized as applicable)/invested assets at the beginning of the period. Group net new money growth is reported as net new money growth for combined wealth management businesses. Global Asset Management net new money growth excludes money market flows.l    l    l    l    
                      
Gross margin on invested assets (bps)Operating income before credit loss (expense) or recovery (annualized as applicable)/average invested assetsl    l    l    
                      
Net new business volume growth for retail business (%)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 periodl    
                      
Net interest margin (%)Net interest income (annualized as applicable)/average loansl    
                      
Average VaR (1-day, 95% confidence, 5 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 datal    
                      

pp

EDTF |Pillar 3 | New key performance indicators in 2015

 

Key performance indicatorsDefinitionGroup Wealth
Management
 Wealth
Management
Americas
 Global Asset
Management
 
Net margin on invested assets (bps)Business division performance before tax (annualized as applicable)/average invested assetsl      l      l      
                        
Return on tangible equity (RoTE) (%)Net profit attributable to UBS Group AG shareholders before amortization and impairment of goodwill and intangible assets (annualized as applicable)/average equity attributable to UBS Group AG shareholders less average goodwill and intangible assets UBS Group AG1l      
                        

1 Goodwill and intangible assets are adjusted to reflect the non-controlling interests in UBS AG.pp

 

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Wealth Management

 

Wealth Management

Wealth Management provides wealthy private clients with investment advice and solutions tailored to their individual needs. At the end of 2014, we had a presence in nearly 50 countries and invested assets of CHF 987 billion.

 

Business

We provide comprehensive financial services to wealthy private clients around the world, with the exception of those served by our colleagues in Wealth Management Americas. UBS is a global firm with global capabilities, and our clients benefit from a full spectrum of resources, ranging from investment management solutions to wealth planning and corporate finance advice, as well as the specific offerings outlined below. Our guided architecture model gives clients access to a wide range of products from third-party providers that complement our own products.

Strategy and clients

We are one of the pre-eminent wealth managers globally and aim to provide our clients with superior investment advice and solutions in line with their individual financial objectives.

The wealth management business has attractive long-term growth prospects and we expect its growth to outpace that of gross domestic product globally. From a client segment perspective, the global ultra high net worth market, including family offices, has 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 capture the growth opportunities across regions and segments.

We provide wealth management solutions, products and services to wealthy private clients as well as financial intermediaries. Investment management and portfolio construction lie at the heart of our offering. Clients who opt for a discretionary investment mandate delegate the management of their assets to a team of professional portfolio managers. Those who prefer to be actively involved can choose an advisory mandate. The portfolios of advisory mandate clients are monitored and analyzed closely, and they receive tailored proposals to help them make informed investment decisions. All clients can also invest in 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 clients advice on structured lending and corporate finance. Our integrated client service model allows us to bundle capabilities from across the Group to identify investment opportunities in all market conditions and create solutions that suit individual client needs. This collaboration is also crucial to our focused expansion in key onshore markets, where we continue to benefit from the established business relationships of our local Investment Bank and Global Asset Management teams.

We cater to the specific needs of our diverse client segments. Our ultra high net worth clients have access to the infrastructure we offer to our institutional clients. This includes the Investment Bank’s trading platforms and our Institutional Solutions Group’s services. In addition, through our Global Family

 

 

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Office Group, our most sophisticated ultra high net worth clients benefit from tailored institutional coverage and global execution provided by dedicated specialist teams from both Wealth Management and the Investment Bank. We offer our high net worth clients the full range of our investment management capabilities. For example, UBS Advice, which forms part of our advisory mandate offering, provides our clients with tailored investment advice. It is an industry first in terms of how it uses state-of-the-art technology to systematically monitor clients’ portfolios to detect risks as well as deviations from their selected investment strategies. We believe that both our advisory and discretionary mandate offerings provide a superior value proposition as they both draw on the full range of our investment management capabilities. We aim to grow our mandates business as it offers premium pricing opportunities and contributes to higher recurring revenues.

Our booking centers across the globe give us a strong local presence that allows us to book client assets in multiple locations. The strength and scope of our franchise also enable us to adapt swiftly to the changing legal and regulatory environment.

In Asia Pacific, we are accelerating our growth with a focus on Hong Kong and Singapore, the leading financial centers in the region. We are also developing our presence in major onshore markets such as Japan and Taiwan, and investing further in our local footprint in China to help capture long-term growth opportunities.

In the emerging markets, we are focused on key growth markets such as Mexico, Brazil, Turkey, Russia, Israel and Saudi Arabia. We regularly assess our local presence to ensure proximity to our clients in key markets, with the aim of serving them most efficiently out of key hubs in the major emerging regions. Many emerging market clients prefer to book their assets in established financial centers and, to that end, we are strengthening our coverage for such clients through our booking centers in Switzerland, the US, and the UK.

In Europe, our long-established local presence in all major markets supports our growth ambition. We recognized early the converging needs of clients and combined our offshore and onshore businesses. This gives clients across the region access to our extensive Swiss product offering, and creates economies of scale by enabling us to deal efficiently with increased regulatory and fiscal requirements. In 2014, we extended our Swiss platform and offering to our German domestic business – a major milestone in terms of capitalizing on our existing global capabilities.

In Switzerland, based on our integrated business model, we collaborate closely with our colleagues in the retail, corporate, asset management and investment banking businesses. This creates opportunities to expand our business through client referrals and generates efficiencies by enabling us to make use of UBS’s extensive branch network, which includes 100 wealth management offices.

Our Global Financial Intermediaries business supports our growth ambitions by providing us with access to markets and clients beyond our own client advisor network. Additionally, it acts as a strategic business partner for more than 2,200 financial intermediaries in all major financial centers. It offers them professional investment advisory services, a global banking infrastructure and tailored solutions, helping financial intermediaries to advise their end-clients more effectively.

Looking ahead, we want to continue to build on our leading position by adapting our business for the digital age. Digitalization represents an important opportunity for us to differentiate ourselves and respond to our evolving client base. Accordingly, we are making significant investments in our IT platform and e-capabilities.

Organizational structure

Headquartered in Switzerland, we have a presence in nearly 50 countries with approximately 230 offices, of which 100 are in Switzerland. As of the end of 2014, we employed approximately 16,700 people worldwide. Of these, approximately 4,250 were

 

 

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client advisors. We are governed by executive, operating and risk committees and are primarily organized along regional lines with our business areas being Asia Pacific, Europe, Global Emerging Markets, Switzerland and Global Ultra High Net Worth. Our business is supported by the Chief Investment Office and a global Investment Products and Services unit, as well as central functions.

Competitors

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

Investment advice and solutions

As part of a global, integrated firm, we are a dynamic wealth manager with investment management capabilities at our core. Our client advisors are proactive in their relationships with clients, and we have a systematic process for developing a thorough understanding of our clients’ financial objectives and risk appetite. In addition, our wealth planners – part of our specialist product team – often support client advisors as they guide their clients in making financial decisions based on their life-cycle needs. With this comprehensive overview, we offer them wealth planning advice and products, and we ascertain their investment strategy, which serves as the foundation for the investment solutions we offer them. Client advisors regularly review their clients’ investor profiles to make sure they correspond to their evolving priorities and changing risk tolerance. Our bespoke training programs and the ongoing support the firm provides to our client advisors enable them to deliver superior advice and solutions to our clients. For example, we require all of our client advisors to obtain the Wealth Management Diploma, a program accredited by Switzerland’s

State Secretariat For Economic Affairs (SECO) that ensures a high level of knowledge and expertise. For our most senior client advisors, we offer extensive training through the Wealth Management Master program.

Our global Chief Investment Office synthesizes the research and expertise of our global network of economists, strategists, analysts and investment specialists across all business divisions worldwide. These experts closely monitor and assess financial market developments. This allows us to deliver real-time insights and to include local expertise in our global investment process. Using these analyses, and in consultation with our external partner network at the UBS Investor Forum, which includes many of the world’s most successful money managers, the Chief Investment Office establishes a clear, concise and consistent investment view – the UBS House View.

The UBS House View identifies and communicates investment opportunities and market risks to help protect and grow our clients’ wealth, and we aim to apply and implement it consistently in our clients’ portfolios. The UBS House View is also reflected in our strategic and tactical asset allocations, both of which underpin the investment strategies for our flagship discretionary mandates. The strategic asset allocation is an essential part of our disciplined style of managing and growing our clients’ wealth, and ensures that our clients remain on course to meet their financial goals over the long term. It is complemented by our tactical asset allocation, which uses our global expertise to help our clients navigate markets and ultimately improve the risk and return trade-off potential of their portfolios.

Our Investment Products and Services unit ensures our solutions are in step with market conditions by aligning our discretionary and advisory offerings with our UBS House View. Our products are aimed at achieving positive performance in various market scenarios. They are developed from a wide range of sources, including Investment Products and Services, Global Asset Management, the Investment Bank and third parties, as we operate within a guided architecture model. By aggregating private investment flows into institutional-size flows, we can offer our clients access to investments normally available only to institutional clients.

 

 

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Wealth Management Americas

Wealth Management Americas developsadvice-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

We are one of the leading wealth managers in the Americas in terms of financial advisor productivity and invested assets. Our business includes the domestic US and Canadian business as well as international business booked in the US. We have attractive growth opportunities and a clear strategy focused on serving our target client segments. As of 31 December 2014, invested assets totaled USD 1,032 billion.

Strategy and clients

Our goal is to be the best wealth management business in the Americas. With our client-focused, advisor-centric strategy, we deliver advice-based wealth management solutions and banking services through our financial advisors in key metropolitan markets,

providing a fully integrated set of products and services to meet the needs of our target client segments – high net worth clients and ultra high net worth clients – while also serving the needs of core affluent clients. We define high net worth clients as those with investable assets of between USD 1 million and USD 10 million, and ultra high net worth clients as those with investable assets of more than USD 10 million. Core affluent clients are defined as those with investable assets of between USD 250,000 and USD 1 million. The Global Family Office – Americas, a joint venture between Wealth Management Americas and the Investment Bank, was launched in 2013 with the objective of seamlessly offering the global resources and reach of the entire firm by providing integrated, comprehensive wealth management and institutional-type services to selected Family Office clients. Our Wealth Advice Center serves emerging affluent clients with investable assets of less than USD 250,000. We are committed to

 

 

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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 about 7,000 financial advisors and USD 1,032 billion in invested assets, we are large enough to be relevant, but focused enough to be nimble, enabling us to combine the advantages of 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, a global Chief Investment Office, and solutions from our asset-gathering businesses and the Investment Bank. These resources are augmented by our commitment to an open architecture platform and are supported by our partnerships with many of the world’s leading third-party institutions. Moreover, our wealth management offering is complemented by banking, mortgage and financing solutions that enable us to provide advice on both the asset and liability sides of our clients’ 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 2014, our strategy and focus led to a continued 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 towards delivering holistic advice across the full spectrum

of client needs, leveraging the global capabilities of UBS to clients by continuing to expand our cross business collaboration efforts throughout the firm, and delivering banking and lending services that complement our wealth management solutions. We also plan to continue investing in improved platforms and technology, while remaining disciplined on cost. We expect these efforts to enable us to achieve higher levels of client satisfaction, strengthen our client relationships, and lead to greater revenue productivity among our financial advisors.

Organizational structure

Wealth Management Americas consists of branch networks in the US, Puerto Rico, Canada and Uruguay, with 6,997 financial advisors as of 31 December 2014. Most corporate and operational functions are located in the Wealth Management Americas home office in Weehawken, New Jersey and the UBS Business Solutions Center in Nashville, Tennessee.

In the US and Puerto Rico, we operate primarily through UBS subsidiaries. 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 bank in Utah, which provides Federal Deposit Insurance Corporation (FDIC)-insured deposit accounts, collateralized lending services, mortgages and credit cards.

Canadian wealth management and banking operations are conducted through UBS Bank (Canada), and Uruguayan wealth management operations are conducted through UBS Financial Services Montevideo.

 

 

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Competitors

We compete with national full-service brokerage firms, domestic and global private banks, regional broker-dealers, independent broker-dealers, registered investment 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

We offer clients a full array of solutions that focus on their individual financial needs. Comprehensive planning supports clients through the various stages of their lives, including education funding, charitable giving, 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 planning, 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 our clients’ investment decisions.

Our offering is 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, resource management accounts, FDIC-insured deposits, mortgages and credit cards.

Additionally, our UBS Equity Plan Advisory Services is a leading provider of equity compensation plan services and advice to more than 150 US corporations, representing one million participants worldwide. 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 authorize 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, we also offer mutual fund advisory programs, 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 invest in structured products and alternative investment offerings to complement their portfolio strategies.

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

 

 

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Retail & Corporate

 

Retail & Corporate

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

 

Business

We provide comprehensive financial products and services to our retail, corporate and institutional clients in Switzerland, maintaining a leading position in these client segments and embedding our offering in a multi-channel approach. As shown in the “Business mix” chart below, our retail and corporate business generates stable profits which contribute substantially to the overall financial performance of the Group. We are among the leading players in the retail and corporate loan market in Switzerland, with a well collateralized lending portfolio of CHF 137 billion as of 31 December 2014, as shown in the “Loans, gross” chart below. This portfolio is managed conservatively, focusing on profitability and credit quality rather than market share.

Our retail and corporate business constitutes a central building block of UBS’s universal bank delivery model in Switzerland, supporting 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, we leverage the cross-selling potential of products and services provided by our asset-gathering and investment banking businesses. In addition, we manage a substantial part of UBS’s Swiss infrastructure and Swiss banking products platform, which are both leveraged across the Group.

Strategy and clients

We aspire to be the bank of choice for retail clients in Switzerland by delivering value-added services. Currently, we serve one in three Swiss households. Our distribution network is comprised of around 300 branches, 1,250 automated teller machines including self-service terminals, and four customer service centers, as well as state-of-the-art digital banking services. Technology is fundamentally transforming the way we deliver our products and services. We are, therefore, continuously expanding and enhancing our multi-channel offering and will continue to build on our long tradition as a leader and innovator in digital services to deliver superior client experience, capture market share and increase efficiency. Moreover, we follow a life-cycle-based product approach to provide our clients with tailored solutions to meet their particular needs in their different stages of life. With regard to execution, we ensure a client-focused and efficient sales process.

Our size in Switzerland and the diversity of businesses we operate put us in an advantageous position to serve all our clients’ complex financial needs in an integrated and efficient way. We aim to be the main bank of corporate and institutional clients ranging from small and medium-sized enterprises to multinationals, and from pension funds and insurers to commodity traders and banks. We serve more than 120,000 companies, including

 

 

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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, and 85% of banks domiciled in Switzerland. We strive to selectively expand our market share in Switzerland with focus on the cash flow-based lending and fee and trading business. Additionally, we systematically expand our international footprint leveraging our product capabilities to optimally serve Swiss corporate clients with activities abroad as well as global corporate clients with headquarters in Switzerland.

Our clients value the good work we do and have rewarded it once again: for the fourth consecutive year, in 2014, the international finance magazine Euromoney named UBS “Best Domestic Cash Manager Switzerland” on the basis of a survey of cash managers and Chief Financial Officers. We were recognized by our clients for our extraordinary quality in the annual “Agent Banks in Major Markets” survey carried out by the Global Custodian magazine.

As the leading retail and corporate banking business in Switzerland, we understand the importance of our role in supporting our clients’ needs. We continuously review structures and processes in order to simplify our service commitments across the business, including streamlining our processes, reducing the administrative burden on our client advisors and enhancing their long-term productivity without compromising our risk standards.

Continuous development, particularly of our client-facing staff, is a crucial element of our strategy, as this is our key to ensuring superior client service. We are the only bank in Switzerland with a mandatory certification scheme for our client advisors acknowledged by an independent third party.

Organizational structure

We are a core element of UBS’s universal bank delivery model in Switzerland, which allows us to extend the expertise of the entire bank to our Swiss retail, corporate and institutional clients. Switzerland is the only country where we operate in retail, corporate and institutional banking, wealth and asset management, as well as investment bank services.

To ensure consistent delivery throughout Switzerland, the Swiss network is organized into 10 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 Raiffeisen, Credit Suisse, the cantonal banks, Postfinance, and 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 comprehensive life-cycle-based offering, comprising easy-to-understand products including cash accounts, payments, savings and retirement solutions, investment fund products, residential mortgages, a loyalty program and advisory services. We provide financing solutions to our corporate clients, offering access to equity and debt capital markets, syndicated and structured credit, private placements, leasing and traditional financing. Our transaction banking offers solutions for payment and cash management services, trade and export finance, receivable finance, as well as global custody solutions to institutional clients. In 2014, we launched a number of product and service innovations. Examples include the UBS Asset Wizard, which enables our globally invested clients to analyze the risks and performance of their portfolios with just a few clicks, digitally and in real time. Additionally, we launched SME Fast Credit based on a lean credit process that includes fast credit decisions and efficient credit monitoring, which optimally addresses small and medium-sized enterprise needs and helps us realize significant efficiency gains. To best leverage our value proposition to clients, close collaboration with our Investment Bank is a key building block in our universal bank strategy. This enables us to offer capital market products, foreign exchange products, hedging strategies and trading, as well as to provide corporate finance advice in fields such as mid-market mergers and acquisitions, corporate succession planning and real estate.

 

 

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Global Asset Management

 

Global Asset Management

Global Asset Management is alarge-scale asset manager with well diversified businesses across regions and client segments. We servethird-party institutional and wholesale clients, as well as 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

Our investment capabilities encompass traditional investments including equities, fixed income, multi-asset and currency strategies, as well as alternative investments including hedge funds, real estate, infrastructure and private equity funds. Complementing the investment offering, our fund services unit provides administration services for traditional and alternative UBS and third-party funds. Invested assets totaled CHF 664 billion and assets under administration were CHF 520 billion as of 31 December 2014. We are a leading fund house in Europe, the largest mutual fund manager in Switzerland and one of the leading fund of hedge funds and real estate investment managers in the world.

Strategy

Our mission is to bring the best of Global Asset Management to our clients by drawing on the full breadth of our capabilities to deliver high-quality solutions and services, and by acting as a trusted partner. We offer a broad range of investment capabilities and styles across all major traditional and alternative asset classes. We are focused on delivering superior investment performance and carefully managing our product shelf to ensure we can offer distinctive and innovative products for our clients. Across our

business, we have a clear focus on fostering an environment that attracts, develops and retains world-class professionals.

Our aim is to drive profitable and sustainable growth across our client segments. In third-party distribution, we are focusing our growth ambitions on key markets, strengthening our institutional business and accelerating the growth of our wholesale business. We are also intensifying our collaboration with UBS’s wealth management businesses to deliver products and solutions for their clients.

Our global business model has proven resilient to challenging market conditions, positions us well to benefit from shifting market dynamics, and provides a solid foundation to capture growth opportunities.

Going forward, we will build on our strengths, including alternatives and passive investments. In alternatives, we continue to work to expand our successful platform, building on our established positions in real estate, hedge funds and fund of hedge funds, and leveraging this expertise across all investment areas. In passive investments, we continue to develop our well established capabilities, including indexed strategies and exchange-traded funds (ETF), to meet growing demand for these products from both institutional and individual investors. Nearly one-third of our invested assets now fall into this category and our platform is highly scalable.

 

 

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Following a challenging period, the asset management industry has seen a resurgence in asset inflows. The long-term outlook is positive, with three main drivers indicating continued industry inflows: (i) populations are aging in developed countries and this will increase future savings requirements; (ii) governments are continuing to reduce support for pensions and benefits, leading to a greater need for private provision; and (iii) emerging markets are becoming ever more important asset pools.

Clients and markets

We serve third-party institutional and wholesale clients, and clients of UBS’s wealth management businesses. As shown in the “Invested assets by client segment” chart, as of 31 December 2014 approximately 71% of invested assets originated from third-party clients. These comprised institutional clients, such as corporate and public pension plans, governments and central banks, and wholesale clients, such as financial intermediaries and distribution partners. UBS’s wealth management businesses represented 29% of invested assets. Geographically, our client base is broadly diversified, as shown in the “Invested assets by region” chart.

Competitors

Our competitors include global firms with wide-ranging capabilities and distribution channels, such as BlackRock, JP Morgan Asset Management, BNP Paribas Investment Partners, Amundi, Goldman Sachs Asset Management, AllianceBernstein Investments, Schroders and Morgan Stanley Investment Management.

Our other competitors include firms with a specific market or asset class focus.

Organizational structure

At the end of 2014, we employed 3,817 personnel in 24 countries, and have our principal offices in London, Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo and Zurich.

Our structure is organized around our:

 

investment and business areas (as detailed under products and services below);

 

client servicing and distribution teams, including regional teams responsible for third-party wholesale and institutional distribution, and dedicated global teams covering sovereign clients, consultants, ETFs and UBS’s wealth management businesses;

 

global product development and management function;

 

regional heads of Americas, Asia Pacific, Switzerland and EMEA to provide regional governance and oversight;

 

a divisional COO function including global product control and logistics, fund services, business risk and regulatory management, fund treasury, global marketing, and strategic planning and development;

 

support functions including shared services provided by Corporate Center.

 

 

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Products and services

We offer our clients investment products and services in equities, fixed income, single and multi-manager hedge funds, global real estate, infrastructure, private equity, and multi-asset solutions. These can be delivered in the form of active or passive, segregated, pooled or advisory mandates, as well as a broad range of registered investment funds, ETFs and other investment vehicles in a wide variety of jurisdictions. We also offer fund administration services for UBS and third-party funds. The “Investment capabilities and services” chart illustrates the distinct offerings of each area.

 

 

Equities offers a wide spectrum of active investment strategies with varying risk and return objectives. Global and regional capabilities in the US, Europe, APAC and emerging markets are complemented by growth and quantitative styles. Strategies include core, high alpha, unconstrained, long-short, small cap, sector, thematic and high dividend.

 

Fixed income offers a diverse range of active 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.

 

Structured beta and indexing offers indexed, alternative beta and rules-based strategies across all major asset classes on a global and regional basis. Its capabilities include indexed equities, fixed income, commodities, real estate and alternatives with benchmarks ranging from mainstream to highly customized indices and rules-driven solutions. Products are offered in a variety of structures including ETFs, pooled funds, structured funds and mandates.

 

Global investment solutions (GIS) offers active asset allocation, currency and multi-manager investment strategies as well as structured solutions and advisory services. It manages a wide array of regional and global multi-asset investment strategies across the full investment universe and risk/return spectrum, customized and risk-managed strategies, convertible bonds

 

 

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and multi-manager strategies. GIS also supports clients in a wide range of advisory functions including outsourced chief investment officer, manager selection, pension risk management, risk advisory, global tactical asset allocation and custom mandates.

 

O’Connoris a global, relative value-focused, single-manager hedge fund platform. It is dedicated to providing investors with strong absolute and risk-adjusted returns, differentiated from those available from long-only investments in traditional asset classes.

 

A&Q hedge fund solutions (A&Q)offers a full spectrum of multi-manager hedge fund solutions and advisory services including a wide range of strategies that provide professionally managed exposure to hedge fund investments with tailored risk and return profiles.

 

Global real estateactively manages real estate investments globally and regionally within Asia Pacific, Europe and 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. These are offered through open and closed-end private funds, real estate investment trusts, customized investment structures, multi-manager funds, individually managed accounts and real estate securities.

 

Infrastructure and private equitymanages direct infrastructure investment and multi-manager infrastructure and private equity strategies for both institutional and private banking clients. Infrastructure asset management manages direct investments in core infrastructure assets globally. Alternative Funds 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, aglobal fund administration business, offers a comprehensive range of flexible solutions, including fund set-up and fiduciary and regulatory services as well as reporting and accounting for traditional investment funds, managed accounts, hedge funds, real estate funds, private equity funds and other alternative structures.

 

 

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Investment Bank

 

Investment Bank

The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovative solutions, execution and comprehensive access to the world’s capital markets. We offer advisory services and access to international capital markets, and provide comprehensivecross-asset research, along with access to equities, foreign exchange, precious metals and selected rates and credit markets, through our business units, Corporate Client Solutions and Investor Client Services. The Investment Bank is an active participant in capital markets flow activities, including sales, trading andmarket-making across a range of securities.

 

Business

The Investment Bank is organized as two distinct but aligned business units:

Corporate Client Solutions includes all advisory and financing solutions businesses, origination, structuring and execution, including equity and debt capital markets in service of corporate, financial institution, sponsor clients and UBS’s wealth management businesses.

Investor Client Services includes execution, distribution and trading for institutional investors and provides support to Corporate Client Solutions and UBS’s wealth management businesses. It is comprised of our equities businesses, including cash, derivatives and financing services, cross-asset class research capabilities, and our foreign exchange franchise, precious metals, rates and credit businesses. The Investor Client Services unit also provides distribution and risk management capabilities required to support all of our businesses.

Strategy

We aspire to provide best-in-class services and solutions to our corporate, institutional and wealth management clients, through an integrated, solutions-led approach, driven by intellectual capital and leveraging our award-winning electronic platforms. With our client-centric business model, we are an ideal partner to our wealth management businesses, Retail & Corporate and Global Asset Management, and we are well positioned to provide our clients with deep market insight as well as global coverage and execution.

We continue to focus on our traditional strengths in advisory, capital markets, equities and foreign exchange businesses, complemented by a re-focused rates and credit platform, in order to deliver attractive, sustainable, risk-adjusted returns. Supported by world-class research and technology capabilities, we continue to pioneer innovative and integrated solutions across asset classes. We are thus able to support our clients as they adapt to evolving market structures, driven by regulatory and technological changes.

Our Corporate Client Solutions business unit is comprised of our advisory and capital markets businesses and financing solutions, which are geared toward industries and geographies that

offer the best opportunities to meet our long-term strategic goals. We are present in all major financial markets, with coverage based on a comprehensive matrix of country, sector and product banking professionals.

Within Investor Client Services, our industry-leading equities business continues to leverage its global distribution platform and comprehensive product capabilities, to support a broad client base, including UBS’s wealth management businesses, and institutional and retail investors, providing access to primary and secondary equity markets globally. Our foreign exchange and precious metals businesses, underpinned by a world-class distribution platform, continue to be a cornerstone of our services. Consistent with our strategy, our rates and credit businesses are focused on client flow and solutions, in addition to executing and clearing exchange-traded fixed income and commodities derivatives. It serves our capital markets business through an intermediation model, similar to our equities and foreign exchange businesses.

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our ongoing cost reduction programs and on strengthening our operational risk framework. In 2014, we further optimized internal efficiencies by implementing a targeted technology plan. This plan is based on a long-term portfolio approach across businesses aimed at enhancing the effectiveness of our platform for clients. In addition, we will continue to undertake targeted measures to simplify our production processes, achieve leaner front-to-back processes and operate with a reduced real-estate footprint.

To support our goal of earning attractive returns on our allocated capital, we operate within a tightly controlled framework of balance sheet, risk-weighted assets and leverage ratio denominator. Consistent with this, we assess both the Corporate Client Solutions and the Investor Client Services business units based on the returns they generate individually, as well as assessing the support and contribution they provide across our two business units.

Organizational structure

At the end of 2014, we employed 11,794 personnel in over 35 countries, and had our principal offices in Hong Kong, London, New York, Singapore, Sydney, Tokyo and Zurich.

To ensure that our corporate and institutional clients benefit from our global reach and capabilities in tailoring solutions to meet their individual needs, we are organized into two client-centric business units: Corporate Client Solutions and Investor Client Services. Dedicated management teams in these business units complement our global product capabilities with their regional expertise to foster cross-product and cross-divisional collaboration, enabling us to deliver the firm’s comprehensive range of services to our clients.

We are governed by executive, operating and risk committees and operate through UBS AG branches, and other subsidiaries of UBS Group. Securities activities in the US are conducted through UBS Securities LLC, a registered broker-dealer. In the UK, Investment Bank activities are conducted mainly out of UBS AG London Branch and UBS Limited, consistent with the modified operating model implemented during 2014 for UBS Limited.

Competitors

Our Investment Bank’s strategy and scope is unique, but other competing firms are active in many of the businesses and markets in which we participate. For our leading equities, foreign exchange and corporate advisory businesses, our main competitors are the major global investment banks, including Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley.

Products and services

Corporate Client Solutions

This unit provides client coverage, advisory, debt and equity capital market solutions and financing solutions for corporate, financial institution, sponsor clients and UBS’s wealth management

businesses. Corporate Client Solutions works closely with Investor Client Services in the distribution and risk management of capital markets products and financing solutions. With a presence in all major financial markets, it is managed by region and is organized on a matrix of product, industry sector and country banking professionals. Its main business lines are as follows:

 

Advisoryprovides bespoke solutions for our clients’ most complex strategic challenges. This includes mergers and acquisitions advice and execution, as well as refinancing, spin-offs, exchange offers, leveraged buyouts, joint ventures, takeover defense, corporate broking and other advisory services.

 

Equity capital marketsoffers equity capital-raising services, as well as related derivative products and risk management solutions. Its services include managing initial public offerings, follow-ons, including rights issues and block trades, as well as equity-linked transactions and other strategic equities solutions.

 

Debt capital marketshelps corporate and financial institution clients in raising debt capital including investment-grade and emerging market bonds, high-yield bonds, subordinated debt and hybrid capital. It also provides leveraged capital services, which include event-driven (acquisition, leveraged buy-out) loans, bonds and mezzanine financing. All debt products are provided alongside risk management solutions, including derivatives in close collaboration with our foreign exchange, rates and credit businesses.

 

Financing solutionsserves corporate and investor clients across the globe by providing customized solutions across asset classes via a wide range of financing capabilities, including structured financing, real estate finance and special situations.

 

Risk managementincludes corporate lending and associated hedging activities.

Investor Client Services

Investor Client Services, which includes our equities business and our foreign exchange, rates and credit business, provides a comprehensive distribution platform with enhanced cross-asset delivery as well as specialist skills to our corporate, institutional and wealth management clients.

Equities

We are one of the world’s largest equities houses and a leading participant in the primary and secondary markets for cash equities and equity derivatives. We provide a full front-to-back product suite globally, including financing, execution, clearing and custody services. Our franchise takes a client-centric approach in serving hedge funds, asset managers, wealth management advisors, financial institutions and sponsors, pension funds, sovereign wealth funds and corporations globally. We distribute, structure, execute, finance and clear cash equity and equity derivative products. Our research franchise provides in-depth investment analysis on companies, sectors, regions, macroeconomic trends, public policy and asset-allocation strategies. The main business lines of the equities unit are:

 

 

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Cashprovides clients with liquidity, investment advisory, trade execution and consultancy services, together with comprehensive access to primary and secondary 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 products, direct market access to over 100 venues worldwide, including low-latency execution, innovative algorithms and pre-trade, post-trade and real-time analytical tools. Our broker and intermediary services franchise offers execution and price improvement to retail wholesalers.

 

Derivativesprovides a full range of flow and structured products, convertible bonds and strategic equity solutions with global access to primary and secondary markets. It enables clients to manage risk and meet funding requirements through a wide range of listed, over-the-counter, securitized and fund-wrapped products. We create and distribute structured products and notes for institutional and retail investors with investment returns linked to companies, sectors and indices across multiple asset classes, including commodities.

 

Financing servicesprovides a fully integrated platform for our hedge fund clients, including prime brokerage, capital introduction, clearing and custody, synthetic financing and securities lending. In addition, we execute and clear exchange-traded equity derivatives in more than 45 markets globally. The business efficiently manages its allocated resources to deliver attractive, risk-adjusted returns.

Foreign exchange, rates and credit

This unit consists of our leading foreign exchange franchise and our market-leading precious metals business, as well as select rates and credit businesses. These businesses support the execution, distribution and risk management related to corporate and institutional client businesses, and they also meet the needs of UBS’s wealth management clients via targeted intermediaries. We are focused on building a leading agency execution and electronic trading business, and continue to maintain high levels of balance sheet velocity. The main business lines are:

 

Foreign exchange provides a full range of G10 and emerging markets currency and precious metals services globally. We are a leading foreign exchange market-maker in the professional spot, forwards and options markets. We provide clients worldwide with first-class execution facilities (voice, electronic, algorithmic) coupled with premier advisory and structuring capabilities when tailored solutions best fit our clients’ positioning, hedging or liquidity management. We have been present in physical and non-physical precious metals markets for almost one century, providing trading, investing and hedging across the precious metals spectrum.

 

Rates and credit encompasses sales, trading and market-making in a selected number of rates and credit products, including standardized rates-driven products, interest rate swaps, medium-term notes, government and corporate bonds, bank notes, credit derivatives and the execution and clearing of exchange-traded fixed income and commodities derivatives. In addition, we work closely with Corporate Client Solutions, providing support to our debt capital markets businesses and tailoring customized financing solutions for our clients.

 

 

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Corporate Center

Corporate Center is comprised of Core Functions andNon-core and Legacy Portfolio. Core Functions includeGroup-wide control functions such as finance (including treasury services such as liquidity, funding, balance sheet and capital management), risk control (including compliance) and legal. In addition, Core Functions provide all logistics and support services, including operations, information technology, human resources, regulatory relations and strategic initiatives, communications and branding, corporate services, physical security, information security as well as outsourcing, nearshoring and offshoring.Non-core and Legacy Portfolios is comprised of thenon-core businesses and legacy positions that were part of the Investment Bank prior to its restructuring.

 

Corporate Center – Core Functions

At the end of 2014, 23,637 personnel were employed in Corporate Center – Core Functions. Core Functions allocates the majority of its treasury income, operating expenses and personnel associated with control and shared services functions to the businesses for which the respective services are performed based on service consumption and financial resource usage.

As of 1 January 2015, Corporate Center – Core Functions was reorganized into two new components, Corporate Center – Services and Corporate Center – Group Asset and Liability Management (Group ALM).

Group Chief Financial Officer

Our Group Chief Financial Officer (Group CFO) is responsible for ensuring transparency in, and the assessment of, the financial performance of our Group and business divisions and for the Group’s financial accounting, controlling, forecasting, planning and reporting processes. The Group CFO also provides advice on financial aspects of strategic projects and transactions. The Group CFO is responsible for divisional and UBS Group financial control functions. The Group CFO is also responsible for management and control of the Group’s tax affairs and for treasury and capital management, including management and control of funding and liquidity risk with independent oversight from the Group Chief Risk Officer (Group CRO), and UBS’s regulatory capital ratios. After consultation with the Audit Committee of the Board of Directors (BoD), our Group CFO makes proposals to the BoD regarding the accounting standards adopted by the Group, and defines financial reporting and disclosure standards. Together with the Group Chief Executive Officer (Group CEO), the Group CFO provides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act of 2002, and, in coordination with the Group CEO, manages relations with investors and external analysts. The Group CFO supports the Group CEO in strategy development and key strategic topics. The Corporate Development function supports UBS’s senior management in the definition, implementation and monitoring of UBS’s strategy.

Group Chief Operating Officer

Our Group Chief Operating Officer (Group COO) is responsible for the management of the Group COO functions, which from January 2014 onward includes Group Technology, Group Operations, Group Corporate Services and Business Design & Effectiveness. The Group COO is responsible for providing quality, cost-effective and differentiating Group-wide IT services and tools in line with the needs of the business divisions and Corporate Center and for the delivery of a wide range of operational services across all business divisions and regions. The Group COO is also responsible for supplying real estate infrastructure and general administrative services, and for directing and controlling all supply and demand management activities for the entire firm. He supports the firm with its third-party sourcing strategies and takes responsibility for the bank’s nearshore, offshore, outsourcing and supplier-related processes. The Group COO supports the firm in enabling change and transition to better serve our clients by redefining the level of services and product offerings throughout the firm, improving the effectiveness and efficiency of UBS’s operating model and processes, reducing complexity and enhancing the flexibility and agility of the organization.

Group Chief Risk Officer

The Group Chief Risk Officer is responsible for the development of the Group’s risk appetite framework, its risk management and control principles and risk policies. In accordance with the risk appetite framework approved by the Board, the Group CRO is responsible for the implementation of appropriate independent control frameworks for credit, market, treasury, country, compliance and operational risks within the Group. The Group CRO is also responsible for the development and implementation of the frameworks for risk measurement, aggregation, portfolio controls and, jointly with the Group CFO, for risk reporting. The Group CRO decides over transactions, positions, exposures, portfolio limits and risk provisions/allowances in accordance with the risk control authorities delegated to him. The Group CRO has management responsibility over the divisional, regional and firm-wide risk control functions, and monitors and challenges the bank’s

 

 

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risk-taking activities. In January 2014, the compliance and operational risk organizations were brought together to form a single function focusing on the control of our regulatory, conduct and operational risks across all business divisions. This integrated unit reports to the Group CRO. Also effective January 2014, our Group Security Services function became part of the Group CRO area.

Group General Counsel

Our Group General Counsel (Group GC) is responsible for legal matters, policies and processes, and for managing the legal function of our Group. The Group GC is responsible for reporting legal risks and material litigation, and for managing litigation, internal, special and regulatory investigations. The Group GC assumes responsibility for legal oversight in respect of the Group’s key regulatory interactions and for maintaining the relationships with our key regulators with respect to legal matters.

Corporate Center –Non-core and Legacy Portfolio

Corporate Center – Non-core and Legacy Portfolio is comprised of the non-core businesses and legacy positions that that were part of the Investment Bank prior to its restructuring, and is over-seen by a committee consisting of the Group Chief Executive Officer, the Group Chief Financial Officer and the Group Chief Risk Officer.

Non-core and Legacy Portfolio’s businesses and positions are being managed and exited over time with the objective of maximizing shareholder value, in line with our strategic plan. We have established clear priorities for regions, counterparties and product lines and have developed detailed wind-down plans with the objective of achieving capital benefits at optimized cost. Non-core and Legacy Portfolio works closely with sales managers and bankers in the Investment Bank as well as with trading market contacts in attempting to execute the most appropriate strategy for each situation, and has built strong management information systems to track the progress of risk-weighted assets (RWA) and leverage ratio denominator reductions and exit costs. The wind-down and exit strategies include negotiated bilateral settlements with specific counterparties, third-party novations, including transfers to central clearing houses, agreements to net down trades with other dealer counterparties and portfolio sales. Significant simplification of books and trades also contributed to our strong progress, and dynamic risk management and hedging of positions effectively mitigated profit and loss volatility in the portfolio.

Fully applied RWA for Non-core and Legacy Portfolio as of 31 December 2014 were CHF 36 billion. As of 31 December 2014, 1,480 personnel were employed within Non-core and Legacy Portfolio compared with 1,585 personnel as of 31 December 2013.

 

 

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Risk factors

 

EDTF |Certain risks, including those described below, may impact our ability to execute our strategy and 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 impact our ability to execute our strategy and affect our business activities, financial condition, results of operations and prospects. The order of presentation of the risk factors below does not indicate the likelihood of their occurrence or the potential magnitude of their consequences.p

Fluctuation in foreign exchange rates and continuing low or negative interest rates may have a detrimental effect on our capital strength, our liquidity and funding position, and our profitability

EDTF |On 15 January 2015, the Swiss National Bank (SNB) discontinued the minimum targeted exchange rate for the Swiss franc versus the euro, which had been in place since September 2011. At the same time, the SNB lowered the interest rate on deposit account balances at the SNB that exceed a given exemption threshold by 50 basis points to negative 0.75%. It also moved the target range for three-month LIBOR to between negative 1.25% and negative 0.25%, (previously negative 0.75% to positive 0.25%). These decisions resulted in an immediate, considerable strengthening of the Swiss franc against the euro, US dollar, British pound, Japanese yen and several other currencies, as well as a reduction in Swiss franc interest rates. The longer-term rate of the Swiss franc against these other currencies is not certain, nor is the future direction of Swiss franc interest rates. Several other central banks have likewise adopted a negative-interest-rate policy.

A significant portion of the equity of UBS’s foreign operations is denominated in US dollars, euros, British pounds and other foreign currencies.

Similarly, a significant portion of our Basel III risk-weighted assets (RWA) are denominated in US dollars, euros, British pounds and other foreign currencies. Group Asset and Liability Management (Group ALM) is mandated with the task of minimizing adverse effects from changes in currency rates on our capital ratios. The Group Asset and Liability Management Committee, a committee of the UBS Group Executive Board, can adjust the currency mix in capital, within limits set by the Board of Directors, to balance the effect of foreign exchange movements on the fully applied CET1 capital and total capital ratio. As a result, the proportion of RWA denominated in foreign currencies outweighs the capital in these currencies, and any further significant appreciation of the Swiss franc against these currencies would be expected

to benefit our Basel III capital ratios, while a depreciation of the Swiss franc would be expected to have a detrimental effect.

The portion of our operating income denominated in non-Swiss franc currencies is greater than the portion of operating expenses denominated in non-Swiss franc currencies. Therefore, appreciation of the Swiss franc against other currencies generally has an adverse effect on our earnings in the absence of any mitigating actions.

In addition to the estimated effects from changes in foreign currency exchange rates, our equity and capital are affected by changes in interest rates. In particular, the calculation of our net defined benefit assets and liabilities is sensitive to the discount rate applied. Any further reduction in interest rates would lower the discount rates and result in an increase in pension plan deficits due to the long duration of corresponding liabilities. This would lead to a corresponding reduction in our equity and fully applied CET1 capital. Also, a continuing low or negative interest rate environment would have an adverse effect on the re-pricing of our assets and liabilities, and would significantly impact the net interest income generated from our wealth management and retail and corporate businesses. The low or negative interest rate environment may affect customer behavior and hence the overall balance sheet structure. Any mitigating actions that we may take to counteract these effects, such as the introduction of selective deposit fees or minimum lending rates, could result in the loss of customer deposits, a key source of our funding, and/or a declining market share in our domestic lending portfolio.

Furthermore, the stronger Swiss franc may have a negative impact on the Swiss economy, which, given its reliance on exports, could impact some of the counterparties within our domestic lending portfolio and lead to an increase in the level of credit loss expenses in future periods.p

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

EDTF |Fundamental changes in the laws and regulations affecting financial institutions can have a material and adverse effect on our business. In the wake of the 2007–2009 financial crisis and the following instability in global financial markets, regulators and legislators have proposed, have adopted, or are actively considering, a wide range of changes to these laws and regulations. These measures are generally designed to address the perceived causes of the crisis and to limit the systemic risks posed by major financial institutions. They include the following:

 

significantly higher regulatory capital requirements;

 

changes in the definition and calculation of regulatory capital;

 

changes in the calculation of RWA, including potential requirements to calculate or disclose RWA using less risk-sensitive standardized approaches rather than the internal models approach

 

 

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we currently use as required by FINMA under the Basel III framework;

 

changes in the calculation of the leverage ratio or the introduction of a more demanding leverage ratio;

 

new or significantly enhanced liquidity requirements;

 

requirements to maintain liquidity and capital in jurisdictions in which 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 or reduce the profitability of trading and other activities;

 

cross-border market access restrictions;

 

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

 

adoption of new liquidation regimes intended to prioritize the preservation of systemically significant functions;

 

requirements to maintain loss-absorbing capital or debt instruments subject to write down as part of recovery measures or a resolution of the Group or a Group company, including requirements for subsidiaries to maintain such instruments;

 

requirements to adopt structural and other changes designed to reduce systemic risk and to make major financial institutions easier to manage, restructure, disassemble or liquidate, including ring-fencing certain activities and operations within separate legal entities; and

 

requirements to adopt risk and other governance structures at a local jurisdiction level.

Many of these measures have been adopted and their implementation has had a material effect on our business. Others will be implemented over the next several years; some are subject to legislative action or to further rulemaking by regulatory authorities before final implementation. As a result, there remains a high level of uncertainty regarding a number of the measures referred to above, including whether (or the form in which) they will be adopted, the timing and content of implementing regulations and interpretations and/or the dates of their effectiveness. The implementation of such measures and further, more restrictive changes may materially affect our business and ability to execute our strategic plans.

Notwithstanding attempts by regulators to coordinate their efforts, the measures adopted or proposed differ significantly across the major jurisdictions, making it increasingly difficult to manage a global institution. The absence of a coordinated approach, moreover, disadvantages institutions headquartered in jurisdictions that impose relatively more stringent standards. Switzerland has adopted capital and liquidity requirements for its major international banks that are among the strictest of the major financial centers. This could disadvantage Swiss banks, such as UBS, when they compete with peer financial institutions subject to more lenient regulation or with unregulated non-bank competitors.p

 è Refer to the “Regulatory and legal developments” in this report for more information on changes in 2014

Regulatory and legislative changes in Switzerland

EDTF |Swiss regulatory changes have generally proceeded more quickly in capital, liquidity and other areas than those in other major jurisdictions, and FINMA, the 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 or proposed by regulatory authorities in other major global financial centers. In December 2014, a group of senior experts representing the private sector, authorities and academia (the Brunetti group) appointed by the Swiss Federal Council published recommendations on, among other things, safeguarding systemic stability and too big to fail (TBTF), including with respect to the calculation of RWA, higher leverage ratio and withdrawing regulatory waivers at the level of the entity holding systemically relevant functions. The Brunetti group’s work on the TBTF regime served as the basis for the Swiss Federal Council’s review report on the Swiss TBTF law that was presented to the Swiss parliament in February 2015. In its report, the Swiss Federal Council confirmed the findings of the Brunetti group and mandated the Federal Department of Finance to set up a working group with representatives of FINMA and SNB that is expected to submit proposals to the Swiss government by the end of 2015. This may result in further changes to the Swiss TBTF and regulatory regime.

Capital regulation: A revised banking ordinance and capital adequacy ordinance implementing the Basel III capital standards and the Swiss TBTF law became effective on 1 January 2013. As a systemically relevant Swiss bank, we are subject to base capital requirements, as well as a progressive buffer that scales with our total exposure (a metric that is based on our balance sheet size) and market share in Switzerland. In addition, Swiss governmental authorities have the authority to impose an additional countercyclical buffer capital requirement of up to 2.5% of RWA. This authority has been exercised to impose an additional capital charge of 2% in respect of RWA arising from Swiss residential mortgage loans. FINMA has further required banks using the internal ratings based approach to use a bank-specific multiplier when calculating RWA for owner-occupied Swiss residential mortgages, which is being phased in through 2019. FINMA has notified us that the RWA increase should be extended to Swiss income producing and commercial real estate from the first quarter of 2015. FINMA also announced that the RWA levels of other asset classes are to be reviewed. We understand these reviews to be in anticipation of the Basel Committee on Banking Supervision (BCBS) expected prudential reforms, for example, the reduction in the variability of capital ratios or capital floors.

In addition, we have mutually agreed with FINMA to an incremental operational capital requirement to be held against litigation, regulatory and similar matters and other contingent liabilities, which added CHF 17.5 billion to our RWA as of 31 December 2014. There can be no assurance that we will not be subject to increases in capital requirements in the future either from the imposition of additional requirements or changes in the calculation of RWA or other components of the existing minimum capital requirement.

 

 

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The BCBS has issued far-reaching proposals (i) on revising the standardized approach to credit risk, e.g., by relying less on external credit ratings, reducing the scope of national discretion and strengthening the link between the standardized and the IRB approach, (ii) on mandatory disclosure of RWA based on the standardized approach and (iii) on the design of a capital floor framework. If adopted by the BCBS and implemented into Swiss regulation, implementation of disclosure or capital calculations based on the standardized approach would result in significant implementation costs to us. In addition, a capital standard or floor based on the standardized approach would likely be less risk sensitive and would likely result in higher capital requirements.

Liquidity and funding: We are required to maintain a Liquidity Coverage Ratio (LCR) of high-quality liquid assets to estimated stressed short-term funding outflows and will be required to maintain a Net Stable Funding Ratio (NSFR), both of which are intended to ensure that we are not overly reliant on short-term funding and that we have sufficient long-term funding for illiquid assets.

We currently calculate our LCR under supervisory guidance from FINMA. FINMA has issued a circular, which requires us to calculate our leverage ratio using new rules that align the leverage ratio denominator with the rules issued by the Bank of International Settlements (BIS). We will make use of a one-year transition period under which the prior definition may still be used, but we must disclose both measures of LCR commencing with the first quarter of 2015.

Neither the international nor Swiss standards for the calculation of NSFR have been fully implemented.

These requirements, together with liquidity requirements imposed by other jurisdictions in which we operate, require us to maintain substantially higher levels of overall liquidity than was previously the case. Increased capital requirements and higher liquidity requirements make certain lines of business less attractive and may reduce our overall ability to generate profits. The LCR and NSFR calculations make assumptions about the relative likelihood and amount of outflows of funding and available sources of additional funding in a market or firm-specific stress situation. There can be no assurance that in an actual stress situation our funding outflows would not exceed the assumed amounts.

Resolution planning and resolvability: The revised Swiss banking act and capital adequacy ordinances provide FINMA with additional powers to intervene to prevent a failure or resolve a failing financial institution. These measures may be triggered when certain thresholds are breached and permit the exercise of considerable discretion by FINMA in determining whether, when or in what manner to exercise such powers. In case of a threatened insolvency, FINMA may impose more onerous requirements on us, including restrictions on the payment of dividends and interest. Although the actions that FINMA may take in such circumstances are not yet defined, we could be required directly or indirectly, for example, to alter our legal structure (e.g., to separate lines of business into dedicated entities, with limitations on intra-group

funding and certain guarantees), or to further reduce business risk levels in some manner. The Swiss banking act also provides FINMA with the ability to extinguish or convert to common equity the liabilities of a bank in connection with its resolution.

Swiss TBTF requirements require systemically important banks, including us, to put in place viable emergency plans to preserve the operation of systemically important functions despite a failure of the institution, to the extent that such activities are not sufficiently separated in advance. The Swiss TBTF law provides for the possibility of a limited reduction of capital requirements for systemically important institutions that adopt measures to reduce resolvability risk beyond what is legally required. Such actions would likely include an alteration of the legal structure of a bank group in a manner that would insulate parts of the group to exposure from risks arising from other parts of the group thereby making it easier to dispose of certain parts of the group in a recovery scenario, to liquidate or dispose of certain parts of the group in a resolution scenario or to execute a debt bail-in. However, there is no certainty with respect to timing or size of a potential capital rebate.

We have announced a series of measures to improve our resolvability:

 

In December 2014, UBS Group AG completed an exchange offer for the shares of UBS AG and now holds approximately 97% of the outstanding shares of UBS AG and is the holding company for UBS Group.

 

We plan to establish a new banking subsidiary of UBS in Switzerland and filed a formal application for a banking license in the third quarter of 2014. The subsidiary, which will be named UBS Switzerland AG, will include our Retail & Corporate business division and the Swiss-booked business within the Wealth Management business division. We expect to implement this change in a phased approach starting in mid-2015.

 

In the United Kingdom, in consultation with UK and Swiss regulators, we have implemented the first stages of a revised business and operating model for UBS Limited in the second quarter of 2014 with a follow-up phase scheduled for implementation during the second quarter of 2015. This change entails UBS Limited bearing and retaining a greater degree of the risk and reward of its business activities. We have increased the capitalization of UBS Limited accordingly.

 

In the United States, new rules for foreign banks promulgated by the Federal Reserve System under Sections 165 and 166 of Dodd-Frank will require an intermediate holding company to own all of our operations other than US branches of UBS AG by 1 July 2016. As a result, we will designate an intermediate holding company to hold all our US subsidiaries.

We may consider further changes to our legal structure in response to regulatory requirements in Switzerland or in other countries in which we operate, including to further improve our resolvability, to respond to Swiss and other capital requirements and to respond to regulatory required changes in legal structure. Such changes may include the transfer of operating subsidiaries

 

 

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of UBS AG to become direct subsidiaries of UBS Group AG, the transfer of shared service and support functions to service companies and adjustments to booking entity or location of services or products. Structural changes are being discussed on an ongoing basis with FINMA and other regulatory authorities and remain subject to a number of uncertainties that may affect feasibility, scope and timing. Movement of businesses to a new subsidiary (subsidiarization) will require significant time and resources to implement. Subsidiarization in Switzerland and elsewhere may create operational, capital, funding and tax inefficiencies and increase our and counterparties’ credit risk. Refer to “Regulatory and legislative changes outside Switzerland” for a description of other regulatory and legislative developments that may affect these decisions and further discussion of these risks. There can be no assurance that the execution of the changes we have planned or may implement in the future will result in a material reduction in the progressive capital buffer as permitted under the Swiss TBTF law or that these changes will satisfy existing or future requirements for resolvability or mandatory structural change in banking organizations.

Market regulation: The Swiss government has also held a consultation on proposed regulations that would affect the terms of client relationships, including providing clients of financial intermediaries and consumer groups a right of collective action against a financial intermediary. These laws may, if enacted, have a material impact on the market infrastructure that we use, available platforms, collateral management and the way we interact with clients. In addition, these initiatives may cause us to incur material implementation costs.p

Regulatory and legislative changes outside Switzerland

EDTF |Regulatory and legislative changes in other locations in which we operate may subject us to a wide range of new restrictions both in individual jurisdictions and, in some cases, globally.

Banking structure and activity limitations: Some of these regulatory and legislative changes may subject us to requirements to move activities from UBS AG branches into subsidiaries. Such “subsidiarization” can create operational, capital and tax inefficiencies, increase our aggregate credit exposure to counterparties as they transact with multiple entities within UBS, expose our businesses to higher local capital requirements, and potentially give rise to client and counterparty concerns about the credit quality of individual subsidiaries. Such changes could also negatively affect our funding model and severely limit our booking flexibility.

For example, we have significant operations in the UK and we currently use UBS AG’s London branch as a global booking center for many types of products. We have been required by the Prudential Regulatory Authority (PRA) and by FINMA to increase very substantially the capitalization of our UK bank subsidiary, UBS Limited, and may be required to change our booking practices to reduce or even eliminate our utilization of UBS AG’s London branch as a global booking center for the ongoing business of the Investment Bank. In addition, the UK Independent Commission

on Banking has recommended structural and non-structural reforms of the banking sector, most of which have been endorsed by the UK government and implemented in the Financial Services (Banking Reform) Act. Key proposed measures include the ring-fencing of retail banking activities in the UK (which we do not expect to affect us directly), additional common equity tier 1 capital requirements of up to 3% of RWA for retail banks, and the issuance by UK banks of debt subject to bail-in provisions. Furthermore, the European Commission published its proposal for a “Regulation on bank structural reform” in January 2014. The objectives of the Regulation center on the reduction of the systemic impact of banks and addressing the too big to fail problem. Proposals include the separation of retail banking activities from wholesale banking activities together with a ban on proprietary trading and lending to hedge funds and private equity funds. Significant divergence in views on the scope and application of these proposals persists at the EU level with full potential political agreement not likely before early 2016. Issues that remain the subject of debate include how prescriptive to be as to separation requirements and which trading activities entities can and cannot engage in. The applicability and implications of such changes to branches and subsidiaries of foreign banks are also not yet entirely clear, but they could have a material adverse effect on our businesses located or booked in the UK and other EU locations.

In February 2014, the Federal Reserve Board issued final rules for foreign banking organizations (FBO) operating in the US (under Section 165 of Dodd-Frank) that include the following: (i) a requirement for FBO with more than USD 50 billion of US non-branch assets to establish an intermediate holding company (IHC) to hold all US subsidiary operations, (ii) risk-based capital and leverage requirements for the IHC, (iii) liquidity requirements, including a 30-day onshore liquidity requirement for the IHC, (iv) risk management requirements including the establishment of a risk committee and the appointment of a US chief risk officer, (v) stress test and capital planning requirements and (vi) a debt-to-equity limit for institutions that pose “a grave threat” to US financial stability. Requirements differ based on the overall size of the foreign banking organization and the amount of its US-based assets. We expect that we will be subject to the most stringent requirements based on our current operations. We will have to establish an IHC by 1 July 2016 and meet many of the new requirements. The IHC will not need to comply with the US leverage ratio until 1 January 2018.

US regulators published final regulations implementing the Volcker Rule in December 2013 and generally extended until 2015 the time to conform to this rule and the related regulations. In general, the Volcker Rule prohibits any banking entity from engaging in proprietary trading and from owning interests in hedge funds and other private fund vehicles. The Volcker Rule also broadly limits investments and other transactional activities between a bank and funds that the bank has sponsored or with which the bank has certain other relationships. The Volcker Rule permits us and other non-US banking entities to engage in certain activities that would otherwise be prohibited to the extent that

 

 

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they are conducted solely outside the US and certain other conditions are met. We will be required to establish an extensive global compliance framework to ensure compliance with the Volcker Rule and the available exemptions. Moreover, the Volcker Rule may affect the way in which we conduct certain business lines. We continue to evaluate the final rule and its impact on our activities. The Volcker Rule could have a substantial impact on market liquidity and the economics of market-making activities.

OTC derivatives regulation: In 2009, the G20 countries committed to require all standardized over-the-counter (OTC) derivative contracts to be traded on exchanges or trading facilities and cleared through central counterparties by the end of 2012. This commitment is being implemented through Dodd-Frank in the US and corresponding legislation in the EU, Switzerland and other jurisdictions, and has and will continue to have a significant effect on our OTC derivatives business, which is conducted primarily in the Investment Bank. For example, we expect that, as a rule, the shift of OTC derivatives trading to a central clearing model will tend to reduce profit margins in these products, although some market participants may be able to offset this effect with higher trading volumes in commoditized products. Although we are preparing for these thematic market changes, the changes are likely to reduce the revenue potential of certain lines of business for market participants generally, and we may be adversely affected.

These mandatory clearing requirements will be supplemented by mandatory requirements to trade such clearable instruments on regulated venues under the forthcoming Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR). These two pieces of legislation, together with the more detailed implementing measures, due to take effect in early 2017, have the potential to bring about a major change to many aspects of the way financial services are provided in and into the European Economic Area. All areas of the provision of financial services are impacted across all client types. Some notable areas covered include increased pre and post-trade transparency, particularly into the area of fixed income products; further restrictions on the provision of inducements; the introduction of a new discretionary trading venue with the aim of regulating broker crossing networks; trading controls for algorithmic trading activities; increased conduct of business requirements and strengthened supervisory powers which include powers for authorities to ban products or services in particular situations. We will not know the full effect of this legislation until the details of the implementing legislation and national implementation (where applicable) are completed. We expect that this legislation will necessitate changes in business models and procedures in a number of areas. This will likely entail the expenditure of significant time and resources on an on-going basis and, in common with some other legislative proposals in this area, may also reduce the revenue potential of some of our businesses.

UBS AG registered as a swap dealer with the Commodity Futures Trading Commission (CFTC) in the US at the end of 2012, enabling the continuation of its swaps business with US persons. We expect to register UBS AG as a securities-based swap dealer

with the SEC, when its registration is required. Regulations issued by the CFTC impose substantial new requirements on registered swap dealers for clearing, trade execution, transaction reporting, recordkeeping, risk management and business conduct. Certain of the CFTC’s regulations, including those relating to swap data reporting, recordkeeping, compliance and supervision, apply to UBS AG globally. Application of these requirements to UBS AG’s swaps business with non-US persons continues to present a substantial implementation burden, will likely duplicate or conflict with legal requirements applicable to us outside the US, including in Switzerland, and may place us at a competitive disadvantage to firms that are not CFTC-registered swap dealers.

Regulation of cross-border provision of financial services: In many instances we provide services on a cross-border basis. We are therefore sensitive to barriers restricting market access for third-country firms. In particular, efforts in the European Union (EU) to harmonize the regime for third-country firms to access the European market may have the effect of creating new barriers that adversely affect our ability to conduct business in these jurisdictions from Switzerland. In addition, a number of jurisdictions are increasingly regulating cross-border activities on the basis of some notion of comity (e.g., substituted compliance and equivalence determination). While the issuance of such determinations in particular jurisdictions may ensure our access to markets in those jurisdictions, a negative determination in other jurisdictions may negatively influence our ability to act as a global firm. In addition, as jurisdictions tend to apply such determinations on a jurisdictional level rather than on an entity level, we will generally need to rely on jurisdictions’ willingness to collaborate.p

Resolution and recovery; bail-in

EDTF |We are currently required to produce recovery and resolution plans in the US, the UK, Switzerland and Germany and are likely to face similar requirements for our operations in other jurisdictions, including our operations in the EU as a whole as part of the proposed EU Bank Recovery and Resolution Directive. Resolution plans may increase the pressure on us to make structural changes, such as the creation of separate legal entities, if the resolution plan in any jurisdiction identifies impediments that are not acceptable to the relevant regulators. Such structural changes may negatively impact our ability to benefit from synergies between business units, and if they include the creation of separate legal entities, may have the other negative consequences mentioned above with respect to subsidiarization more generally.

The Financial Stability Board (FSB) and the BCBS have issued proposed standards on Total Loss-Absorbing Capacity (TLAC) that aims to build up adequate loss-absorbing capacity for global systemically important banks to ensure that an orderly wind-down is possible. The FSB proposes that a minimum Pillar 1 TLAC requirement be set within the range of 16% to 20% of RWA and at least twice the Basel III tier 1 leverage ratio requirement. In addition, a number of jurisdictions, including Switzerland, the US, the UK and the EU, have implemented or are considering implementing changes that would allow resolution authorities to write down or convert into equity

 

 

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unsecured debt to execute a bail-in. The scope of bail-in authority and the legal mechanisms that would be utilized for the purpose are subject to a great deal of development and interpretation. Regulatory requirements to maintain minimum TLAC, including potential requirements to maintain TLAC at subsidiaries, as well as the power of resolution authorities to bail in TLAC and other debt obligations and uncertainty as to how such powers will be exercised, may increase the total amount and cost of funding for us.p

Possible consequences of regulatory and legislative developments

EDTF |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. The developments have been, and are likely to continue to be, costly to implement and could also have a negative impact on our legal structure or business model, potentially generating capital inefficiencies and affecting our profitability. Finally, the uncertainty related to, or the implementation of, legislative and regulatory changes may have a negative impact on our relationships with clients and our success in attracting client business.p

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

EDTF |Our capital position, as measured by the fully applied common equity tier 1 and total capital ratios under Basel III requirements, 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 may fluctuate based on a number of factors. RWA are driven by our business activities and by changes in the risk profile of our exposures, as well as regulatory requirements. For instance, substantial market volatility, a widening of credit spreads (a major driver of our value-at-risk), adverse currency movements, increased counterparty risk, deterioration in the economic environment, or increased operational risk could result in a rise in RWA. Our eligible capital would be reduced if we experience net losses or losses through other comprehensive income, as determined for the purpose of the regulatory capital calculation, which may also render it more difficult or more costly for us to raise new capital. In addition, eligible capital can be reduced for a number of other reasons, including certain reductions in the ratings of securitization exposures, acquisitions and divestments changing the level of goodwill, adverse currency movements affecting the value of equity, prudential adjustments that may be required due to the valuation uncertainty associated with certain types of positions, and changes in the value of certain pension fund assets and liabilities or in the interest rate and other assumptions used to calculate the changes in our net defined benefit obligation recognized in other comprehensive income.

See “Fluctuation in foreign exchange rates and continuing low or negative interest rates may have a detrimental effect on our capital strength, our liquidity and funding position, and our profitability.” Any such increase in RWA or reduction in eligible capital could materially reduce our capital ratios.

Risks captured in the operational risk component of RWA have become increasingly significant as a component of our overall RWA as a result of significant reductions in market and credit risk RWA, as we execute our strategy, and increased operational risk charges arising from operational risk events (including charges arising from litigation, regulatory and similar matters). We have agreed with FINMA on a supplemental analysis that is used to calculate an incremental operational risk capital charge to be held for litigation, regulatory and similar matters and other contingent liabilities. The incremental RWA calculated based on this supplemental analysis as of 31 December 2014 was CHF 17.5 billion. Future developments in and the ultimate elimination of the incremental RWA attributable to the supplemental analysis will depend on provisions charged to earnings for litigation, regulatory and similar matters and other contingent liabilities and on developments in these matters. There can be no assurance that we will be successful in addressing these matters and reducing or eliminating the incremental operational risk component of RWA.

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, as well as the exercise of regulatory discretion. Changes in the calculation of RWA under Basel III and Swiss requirements (such as the revised treatment of certain securitization exposures under the Basel III framework) have significantly increased the level of our RWA and, therefore, have adversely affected our capital ratios. We have achieved substantial reductions in RWA, in part to mitigate the effects of increased capital requirements. Further changes in the calculation of RWA, imposition of additional supplemental RWA charges, or imposition of an RWA floor based on the standardized approach or other methodology could substantially increase our RWA. In addition, we may not be successful in our plans to further reduce RWA, either because we are unable to carry out fully the actions we have planned or because other business or regulatory developments or actions to some degree counteract the benefit of our actions.

In addition to the risk-based capital requirements, we are subject to a minimum leverage ratio requirement for Swiss systemically relevant banks. The leverage ratio operates separately from the risk-based capital requirements, and, accordingly, under certain circumstances could constrain our business activities even if we satisfy other risk-based capital requirements. We have achieved substantial reductions in our balance sheet and expect to make further reductions as we wind down our Non-core and Legacy Portfolio positions. These reductions have improved our leverage ratio and contributed to our ability to comply with the more stringent leverage ratio requirements. There is also a risk that the minimum leverage ratio requirement will be increased significantly beyond the levels currently scheduled to come into effect, which

 

 

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would make it more difficult for us to satisfy the requirements without adversely affecting certain of our businesses. The leverage ratio is a simple balance sheet measure and therefore limits balance sheet intensive activities, such as lending, more than activities that are less balance sheet intensive.

Changes in international or Swiss requirements for risk-based capital, leverage ratios, LCR or NSFR, including changes in minimum levels, method of calculation or supervisory add-ons could have a material adverse effect on our capital position and our business. Any such changes that are implemented only in Switzerland or more quickly in Switzerland may have an adverse effect on our competitive position compared with institutions regulated under different regimes.p

We may not be successful in completing our announced strategic plans or in implementing changes in our businesses to meet changing market, regulatory and other conditions

EDTF |In October 2012, we announced a significant acceleration in the implementation of our strategy. The strategy included transforming our Investment Bank to focus it on its traditional strengths, very significantly reducing Basel III RWA and further strengthening our capital position, and significantly reducing costs and improving efficiency. We have substantially completed the transformation of our business, but elements remain that are not complete. There continues to be a risk that we will not be successful in completing the execution of our plans, that our plans may be delayed, that market events may adversely affect the implementation of our plan or that the effects of our plans may differ from those intended.

We have substantially reduced the RWA and balance sheet usage of our Non-core and Legacy Portfolio positions, but there can be no assurance that we will continue to be able to exit them as quickly as our plans suggest or that we will not incur significant losses in doing so. The continued illiquidity and complexity of many of our legacy risk positions in particular could make it difficult to sell or otherwise exit these positions and reduce the RWA and the balance sheet usage associated with these exposures. As the size of the Non-core and Legacy Portfolio decreases, achieving a complete exit of particular classes of transactions will be necessary to achieve the reductions of RWA, balance sheet and costs associated with the positions. At the same time, our ability to meet our future capital targets and requirements depends in part on our ability to reduce RWA and balance sheet usage without incurring unacceptable losses.

As part of our strategy, we have a program underway to achieve significant incremental cost reductions. The success of our strategy and our ability to reach certain of the targets we have announced depends on the success of the effectiveness and efficiency measures we are able to carry out. As is often the case with major effectiveness and efficiency programs, our plans involve significant risks. Included among these are the risks that restructuring costs may be higher and may be recognized sooner than we

have projected, that we may not be able to identify feasible cost reduction opportunities that are also consistent with our business goals and that cost reductions may be realized later or may be less than we anticipate. Changes in workforce location or reductions in workforce can lead to charges to the income statement well in advance of the cost savings intended to be achieved through such workforce strategy. For example, under IFRS we are required to recognize provisions for real estate lease contracts when the unavoidable costs of meeting the obligations under the contracts are considered to exceed the future economic benefits expected to be received under them. In addition, as we implement our effectiveness and efficiency programs we may experience unintended consequences such as the loss or degradation of capabilities that we need in order to maintain our competitive position and achieve our targeted returns.

We are exposed to possible outflows of client assets in our asset-gathering businesses and to changes affecting the profitability of our Wealth Management business division and we may not be successful in implementing the business changes needed to address them. 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, damage to our reputation, the loss of client advisors, difficulty in recruiting qualified client advisors and tax, legal and regulatory developments concerning our cross-border private banking business.

Many of these factors have been successfully addressed. Our Wealth Management and Wealth Management Americas business divisions recorded substantial net new money inflows in 2013 and 2014. Long-term changes affecting the cross-border private banking business model will, however, continue to affect client flows in the Wealth Management business division for an extended period of time. One of the important drivers behind the longer-term reduction in the amount of cross-border private banking assets, particularly in Europe but increasingly also in other regions, is the heightened focus of fiscal authorities on cross-border investments. Changes in local tax laws or regulations and their enforcement and the implementation of cross-border tax information exchange regimes may affect the ability or the willingness of our clients to do business with us or the viability of our strategies and business model. For the last three years, we have experienced net withdrawals in our Swiss booking center from clients domiciled elsewhere in Europe, in many cases related to the negotiation of tax treaties between Switzerland and other countries.

The net new money inflows in recent years in our Wealth Management business division have come predominantly from clients in Asia Pacific and in the ultra high net worth segment globally. Over time, inflows from these lower-margin segments and markets have been replacing outflows from higher-margin segments and markets, in particular cross-border European clients. This dynamic, combined with changes in client product preferences as a result of which low-margin products account for a larger share of our revenues than in the past, put downward pressure on our return on invested assets and adversely affect the profitability of our Wealth Management business division. We have implemented

 

 

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changes in our product offerings and service improvements, and will continue our efforts to adjust to client trends and market dynamics as necessary, in an effort to overcome the effects of these changes in the business mix on our profitability, but there can be no assurance that we will be able to counteract those effects. In addition, we have made changes to our business offerings and pricing practices in line with the Swiss Supreme Court case concerning “retrocessions” (fees paid to a bank for distributing third-party and intra-group investment funds and structured products) and other industry developments. These changes may adversely affect our margins on these products and the current offering may be less attractive to clients than the products it replaces. There can be no assurance that we will be successful in our efforts to offset the adverse impact of these trends and developments.

Global Asset Management experienced net outflows of client assets in 2012 and 2013, although it had net inflows for the first three quarters of 2014 and for full year 2014. Further net outflows of client assets could adversely affect the results of this business division.p

Material legal and regulatory risks arise in the conduct of our business

EDTF |The nature of our business subjects us to significant regulatory oversight and liability risk. As a global financial services firm operating in more than 50 countries, we are subject to many different legal, tax and regulatory regimes. We are involved in a variety of claims, disputes, legal proceedings and government investigations. 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 most of these matters, and their potential effect on our future business or financial results, is extremely difficult to predict.

In December 2012, we announced settlements totaling approximately CHF 1.4 billion in fines by and disgorgements to US, UK and Swiss authorities to resolve investigations by those authorities relating to LIBOR and other benchmark interest rates. We entered into a non-prosecution agreement with the US Department of Justice (DOJ) and UBS Securities Japan Co. Ltd. also pled guilty to one count of wire fraud relating to the manipulation of certain benchmark interest rates. The settlements do not resolve investigations by other authorities or civil claims that have been or may in the future be asserted by private and governmental claimants with respect to submissions regarding LIBOR or other benchmark interest rates. The extent of our financial exposure to these remaining matters is extremely difficult to estimate and could be material.

Our settlements with governmental authorities in connection with LIBOR and benchmark interest rates starkly illustrate the much-increased level of financial and reputational risk now associated with regulatory matters in major jurisdictions. Very large fines and disgorgement amounts were assessed against us, and the guilty plea of our subsidiary was required, despite our full

cooperation with the authorities in the investigations relating to LIBOR and other benchmark interest rates, and despite our receipt of conditional leniency or conditional immunity from antitrust authorities in a number of jurisdictions, including the US and Switzerland. We understand that, in determining the consequences to us, the authorities considered the fact that it has in the recent past been determined that we have engaged in serious misconduct in several other matters. The heightened risk level was further illustrated by the European Commission (EC) announcement in December 2013 of fines against other financial institutions related to its Yen Interest Rate Derivatives (YIRD) investigation. The EC stated that we would have been subject to fines of approximately EUR 2.5 billion had we not received full immunity for disclosing to the EC the existence of infringements relating to YIRD. Recent resolution of enforcement matters involving other financial institutions further illustrates the continued increase in the financial and other penalties, reputational risk and other consequences of regulatory matters in major jurisdictions, particularly the US, and the resulting difficulty in predicting in this environment the financial and other terms of resolutions of pending government investigations and similar proceedings. In 2014, Credit Suisse AG (CS) and BNP Paribas (BNPP) each pleaded guilty to criminal charges in the United States and simultaneously entered into settlements with other US agencies, including the Federal Reserve and the New York Department of Financial Services (DFS). These resolutions involved the payment of substantial penalties (USD 1.8 billion in the case of CS and USD 8.8 billion in the case of BNPP), agreements with respect to future operation of their businesses and actions with respect to relevant personnel. In the case of BNPP, the DFS suspended for a one-year period BNPP’s ability to conduct through its New York branch business activity related to the business line that gave rise to the illegal conduct, namely US dollar clearing for specified BNPP business units. In addition, the US Department of Justice (DOJ) has announced a series of resolutions related to the conduct of major financial institutions in packaging, marketing, issuing and selling residential mortgage-backed securities. In these resolutions, financial institutions have been required to pay penalties ranging from USD 7 to USD 16.7 billion and, in many cases, were also required to provide relief to consumers who were harmed by the relevant conduct.

We continue to be subject to a large number of claims, disputes, legal proceedings and government investigations, including the matters described in the notes to the financial statements included herein and we expect that our ongoing business activities will continue to give rise to such matters in the future. The extent of our financial exposure to these and other matters is material and could substantially exceed the level of provisions that we have established for litigation, regulatory and similar matters. We are not able to predict the financial and other terms on which some of these matters may be resolved. Litigation, regulatory and similar matters may also result in non-monetary penalties and consequences. Among other things, the non-prosecution agreement we entered into with the DOJ in connection with LIBOR (the NPA) may be terminated by the DOJ if we commit any US crime or

 

 

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otherwise fail to comply with the NPA and the DOJ may obtain a criminal conviction of UBS AG in relation to the matters covered by the NPA. A guilty plea to, or conviction of, a crime (including as a result of termination of the NPA) could have material consequences for us. Resolution of regulatory proceedings may require us to obtain waivers of regulatory disqualifications to maintain certain operations, may entitle regulatory authorities to limit, suspend or terminate licenses and regulatory authorizations and may permit financial market utilities to limit, suspend or terminate our participation in such utilities. Failure to obtain such waivers, or any limitation, suspension or termination of licenses, authorizations or participations, could have material consequences for us. In connection with discussions of a possible resolution of investigations relating to our foreign exchange business with the Antitrust and Criminal Division of the DOJ, we and the DOJ have extended the term of the NPA by one year to 18 December 2015. As a result of this history and our ongoing obligations under the NPA, our level of risk with respect to regulatory enforcement may be greater than that of some of our peer institutions.

At this point in time, we believe that the industry continues to operate in an environment where charges associated with litigation, regulatory and similar matters will remain elevated for the foreseeable future and we continue to be exposed to a number of significant claims and regulatory matters.

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 remediated the deficiencies that led to the material losses during the 2007–2009 financial crisis, the unauthorized trading incident announced in September 2011, the LIBOR-related settlements of 2012 and settlements with some regulators of matters related to our foreign exchange and precious metals business, the resulting effects of these matters on our reputation and relationships with regulatory authorities have proven to be more difficult to overcome. For example, following the unauthorized trading incident, FINMA placed restrictions (since removed) on acquisitions or business expansions in our Investment Bank unit. We are determined to address the issues that have arisen in the above and other matters in a thorough and constructive manner. We are in active dialogue with our regulators concerning the actions that we are taking to improve our operational risk management and control framework, but there can be no assurance that our efforts will have the desired effects.p

Operational risks affect our business

EDTF | 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, misconduct, unauthorized trading, fraud, system failures, financial crime, cyber-attacks, breaches of information security and failure of security and physical protection, are appropriately controlled.

For example, cyber-crime is a fast growing threat to large organizations that rely on technology to support their business.Cyber-crime can range frominternet-based attacks that interfere with the organizations’ internet websites, to more sophisticated crimes that target the organizations, as well as their clients, and seek to gain unauthorized access to technology systems in efforts to disrupt business, steal money or obtain sensitive information.

A major focus of US governmental policy relating to financial institutions in recent years has been fighting money laundering and terrorist financing. Regulations applicable to us 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 our clients. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious consequences both from legal enforcement action and from damage to our reputation.

Although we seek to continuously adapt our capability to detect and respond to the risks described above, if our internal controls fail or prove ineffective in identifying and remedying these 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.

Participation in high-volume and high-frequency trading activities, even in the execution of client-driven business, can also expose us to operational risks. Our loss in 2012 relating to the Facebook initial public offering illustrates the exposure participants in these activities have to unexpected results arising not only from their own systems and processes but also from the behavior of exchanges, clearing systems and other third parties and from the performance of third-party systems.

Our wealth and asset management businesses operate in an environment of increasing regulatory scrutiny and changing standards. Legislation and regulators have changed and are likely to continue to change fiduciary and other standards of care for asset managers and advisers and have increased focus on mitigating or eliminating conflicts of interest between a manager or adviser and the client. These changes have and likely will continue to present regulatory and operational risks if not implemented effectively across the global systems and processes of investment managers and other industry participants. If we fail to effectively implement controls to ensure full compliance with new, rising standards in the wealth and asset management industry, we could be subject to additional fines and sanctions as a result. These could have an impact on our ability to operate or grow our wealth and asset management businesses in line with our strategy.

Certain types of operational control weaknesses and failures could also adversely affect our ability to prepare and publish accurate and timely financial reports. Following the unauthorized trading incident announced in September 2011, management determined that we had a material weakness in our internal control

 

 

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over financial reporting as of the end of 2010 and 2011, although this did not affect the reliability of our financial statements for either year.

In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our businesses and the communities in which we are located. This may include a disruption due to natural disasters, pandemics, civil unrest, war or terrorism and involve electrical, communications, transportation or other services used by us or third parties with whom we conduct business.p

Our reputation is critical to the success of our business

EDTF |Our reputation is critical to the success of our strategic plans. Damage to our reputation can have fundamental negative effects on our business and prospects. 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 (relating to the governmental inquiries and investigations relating to our cross-border private banking services to US private clients during the years 2000–2007 and the settlements entered into with US authorities with respect to this 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 difficulty in attracting staff in 2008 and 2009. These developments had short-term and also more lasting adverse effects on our financial performance, and 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. More recently, the unauthorized trading incident announced in September 2011 and our involvement in the LIBOR matter and investigations relating to our foreign exchange and precious metals business have 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.p

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

EDTF | 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, continued low interest rates or weak or stagnant economic growth in our core markets, or a severe financial crisis can negatively affect our revenues and ultimately our capital base.

A market downturn and weak macroeconomic conditions 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 impact well beyond the countries in which they occur. A crisis could develop, regionally or globally, as a result of disruptions in emerging markets as well as developed markets that are susceptible to macroeconomic and political developments, or as a result of the failure of a major market participant. We have material exposures to a number of these markets, both as a wealth manager and as an investment bank. Moreover, our strategic plans depend more heavily upon our ability to generate growth and revenue in emerging markets, causing us to be more exposed to the risks associated with them. The continued absence of sustained and credible improvements to unresolved issues in Europe, continued US fiscal and monetary policy issues, emerging markets fragility and the mixed outlook for global growth demonstrate that macroeconomic and political developments can have 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 recently experienced, affects fees, commissions and margins; local or regional economic factors, such as the ongoing European sovereign debt concerns and negative interest rates, could also have an effect on us;

 

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;

 

the ongoing low interest rate environment will further erode interest margins in several of our businesses and adversely affect our net defined benefit obligations in relation to our pension plans;

 

negative interest rates announced by central banks in Switzerland or elsewhere may also affect client behavior and changes to our deposit and lending pricing and structure that we may make to respond to negative interest rates and client behavior may cause deposit outflows, reduced business volumes or otherwise adversely affect our businesses;

 

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

 

deteriorating market conditions could cause a decline in the value of assets that we own and account for as investments or trading positions;

 

worsening economic conditions and adverse market developments could lead to impairments and defaults on credit exposures and on our trading and investment positions, and losses may be exacerbated by declines in the value of collateral we hold; and

 

if individual countries impose restrictions oncross-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.

 

 

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

The developments mentioned above have in the past affected and could materially affect the performance of the business units and of UBS as a whole, and ultimately our financial condition. There are related risks that, as a result of the factors listed above, carrying value of goodwill of a business unit might suffer impairments, deferred tax asset levels may need to be adjusted or our capital position or regulatory capital ratios could be adversely affected.p

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

EDTF | We, like other financial market participants, were 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 2009. Although we have significantly reduced our risk exposures starting in 2008, and more recently as we progress our strategy and focus on complying with Basel III capital standards, we continue to hold substantial legacy risk positions, primarily in our Non-core and Legacy Portfolio. In many cases these risk positions remain illiquid, and we continue to be exposed to the risk that the remaining positions may again deteriorate in 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.

Moreover, we hold positions related to real estate in various countries, and could suffer losses on these positions. These positions include a substantial Swiss mortgage portfolio. Although management believes that this portfolio has been very prudently managed, we could nevertheless be exposed to losses if the concerns expressed by the Swiss National Bank and others about unsustainable price escalation in the Swiss real estate market come to fruition. Other macroeconomic developments, such as the implications on export markets of dramatic appreciation of the Swiss franc following recent announcements by the Swiss National Bank, adoption of negative interest rates by the Swiss National Bank or other central banks or any return of crisis conditions within the eurozone and the potential implications of the recent decision in Switzerland to reinstate immigration quotas for EU/EEA countries, could also adversely affect the Swiss economy, our business in Switzerland in general and, in particular, our Swiss mortgage and corporate loan portfolios.

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.p

Our global presence subjects us to risk from currency fluctuations

EDTF |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 revenues account for the largest portion of our non-Swiss franc revenues) have an effect on our reported income and expenses, and on other reported figures such as other comprehensive income, invested assets, balance sheet assets, RWA and Basel III CET1 capital. These effects may adversely affect our income, balance sheet, capital and liquidity ratios. The effects described in the sidebar “Impact of Swiss National Bank actions” in the “Current market climate and industry drivers” section of this report clearly illustrate the potential effect of significant currency movements, particularly of the Swiss Franc.p

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

EDTF |Controlled risk-taking is a major part of the business of a financial services firm. Credit risk is an integral part of many of our retail, corporate, wealth management and Investment Bank activities, and our non-core activities that were transferred to Corporate Center – Non-core and Legacy Portfolio, including lending, underwriting and derivatives activities. Changes in interest rates, credit spreads, securities’ prices, market volatility 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 aggregated risk to identify potentially highly correlated exposures proved to be inadequate. Notwithstanding the steps we have taken to strengthen our risk management and control framework, 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;

 

 

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our assessment of the risks identified or our response to negative trends proves to be untimely, inadequate, insufficient 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 resulting 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. The performance of assets we hold for our clients in these activities could be adversely affected 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, we might, depending on the facts and circumstances, incur charges that could increase to material levels.

Investment positions, such as equity investments made as 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.p

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

EDTF |If available, fair value of a financial instrument or non-financial asset or liability is determined using quoted prices in active markets for identical assets or liabilities. Where the market is not active, fair value is established using a valuation technique, including pricing models. Where available, valuation techniques use market observable assumptions and inputs. If such information is not available, inputs may be derived by reference to similar instruments in active markets, from recent prices for comparable transactions or from other observable market data. If market observable data is not available, we select non-market observable inputs to be used in our valuation techniques. We also use internally developed models. 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, and failure to make the changes necessary to reflect evolving market conditions could have a material adverse effect on our financial results. Moreover, evolving market practice may result in changes to valuation techniques that could have a material impact on our financial results. Changes in model inputs or calibration, changes in the valuation methodology incorporated in models, or failure to make the changes necessary to reflect evolving market conditions could have a material adverse effect on our financial results.p

Liquidity and funding management are critical to our ongoing performance

EDTF |The viability of our business depends on the availability of funding sources, and our success depends on 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 retail and wholesale 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 or widening credit spreads, 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 connection with Moody’s downgrade of our long-term rating in June 2012, rating 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.

More stringent 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. The addition of loss-absorbing debt as a component of capital requirements and potential future requirements to maintain senior unsecured debt that could be written down in the event of our insolvency or other resolution, may increase our funding costs or limit the availability of funding of the types required.p

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

EDTF |The financial services industry is characterized by intense competition, continuous innovation, detailed (and sometimes

 

 

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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 us in their size and breadth. Barriers to entry in individual markets and pricing levels 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, adequately developing or updating our technology, particularly in trading businesses, 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 or structure of employee compensation, higher levels of deferral, performance conditions and other circumstances triggering the forfeiture of unvested awards may adversely affect our ability to retain and attract key employees, and may in turn negatively affect our business performance. We have made changes to the terms of compensation awards to reflect the demands of various stakeholders, including regulatory authorities and shareholders. These terms include the introduction of a deferred contingent capital plan with many of the features of the loss-absorbing capital that we have issued in the market but with a higher capital ratio write-down trigger, increased average deferral periods for stock awards, and expanded forfeiture provisions for certain awards linked to business performance. These changes, while intended to better align the interests of our staff with those of other stakeholders, increase the risk that key employees will be attracted by competitors and decide to leave us, and that we may be less successful than our competitors in attracting qualified employees. The loss of key staff and the inability to attract qualified replacements, depending upon which and how many roles are affected, could seriously compromise our ability to execute our strategy and to successfully improve our operating and control environment.

In a referendum in March 2013, the Swiss cantons and voters approved an initiative to give shareholders of Swiss listed companies more influence over board and management compensation (the “Minder Initiative”). In November 2013, the Swiss Federal Council issued the final transitional ordinance implementing the constitutional amendments resulting from this initiative, which came into force on 1 January 2014. The ordinance requires public companies to specify in their articles of association (AoA) a mechanism to permit a “say-on-pay” vote, setting out three requirements: (i) the vote on compensation must be held annually, (ii) the vote on compensation must be binding rather than advisory and (iii) the vote on compensation must be held separately for the board of directors and members of the executive board. In addition, shareholders will need to determine the details of the “say-on-pay” vote in the AoA, in particular the nature of the vote, timing aspects and the consequences of a “no” vote. Each company affected by the Minder Initiative must undertake a first binding

vote on management compensation and remuneration of the board of directors at its 2015 annual general meeting.

The EU has adopted legislation that caps the amount of variable compensation in proportion to the amount of fixed compensation for employees of a bank active within the EU. This legislation will apply to employees of UBS in the EU. These and other similar initiatives may require us to make further changes to our compensation structure and may increase the risks described above.p

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

EDTF |We report our results and financial position in accordance with IFRS as issued by the IASB. Changes to IFRS or interpretations thereof may cause our future reported results and financial position to differ from current expectations, or historical results to differ from those previously reported due to the adoption of accounting standards on a retrospective basis. Such changes may also affect our regulatory capital and ratios. We monitor potential accounting changes and when these are finalized by the IASB, we determine the potential impact and disclose significant future changes in our financial statements. Currently, there are a number of issued but not yet effective IFRS changes, as well as potential IFRS changes, some of which could be expected to impact our reported results, financial position and regulatory capital in the future.p

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

EDTF |The goodwill that we have recognized on the respective balance sheets of our operating segments is tested for impairment at least annually. Our impairment test in respect of the assets recognized as of 31 December 2014 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. For example, in the third quarter of 2012, the carrying amount of goodwill and certain other non-financial assets of the Investment Bank was written down, resulting in a pre-tax impairment loss of almost CHF 3.1 billion.p

The effect of taxes on our financial results is significantly influenced by reassessments of our deferred tax assets

EDTF |The deferred tax assets (DTA) that we have recognized on our balance sheet as of 31 December 2014 in respect of prior years’ tax losses reflect the probable recoverable level based on future

 

 

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taxable profit as informed by our business plans. If the business plan earnings and assumptions in future periods substantially deviate from current forecasts, the amount of recognized deferred tax assets may need to be adjusted in the future. These adjustments may include write-downs of deferred tax assets through the income statement.

Our effective tax rate is highly sensitive both to our performance as well as our expectation of future profitability as reflected in our business plans. 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 our performance is expected to improve, particularly in the US, the UK or Switzerland, we could potentially recognize additional deferred tax assets as a result of that assessment. The effect of doing so would be to significantly reduce our effective tax rate in years in which additional deferred tax assets are recognized. Conversely, if our performance in those countries is expected to produce diminished taxable profit in future years, we may be required to write down all or a portion of the currently recognized deferred tax assets through the income statement. This would have the effect of increasing our effective tax rate in the year in which any write-downs are taken.

In 2015, notwithstanding the effects of any potential reassessment of the level of deferred tax assets, we expect our effective tax rate to be approximately 25%. Consistent with past practice, we expect to revalue our overall level of deferred tax assets in the second half of 2015 based on a reassessment of future profitability taking into account updated business plan forecasts, including consideration of a possible further extension of the forecast period used for US DTA recognition purposes to seven years from the six years used at 31 December 2014. The full year effective tax rate could change significantly on the basis of this reassessment. It could also change if aggregate tax expenses for locations other than Switzerland, the US and the UK differ from what is expected. Our effective tax rate is also sensitive to any future reductions in statutory tax rates, particularly in the US and Switzerland. Reductions in the statutory tax rate would cause the expected future tax benefit from items such as tax loss carry-forwards in the affected locations to diminish in value. This in turn would cause a write-down of the associated deferred tax assets.

In addition, statutory and regulatory changes, as well as changes to the way in which courts and tax authorities interpret tax laws could cause the amount of taxes ultimately paid by us to materially differ from the amount accrued.

We are currently considering changes to our legal structure in the US, the UK, Switzerland and other countries in response to regulatory changes. Tax laws or the tax authorities in these countries may prevent the transfer of tax losses incurred in one legal entity to newly organized or reorganized subsidiaries or affiliates or may impose limitations on the utilization of tax losses that are expected to carry on businesses formerly conducted by the transferor. Were this to occur in situations where there were also limited planning opportunities to utilize the tax

losses in the originating entity, the deferred tax assets associated with such tax losses could be written down through the income statement.

A net charge of CHF 123 million was recognized in operating expenses (within operating profit before tax) in 2014 in relation to the UK bank levy. This is a balance sheet levy, payable by banks operating in the UK. Our bank levy expense for future years will depend on both the rate of the levy and our taxable UK liabilities at each year-end; changes to either factor could increase the cost. This expense could increase if organizational changes involving UBS Limited and/or UBS AG alter the level or profile of our bank levy tax base. We expect that the annual bank levy charge will continue to be recognized for IFRS purposes as an expense 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.p

As UBS Group AG is a holding company, our operating results, financial condition and ability to pay dividends, other distributions or to pay our obligations in the future is dependent on funding, dividends and other distributions received from UBS AG or any other future direct subsidiary, which may be subject to restrictions

EDTF |UBS Group’s ability to pay dividends and other distributions and to pay our obligations in the future will depend on the level of funding, dividends and other distributions, if any, received from UBS AG and any new subsidiaries established by UBS Group in the future. The ability of such subsidiaries to make loans or distributions (directly or indirectly) to UBS Group may be restricted as a result of several factors, including restrictions in financing agreements and the requirements of applicable laws and regulatory and fiscal or other restrictions. UBS Group’s subsidiaries, including UBS AG, UBS Switzerland AG, UBS Limited and the US IHC (when designated) are subject to laws that restrict dividend payments, authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to UBS Group, or limit or prohibit transactions with affiliates. Restrictions and regulatory action of this kind could impede access to funds that UBS Group may need to make payments.

In addition, UBS Group’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to all prior claims of the subsidiary’s creditors.

UBS Group’s credit rating could be lower than the rating of UBS AG, which may adversely affect the market value of the securities and other obligations of UBS Group on a standalone basis.

Furthermore, we expect that UBS Group may guarantee some of the payment obligations of certain of our subsidiaries from time to time. These guarantees may require UBS Group to provide substantial funds or assets to subsidiaries or their creditors or counterparties at a time when UBS Group is in need of liquidity to fund its own obligations.p

 

 

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Our stated capital returns objective is based, in part, on capital ratios that are subject to regulatory change and may fluctuate significantly

EDTF |UBS has committed to return at least 50% of its net profit to shareholders as capital returns, provided its fully applied CET1 capital ratio is at least 13% and our post-stress fully applied CET1 capital ratio is at least 10%. As of 31 December 2014, ourpost-stress CET1 capital ratio exceeded this 10% objective, and the actions of the Swiss National Bank did not cause a breach of this objective in either January or February 2015. However, our ability to maintain a fully applied CET1 capital ratio of at least 13% is subject to numerous risks, including the results of our business, changes to capital standards, methodologies and interpretation that may adversely affect our calculated fully applied CET1 capital ratio, imposition of risk add-ons or additional capital requirements such as additional capital buffers.

Changes in the methodology, assumptions, stress scenario and other factors may result in material changes in our post-stress fully applied CET1 capital ratio. Our objective to maintain a post-stress fully applied CET1 capital ratio of at least 10% is a condition to our capital returns commitment. To calculate our post-stress CET1 capital ratio, we forecast capital one year ahead based on internal projections of earnings, expenses, distributions to shareholders and other factors affecting CET1 capital, including our net defined benefit assets and liabilities. We also forecast one-year developments in RWA. We adjust these forecasts based on assumptions as to how they may change as a result of a severe stress event. We then further deduct from capital the stress loss estimated using our combined stress test (CST) framework to arrive at the post-stress CET1 capital ratio. Changes to our results, business plans and forecasts, in the assumptions used to reflect the effect of a stress event on our business forecasts or in the results of our CST, could have a material effect on our stress scenario results and on our calculated fully applied post-stress CET1 capital ratio. Our CST framework relies on various risk exposure measurement methodologies which are predominantly proprietary, on our selection and definition of potential stress scenarios and on our assumptions regarding estimates of changes in a wide range of macroeconomic variables and certain idiosyncratic events for each of those scenarios. We periodically review these methodologies, and assumptions are subject to periodic review and change on a regular basis. Our risk exposure measurement methodologies may change in response to developing market practice and enhancements to our own risk control environment, and input parameters for models may change due to changes in positions, market parameters and other factors. Our stress scenarios, the events comprising a scenario and the assumed shocks and market and economic consequences applied in each scenario are subject to periodic review and change. A change in the CST scenario used to calculate the fully applied post-stress CET1 capital ratio, or in the assumptions used in a particular scenario, may cause the post-stress CET1 capital ratio to fluctuate materially from period to period. Our business plans and forecasts are subject to inherent uncertainty, our choice of stress test

scenarios and the market and macroeconomic assumptions used in each scenario are based on judgments and assumptions about possible future events. Our risk exposure methodologies are subject to inherent limitations, rely on numerous assumptions as well as on data which may have inherent limitations. In particular, certain data are not available on a monthly basis and we may therefore rely on prior month/quarter data as an estimate. All of these factors may result in ourpost-stress CET1 capital ratio, as calculated using our methodology for any period, being materially higher or lower than the actual effect of a stress scenario.p

We may fail to realize the anticipated benefits of the exchange offer

EDTF |We established UBS Group AG as a holding company for UBS AG because we believe that it will, along with other measures already announced, substantially improve the resolvability of the Group in response to evolving regulatory requirements. These measures may also qualify us for a rebate on the progressive buffer capital requirements applicable to us as a systemically relevant Swiss bank under applicable Swiss TBTF requirements. We may, however, encounter substantial difficulties in achieving these anticipated benefits or these anticipated benefits may not materialize. For example, the relevant regulators may find the measures that we are undertaking or their implementation to be ineffective or insufficient (especially in the context of market turbulence or in distressed situations), or they may not grant potential relief to the full extent we anticipate. We may also be required to adopt further measures to meet existing or new regulatory requirements.

UBS Group has acquired approximately 97 percent of the outstanding shares of UBS AG. Delay in acquiring full ownership of UBS AG could adversely affect the anticipated benefits of the exchange offer and the liquidity and market value of UBS Group AG shares. Such a delay may occur if we determine that the squeeze-out merger cannot be implemented or is not advisable for any reason, including, among other things, disruption to the business, the negative impact on regulatory consents, approvals and licenses or required third-party rights. The existence of minority shareholders in UBS AG may, among other things, make it more difficult or delay UBS Group’s ability to implement changes to our legal structure and interfere with ourday-to-day business operations and our corporate governance. In addition, any holders of UBS AG shares will have a pro rata claim upon any dividends or other distributions of UBS AG and would receive a proportionate share of any dividend payments or other distributions made by UBS AG, reducing the amount of any dividend payments or other distributions that UBS Group might make to holders of UBS Group AG shares. p

Risks associated with asqueeze-out merger

EDTF |If UBS Group conducts a squeeze-out merger under Swiss law, UBS AG will merge into a merger subsidiary of UBS Group,

 

 

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which will survive the transaction. Although UBS Group expects that the surviving entity will in most cases succeed to UBS AG’s banking licenses, permits and other authorizations, such entity may need to re-apply for or seek specific licenses, permits and authorizations, as well as third-party consents. Furthermore, although we expect this occurrence to be unlikely given that minority shareholders subject to the squeeze-out will be offered listed securities in UBS Group and the consideration to be offered in the squeeze-out merger will be identical to the consideration

offered in the exchange offer, under Swiss law, a minority shareholder subject to the squeeze-out merger could theoretically seek to claim, within two months of the publication of the squeeze-out merger, that the consideration offered is “inadequate” and petition a Swiss competent court to determine what is “adequate” consideration. Each of these circumstances, if it were to happen, may generate costs, delay the implementation of the squeeze-out merger or disrupt or negatively impact our business.p

 

 

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Critical accounting policies

 

Basis of accounting

We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The application of these accounting standards requires the use of judgment, based upon estimates and assumptions that may involve significant uncertainty at the time they are made. Such judgments, including the underlying estimates and assumptions, which reflect historical experience, expectations of the future and other factors, or some combination thereof, are regularly evaluated to determine their continuing relevance under the circumstances. Using different assumptions could cause the reported results to differ. Changes in assumptions may have a significant impact on the financial statements in the periods when changes occur.

We believe that the assumptions we have made are appropriate under the circumstances, and that our financial statements therefore present fairly the financial position, financial performance and cash flows, in all material respects. Alternative outcomes and sensitivity analyses discussed or referred to in this section are included solely to assist the reader in understanding the uncertainty inherent in the estimates and assumptions used in our financial statements. They are not intended to suggest that other estimates and assumptions would be more appropriate.

This section discusses accounting policies that are deemed critical to our financial position, financial performance and cash flows, because they are material in terms of the items to which they apply, and they involve significant assumptions and estimates. A broader and more detailed description of our significant accounting policies is included in “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report.

Consolidation of structured entities

We sponsor the formation of structured entities (SEs) and interact with non-sponsored SEs for a variety of reasons, including allowing clients to obtain or be exposed to particular risk profiles, to provide funding or to sell or purchase credit risk. An SE is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Such entities generally have a narrow and well-defined objective and include those historically referred to as special purpose entities and some investment funds.

In accordance with IFRS, UBS consolidates only SEs that it controls, with control being defined as a function of three elements: power over the relevant activities of the entity, exposure to variable returns and an investor’s ability to use its power to affect its

returns. UBS consolidates an entity when all three elements of control are present. Where UBS has an interest in an SE that absorbs variability, we consider whether UBS has power over the SE which allows it to affect the variability of its returns. Consideration is given to all facts and circumstances to determine whether the Group has power over the SE, that is, the current ability to direct the relevant activities of the SE when decisions about those activities need to be made. Determining whether we have power to direct the relevant activities requires a significant degree of judgment in light of all facts and circumstances. In making that determination, we consider a range of factors, including the purpose and design of the SE, any rights held through contractual arrangements such as call rights, put rights or liquidation rights, as well as potential decision-making rights. Where the Group has power over the relevant activities, a further assessment is made to determine whether, through that power, it has the ability to affect its own returns, that is, assessing whether power is held in a principal or agent capacity. Consideration is given to the overall relationship between UBS, the SE and other parties involved in the SE. In particular, we assess the following: (i) the scope of decision-making authority, (ii) rights held by other parties, including removal or other participating rights and (iii) exposure to variability, including remuneration, relative to the total variability of the SE, as well as whether UBS’s exposure is different from that of other investors. Appropriate weightings are applied to each of these factors on the basis of the particular facts and circumstances.

 è Refer to “Note 1a item 3 Subsidiaries and structured entities” and “Note 30 Interests in subsidiaries and other entities” in the “Financial information” section of this report for more information

Fair value of financial instruments

UBS accounts for a significant portion of its assets and liabilities at fair value. Under IFRS, the relative degree of uncertainty associated with the measurement of fair value is reflected by use of a three-level valuation hierarchy. The best evidence of fair value is a quoted price in an actively traded market (Level 1). In the event that the market for a financial instrument is not active, or where quoted prices are not otherwise available, a valuation technique is used. In these cases, fair value is estimated using observable data in respect of similar financial instruments as well as financial models. Level 2 of the hierarchy pertains to instruments for which inputs to a valuation technique are principally based on observable market data. Level 3 applies to instruments that are measured by a valuation technique that incorporates one or more significant unobservable inputs. Valuation techniques that rely to a greater

 

 

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extent on unobservable inputs require a higher level of judgment to calculate a fair value than those based wholly on observable inputs. Substantially all of UBS’s financial assets and financial liabilities are based on observable prices and inputs and hence are classified in Levels 1 and 2 of the hierarchy.

Where valuation techniques, including 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 comparable market prices. Also, models prioritize the use of observable inputs, when available, over unobservable inputs. Judgment is required in selecting appropriate models as well as inputs for which observable data is less readily or not available.

The valuation techniques 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 nature of the instrument. A credit-valuation-adjustment approach based on an expected exposure profile is used to adjust the fair value of derivative instruments, including funded derivative instruments which are classified asFinancial assets designated at fair value, to reflect counterparty credit risk. Correspondingly, a debit-valuation-adjustment approach is applied to incorporate UBS’s own credit risk, where applicable, in the fair value of derivative instruments. Own credit risk for financial liabilities designated at fair value is calculated using the funds transfer price curve.

In 2014, the Group incorporated funding valuation adjustments (FVA) into its valuation estimates for certain OTC derivatives, consistent with the industry’s migration towards reflecting the market cost of unsecured funding in the valuation of such instruments. Recognition and measurement of FVA derives from several important management judgments, including estimation of relevant market clearing prices for funding, the interaction between FVA and DVA (DVA previously incorporated the full UBS credit spread including a funding component which is now captured in FVA), and the determination as to when the weight of market evidence becomes sufficiently compelling to justify the change in estimate.

 è Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Financial information” section of this report for more information

As of 31 December 2014, financial assets and financial liabilities for which valuation techniques are used and whose significant inputs are considered observable (Level 2) amounted to CHF 304 billion and CHF 333 billion, respectively, (67% and 89% of total financial assets measured at fair value and total financial liabilities measured at fair value, respectively). Financial assets and financial liabilities whose valuations include significant unobservable inputs (Level 3) amounted to CHF 12 billion and CHF 17 billion, respectively, (3% and 5% of total financial assets measured

at fair value and total financial liabilities measured at fair value, respectively). These amounts reflect the effect of offsetting, wherever such presentation is required under IFRS.

Uncertainty inherent to estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular position. While the Group believes its valuation techniques are appropriate and consistent with those of other market participants, the use of different techniques or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. As of 31 December 2014, the total favorable and unfavorable effects of changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions for financial instruments classified as Level 3 were CHF 965 million and CHF 824 million, respectively. Further discussion of the Group’s use of valuation techniques, the critical estimates and adjustments applied to reflect uncertainties within the fair value measurement process, and its governance over the fair value measurement process can be found in “Note 24 Fair value measurement” in the “Financial information” section of this report.

 è Refer to “Note 24 Fair value measurement” in the “Financial information” section of this report for more information

Allowances for credit losses on loans and receivables measured at amortized cost

Allowances for credit losses represent management’s best estimate of credit losses incurred in the lending portfolio at the balance sheet date due to credit deterioration of the issuer or counterparty. The loan portfolio, which is measured at amortized cost less impairment, consists of financial assets presented on the balance sheet linesDue from banks andLoans. In addition, irrevocable loan commitments are tested for impairment as described below.

A credit loss expense is recognized if there is objective evidence that the Group will be unable to collect all amounts due (or the equivalent thereof) on a claim based on the original contractual terms due to credit deterioration of the issuer or counterparty. Allowances for credit losses are evaluated at both a counterparty-specific level and collectively. Under this incurred loss model, a financial asset or group of financial assets is impaired if there is objective evidence that a credit loss has occurred by the balance sheet date. Judgment is used in making assumptions when calculating impairment losses both on a counterparty-specific level and collectively.

The impairment loss for a loan is the excess of the carrying value of the financial asset over the estimated recoverable amount. The estimated recoverable amount is the present value, calculated 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 calculating the recoverable amount is the current effective interest rate. An allowance for

 

 

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credit losses is reported as a reduction of the carrying value of the financial asset on the balance sheet.

The collective allowances for credit losses are calculated for portfolios with similar credit risk characteristics, taking into account historical loss experience and current conditions. The methodology and assumptions used are reviewed regularly to reduce any differences between estimated and actual loss experience. For all of our portfolios, we also assess whether there have been any unforeseen developments which might result in impairments but which are not immediately observable. To determine whether an event-driven collective allowance for credit losses is required, we consider global economic drivers to assess the most vulnerable countries and industries.

As of 31 December 2014, the gross loan portfolio was CHF 316 billion and the related allowances for credit losses amounted to CHF 0.7 billion, consisting of specific and collective allowances of CHF 687 million and CHF 8 million, respectively.

 è Refer to “Note 1a item 11 Allowances and provisions for credit losses,” “Note 10 Due from banks and loans (held at amortized cost),” “Note 12 Allowances and provisions for credit losses” and “Note 27a Measurement categories of financial assets and liabilities” in the “Financial information” section of this report for more information
 è Refer to “Policies for past due, non-performing and impaired claims” in the “Risk management and control” section of this report for more information

Goodwill impairment test

UBS performs an impairment test on its goodwill assets on an annual basis, or when indicators of impairment exist. UBS considers the segments, as reported in “Note 2 Segment reporting,” as separate cash-generating units. The impairment test is performed for each segment to which goodwill is allocated by comparing the recoverable amount, based on its value-in-use, to the carrying amount of the respective segment. An impairment charge is recognized if the carrying amount exceeds the recoverable amount. The impairment test is based on the assumptions described below.

The recoverable amounts are determined using a discounted cash flow model, which has been adapted to use 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 forecasted years and the terminal value.

The carrying amount for each segment is determined by reference to the Group’s equity attribution framework described in the “Capital management” section of this report. 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.

Key assumptions used to determine the recoverable amounts of each segment are tested for sensitivity by applying a reasonably possible change to those assumptions. Forecast earnings available to shareholders were changed by 10%, the discount rates were changed by 1.0 percentage point and the long-term growth rates were changed by 0.5 percentage point. Under all scenarios, the recoverable amounts for each segment exceeded the respective carrying amount, such that the reasonably possible changes in key assumptions would not result in impairment as of 31 December 2014.

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. 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, no impact would be expected on the Group total capital ratios.

As of 31 December 2014, total goodwill recognized on the balance sheet was CHF 6.4 billion, of which CHF 1.4 billion, CHF 3.5 billion and CHF 1.5 billion was carried by Wealth Management, Wealth Management Americas and Global Asset Management, respectively. On the basis of the impairment testing methodology described above, UBS concluded that the year-end 2014 balances of goodwill allocated to its segments remain recoverable and thus were not impaired.

 è Refer to “Note 1a item 21 Goodwill and intangible assets,” “Note 2 Segment reporting” and “Note 17 Goodwill and intangible assets” 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 IAS 12Income Taxes. The level of deferred tax asset recognition is influenced by management’s assessment of our future profitability based on 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, IAS 12 requires convincing evidence that there will be sufficient future profitability.

 

 

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Swiss tax losses may 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 as of 31 December 2014 have been based on future profitability assumptions, adjusted to take into account the recognition criteria of IAS 12. 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. As of 31 December 2014, the deferred tax assets amounted to CHF 11 billion, which included CHF 7.5 billion in respect of tax losses (mainly in Switzerland and the US) that may be utilized to offset taxable income in future years.

 è Refer to “Note 1a item 22 Income taxes” and “Note 8 Income taxes” in the “Financial information” section of this report for more information

Provisions

Provisions are liabilities of uncertain timing or amount, and are recognized when UBS has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions are recognized for the best estimate of the consideration required to settle the present obligation at the balance sheet date.

Recognition of provisions often involves significant judgment in assessing the existence of an obligation resulting from past events and in estimating the probability, timing and amount of any outflows of resources. This is particularly the case with litigation, regulatory and similar matters which, because of their nature, are subject to many uncertainties, making their outcome difficult to predict. Such matters may involve unique fact patterns or novel legal theories, proceedings which have not yet been initiated or are at early stages of adjudication, or as to which alleged damages have not been quantified by the claimants. Determining whether an obligation exists as a result of a past event and estimating the probability, timing and amount of any potential outflows is based on a variety of assumptions, variables, and known and unknown uncertainties. The amount of any provision recognized can be very sensitive to the assumptions used and there could be a wide range of possible outcomes for any particular matter. Statistical or other quantitative analytical tools are of limited use in determining whether to establish or determine the amount of provisions in the case of litigation, regulatory or similar matters. Furthermore, information currently available to management may be incomplete or inaccurate increasing the risk of erroneous assumptions with regards to the future developments of such matters. Management regularly reviews all the available information regarding such matters, including advice from legal advisors, to assess whether the recognition criteria for provisions have been satisfied for those matters and, if not, to evaluate whether such matters represent contingent liabilities. Legal advice is a significant consideration in determining whether it is more

likely than not that an obligation exists as a result of a past event and in assessing the probability, timing and amount of any potential outflows.

As of 31 December 2014, total provisions amounted to CHF 4,366 million, of which CHF 3,053 million pertained to the litigation, regulatory and similar matters class. Since the future outflow of resources in respect of these matters cannot be determined with certainty based on currently available information, the actual outflows may ultimately prove to be substantially greater (or may be less) than the provisions recognized.

 è Refer to “Note 1a item 27 Provisions” and “Note 22 Provisions and contingent liabilities” in the “Financial information” section of this report for more information

Pension and other post-employment benefit plans

The full defined benefit obligation, net of plan assets, relating to our pension and other-post employment benefits is recognized on the balance sheet, with changes resulting from re-measurements recorded immediately in other comprehensive income. The net defined benefit liability (asset) at the end of the year and the related personnel expense depend on the expected future benefits to be provided, determined using a number of economic and demographic assumptions. The most significant assumptions include life expectancy, the discount rate, expected salary increases, pension rates, and in addition, for the Swiss plan, interest credits on retirement savings account balances.

Life expectancy is determined by reference to published mortality tables. The discount rate is determined by reference to the rates of return on high-quality fixed-income investments of appropriate currency and 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. For a sensitivity analysis of the defined benefit obligation to these significant actuarial assumptions, refer to “Note 28 Pension and other post-employment benefit plans” in the “Financial information” section of this report.

The most significant plan is the Swiss pension plan. Consistent with 2013, life expectancy for this plan has been based on the 2010 BVG generational mortality tables. The assumption for the discount rate has changed from 2.30% in the prior year to 1.15% in the current year, as a result of lower market yields on corporate bonds.

 è Refer to “Note 1a item 24 Pension and other post-employment benefit plans” and “Note 28 Pension and other post-employment benefit plans” in the “Financial information” section of this report for more information
 

 

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Critical accounting policies

 

 

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 Group AG shares issued to employees is determined by reference to quoted market prices, adjusted, when relevant, 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. Several recognized valuation models exist. The models we apply have been selected because they are able to accommodate

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.

The models we use 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.

 è Refer to “Note 1a item 25 Equity participation and other compensation plans” and “Note 29 Equity participation and other compensation plans” in the “Financial information” section of this report for more information
 

 

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Significant accounting and financial reporting changes

 

Significant accounting changes

Fair value measurements – funding valuation adjustments

In 2014, we incorporated funding valuation adjustments (FVA) into our fair value measurements. This resulted in a net loss of CHF 267 million when the change was adopted as of 30 September 2014, of which CHF 252 million was attributable to Corporate Center – Non-core and Legacy Portfolio, CHF 12 million to the Investment Bank and CHF 3 million to Retail & Corporate.

 è Refer to the “Critical accounting policies” section, “Note 1b Changes in accounting policies, comparability and other adjustments” and “Note 24d Valuation adjustments” in the “Financial information” section of this report for more information

Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32,Financial Instruments: Presentation)

On 1 January 2014, UBS adoptedOffsetting Financial Assets and Financial Liabilities (Amendments to IAS 32,Financial Instruments: Presentation). The amended IAS 32 restricts offsetting on the balance sheet to only those arrangements in which a right of set-off exists that is unconditional and legally enforceable, in the normal course of business and in the event of the default, bankruptcy or insolvency of the Group and its relevant counterparties and for which the Group intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously.

The amendments also provide incremental guidance for determining when gross settlement systems result in the functional equivalent of net settlement. UBS is no longer able to offset certain

derivative arrangements under the revised rules. The prior period balance sheet information as of 31 December 2013 has been restated to reflect the effects of adopting these amendments. There was no impact on total equity, net profit or earnings per share. In addition, there was no material impact on the Group’s Basel III capital, capital ratios and Swiss SRB leverage ratio.

 è Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” for more information

ETD client cash balances removed from balance sheet

We provide clearing and execution services to clients entering into exchange-traded derivatives (ETD). In 2014, we changed our accounting policy with respect to recognizing cash initial margin collected and remitted (together, client cash balances) to more closely align with evolving market practices.

Client cash balances that are legally isolated from UBS’s estate, and that UBS neither benefits from nor controls, are not deemed assets and corresponding liabilities of the Group. Consequently, they are no longer reflected withinCash collateral payables on derivative instruments for the amounts due to clients,Cash collateral receivables on derivative instruments in relation to amounts posted to central counterparties, andDue from banks for any amounts that are deposited at third-party deposit banks. The comparative balance sheets as of 31 December 2013 have been restated accordingly.

 è Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” for more information
 

 

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Financial and operating performance

Significant accounting and financial reporting changes

 

 

Financial reporting changes

Refinement to the allocation of operating costs for internal services

At the beginning of 2014, we refined the way operating costs for internal services are allocated from Corporate Center – Core Functions to the business divisions and Corporate Center – Non-core and Legacy Portfolio. Under this refinement, each year, as part of the annual business planning cycle, Corporate Center – Core Functions agrees with the business divisions and Non-core and Legacy Portfolio cost allocations for services at fixed amounts or at variable amounts based on fixed formulas, depending on capital and service consumption levels as well as the nature of the services performed. These pre-agreed cost allocations are designed with the expectation that Corporate Center – Core Functions recovers its costs, without a mark-up. Because actual costs incurred may differ from those expected, however, Corporate Center – Core Functions may recognize significant under- or over-allocations depending on various factors, including Corporate Center – Core Functions’ ability to manage the delivery of its services and achieve cost savings. Each year, these cost allocations will be reset, taking account of the prior year’s experience and plans for the forthcoming period. We expect the refined approach to strengthen the effectiveness and efficiency of the services performed by Corporate Center – Core Functions, and in particular to facilitate the achievement of cost savings, by better aligning cost accountability with the management of these services. Prior periods have not been adjusted for this refinement.

Operating income

In 2014, we amended our management discussion and analysis of operating income for Wealth Management, Wealth Management Americas and Retail & Corporate to disclose “recurring net fee income,” which is part of total net fee and commission income in the UBS Group financial statements, as a separate line in the business division reporting tables. This includes fees for services provided on an ongoing basis such as portfolio management fees, asset-based investment fund fees, custody fees and account keeping fees, which are generated on the respective business division’s client assets. The non-recurring portion of the net fee and commission income for these business divisions, which mainly consists of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, is now presented together with net trading income as “transaction-based income.” With these changes, we aim to enhance the transparency of operating income disclosure for our client asset-gathering businesses.

In addition, we have added a tabular disclosure in the “Group performance” section with the operating income breakdown for Wealth Management, Wealth Management Americas and Retail & Corporate, as well as specific commentary on the new operating income lines of recurring net fee income and transaction-based income for these business divisions.

 

 

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Changes to internal funding and fund transfer pricing methodology

Effective July 2014, we changed our fund transfer pricing methodology for the divisions Wealth Management and Retail & Corporate. Under the revised methodology, the divisions share in the benefits of raising liabilities and originating assets, with the pricing curve incentivizing a balanced funding position from a currency and tenor perspective. The new methodology better aligns the economics of flows originated in Wealth Management and Retail & Corporate with UBS’s liquidity and funding appetite and supports initiatives aimed at achieving the right mix of assets and liabilities across the two divisions in response to the evolving regulatory liquidity and funding landscape. The change in fund transfer pricing methodology in Wealth Management and Retail & Corporate falls under the governance of Group Treasury.

 è Refer to the “Treasury management” section in this report for more information on the internal funding and funds transfer pricing

Client shifts and referrals between Retail & Corporate and Wealth Management

In 2014, we implemented a remuneration framework for net client shifts and referrals between Retail & Corporate and Wealth Management, consistent with our strategy of collaboration across our various businesses. Under this framework, a fee is paid from one business division to the other for the overall net volume of client shifts and referrals. Clients are mostly shifted from Retail & Corporate to Wealth Management when they reach a certain level of wealth following our objective to develop our client relationships.

Investment bank – Fixed Income Exchange-Traded Derivatives

During 2014, we transferred the fixed income exchange-traded derivatives execution team from our equities business into our foreign exchange, rates and credit (FRC) business within the Investment Bank’s Investor Client Service business unit. The change is intended to facilitate the build-out of our FRC execution services platform. Prior period operating income numbers for equities and FRC have been restated accordingly. The transfer had no impact on total operating income for either Investor Client Services or the overall Investment Bank.

Disclosure of regional performance in financial reports

Throughout 2014, our quarterly results presentations included disclosure of the regional performance of our business divisions, including a breakdown of regional operating income, operating expenses and performance before tax by business division.

Starting with this Annual Report, we also provide such disclosure in the “Group performance” section of our financial reports, including our interim reports.

 è Refer to the “Group performance” section and “Note 2 Segment reporting” in the “Financial information” section of this report for more information

New structure of the Corporate Center

As of 1 January 2015, Corporate Center – Core Functions was reorganized into two new components, Corporate Center – Services and Corporate Center – Group Asset and Liability Management (Group ALM), each of which will be reported separately. In our first quarter 2015 report, we will reflect this change and provide more information. Our presentation of Corporate Center – Non-core and Legacy Portfolio is not affected by this change.

 

 

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Group performance

 

 

Group performance

Net profit attributable to UBS Group AG shareholders was CHF 3,466 million compared with CHF 3,172 million in 2013. We recorded an operating profit before tax of CHF 2,461 million compared with CHF 3,272 million, largely reflecting an increase of CHF 1,106 million in operating expenses, driven by CHF 893 million higher charges for provisions for litigation, regulatory and similar matters. Operating income increased by CHF 295 million, due to higher net fee and commission income, largely offset by a decline in net interest and trading income. We recorded a net tax benefit of CHF 1,180 million compared with a net tax benefit of CHF 110 million in the prior year, reflecting net upward revaluations of deferred tax assets in both years, which more than offset tax expenses for taxable profits.

Income statement

 

 

For the year ended % change from 
CHF million31.12.14 31.12.13 31.12.12 31.12.13 
Net interest income 6,555   5,786   5,978   13  
                  
Credit loss (expense)/recovery (78 (50 (118 56  
                  
Net interest income after credit loss expense 6,477   5,736   5,860   13  
                  
Net fee and commission income 17,076   16,287   15,396   5  
                  
Net trading income 3,842   5,130   3,526   (25
                  

of which: net trading income excluding own credit

 3,551   5,413   5,728   (34
                  

of which: own credit on financial liabilities designated at fair value

 292   (283 (2,202
                  
Other income 632   580   641   9  
                  
Total operating income 28,027   27,732   25,423   1  
                  
Personnel expenses 15,280   15,182   14,737   1  
                  
General and administrative expenses 9,387   8,380   8,653   12  
                  
Depreciation and impairment of property and equipment 817   816   689   0  
                  
Impairment of goodwill 0   0   3,030  
                  
Amortization and impairment of intangible assets 83   83   106   0  
                  
Total operating expenses 25,567   24,461   27,216   5  
                  
Operating profit/(loss) before tax 2,461   3,272   (1,794 (25
                  
Tax expense/(benefit) (1,180 (110 461   973  
                  
Net profit/(loss) 3,640   3,381   (2,255 8  
                  
Net profit/(loss) attributable to preferred noteholders 142   204   220   (30
                  
Net profit/(loss) attributable to non-controlling interests 32   5   5   540  
                  
Net profit/(loss) attributable to UBS Group AG shareholders 3,466   3,172   (2,480 9  
                  
Comprehensive income
                  
Total comprehensive income 5,220   2,524   (1,767 107  
                  
Total comprehensive income attributable to preferred noteholders 221   559   179   (60
                  
Total comprehensive income attributable to non-controlling interests 79   4   20  
                  
Total comprehensive income attributable to UBS Group AG shareholders 4,920   1,961   (1,966 151  
                  

 

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Adjusted results1, 2

 

 

 

For the year ended 31.12.14 
CHF millionWealth
Management
 Wealth
Management
Americas
 Retail &
Corporate
 Global Asset
Management
 Investment
Bank
 CC – Core
Functions3
 CC –
Non-core
and  Legacy
Portfolio
 UBS 
Operating income as reported 7,901   6,998   3,741   1,902   8,346   (39 (821 28,027  
                                 

of which: own credit on financial liabilities designated at fair value4

 292   292  
                                 

of which: gains on sales of real estate

 44   44  
                                 

of which: gain from the partial sale of our investment in Markit

 43   43  
                                 

of which: impairment of a financial investment available-for-sale

 (48 (48
                                 
Operating income (adjusted) 7,901   6,998   3,741   1,902   8,351   (375 (821 27,696  
                                 
Operating expenses as reported 5,574   6,099   2,235   1,435   8,392   688   1,144   25,567  
                                 

of which: personnel-related restructuring charges5

 70   23   29   37   130   21   17   327  
                                 

of which: other restructuring charges5

 116   33   34   13   131   9   14   350  
                                 

of which: credit related to changes to retiree benefit plans in the US6

 0   (9 0   (8 (20 0   (3 (41
                                 
Operating expenses (adjusted) 5,389   6,053   2,171   1,393   8,151   658   1,116   24,931  
                                 
Operating profit/(loss) before tax as reported 2,326   900   1,506   467   (47 (728 (1,965 2,461  
                                 
Operating profit/(loss) before tax (adjusted) 2,511   946   1,570   509   199   (1,034 (1,937 2,766  
                                 

 

For the year ended 31.12.13 
CHF millionWealth
Management
 Wealth
Management
Americas
 Retail &
Corporate
 Global Asset
Management
 Investment
Bank
 CC – Core
Functions3
 CC –
Non-core
and Legacy
Portfolio
 UBS 
Operating income as reported 7,563   6,538   3,756   1,935   8,601   (1,007 347   27,732  
                                 

of which: own credit on financial liabilities designated at fair value4

 (283 (283
                                 

of which: gains on sales of real estate

 288   288  
                                 

of which: net losses related to the buyback of debt in public tender offers

 (194 27   (167
                                 

of which: gain on sale of Global AM’s Canadian domestic business

 34   34  
                                 

of which: net gain on sale of remaining proprietary trading business

 55   (24)7  31  
                                 
Operating income (adjusted) 7,563   6,538   3,756   1,901   8,546   (794 320   27,829  
                                 
Operating expenses as reported 5,316   5,680   2,298   1,359   6,300   847   2,660   24,461  
                                 

of which: personnel-related restructuring charges5

 71   14   19   10   9   (2 35   156  
                                 

of which: other restructuring charges5

 107   45   35   33   201   (4 200   616  
                                 
Operating expenses (adjusted) 5,138   5,621   2,244   1,316   6,090   853   2,425   23,689  
                                 
Operating profit/(loss) before tax as reported 2,247   858   1,458   576   2,300   (1,854 (2,312 3,272  
                                 
Operating profit/(loss) before tax (adjusted) 2,425   917   1,512   585   2,455   (1,647 (2,104 4,141  
                                 

 

1  Adjusted results are non-GAAP financial measures as defined by SEC regulations.  2  Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, and restatements due to the retrospective adoption of new accounting standards or changes in accounting policies.  3  Corporate Center – Core Functions operating expenses presented in this table are after service allocations to business divisions and Corporate Center – Non-core and Legacy Portfolio.  4  Refer to “Note 24 Fair value measurement” in the “Financial information” section of this report for more information.  5  Refer to “Note 32 Changes in organization” in the “Financial information” section of this report for more information.  6  Refer to “Note 28 Pension and other post-employment benefit plans” in the “Financial information” section of this report for more information.  7  Reflects a foreign currency translation loss.

 

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Group performance

 

 

Adjusted results1, 2 (continued)

 

 

For the year ended 31.12.12 
CHF millionWealth
Management
 Wealth
Management
Americas
 Retail &
Corporate
 Global Asset
Management
 Investment
Bank
 CC – Core
Functions3
 CC –
Non-core
and Legacy
Portfolio
 UBS 
Operating income as reported 7,041   5,877   3,728   1,883   7,144   (1,689 1,439   25,423  
                                  

of which: own credit on financial liabilities designated at fair value4

 (2,202 (2,202
                                  

of which: gains on sales of real estate

 112   112  
                                  
Operating income (adjusted) 7,041   5,877   3,728   1,883   7,144   401   1,439   27,513  
                                  
Operating expenses as reported 4,634   5,281   1,901   1,314   6,877   2,008   5,202   27,216  
                                  

of which: personnel-related restructuring charges5

 25   3   3   20   250   (1 58   358  
                                  

of which: other restructuring charges5

 0   (5 0   0   24   (6 0   14  
                                  

of which: credit related to changes to the Swiss pension plan

 (357 (287 (30 (51 (3 (2 (730
                                  

of which: credit related to changes to retiree benefit plans in the US

 (1 (2 (16 (91 (1 (7 (116
                                  

of which: impairment of goodwill and other non-financial assets

 3,064   3,064  
                                  
Operating expenses (adjusted) 4,966   5,284   2,185   1,340   6,746   2,020   2,089   24,627  
                                  
Operating profit/(loss) before tax as reported 2,407   597   1,827   569   267   (3,698 (3,764 (1,794
                                  
Operating profit/(loss) before tax (adjusted) 2,075   594   1,543   543   398   (1,620 (651 2,885  
                                  

1  Adjusted results are non-GAAP financial measures as defined by SEC regulations.  2  Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, and restatements due to the retrospective adoption of new accounting standards or changes in accounting policies.  3  Corporate Center – Core Functions operating expenses presented in this table are after service allocations to business divisions and Corporate Center – Non-core and Legacy Portfolio.  4  Refer to “Note 24 Fair value measurement” in the “Financial information” section of this report for more information.  5  Refer to “Note 32 Changes in organization” in the “Financial information” section of this report for more information.

 

2014 compared with 2013

Results

We recorded an operating profit before tax of CHF 2,461 million compared with CHF 3,272 million, largely reflecting an increase of CHF 1,106 million in operating expenses, driven by CHF 893 million higher charges for provisions for litigation, regulatory and similar matters. Operating income increased by CHF 295 million, due to CHF 789 million higher net fee and commission income, largely offset by a CHF 518 million decline in net interest and trading income. We recorded a net tax benefit of CHF 1,180 million compared with a net tax benefit of CHF 110 million in the prior year, reflecting net upward revaluations of deferred tax assets in both years, which more than offset tax expenses in respect of taxable profits.

In addition to reporting our results in accordance with IFRS, we report adjusted results that exclude items that management believes are not representative of the underlying performance of our businesses. Such adjusted results are non-GAAP financial measures as defined by SEC regulations. For 2014, the items we excluded were an own credit gain of CHF 292 million, gains on sales of real estate of CHF 44 million, a gain of CHF 43 million

from the partial sale of our investment in Markit, a loss of CHF 48 million related to the impairment of a financial investment available-for-sale, net restructuring charges of CHF 677 million and a credit of CHF 41 million related to changes to retiree benefit plans in the US. For 2013, the items we excluded were an own credit loss of CHF 283 million, gains on sales of real estate of CHF 288 million, net losses related to the buyback of debt in public tender offers of CHF 167 million, a gain on the sale of Global Asset Management’s Canadian domestic business of CHF 34 million, a net gain on the sale of our remaining proprietary trading business of CHF 31 million and net restructuring charges of CHF 772 million.

On this adjusted basis, profit before tax was CHF 2,766 million compared with CHF 4,141 million in the prior year.

Adjusted operating income decreased by CHF 133 million to CHF 27,696 million, mainly reflecting a decline of CHF 1,066 million in adjusted net interest and trading income, largely offset by an increase in net fee and commission income of CHF 789 million and CHF 172 million higher adjusted other income.

Adjusted operating expenses increased by CHF 1,242 million to CHF 24,931 million, mainly due to CHF 893 million higher net charges for provisions for litigation, regulatory and similar matters as well as CHF 381 million higher other non-personnel expenses. Adjusted personnel expenses were largely unchanged.

 

 

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Operating income

Total operating income was CHF 28,027 million compared with CHF 27,732 million. On an adjusted basis, total operating income decreased by CHF 133 million to CHF 27,696 million. Adjusted net interest and trading income declined CHF 1,066 million, largely in Corporate Center – Non-core and Legacy Portfolio and in the Investment Bank, partly offset by an increase in Corporate Center – Core Functions. Net fee and commission income increased by CHF 789 million, mainly in our wealth management businesses, as well as in the Investment Bank. Adjusted other income increased by CHF 172 million.

Net interest and trading income

Net interest and trading income decreased by CHF 518 million to CHF 10,397 million. 2014 included an own credit gain on financial liabilities designated at fair value of CHF 292 million, primarily as life-to-date own credit losses partially reversed due to time decay. The prior year included an own credit loss on financial liabilities of CHF 283 million. Adjusted for the effect of own credit in both years and a gain related to the buyback of debt in a public tender offer of CHF 27 million in 2013, net interest and trading income decreased by CHF 1,066 million to CHF 10,105 million, mainly in Non-core and Legacy Portfolio and in the Investment Bank, partly offset by an increase in Corporate Center – Core Functions.

In Wealth Management, net interest and trading income decreased by CHF 23 million. Net interest income increased by CHF 104 million to CHF 2,165 million, mainly due to higher net interest income from Lombard loans and mortgages as well as a positive effect from methodology changes in the allocation of liquidity and funding costs and benefits for loans and deposits between

Wealth Management and Group Treasury. These effects were partly offset by lower net interest income from client deposits and lower allocated revenues from Group Treasury. Net trading income decreased by CHF 127 million to CHF 680 million, largely driven by lower revenues from structured products and decreases in foreign exchange trading revenues.

In Wealth Management Americas, net interest and trading income increased by CHF 29 million to CHF 1,352 million. Net interest income increased by CHF 47 million to CHF 983 million, due to continued growth in loan and deposit balances. Net trading income decreased by CHF 18 million to CHF 369 million.

In Retail & Corporate, net interest and trading income increased by CHF 51 million to CHF 2,536 million. Net interest income increased by CHF 40 million to CHF 2,184 million, mainly due to higher revenues allocated from Group Treasury and a higher loan margin. This was partly offset by a decline in the deposit margin, despite selective pricing measures, as the persistently low interest rate environment continued to have an adverse effect on our replication portfolios. Net trading income increased by CHF 11 million to CHF 352 million.

In the Investment Bank, net interest and trading income decreased by CHF 461 million to CHF 4,554 million. Within Investor Client Services, foreign exchange, rates and credit net interest and trading income decreased by CHF 246 million, with lower revenues across most products as client activity and volatility levels decreased compared with 2013, reflecting the ongoing macroeconomic uncertainty. Also within Investor Client Services, equities net interest and trading income decreased by CHF 120 million, largely due to lower derivatives revenues, reflecting lower volatility levels during 2014, as well as reduced cash revenues. This was partly offset by higher revenues in financing services, mainly due to

 

 

Net interest and trading income

 

 

For the year ended % change from 
CHF million31.12.14 31.12.13 31.12.12 31.12.13 
Net interest and trading income
                  
Net interest income 6,555   5,786   5,978   13  
                  
Net trading income 3,842   5,130   3,526   (25
                  
Total net interest and trading income 10,397   10,915   9,504   (5
                  
Wealth Management 2,845   2,868   2,728   (1
                  
Wealth Management Americas 1,352   1,323   1,265   2  
                  
Retail & Corporate 2,536   2,485   2,467   2  
                  
Global Asset Management 0   9   9   (100
                  
Investment Bank 4,554   5,015   3,574   (9
                  

of which: Corporate Client Solutions1

 1,047   1,142   706   (8
                  

of which: Investor Client Services1

 3,507   3,873   2,868   (9
                  
Corporate Center (891 (784 (540 14  
                  

of which: Core Functions

 (28 (1,045 (1,992 (97
                  

of which: own credit on financial liabilities designated at fair value

 292   (283 (2,202
                  

of which: Non-core and Legacy Portfolio

 (864 261   1,452  
                  
Total net interest and trading income 10,397   10,915   9,504   (5
                  

1  In 2014, comparative period figures were corrected. As a result, net interest and trading income for Investment Bank Corporate Client Solutions increased by CHF 107 million and CHF 131 million for 2013 and 2012, respectively, with an equal and offsetting decrease for Investment Bank Investor Client Services.

 

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higher equity finance revenues. Corporate Client Solutions net interest and trading income declined by CHF 95 million, largely due to lower revenues within equities capital markets, which included revenues from a large private transaction in 2013. This was partly offset by higher revenues in debt capital markets, due to higher revenues from leveraged finance, as well as reduced negative risk management revenues, mainly due to the positive effect of widening credit spreads during 2014.

Corporate Center – Core Functions net interest and trading income, adjusted for the effect of own credit in both years and a gain related to the buyback of debt in a public tender offer of CHF 27 million in 2013, increased by CHF 469 million. 2014 included gains of CHF 113 million on cross-currency basis swaps held as economic hedges compared with losses of CHF 222 million in the prior year. Furthermore, 2014 included gains related to our macro cash flows hedges of CHF 47 million compared with losses of CHF 153 million in the prior year.

In Corporate Center – Non-core and Legacy Portfolio, net interest and trading income decreased by CHF 1,125 million. Non-core net interest and trading income decreased by CHF 444 million, partly as 2014 included a net loss of CHF 175 million from the implementation of funding valuation adjustments (FVA) on derivatives. Further, 2014 included losses in rates of CHF 197 million, mainly from novation and unwind activities compared with gains of CHF 23 million in the prior year. In addition, 2014 included a loss of CHF 97 million in structured credit as a result of the exit of the majority of the correlation trading portfolio. This was partly offset by a valuation gain of CHF 68 million on certain equity positions.

Legacy Portfolio net interest and trading income decreased by CHF 680 million. In 2013, we exercised our option to acquire the SNB StabFund’s equity and recorded total option revaluation gains of CHF 431 million prior to the exercise. 2014 included a loss of CHF 108 million resulting from the termination of certain credit default swap (CDS) contracts and a net loss from the implementation of FVA on derivatives of CHF 77 million.

 è Refer to the “Significant accounting and financial reporting changes” section as well as “Note 1b Changes in accounting policies, comparability and other adjustments” and “Note 24 Fair value measurement” in the “Financial information” section of this report for more information on the implementation of funding valuation adjustments
 è Refer to the “Liquidity and funding management” section of this report for more information on the changed methodology for the allocation of liquidity and funding costs and benefits
 è Refer to “Note 3 Net interest and trading income” in the “Financial information” section of this report for more information
 è Refer to “Note 24 Fair value measurement” in the “Financial information” section of this report for more information on own credit

Credit loss expense/recovery

We recorded net credit loss expenses of CHF 78 million compared with CHF 50 million in the prior year.

Net credit loss expenses in Retail & Corporate were CHF 95 million compared with CHF 18 million in the prior year. 2014 included net specific credit loss allowances of CHF 105 million compared with CHF 113 million in the prior year, which was primarily related to corporate clients in both periods. In addition, 2014 included a release of CHF 10 million in collective loan loss allowances compared with a release of CHF 95 million in 2013, which partly reflected the overall improved outlook for relevant industries.

Wealth Management Americas recorded a net credit loss recovery of CHF 15 million in 2014, mainly reflecting the full release of a loan loss allowance for a single client as well as releases of loan loss allowances on securities-backed lending facilities collateralized by Puerto Rico municipal securities and related funds. In the prior year, Wealth Management Americas recorded a net credit loss expense of CHF 27 million, largely due to loan loss allowances on securities-backed lending facilities collateralized by Puerto Rico municipal securities and related funds.

Net fee and commission income

Net fee and commission income increased by CHF 789 million to CHF 17,076 million.

Portfolio management and advisory fees increased by CHF 718 million to CHF 7,343 million, primarily in Wealth Management Americas, largely reflecting an increase in managed account fees reflecting higher invested asset levels. Portfolio management and advisory fees also increased in Wealth Management, primarily due to an increase in invested assets, the positive effect of pricing measures and continued growth in discretionary and advisory mandates. These increases were partly offset by lower income

 

 

Credit loss (expense)/recovery

 

 

For the year ended % change from 
CHF million31.12.14 31.12.13 31.12.12 31.12.13 
Wealth Management (1 (10 1   (90
                  
Wealth Management Americas 15   (27 (14
                  
Retail & Corporate (95 (18 (27 428  
                  
Investment Bank 2   2   0   0  
                  
Corporate Center 2   3   (78 (33
                  

of which: Non-core and Legacy Portfolio

 2   3   (78 (33
                  
Total (78 (50 (118 56  
                  

 

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due to the effect of ongoing outflows of assets from cross-border clients and due to the migration into retrocession-free products for investment mandates during 2013.

Merger and acquisitions and corporate finance fees increased by CHF 118 million to CHF 731 million, predominantly in the Investment Bank, mainly reflecting an increased volume of mergers and acquisition transactions in 2014.

Underwriting fees rose by CHF 96 million, mainly reflecting higher equity underwriting fees, largely in the Investment Bank, due to higher revenues from public offerings as the fee pool increased.

 è 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 632 million compared with CHF 580 million in the prior year. Adjusted other income increased by CHF 172 million.

Income related to associates and subsidiaries increased by CHF 90 million when adjusted for a net gain of CHF 31 million on the sale of our remaining proprietary trading business in 2013. 2014 included a gain of CHF 65 million in Corporate Client Solutions within the Investment Bank on an investment in an associate which was reclassified to a financial investment available-for-sale following its initial public offering. 2014 also included a credit of CHF 58 million related to the release of a provision for litigation, regulatory and similar matters, which was recorded as other income in Corporate Center – Core Functions, compared with a credit of CHF 21 million in 2013.

Excluding a gain of CHF 43 million from the partial sale of our investment in Markit and a loss of CHF 48 million related to the impairment of a financial investment available-for-sale, both in 2014, adjusted income from financial investments available-for-sale decreased by CHF 20 million.

Adjusted other income other than income related to associates and subsidiaries and from financial investments available-for-sale increased by CHF 102 million when excluding gains on sales of real estate of CHF 44 million in 2014 and CHF 288 million in 2013, net losses related to the buyback of debt in public tender

offers of CHF 194 million in 2013 and a gain on the sale of Global Asset Management’s Canadian domestic business of CHF 34 million in 2013.

In January 2015, UBS sold a real estate property in Geneva, Switzerland for a sales price of CHF 535 million, resulting in a gain on sale of CHF 377 million which will be recognized in the income statement within Corporate Center in the first quarter of 2015. This gain will be treated as an adjusting item for the purpose of calculating adjusted results.

 è Refer to “Note 5 Other income” in the “Financial information” section of this report for more information
 è Refer to “Note 37 Events after the reporting period” in the “Financial information” section of this report for more information

Recurring net fee and transaction-based income in Wealth Management, Wealth Management Americas and Retail & Corporate

Recurring net fee income for Wealth Management, Wealth Management Americas and Retail & Corporate includes fees for services provided on an ongoing basis such as portfolio management fees, asset-based investment fund fees, custody fees and account keeping fees, which are generated on the respective business division’s client assets. This is part of total net fee and commission income in the UBS Group financial statements. Transaction-based income includes the non-recurring portion of the net fee and commission income for these business divisions, mainly consisting of brokerage and transaction-based investment fund fees, as well as credit card fees and fees for payment transactions, together with the respective divisional net trading income.

In Wealth Management, recurring net fee income increased by CHF 216 million to CHF 3,783 million, primarily due to an increase in invested assets, the positive effect of pricing measures and continued growth in discretionary and advisory mandates. These increases were partly offset by lower income due to ongoing outflows of assets from cross-border clients and due to the migration into retrocession-free products for investment mandates during 2013. Transaction-based income increased by CHF 41 million to CHF 1,928 million. The overall increase was mainly related to structured products, mandates, wealth planning

 

 

Operating income Wealth Management, Wealth Management Americas and Retail & Corporate

 

 

Wealth Management Wealth Management Americas Retail & Corporate 

 

For the year ended 
CHF million31.12.14 31.12.13 31.12.12 31.12.14 31.12.13 31.12.12 31.12.14 31.12.13 31.12.12 
Net interest income 2,165   2,061   1,951   983   936   792   2,184   2,144   2,186  
                                        
Recurring net fee income 3,783   3,567   3,309   4,294   3,796   3,199   556   511   512  
                                        
Transaction-based income 1,928   1,887   1,744   1,678   1,800   1,871   1,022   1,034   967  
                                        
Other income 25   57   37   30   33   30   75   86   90  
                                        
Income 7,902   7,573   7,040   6,984   6,565   5,891   3,836   3,774   3,756  
                                        
Credit loss (expense)/recovery (1 (10 1   15   (27 (14 (95 (18 (27
                                        
Total operating income 7,901   7,563   7,041   6,998   6,538   5,877   3,741   3,756   3,728  
                                        

 

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services and hedge funds, partly offset by lower income from foreign exchange trading and investment funds. In addition, 2014 included first-time fees paid to Retail & Corporate for net client shifts and referrals.

In Wealth Management Americas, recurring net fee income increased by CHF 498 million to CHF 4,294 million, mainly due to an increase in managed account fees reflecting higher invested asset levels. Transaction-based income decreased by CHF 122 million to CHF 1,678 million, mainly due to lower client activity.

In Retail & Corporate, recurring net fee income increased by CHF 45 million to CHF 556 million, mainly as certain fees related to retail bank accounts were recorded as recurring net fee income in 2014, totaling CHF 58 million in 2014, while these fees were recorded as transaction-based income in 2013. Transaction-based income decreased by CHF 12 million to CHF 1,022 million, mainly reflecting the aforementioned change in classification of certain fees related to retail bank accounts. This was partly offset by first-time fees received from Wealth Management for net client shifts and referrals.

 è Refer to the “Wealth Management,” “Wealth Management Americas” and “Retail & Corporate” sections of this report for more information

Operating expenses

Total operating expenses increased by CHF 1,106 million to CHF 25,567 million. Restructuring charges were CHF 677 million compared with CHF 772 million in the prior year. Personnel-related restructuring charges increased by CHF 171 million to CHF 327 million, while non-personnel-related restructuring charges decreased by CHF 266 million to CHF 350 million.

On an adjusted basis, excluding restructuring charges in both years as well as credits related to changes to retiree benefit plans in the US of CHF 41 million in 2014, total operating expenses increased by CHF 1,242 million to CHF 24,931 million. This increase was mainly due to CHF 893 million higher net charges for provisions for litigation, regulatory and similar matters as well as CHF 381 million higher other non-personnel expenses, due to higher costs for outsourcing of IT and other services as well as higher professional fees. Adjusted personnel expenses were largely unchanged.

 è Refer to “Note 32 Changes in organization” in the “Financial information” section of this report for more information on restructuring charges
 

 

Operating expenses

 

 

For the year ended % change from 
CHF million31.12.14 31.12.13 31.12.12 31.12.13 
Personnel expenses (adjusted)1
                   
Salaries 6,124   6,203   6,750   (1
                   
Total variable compensation 3,113   3,201   3,005   (3
                   

of which: relating to current year2

 2,338   2,369   1,901   (1
                   

of which: relating to prior years3

 775   832   1,104   (7
                   
Wealth Management Americas: Financial advisor compensation4 3,385   3,140   2,873   8  
                   
Other personnel expenses5 2,372   2,481   2,595   (4
                   
Total personnel expenses (adjusted)1 14,994   15,026   15,225   0  
                   
Non-personnel expenses (adjusted)1
                   
Provisions for litigation, regulatory and similar matters 2,594   1,701   2,549   52  
                   
Other non-personnel expenses6 7,343   6,962   6,852   5  
                   
Total non-personnel expenses (adjusted)1 9,937   8,662   9,401   15  
                   
Adjusting items 636   772   2,589   (18
                   

of which: personnel-related restructuring charges

 327   156   358   110  
                   

of which: other restructuring charges

 350   616   14   (43
                   

of which: credits related to changes to retiree benefit plans in the US7

 (41 (116
                   

of which: credits related to changes to the Swiss pension plan

 (730
                   

of which: impairment of goodwill and other non-financial assets

 3,064  
                   
Total operating expenses as reported 25,567   24,461   27,216   5  
                   

1  Excluding adjusting items.  2  Includes expenses relating to performance awards and other variable compensation for the respective performance year.  3  Consists of amortization of prior years’ awards relating to performance awards and other variable compensation.  4  Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes charges related to compensation commitments with financial advisors entered into at the time of recruitment which are subject to vesting requirements.  5  Consists of expenses related to contractors, social security, pension and other post-employment benefit plans and other personnel expenses. Refer to “Note 6 Personnel expenses” in the “Financial information” section of this report for more information.  6  Includes general and administrative expenses (excluding charges for provisions for litigation, regulatory and similar matters) as well as depreciation and impairment of property and equipment and amortization and impairment of intangible assets.  7  Refer to “Note 28 Pension and other post-employment benefit plans” in the “Financial information” section of this report for more information.

 

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Personnel expenses

Personnel expenses increased by CHF 98 million to CHF 15,280 million and included CHF 327 million personnel-related restructuring charges compared with CHF 156 million in the prior year. On an adjusted basis, excluding restructuring charges and the aforementioned credits related to changes to retiree benefit plans in the US in 2014, personnel expenses decreased slightly by CHF 32 million to CHF 14,994 million.

Expenses for salaries, excluding the effect of restructuring, decreased by CHF 79 million to CHF 6,124 million, mainly reflecting an increase in the capitalization of personnel expenses related to internally generated computer software, partly offset by charges for role-based allowances.

Adjusted for the effect of restructuring, total variable compensation expenses decreased by CHF 88 million to CHF 3,113 million. Expenses for current year awards declined by CHF 31 million and expenses for prior-year awards decreased by CHF 57 million.

Financial advisor compensation in Wealth Management Americas increased by CHF 245 million to CHF 3,385 million, corresponding with higher compensable revenues.

Other personnel expenses, adjusted for the effect of restructuring and the aforementioned credits related to changes to retiree benefit plans in the US, decreased by CHF 109 million to CHF 2,372 million, largely due to a decline of CHF 98 million in costs for pension and other post-employment benefits plans.

 è Refer to “Note 6 Personnel expenses” in the “Financial information” section of this report for more information
 è Refer to “Note 28 Pension and other post-employment benefit plans” in the “Financial information” section of this report for more information
 è Refer to “Note 29 Equity participation and other compensation plans” in the “Financial information” section of this report for more information
 è Refer to the “Compensation” section of this report for more information

General and administrative expenses

General and administrative expenses increased by CHF 1,007 million to CHF 9,387 million. On an adjusted basis, excluding net restructuring charges of CHF 319 million in 2014 compared with CHF 548 million in the prior year, general and administrative expenses increased by CHF 1,236 million, mainly due to CHF 893 million higher net charges for provisions for litigation, regulatory and similar matters, as well as higher costs for outsourcing of IT and other services and higher professional fees.

At this point in time, we believe that the industry continues to operate in an environment where charges associated with litigation, regulatory and similar matters will remain elevated for the foreseeable future and we continue to be exposed to a number of significant claims and regulatory matters.

Outsourcing of IT and other services, adjusted for the effect of restructuring, increased by CHF 240 million.

General and administrative expense also included a net charge of CHF 123 million for the annual UK bank levy for 2014, mainly in the Investment Bank and in Non-core and Legacy Portfolio, compared with a net charge of CHF 124 million in the prior year. Further, 2014 included net charges of CHF 120 million in Non-core and Legacy Portfolio related to certain disputed receivables compared with an impairment charge of CHF 87 million in the prior year.

 è Refer to “Note 7 General and administrative expenses” in the “Financial information” section of this report for more information
 è Refer to “Note 22 Provisions and contingent liabilities” in the “Financial information” section of this report for more information

Tax

We recognized a net income tax benefit of CHF 1,180 million for 2014, which included a Swiss tax expense of CHF 1,395 million and a net foreign tax benefit of CHF 2,574 million.

The Swiss tax expense included a current tax expense of CHF 46 million related to taxable profits, against which no losses were available to offset, mainly earned by Swiss subsidiaries. In addition, it included a deferred tax expense of CHF 1,348 million, mainly reflecting the net decrease of deferred tax assets (DTA) previously recognized in relation to tax losses carried forward.

The net foreign tax benefit included current tax expense of CHF 409 million in respect of taxable profits earned by non-Swiss subsidiaries and branches, against which no losses were available to offset. This was more than offset by a net deferred tax benefit of CHF 2,983 million, primarily reflecting an increase of DTA relating to the US.

In 2015, notwithstanding the effects of any potential reassessment of the level of DTA, we expect the effective tax rate to be approximately 25%. Consistent with past practice, we expect to revalue the overall level of DTA in the second half of 2015 based on a reassessment of future profitability taking into account updated business plan forecasts, including consideration of a possible further extension of the forecast period used for US DTA recognition purposes to seven years from the six years used at 31 December 2014. The full year effective tax rate could change significantly on the basis of this reassessment. It could also change if aggregate tax expenses for locations other than Switzerland, the US and the UK differ from what is expected.

 è Refer to “Note 8 Income taxes” in the “Financial information” section of this report for more information

Total comprehensive income attributable to UBS Group AG shareholders

Total comprehensive income attributable to UBS Group AG shareholders includes all changes in equity (including net profit) attributed to UBS Group AG shareholders during a period, except

 

 

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those resulting from investments by and distributions to UBS Group AG 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). These items will be reclassified to net profit when the underlying item is sold or realized, with the exception of gains and losses on defined benefit plans and certain property revaluations.

In 2014, total comprehensive income attributable to UBS Group AG shareholders was CHF 4,920 million, reflecting net profit attributable to UBS Group AG shareholders of CHF 3,466 million and OCI attributable to UBS Group AG shareholders of CHF 1,453 million (net of tax).

In 2014, OCI included foreign currency translation gains of CHF 1,795 million (net of tax), primarily related to the significant strengthening of the US dollar against the Swiss franc. OCI related to cash flow hedges was positive CHF 689 million (net of tax), mainly reflecting decreases in long-term interest rates across all major currencies. OCI associated with financial investments available-for-sale was positive CHF 141 million (net of tax), mainly due to an increase in net unrealized gains following decreases in long-term interest rates, partly offset by previously unrealized net gains that were reclassified from OCI to the income statement upon sale of investments.

These OCI gains were partly offset by negative OCI on defined benefit plans of CHF 1,172 million (net of tax). A pre-tax OCI loss of CHF 995 million was recorded for the Swiss pension plan, which was mainly due to an increase in the defined benefit obligation, resulting from a significant decline in the applicable discount rate, which is linked to the returns on Swiss AA-rated corporate bonds and decreased from 2.3% as of 31 December 2013 to 1.2% as of 31 December 2014. This was partly offset by an increase in the fair value of the underlying plan assets and the reversal of the asset ceiling effect. Net pre-tax OCI losses on non-Swiss pension plans amounted to CHF 414 million and primarily related to the UK and US pension plans.

 è Refer to the “Statement of comprehensive income” in the “Financial information” section of this report for more information
 è Refer to “Note 28 Pension and other post-employment benefit plans” in the “Financial information” section of this report for more information on OCI related to defined benefit plans

Net profit attributable to preferred noteholders and non-controlling interests

Net profit attributable to preferred noteholders was CHF 142 million in 2014 compared with CHF 204 million in the prior year. Dividends of CHF 81 million were paid to preferred noteholders, for which no accrual was required in a prior period. In addition, 2014 included an accrual of CHF 30 million for future dividend payments triggered by the dividend payment to UBS shareholders in May 2014. Furthermore, the purchase of UBS AG shares by UBS Group AG pursuant to the exchange offer caused a triggering

event which resulted in accruals for future distributions to preferred noteholders of CHF 31 million. Subsequent to the exchange offer, the preferred notes issued by UBS AG were re-classified to equity attributable to non-controlling interests from a UBS Group AG perspective.

We expect to attribute approximately CHF 80 million in net profit to these non-controlling interests in both 2015 and 2016.

Net profit attributable to non-controlling interests was CHF 32 million in 2014, which largely reflects net profit attributable to non-controlling interests in UBS AG and was related to the non-tendered or not subsequently exchanged UBS AG shares.

 è Refer to the “UBS Group – Changes to our legal structure” section for more information on the establishment of UBS Group AG

Key figures

Cost/income ratio

The cost/income ratio was 91.0% in 2014 compared with 88.0% in the prior year. On an adjusted basis, the cost/income ratio was 89.8% compared with 85.0%.

Risk-weighted assets

During 2014, our phase-in Basel III risk-weighted assets (RWA) decreased by CHF 7.7 billion to CHF 220.9 billion. Phase-in credit risk RWA decreased by CHF 15.7 billion, primarily driven by the sale of securitization exposures, as well as a reduction in RWA for advanced and standardized credit valuation adjustments (CVA), mainly due to derivative trade unwinds and trade compressions. Furthermore, credit risk RWA of CHF 3.0 billion related to defined benefit plans were reclassified from credit risk to non-counterparty-related risk. Non-counterparty-related risk RWA increased by CHF 6.5 billion, mainly due to the aforementioned reclassification, as well as higher RWA relating to DTA recognized. Phase-in market risk RWA increased by CHF 2.8 billion, mainly due to higher RWA relating to risks-not-in-VaR. Phase-in operational risk RWA decreased by CHF 1.2 billion. Incremental operational risk RWA based on the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA decreased by CHF 5.0 billion, which was partly offset by a higher capital requirement based on the advanced measurement approach (AMA) model output using the latest FINMA-approved model parameters.

 è Refer to the “Investment Bank,” “Corporate Center” and “Capital management” sections of this report for more information

Net new money

In Wealth Management, net new money was CHF 34.4 billion with strongest net inflows in Asia Pacific followed by Switzerland and emerging markets. Net outflows in Europe mainly reflected ongoing cross-border asset outflows, partly offset by net inflows from domestic markets. On a global basis, net new money from ultra high net worth clients was CHF 29.8 billion compared with CHF 33.6 billion in the prior year.

 

 

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In Wealth Management Americas, net new money totaled CHF 9.6 billion (USD 10.0 billion) and was predominantly made up of net inflows from financial advisors employed with UBS for more than one year. In 2013, net new money was CHF 17.6 billion (USD 19.0 billion).

In Global Asset Management, excluding money market flows, net new money inflows were CHF 22.6 billion compared with net new money outflows of CHF 4.8 billion. By channel, net inflows from third parties were CHF 11.3 billion compared with CHF 0.7 billion in 2013. Net inflows were mainly from clients serviced from Switzerland, Asia Pacific and Europe. Net new money inflows from clients of UBS’s wealth management businesses were CHF 11.3 billion compared with net outflows of CHF 5.5 billion in the prior year. This improvement mainly resulted from better matching of available and attractive Global Asset Management products to wealth management clients’ changing needs. The net inflows were mainly from clients serviced from Asia Pacific and Europe.

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

Invested assets

In Wealth Management, invested assets were CHF 987 billion as of 31 December 2014, representing an increase of CHF 101 billion from 31 December 2013, due to positive market performance of CHF 38 billion, net new money inflows of CHF 34 billion and positive currency translation effects of CHF 32 billion.

In Wealth Management Americas, invested assets increased by CHF 162 billion to CHF 1,027 billion during 2014, mainly due to the strengthening of the USD dollar versus the Swiss franc. In US dollar terms, invested assets increased by USD 62 billion to USD 1,032 billion, reflecting positive market performance of USD 52 billion and net new money inflows of USD 10 billion.

In Global Asset Management, invested assets were CHF 664 billion as of 31 December 2014 compared with CHF 583 billion as of 31 December 2013. Positive currency translation effects of CHF 36 billion, favorable market performance of CHF 30 billion, and net new money inflows of CHF 16 billion all contributed to the overall increase of CHF 81 billion.

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

 

Net new money1

 

 

For the year ended 
CHF billion 31.12.14   31.12.13   31.12.12  
Wealth Management 34.4   35.9   26.3  
              
Wealth Management Americas 9.6   17.6   20.6  
              
Global Asset Management 15.9   (19.9 (13.3
              

of which: excluding money market flows

 22.6   (4.8 (5.9
              

of which: money market flows

 (6.7 (15.1 (7.4
              

1  Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes and restatements due to the retrospective adoption of new accounting standards or changes in accounting policies. Net new money excludes interest and dividend income.

Invested assets1

 

 

As of % change from 
CHF billion31.12.14 31.12.13 31.12.12 31.12.13 
Wealth Management 987   886   821   11  
                     
Wealth Management Americas 1,027   865   772   19  
                     
Global Asset Management 664   583   581   14  
                     

of which: excluding money market funds

 600   518   497   16  
                     

of which: money market funds

 64   65   83   (2
                     

1  Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes and restatements due to the retrospective adoption of new accounting standards or changes in accounting policies.

 

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Regional performance

The operating regions shown in the “Regional performance” table below, i.e., Americas, Asia Pacific, Europe, Middle East and Africa, and Switzerland, correspond to the management structure of the Group from a regional perspective. The allocation of income and expenses to these regions reflects, and is consistent with, the basis on which the business is managed and performance evaluated. These allocations involve assumptions and judgments which management considers to be reasonable. The main principles of the allocation methodology are that client

revenues are attributed to the domicile of the client, with global clients being split into relevant countries and trading and portfolio management revenues attributed to the country where the risk is managed. This revenue attribution is consistent with the mandate of the country and regional Presidents. Expenses are aligned to the revenues. Certain revenues and expenses, such as those related to the Corporate Center – Non-core and Legacy Portfolio, certain litigation expenses and restructuring charges and other items, are managed at a Group level. These revenues and expenses are included in theGlobalcolumn.

 

 

Regional performance

 

 

Americas Asia Pacific Europe, Middle East
and Africa
 Switzerland Global Total 

 

For the year ended 
CHF billion31.12.14 31.12.13 31.12.14 31.12.13 31.12.14 31.12.13 31.12.14 31.12.13 31.12.14 31.12.13 31.12.14 31.12.13 
Operating income
                                                 
Wealth Management 0.5   0.4   1.9   1.7   4.0   3.9   1.5   1.5   0.0   0.1   7.9   7.6  
                                                 
Wealth Management Americas 7.0   6.5   0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   7.0   6.5  
                                                 
Retail & Corporate 0.0   0.0   0.0   0.0   0.0   0.0   3.7   3.8   0.0   0.0   3.7   3.8  
                                                 
Global Asset Management 0.7   0.7   0.3   0.3   0.4   0.4   0.5   0.5   0.0   0.0   1.9   1.9  
                                                 
Investment Bank 2.6   2.5   2.4   2.6   2.4   2.2   1.0   1.1   (0.1 0.2   8.3   8.6  
                                                 
Corporate Center 0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   (0.9 (0.7 (0.9 (0.7
                                                 
Total operating income 10.7   10.2   4.6   4.5   6.8   6.6   6.8   6.8   (0.9 (0.4 28.0   27.7  
                                                 
Operating expenses
                                                 
Wealth Management 0.4   0.4   1.3   1.2   3.0   2.9   0.9   0.8   0.0   0.0   5.6   5.3  
                                                 
Wealth Management Americas 6.1   5.7   0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   6.1   5.7