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AMNA Ubs

Filed: 17 Mar 16, 8:00pm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 

Washington, D.C. 20549  

FORM 20-F  

(Mark One)

 

 

 

o

 

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

OR

 

 

 

 

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

For the fiscal year ended December 31, 2015

OR

 

 

 

o

 

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

For the transition period from            to                .

OR

 

 

 

o

 

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

 

UBS Group AG

Commission file number: 1-36764

UBS AG  

Commission file number: 1-15060  

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

Switzerland
(Jurisdiction of Incorporation or Organization)

 

UBS Group AG

Bahnhofstrasse 45, CH-8001 Zurich, Switzerland

(Address of Principal Executive Office)

 

 

 

UBS AG

Bahnhofstrasse 45, CH-8001 Zurich, Switzerland and

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.

 


 

 

 

Indicate the number of outstanding shares of each of each issuer’s classes of capital or common stock as of 31 December 2015:

 

UBS Group AG

Ordinary shares, par value CHF 0.10 per share: 3,849,731,535 ordinary shares

(including 98,706,275 treasury shares)

UBS AG

Ordinary shares, par value CHF 0.10 per share: 3,858,408,466 ordinary shares

(none of which are 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

Yes o 

 

No

 

UBS AG

Yes ☐

 

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 o  

 

No

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  

 

No o 

 

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   

 

No o 

����

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 o  

 

Non-accelerated filer ☐

 

 

 

UBS AG

 

 

Large accelerated filer  ☐

 

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 o  

 

International Financial Reporting Standards as issued by the International Accounting Standards Board  

 

Other o 

 

 

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.

 

2 


 

 

 

 

 

Item 17 o  

 

Item 18 o 

 

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 o  

 

No

 

 

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

 

UBS Group AG

 

 

 

Name of each exchange on

Title of each class

which registered

Ordinary Shares (par value of CHF 0.10 each)

New York Stock Exchange

 

UBS AG

 

 

 

Name of each exchange on

Title of each class

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 Total Return Series B 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

 

3 


 

 

E-TRACS Long Platinum Linked to the UBS Bloomberg CMCI Platinum Total Return due May 14, 2018

NYSE Arca

  

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

E-TRACS Linked to the Alerian MLP Infrastructure Index Series B 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

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

E-TRACS Linked to the Wells Fargo® Business Development Company Index Series B 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

2×Leveraged Long E-TRACS Linked to the Wells Fargo® Business Development Company Index Series B 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 Alerian MLP Index ETN Series B due July 18, 2042

NYSE Arca

ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN due October 16, 2042

NYSE Arca

ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN Series B 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

4 


 

 

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

ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN due February 6, 2045

NYSE Arca

ETRACS Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN due March 13, 2045

NYSE Arca

ETRACS ISE Exclusively Homebuilders ETN due March 13, 2045

NYSE Arca

ETRACS Monthly Pay 2xLeveraged MSCI US REIT index ETN due May 5, 2045

NYSE Arca

ETRACS 2xMonthly Leveraged S&P MLP Index ETN Series B due February 12. 2046

NYSE Arca

ETRACS 2xMonthly Leveraged Alerian MLP Infrastructure Index ETN Series B due February 12, 2046

NYSE Arca

UBS AG FI Enhanced Global High Yield ETN due March 3, 2026

NYSE Arca

UBS AG FI Enhanced Europe 50 ETN due February 12, 2016

NYSE Arca

ETRACS S&P GSCI Crude Oil Total Return Index ETN due February 22, 2046

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

5 


 

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 targets for risk-weighted assets (RWA) and leverage ratio denominator (LRD), and the degree to which UBS is successful in implementing changes to its wealth management businesses to meet changing market, regulatory and other conditions; (ii) the continuing low or negative interest rate environment, developments in the macroeconomic climate and in the markets in which UBS operates or to which it is exposed, including movements in securities prices or liquidity, credit spreads, and currency exchange 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, as well as availability and cost of funding to meet requirements for debt that will be eligible for total loss-absorbing capacity (TLAC) requirements, 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, or result in, more stringent capital, TLAC, 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 or gone concern requirements due to measures to reduce resolvability risk; (vi) the degree to which UBS is successful in implementing changes to its legal structure to improve its resolvability and meet related regulatory requirements, including changes in legal structure and reporting required to implement US enhanced prudential standards, implementing a service company model, the transfer of the Asset Management business to a holding company and the potential need to make further changes to the legal structure or booking model of UBS Group in response to legal and regulatory requirements relating to capital requirements, resolvability requirements and proposals in Switzerland and other countries for mandatory structural reform of banks, and the extent to which such changes have the intended effects; (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) changes in the standards of conduct applicable to our businesses that may result from new regulation or new enforcement of existing standards, including measures to impose new or enhanced duties when interacting with customers or in the execution and handling of customer transactions; (ix) 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, including the potential for disqualification from certain businesses or loss of licenses or privileges as a result of regulatory or other governmental sanctions; (x) 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; (xi) 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; (xii) 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; (xiii) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (xiv) whether UBS will be successful in keeping pace with competitors in updating its technology, particularly in trading businesses; (xv) the occurrence of operational failures, such as fraud, misconduct, unauthorized trading, financial crime, cyber-attacks, and systems failures; (xvi) restrictions to the ability of UBS Group AG to make payments or distributions, including due to restrictions to the ability of its subsidiaries to make loans or distributions, directly or indirectly, or, in case of financial difficulties, due to the exercise by FINMA of its broad statutory powers in relation to protective measures, restructuring and liquidation proceedings; (xvii) the degree to which changes in regulation, capital or legal structure, financial results or other factors, including methodology, assumptions, and stress scenarios, may affect UBS’s ability to maintain its stated capital return objective; and (xviii) 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.

6 


 

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 2015 of UBS Group AG and UBS AG annexed hereto, which forms an integral part hereof. 
  • Supplement refers to certain supplemental information contained in this forepart of the Form 20-F, starting on page 13 following the cross-reference table. 
  • Financial Statements refers to the consolidated financial statements of either UBS Group AG 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 18 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 (830-834 and 909-913 ) and Statement of changes in equity (402-405 and 572-575)

 

The exchange rate for the Swiss franc on 11 March 2016, as reported by the Federal Reserve System (H.10 Weekly), was CHF 0.9813 per USD 1.  See page 830 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 (59-74) 

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 (12-14), The legal structure of UBS Group (15-16) and Our strategy (33-37) 

5-7: Not applicable

B – Business Overview.

1, 2, 5 and 7: Annual Report, UBS and its businesses (8-9) and 41-58, Note 2a to each set of Financial Statements (Segment reporting) (432-435 and 603-606),and Note 2b to each set of Financial Statements (Segment reporting by geographic location) (436 and 607)

3: Seasonal characteristics (38) 

4: Not applicable

6: None

8: Regulation and supervision and Regulatory and legal developments (22-32),

Supplement (13-14)

C – Organizational Structure.

 

Annual Report, UBS and its businesses (8-9), The legal structure of UBS Group (15-16) and Note 30 to each set of Financial Statements (Interests in subsidiaries and other entities) (540-549 and 707-716)

7 


 

 

D – Property, Plant and Equipment.

 

Annual Report, Property, plant and equipment (835 and 914), Note 16 to each set of Financial Statements (Property, equipment and software) (458 and 628) , Note 33 to each set of Financial Statements, Operating leases and finance leases (552 and 719)

Information required by Industry Guide 3

Annual Report, Information required by industry guide 3 (836-850 and 915-929) and Selected financial data (830-834 and 909-913)

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), UBS AG (consolidated) key figures (561), Measurement of performance (38-39), Group performance (85-110), operating results by business division (111-148), Currency management (247), Capital management (248-285), 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 (59), Current market climate (20-21) and Regulatory and legal developments (26-32) 

B – Liquidity and Capital Resources.

Annual Report, As UBS Group AG is a holding company, its operating results, financial condition and ability to pay dividends and other distributions and/or to pay its obligations in the future depend on funding, dividends and other distributions received directly or indirectly from its subsidiaries, which may be subject to restrictions (72), Seasonal characteristics (38), Cash flows (110), Interest rate risk in the banking book (217-221), Liquidity and funding management (234-246), Capital management (248-285)Note 25a to each set of Financial Statements (Restricted financial assets) (504 and 674), Currency management (247), Note 20 to each set of Financial Statements (Financial liabilities designated at fair value) (462-463 and 632-633), Note 21 to each set of Financial Statements (Debt issued held at amortized cost) (463-464 and 633-634) and Short-term borrowings (843 and 922).

 

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 (20-21) and Regulatory and legal developments (26-32)

E—Off-Balance Sheet Arrangements.

Annual Report, Off-balance sheet (107-109), Note 25 to each set of Financial Statements (Restricted and transferred financial assets) (504-507 and 674-677) and Note 33 to each set of Financial Statements (Operating leases and finance leases) (552 and 719)

F—Tabular Disclosure of Contractual Obligations.

Annual Report, Contractual obligations (108-109) 

Item 6.  Directors, Senior Management and Employees.

A – Directors and Senior Management.

1, 2 and 3: Annual Report, 299-319

4, 5: None

B – Compensation.

1: Annual Report, 342-388, Note 29 to each set of Financial Statements (Equity participation and other compensation plans) (530-539 and 700-706) and Note 34 to each set of Financial Statements (Related parties) (553-555 and 720-722)

2: Annual Report, Note 28 to each set of Financial Statements (Pension and other post-employment benefit plans) (513-529 and 683-689)

C – Board practices.

1: Annual Report, 306-310

2: Annual Report, 342-388, and Note 34 to each set of Financial Statements (Related parties) (553-555 and 720-722)

3: Annual Report, Audit committee (307) and Compensation Committee (307-308) 

D—Employees.

Annual Report, Our employees (335-341) 

8 


 

 

E—Share Ownership.

Annual Report, 383-385, Note 29 to each set of Financial Statements (Equity participation and other compensation plans) (530-539 and 700-706) and “Equity holdings of key management personnel” in Note 34 to each set of Financial Statements (Related parties) (553 and 720)

Item 7.  Major Shareholders and Related Party Transactions.

A—Major Shareholders. 

Annual Report, Group structure and shareholders  (290-291), Capital structure (292-296) and Voting rights, restrictions and representation (297) 

The number of shares of UBS Group AG held by the respective shareholders listed on page 291 of the Annual Report as holding 3% or more of total share capital is as follows:

 

Shareholder

Number of shares held

Chase Nominees Ltd., London

351,860,165

GIC Private Limited, Singapore

245,517,417

DTC (Cede & Co.), New York

236,503,280

Nortrust Nominees Ltd., London

138,540,340

 

The number of shares of UBS AG held by UBS Group AG as of 31 December 2015 was 3,858,408,466 shares.

B—Related Party Transactions.

Annual Report, Loans granted to GEB members (386), Loans granted to BoD members (386) , and Note 34 to each set of Financial Statements (Related parties) (553-555 and 720-722)

 

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) (465-477 and 635-647). 

For developments during the year, please see also Note 16 (Provisions and contingent liabilities), in the Financial Information section in our respective quarterly reports for the First, Second and Third Quarters 2015, filed on Forms 6-K dated May 5, 2015, July 28, 2015 and November 3, 2015, respectively; as well as the Provisions and litigation, regulatory and similar matters section in the Fourth quarter 2015 Financial supplement, filed on Form 6-K dated February 2, 2016.  The disclosures in each such Quarterly Report or Financial supplement speak only as of their respective dates.

8: Annual Report, We are committed to an attractive capital returns policy (34), Distributions to shareholders (296) 

B—Significant Changes.

Annual Report, Note 1 to each set of Financial Statements (Summary of significant accounting policies) (409-431 and 579-602) and Note 37 to each set of Financial Statements (Events after the reporting period) (557 and 724)

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 (285) 

B—Plan of Distribution.

Not applicable

C—Markets.

Annual Report, Listing of UBS shares (284)

D—Selling Shareholders.

Not applicable

E—Dilution.

Not applicable

9 


 

 

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 (306), Capital structure (292-296), Organizational principles and structure (306-309), Shareholders' participation rights (297-298), Significant shareholders (291) and Change of control and defense measures (320)

Supplement, 14-19

C—Material Contracts.

The Terms & Conditions of the several series of tier 1 and tier 2 capital instruments issued to date, and to be issued pursuant to Deferred Capital Contingent Plans, are exhibits 4.1 through 4.9 to this Form 20-F.  These notes are described under Tier 1 capital and Tier 2 capital on pages 255-259 of the Annual Report and Deferred Contingent Capital Plan on page 376 of the Annual Report.

 

The settlement agreements and orders filed as exhibits 4.10 through 4.14 are described in section 5 (Foreign exchange, LIBOR, and benchmark rates, and other trading practices) of Note 22 (Provisions and contingent liabilities) to each set of Financial Statements (473-476 and 643-646).

 

The Asset Transfer Agreement by which certain assets and liabilities of UBS AG were transferred to UBS Switzerland AG is filed as Exhibit 4.15, and is described under Establishment of UBS Switzerland AG on pages 764-765 of the Annual Report.

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, 19-22

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 +1 202 551 8090 (outside the United States) for further information on the operation of its public reference room. Much of this information may also be found on the UBS website at www.ubs.com/investors.  

I—Subsidiary Information.

Not applicable

Item 11.  Quantitative and Qualitative Disclosures About Market Risk.

(a) Quantitative Information About Market Risk.

Annual Report, Market risk (204-223) 

(b) Qualitative Information About Market Risk.

Annual Report, Market risk (204-223) 

(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.

10 


 

 

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 (324), and Exhibit 12 to this Form 20-F.

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

Annual Report, Management’s reports on internal control over financial reporting (393 and 563)

(c) Attestation Report of the Registered Public Accounting Form

Annual Report, Reports of independent registered public accounting firm on internal control over financial reporting (394 and 564)

(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 (307) and Corporate governance  (288-289) 

 

All Audit Committee members have accounting or related financial management expertise and in compliance with the rules established pursuant to the US Sarbanes-Oxley Act of 2002, at least one member, the Chairperson William G. Parrett, qualifies as a financial expert.

Item 16B.  Code of Ethics.

Annual Report, How we do business (326-330) and Code of Business Conduct and Ethics (171).

 No waiver from any provision of the Code of Business Conduct and Ethics (the “Code”) was granted to any employee in 2015.  The Code is published on our website under http://www.ubs.com/1/e/investors/corporategovernance/business_conduct.html.  

Item 16C.  Principal Accountant Fees and Services.

Annual Report, Auditors  (321-322) 

 

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 (283) 

 

UBS does not currently have a share repurchase program.

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

Not applicable

Item 16G.  Corporate Governance.

Annual Report, Corporate governance  (288-289)

Item 17.  Financial Statements.

Not applicable

Item 18.  Financial Statements.

Annual Report, Financial Statements and the Notes to the Financial Statements  (389-738)

Item 19.  Exhibits

Supplement, 22-24

 

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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 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 may include reporting of activities not prohibited by U.S. or other law, 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 (SDN) blocked or otherwise restricted under U.S. or Swiss law.  In 2015, the gross revenues for this UN-related account were approximately USD 9,639 which were generated by fees charged to the account; the net profit was approximately USD 6,664 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 with the Swiss Government and consistent with its Group Sanctions Policy.

 

As previously reported, UBS had certain outstanding legacy trade finance arrangements issued on behalf of Swiss client exporters in favor of their Iranian counterparties. 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.  There was no financial activity involving Iran in connection with these trade finance arrangements in 2015, and no gross revenue or net profit.

 

In connection with these trade finance arrangements, UBS has maintained one existing account relationship with an Iranian bank.   This account was established prior to the U.S. designation of this bank and maintained due to the existing trade finance arrangements.  In 2007, following the designation of the bank pursuant to sanctions issued by the US, UN and Switzerland, the account was blocked under Swiss law and remained subject to blocking requirements until January 2016.  Client assets as of December 2015 were USD 3,174.  As there have been no transactions involving this account in 2015 other than general account fees, there are no gross revenues or net profits to report for 2015.

 

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Pursuant to the Joint Plan of Action (JPOA) and the Joint Comprehensive Plan of Action (JCPOA), the parties to these Plans, including the US, agreed to facilitate certain payments regarding funds of the Central Bank of Iran (CBI). The Swiss State Secretariat for Economic Affairs (SECO) was contacted in this regard by the US Office of Foreign Assets Control (OFAC), and SECO then approached UBS to request assistance in several such transfers of oil revenues for humanitarian purposes. On the basis of this request and specific written approval and guidance from OFAC regarding the transactions, UBS processed several transfers from the Bank of Japan to certain special purpose accounts at a third party bank in Switzerland. Following Implementation Day, the CBI was removed from the SDN list. These transactions yielded negligible gross revenues and no net profits.

 

 

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).

 

     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 principal legislation under which UBS Group AG and UBS AG operate, and under which the ordinary shares of UBS Group AG are issued, is the Swiss Code of Obligations.

 

     The shares are registered shares with a par value of CHF 0.10 per share. The shares are fully paid up. The shares rank pari passu in all respects with each other, including voting rights, entitlement to dividends, liquidation proceeds in case of the liquidation of UBS Group AG, subscription or preemptive rights in the event of a share issue (Bezugsrechte) and preemptive rights in the event of the issuance of equity-linked securities (Vorwegzeichnungsrechte). 

 

     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; however, the shareholder has no entitlement to the printing and delivery of share certificates.

   

Share Register and Transfer of Shares  

 

     UBS’s share register is kept by UBS Shareholder Services, P.O. Box, CH-8098 Zurich, Switzerland. Shareholder Services is responsible for the registration of the global shares. It is split into two parts – a Swiss register, which is maintained by UBS Group, acting as Swiss share registrar, and a US register, which is maintained by Computershare Inc., c/o Voluntary Corporate Actions 250 Royall Street, Suite V, Canton, MA 02021, as U.S. transfer agent (“Computershare”).

 

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     Swiss law and the Articles of UBS Group require UBS Group to keep a share register in which the names, addresses and nationality (for legal persons, the registered office) of the owners (and beneficial owners) of registered UBS Group Shares are recorded. The main function of the share register is to record shareholders entitled to vote and participate in general meetings, or to assert or exercise other rights related to voting rights.

 

     In order to register UBS Group Shares in UBS Group’s share register, a purchaser must file a share registration form with UBS Group’s share register. Failing such registration, the purchaser may not vote at or participate in shareholders’ meetings.

 

     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.

 

     Swiss law distinguishes between registration with and without voting rights. Shareholders must be registered in the share register as shareholders with voting rights in order to vote and participate in general meetings or to assert or exercise other rights related to voting rights. A purchaser of shares will be recorded in our share register with voting rights upon disclosure of its name and nationality (and for legal persons, the registered office). 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.

 

     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:

14 


 

 

  • Amendments to the Articles;
  • Elections of directors, Chairman of the BoD, members of the compensation committee and statutory auditors;
  • Election of the independent proxy;
  • Approval of the management report and the consolidated financial statements;
  • Approval of the annual financial statements and the resolution on the use of the balance sheet profit (declaration of dividend);
  • Approval of the compensation for the BoD and the Group Executive Board (GEB), including the approval of the maximum aggregate amount of compensation of the members of the BoD for the period until the next Annual General Meeting (AGM), the maximum aggregate amount of fixed compensation of the GEB members for the following financial year and the aggregate amount of variable compensation of the GEB members for the preceding financial year, with the exception of a supplementary amount of up to 40% for persons joining or promoted within the GEB;
  • 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 or registration of shares;
  • An increase in authorized or contingent capital or the creation of reserve capital in accordance with Swiss banking law;
  • An increase in share capital 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 or, under a written or electronic power of attorney, by the independent 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.

 

15 


 

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 until this equals 20% of the corporation’s paid-up 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.

 

     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 or senior management from participating in discussions and decision-making regarding a matter as to which he or she has a conflict of interest, subject to exceptional circumstances in which the best interest of UBS Group dictates otherwise.

16 


 

Repurchase of Shares  

 

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

 

Notices  

 

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

     

Registration and Business Purpose  

 

     UBS Group AG was incorporated and registered as a stock corporation (Aktiengesellschaft) under the laws of Switzerland.  It was entered into the commercial register of Canton Zurich on 10 June 2014 under the registration number CHE-395.345.924 and has its registered domicile 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 was incorporated and registered as a stock corporation (Aktiengesellschaft) under the laws of Switzerland.  It was entered into the commercial registers of Canton Zurich and Canton Basle-City on 29 June 1998 under the registration number CHE-101.329.561 and has registered domiciles 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 a supermajority of at least two-thirds of the votes represented and an absolute majority of the nominal value of the shares represented at the meeting. Dissolution by law or court order is possible, for example, 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.

 

17 


 

Disclosure of Principal Shareholders

 

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

 

Mandatory Tender Offer  

 

     Under the applicable provisions of 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.

 

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 (or other entity treated as 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.

 

18 


 

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

 

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

 

  • A citizen or resident of the United States;
  • A domestic corporation or other entity taxable as a corporation;
  • An estate, the income of which is subject to U.S. federal income tax without regard to its source; or
  • A trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.

 

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

 

(a) Ownership of UBS Ordinary Shares - Swiss Taxation  

 

Dividends and Distributions  

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

 

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

 

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

 

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

 

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

 

     Dividends paid to a noncorporate U.S. holder 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 payment is included in income to the date such dividend payment is converted into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. Such gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

 

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

 

Transfers of UBS Ordinary Shares  

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

 

Passive Foreign Investment Company Rules  

     UBS believes that UBS ordinary shares should not be treated as stock of a passive foreign investment company for U.S. federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change. In general, UBS will be a passive foreign investment company with respect to a U.S. holder if, for any taxable year in which the U.S. holder held UBS ordinary shares, either (i) at least 75% of the gross income of UBS for the taxable year is passive income or (ii) at least 50% of the value, determined on the basis of a quarterly average, of UBS’s assets is attributable to assets that produce or are held for the production of passive income (including cash). If UBS were to be treated as a passive foreign investment company, gain realized on the sale or other disposition of UBS ordinary shares would in general not be treated as capital gain. Instead, unless a U.S. holder elects to be taxed annually on a mark-to-market basis with respect to its UBS ordinary shares, such gain and certain “excess distributions” would be treated as having been realized ratably over the holder’s holding period for the shares and generally 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.

 

 

 

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Item 19.  Exhibits. 

 

 

Exhibit number

 

Description

 

 

1.1

Articles of Association of UBS Group AG dated 15 February 2016.

 

 

1.2

Articles of Association of UBS AG dated 7 May 2015.

 

 

1.3

Organization Regulations of UBS Group AG and UBS AG dated 1 January 2016. 

 

 

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. (Incorporated by reference to Exhibit 4.3 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 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. (Incorporated by reference to Exhibit 4.4 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2014)

 

 

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. (Incorporated by reference to Exhibit 4.5 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2014)

 

 

4.6

Terms and Conditions of EUR 1 billion 5.75% Tier 1 Subordinated Notes issued by UBS Group AG on 19 February 2015. (Incorporated by reference to Exhibit 4.6 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2014)

 

 

4.7

Terms and Conditions of additional Tier 1 capital instruments to be issued pursuant to the Deferred Contingent Capital Plan 2014/15. (Incorporated by reference to Exhibit 4.7 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2014)

 

 

4.8

Terms and Conditions of USD 1.575 billion Tier 1 Subordinated Notes issued by UBS Group AG on 7 August 2015.

 

 

4.9

Terms and Conditions of additional Tier 1 capital instruments to be issued pursuant to the Deferred Contingent Capital Plan 2015/16.

 

 

4.10

Commodity Futures Trading Commission Order Instituting Proceedings Pursuant to Section 6(c)(4)(A) and 6(d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, dated November 11, 2014.

 

22 


 

 

4.11

Financial Conduct Authority Final Notice issued 11 November 2014.

 

 

4.12

Swiss Financial Market Supervisory Authority Report on Foreign Exchange Trading at UBS AG dated 12 November 2014.

 

 

4.13

Plea Agreement between the Criminal Division of the US Department of Justice and UBS AG dated May 20, 2015.

 

 

4.14

Board of Governors of the Federal Reserve System and State of Connecticut Department of Banking Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as Amended, dated May 20, 2015.

 

 

4.15

Asset Transfer Agreement between UBS AG and UBS Switzerland AG dated 12 June 2015 (Incorporated by reference to Form 6-K of UBS AG filed on June 17, 2015).

 

 

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 540-549 and 707-716 of the Annual Report.

 

 

12

The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a))

 

 

13

The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).

15.1

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

 

 

15.2

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

 

23 


 

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/ Kirt Gardner__________________ 

Name: Kirt Gardner

Title: Group Chief Financial Officer

 

 

 

UBS AG

 

 

_/s/ Sergio Ermotti_______________ 

Name: Sergio Ermotti

Title: Group Chief Executive Officer

 

 

_/s/ Kirt Gardner __________________

Name: Kirt Gardner

Title: Group Chief Financial Officer

 

 

 

March 18, 2016

24 


 

 

 

UBS Group AG and UBS AG

Annual Report 2015

 


 

Contents

2

Letter to shareholders

5

UBS Group AG key figures

8

UBS and its businesses

10

Our Board of Directors

11

Our Group Executive Board

12

The making of UBS

15

The legal structure of UBS Group

17

External reporting concept

1.

Operating environment

and strategy

20

Current market climate

22

Regulation and supervision

26

Regulatory and legal developments

33

Our strategy

39

Measurement of performance

41

Wealth Management

45

Wealth Management Americas

48

Personal & Corporate Banking

51

Asset Management

54

Investment Bank

57

Corporate Center

59

Risk factors

2.

Financial and

operating performance

76

Critical accounting policies

81

Significant accounting and financial reporting changes

85

Group performance

102

Balance sheet

107

Off-balance sheet

110

Cash flows

111

Wealth Management

117

Wealth Management Americas

122

Personal & Corporate Banking

125

Asset Management

132

Investment Bank

138

Corporate Center

3.

Risk, treasury and

capital management

152

Implementation of EDTF recommendations

160

Key developments

163

Risk management and control

234

Treasury management

248

Capital management

282

UBS Shares

 

 

 

 

 

 

4.

Corporate governance, responsibility

and compensation

288

Corporate governance

325

UBS and Society

335

Our employees

342

Compensation

5.

Consolidated

financial statements

393

UBS Group AG consolidated financial statements

563

UBS AG consolidated financial statements

6.

Legal entity financial and

regulatory information

743

UBS Group AG

766

Establishment of UBS Switzerland AG

772

UBS AG

800

UBS Switzerland AG

823

UBS Limited

7.

Additional regulatory

information

831

UBS Group AG consolidated supplemental disclosures required under SEC regulations

853

UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations

908

UBS AG consolidated supplemental disclosures required under SEC regulations

 

 

 

Appendix

 

 

931

Abbreviations frequently used in our financial reports

933

Information sources

934

Cautionary statement

  

 


Annual Report 2015
Letter to shareholders

 

Dear shareholders,

In 2015, many of the macroeconomic and geopolitical issues we highlighted in our outlook statements materialized, and in some cases became more pressing. A number of developments continued to create uncertainty in global economic and financial markets: the mixed outlook on global growth; the absence of credible improvements in the eurozone; fiscal and monetary uncertainty, including the impact of negative rates; instability resulting from falling commodity and energy prices, as well as rising geopolitical tensions. In addition, a number of specific macroeconomic events had a particular impact on UBS, including the Swiss National Bank’s (SNB) decision in January to abandon its euro currency floor, and the relative weakness of the Chinese economy in the second half of the year.

 

Against this backdrop we stayed close to our clients while prudently managing risk and resources to deliver a net profit attributable to shareholders of CHF 6.2 billion, up 79% on the previous year, our best full-year result in eight years. We also achieved a full-year adjusted1 return on tangible equity of 13.7%, above our full-year 2015 target of around 10%. In addition, we continued to strengthen our capital position and reported a fully-applied Swiss systemically relevant bank (SRB) common equity tier 1 capital ratio of 14.5% and a Swiss SRB leverage ratio of 5.3% at year end, leaving us well-positioned to deal with both challenging market conditions and the future requirements of the revised Swiss too big to fail (TBTF) framework.

 

This strong performance was driven by the dedication of our employees and the disciplined execution of our strategy and has allowed us to deliver on our capital return commitment to shareholders, even in a difficult environment. As previously announced in our fourth-quarter earnings release, we are proposing an ordinary dividend of CHF 0.60 per share, as well as a special dividend of CHF 0.25 per share, reflecting a significant net upward revaluation of deferred tax assets in 2015.

 

In 2015, Wealth Management’s adjusted1 profit before tax was up 13% on the prior year to CHF 2.8 billion (reported CHF 2.7 billion), its best annual pre-tax adjusted1 profit since 2008. Wealth Management Americas’ adjusted1 profit before tax was USD 874 million (reported USD 754 million) with record operating income, and solid net new money of USD 21.4 billion. Personal & Corporate Banking posted its best adjusted1 profit before tax since 2010 with CHF 1.7 billion (reported CHF 1.6 billion) and attracted a record number of new clients. Asset Management’s adjusted1 profit before tax of CHF 610 million (reported CHF 584 million) was up 20% year on year, making progress towards its medium-term profit target. The Investment Bank delivered a strong performance with an adjusted1 profit before tax of CHF 2.3 billion (reported CHF 1.9 billion), and achieved an adjusted1 return on attributed equity of 31% for the full year.

 

Over the past two years, we made significant investments to execute on a series of measures to improve the resolvability of the Group in response to TBTF requirements in Switzerland and other countries. In 2015, we transferred our Personal & Corporate Banking and Wealth Management businesses booked in Switzerland from UBS AG to UBS Switzerland AG, and implemented a more self-sufficient business and operating model for UBS Limited, our investment banking subsidiary in the UK. We established UBS Business Solutions AG as a direct subsidiary of UBS Group AG, to act as the Group service company. Also during 2015, UBS AG established a new subsidiary, UBS Americas Holding LLC, which we intend to designate as our intermediate holding company for our US subsidiaries in accordance with the new Dodd-Frank rules for foreign banks in the US. The successful completion of these measures not only improves the firm’s resolvability, but should also allow us to qualify for a capital rebate under the proposed new Swiss TBTF rules.

 

We were honored with a number of prestigious awards for operational excellence throughout the year. UBS dominated the recently announced 2015 Euromoney awards, reclaiming the title “Best Private Banking Services Overall” and “Best Global Wealth Manager”. In July, UBS Switzerland confirmed its status as the country’s premier universal bank, taking the Euromoney prize for “Best Bank in Switzerland” for the fourth year running. Our Investment Bank was named “Bank of the Year” by the International Financing Review for the first time. The publication singled out the Investment Bank’s remarkable transformation over the last few years and the success of its client-centric model. UBS was also named “Outstanding Global Private Bank – Overall” as well as “Outstanding Global Private Bank – Asia Pacific” by Private Banker International.

 

 

 

 

 

1  Refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results.

   

 

2 


 

 

 

 

 

3 


Annual Report 2015
Letter to shareholders

 

 

We also continued to build on our position and reputation as a sustainability leader. UBS was named industry group leader in the Dow Jones Sustainability Indices (DJSI). DJSI praised our role in offering a variety of sustainability-focused portfolios, as well as creating a reporting framework to help clients better understand these investments. As of 31 December 2015, sustainable investments increased to CHF 934 billion, representing over a third of total invested assets. As the United Nations’ COP21 Climate Change Summit convened in Paris in November, we added our voice in support of a comprehensive agreement of all parties to combat climate change and reduce greenhouse gas emissions. At the same time, UBS reaffirmed its own commitment to limit the effects of climate change and enable the transition to a low-carbon economy.

 

In 2015, we expanded our program of community engagement. Our global volunteer program saw 16,356 (27%) of our employees contribute over 130,000 hours to community projects. In addition, we donated over CHF 37 million to foundations in Switzerland, and made direct cash contributions of over CHF 27 million to a variety of global projects, more than 90% of which were in support of education and entrepreneurial initiatives.

 

Technology and innovation remained a priority in 2015. We further upgraded our IT infrastructure and enhanced our technology offering for customers with our e- and mobile-banking solutions. This included the award-winning Swiss peer-to-peer mobile payments application “Paymit,” and Wealth Management Online – a new digital platform for Wealth Management clients in Switzerland and Europe International. Our Investment Bank continued to upgrade UBS Neo, its highly innovative, award-winning client platform, with further features and enhancements.

 


UBS also opened its own innovation lab at Level39, Europe’s largest technology accelerator and incubator. The lab is exploring potential applications for Blockchain and other disruptive digital technologies in financial services. UBS received awards for “Most Innovative Digital Offering” from Private Banker International and “Most Innovative Investment Bank for Financial Institutions” by The Banker. UBS’s commitment to and interest in innovation was also highlighted by the launch of the first ever UBS Future of Finance Challenge, an international competition for entrepreneurs and technology startups developing ideas and solutions for the financial services industry. The competition attracted over 600 entrants from 50 countries.

 

We would like to take this opportunity to thank both our shareholders and our clients for their continued support. 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 over the long term and continue to deliver attractive returns to shareholders. We look forward to seeing many of you at this year’s AGM.

 

 

18 March 2016

 

Yours sincerely,

 

UBS

 

 

                 

 

Axel A. Weber                                Sergio P. Ermotti

Chairman of the                            Group Chief Executive Officer

Board of Directors

 

 

  

 

4 


 

 

UBS Group AG key figures1

 

 

 

As of or for the year ended

CHF million, except where indicated

 

31.12.15

31.12.14

31.12.13

 

 

 

 

 

Group results

 

 

 

 

Operating income

 

30,605

28,027

27,732

Operating expenses

 

25,116

25,567

24,461

Operating profit / (loss) before tax

 

5,489

2,461

3,272

Net profit / (loss) attributable to UBS Group AG shareholders

 

6,203

3,466

3,172

Diluted earnings per share (CHF)²

 

1.64

0.91

0.83

 

 

 

 

 

Key performance indicators³

 

 

 

 

Profitability

 

 

 

 

Return on tangible equity (%)

 

13.7

8.2

8.0

Return on assets, gross (%)

 

3.1

2.8

2.5

Cost / income ratio (%)

 

81.8

91.0

88.0

Growth

 

 

 

 

Net profit growth (%)

 

79.0

9.3

 

Net new money growth for combined wealth management businesses (%)⁴

 

2.2

2.5

3.4

Resources

 

 

 

 

Common equity tier 1 capital ratio (fully applied, %)⁵

 

14.5

13.4

12.8

Leverage ratio (phase-in, %)⁶

 

6.2

5.4

4.7

 

 

 

 

 

Additional information

 

 

 

 

Profitability

 

 

 

 

Return on equity (RoE) (%)

 

11.8

7.0

6.7

Return on risk-weighted assets, gross (%)⁷

 

14.1

12.4

11.4

Resources

 

 

 

 

Total assets

 

942,819

1,062,478

1,013,355

Equity attributable to UBS Group AG shareholders

 

55,313

50,608

48,002

Common equity tier 1 capital (fully applied)⁵

 

30,044

28,941

28,908

Common equity tier 1 capital (phase-in)⁵

 

40,378

42,863

42,179

Risk-weighted assets (fully applied)⁵

 

207,530

216,462

225,153

Risk-weighted assets (phase-in)⁵

 

212,302

220,877

228,557

Common equity tier 1 capital ratio (phase-in, %)⁵

 

19.0

19.4

18.5

Total capital ratio (fully applied, %)⁵

 

22.9

18.9

15.4

Total capital ratio (phase-in, %)⁵

 

26.8

25.5

22.2

Leverage ratio (fully applied, %)⁶

 

5.3

4.1

3.4

Leverage ratio denominator (fully applied)⁶

 

897,607

997,822

1,015,306

Leverage ratio denominator (phase-in)⁶

 

904,014

1,004,869

1,022,924

Liquidity coverage ratio (%)⁸

 

124

123

110

Other

 

 

 

 

Invested assets (CHF billion)⁹

 

2,689

2,734

2,390

Personnel (full-time equivalents)

 

60,099

60,155

60,205

Market capitalization¹⁰

 

75,147

63,526

65,007

Total book value per share (CHF)¹⁰

 

14.75

13.94

12.74

Tangible book value per share (CHF)¹⁰

 

13.00

12.14

11.07

1 Represents information for UBS Group AG (consolidated). Comparative information as of 31 December 2013 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 “The legal structure of UBS Group” section and to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information.    2 Refer to "Note 9 Earnings per share (EPS) and shares outstanding" in the "Consolidated financial statements" 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 adjusted net new money, which excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital optimization program.    5 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the "Capital management" section of this report for more information.    6 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the Swiss SRB leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the "Capital management" section of this report for more information.    7 Based on phase-in risk-weighted assets.    8 Refer to the "Liquidity and funding management" section of this report for more information. Figures reported for 31 December 2015 represent a 3-month average. Figures for 31 December 2014 and 31 December 2013 were calculated on a pro forma basis and represent spot numbers.    9 Includes invested assets for Personal & Corporate Banking.    10 Refer to the "UBS shares" section of this report for more information.   

  

 

5 


Annual Report 2015

 

 

 

 

 

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. 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.

 

6 


 

 

Contacts

Switchboards

For all general inquiries.
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, London, New York and Singapore.

UBS Group AG, Investor Relations
P.O. Box, CH-8098 Zurich, Switzerland

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 Group Company Secretary

The Group Company Secretary receives
inquiries on compensation and related
issues addressed to members of the
Board of Directors.

UBS Group AG, Office of the
Group 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 Group 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
inquiries in the US.

Computershare Trust Company NA
P.O. Box 30170
College Station
TX 77842-3170, USA

Shareholder online inquiries:
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 AG

Publication of the first quarter 2016 report:       Tuesday, 3 May 2016

Annual General Meeting 2016:                        Thursday, 10 May 2016

Publication of the second quarter 2016 report: Friday, 29 July 2016

Publication of the third quarter 2016 report:      Tuesday, 1 November 2016

 

Corporate calendar UBS AG

Publication of the first quarter 2016 report:       Friday, 6 May 2016

Additional publication dates of quarterly and annual reports
will be made available as part of the corporate calendar of UBS AG at
www.ubs.com/investors. 

 


Imprint

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

Language: English

© UBS 2016. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

 

7 


Annual Report 2015

 

UBS and its businesses

We provide financial advice and solutions to private, institutional and corporate clients worldwide, as well as private clients in Switzerland. The operational structure of the Group is comprised of our Corporate Center and five business divisions: Wealth Management, Wealth Management Americas, Personal & Corporate Banking, Asset Management and the Investment Bank. 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, in order to generate attractive and sustainable returns for our shareholders. All of our businesses are capital-efficient and benefit from a strong competitive position in their targeted markets.

 

 

Wealth Management

Wealth Management provides comprehensive advice and financial services to wealthy private clients around the world, with the exception of those served by Wealth Management Americas. UBS is a global firm with global capabilities, and its clients benefit from a full spectrum of resources, including wealth planning, investment management solutions and corporate finance advice, banking and lending solutions, as well as a wide range of specific offerings. Wealth Management’s guided architecture model gives clients access to a wide range of products from the world's leading third-party institutions that complement its 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. Its business includes UBS’s domestic US and Canadian wealth management businesses, as well as international business booked in the US. It provides a fully integrated set of wealth management solutions designed to address the needs of ultra high net worth and high net worth clients. 

 


Personal & Corporate Banking

Effective January 2016, the business division Retail & Corporate was renamed Personal & Corporate Banking. This change is reflected throughout this report.

Personal & Corporate Banking provides comprehensive financial products and services to UBS's private, corporate and institutional clients in Switzerland, maintaining a leading position in these segments and embedding its offering in a multi-channel approach. The business is a central element of UBS’s universal bank delivery model in Switzerland, supporting other business divisions by referring clients and growing the wealth of the firm's private clients so they can be transferred to Wealth Management. Personal & Corporate Banking leverages the cross-selling potential of UBS's asset-gathering and investment bank businesses, and manages a substantial part of UBS’s Swiss infrastructure and banking products platform.

 

 

8 


 

 

Asset Management

Effective October 2015, the business division Global Asset Management was renamed Asset Management. This change is reflected throughout this report.

Asset Management is a large-scale asset manager, with a presence in 22 countries. It offers investment capabilities and investment styles across all major traditional and alternative asset classes to institutions, wholesale intermediaries and wealth management clients around the world. It is a leading fund house in Europe, the largest mutual fund manager in Switzerland, the third-largest international asset manager in Asia, the second largest fund of hedge funds manager and one of the largest real estate investment managers in the world.

Investment Bank

The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovative solutions, execution and comprehensive access to international capital markets. It offers advisory services and provides in-depth cross-asset research, along with access to equities, foreign exchange, precious metals and selected rates and credit markets, through its 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 Services, Group Asset and Liability Management (Group ALM) and Non-core and Legacy Portfolio. Services includes the Group’s control functions such as finance, risk control (including compliance) and legal. In addition, it provides 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. Group ALM is responsible for centrally managing the Group’s liquidity and funding position, as well as providing other balance sheet and capital management services to the Group. 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. 

 

 

  

 

9 


Annual Report 2015

 

Our Board of Directors as of 31 December 2015

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 David Sidwell Senior Independent Director/Chairperson of the Risk Committee/member of the Governance and Nominating Committee    3 Reto Francioni Member of the Compensation Committee/member of the Corporate Culture and Responsibility Committee/member of the Risk Committee    4 Ann F. Godbehere Chairperson of the Compensation Committee/member of the Audit Committee    5 William G. Parrett Chairperson of the Audit Committee/member of the Compensation Committee/member of the Corporate Culture and Responsibility Committee    6 Isabelle Romy Member of the Audit Committee/member of the Governance and Nominating Committee    7 Beatrice Weder di Mauro Member of the Audit Committee/member of the Risk Committee    8 Joseph Yam Member of the Corporate Culture and Responsibility Committee/member of the Risk Committee    9 Axel P. Lehmann Member of the Risk Committee until 31December 2015    10 Jes Staley (resigned as of 28October 2015)Michel Demaré (not on this picture) Independent Vice Chairman/member of the Audit Committee/member of the Compensation Committee/member of the Governance and Nominating Committee

 

 

The Board of Directors (BoD) of UBS Group AG and UBS AG, each under the leadership of the Chairman, consists of six to twelve members as per our Articles of Association (AoA). The BoD decides on the strategy of the Group upon recommendation of the Group Chief Executive Officer (Group CEO) and is responsible for the overall direction, supervision and control of the Group and its management as well as for supervising compliance with applicable laws, rules and regulations. The BoD exercises oversight over UBS Group AG and its subsidiaries and is responsible for ensuring the establishment of a clear Group governance framework to ensure effective steering and supervision of the Group, taking into account the material risks to which UBS Group AG and its subsidiaries are exposed. The BoD has ultimate responsibility for the success of the Group and for delivering sustainable shareholder value within a framework of prudent and effective controls, approves all financial statements for issue and appoints and removes all Group Executive Board (GEB) members.

  

 

10 


 

 

Our Group Executive Board as of 31 December 2015

1 Sergio P. Ermotti Group Chief Executive Officer    2 Markus U. Diethelm Group General Counsel    3 Lukas Gähwiler President Personal & Corporate Banking and President UBS Switzerland    4 Ulrich Körner President Asset Management and President UBS Europe, Middle East and Africa    5 Tom Naratil Group Chief Financial Officer and Group Chief Operating Officer until 31 December 2015/President Wealth Management Americas and President UBS Americas as of 1 January 2016    6 Andrea Orcel President Investment Bank    7 Jürg Zeltner President Wealth ­Management    8 Philip J. Lofts Group Chief Risk Officer until 31 December 2015    9 Robert J. McCann President Wealth ­Management Americas and President UBS Americas until 31 December 2015    10 Chi-Won Yoon President UBS Asia Pacific until 31 December 2015

 

 

 

 

 

UBS Group AG and UBS AG operate under a strict dual board structure, as mandated by Swiss banking law, and therefore the BoD delegates the management of the business to the GEB. Under the leadership of the Group CEO, the GEB has executive management responsibility for the steering of the Group and its business. It assumes overall responsibility for developing the Group and business division strategies and the implementation of approved strategies.


®   Refer to “Board of Directors” and “Group Executive Board” in the “Corporate governance” section of this report or to www.ubs.com/bod and www.ubs.com/geb, for the full biographies of our BoD and GEB members

  

 

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Annual Report 2015

 

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 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 historical pillar of UBS’s Investment Bank, commenced operations in 1946.

 

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

Union Bank of Switzerland, the largest 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 mainly through a combination of partnerships and acquisitions. In 1989, SBC started a joint venture with O’Connor, a leading US derivatives firm, before fully acquiring it in 1992. 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.

 

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Annual Report 2015

 

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. Over the last 50+ years, UBS has established a strong presence in the Asia Pacific region, where it is the leading wealth manager and a top-tier investment bank, as well as in the emerging markets.

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 fourth quarter of 2009, we incurred significant losses on these types of assets. We responded with decisive action, designed to reduce risk exposures and stabilize our businesses, including raising capital. Since then, we have 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 the strategic transformation to create a business model that is better adapted to the new regulatory and market conditions and that we believe results in more consistent and high-quality returns. To this effect, we launched the Pillars, Principles and Behaviors in 2014 as a foundation for our new corporate strategy, identity and culture. In the same year, we established UBS Group AG as the Group holding company and, in 2015, we transferred the Personal & Corporate Banking and the Wealth Management business booked in Switzerland from UBS AG to the wholly owned subsidiary UBS Switzerland AG, with its own banking license, thereby significantly advancing our strategic transformation process.

We remain committed to executing our strategy aimed at ensuring the firm’s long-term success and delivering sustainable returns for our shareholders. 

®     Refer to www.ubs.com/history for more information on UBS’s history of more than 150 years

  

 

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The legal structure of UBS Group

Over the past two years, we have undertaken a series of measures to improve the resolvability of the Group in response to too big to fail (TBTF) requirements in Switzerland and other countries in which the Group operates.

In December 2014, UBS Group AG completed an exchange offer for the shares of UBS AG and established UBS Group AG as the holding company for UBS Group.

During 2015, UBS Group AG filed and completed a court procedure under article 33 of the Swiss Stock Exchange Act (SESTA procedure) resulting in the cancellation of the shares of the remaining minority shareholders of UBS AG. As a result, UBS Group AG now owns 100% of the outstanding shares of UBS AG.

In June 2015, we transferred our Personal & Corporate Banking and Wealth Management business booked in Switzerland from UBS AG to UBS Switzerland AG.

In the second quarter of 2015, we also completed the implementation of a more self-sufficient business and operating model for UBS Limited, our investment banking subsidiary in the UK, under which UBS Limited bears and retains a larger proportion of the risk and reward in its business activities.

 

 

 

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Annual Report 2015

 

In the third quarter, we established UBS Business Solutions AG as a direct subsidiary of UBS Group AG to act as the Group service company. We will transfer the ownership of the majority of our existing service subsidiaries to this entity. We expect that the transfer of shared service and support functions into the service company structure will be implemented in a staged approach through 2018. The purpose of the service company structure is to improve the resolvability of the Group by enabling us to maintain operational continuity of critical services should a recovery or resolution event occur.

Also during 2015, UBS AG established a new subsidiary, UBS Americas Holding LLC, which we intend to designate as our intermediate holding company for our US subsidiaries prior to the 1 July 2016 deadline under new rules for foreign banks in the US pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). During the third quarter of 2015, UBS AG contributed its equity participation in the principal US operating subsidiaries to UBS Americas Holding LLC to meet the requirement under Dodd-Frank that the intermediate holding company own all of our US operations, except branches of UBS AG.

®     Refer to the “Legal entity financial and regulatory information” section of this report for more information

 

We have also established a new subsidiary of UBS AG, UBS Asset Management AG, into which we expect to transfer the majority of the operating subsidiaries of Asset Management during 2016. We continue to consider further changes to the legal entities used by Asset Management, including the transfer of operations conducted by UBS AG in Switzerland into a subsidiary of UBS Asset Management AG.

Our strategy, our business and the way we serve the vast majority of our clients are not affected by these changes. These plans do not create the need 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 and UBS Switzerland AG, along with our other announced measures, will substantially enhance the resolvability of the Group. The Swiss Financial Market Supervisory Authority (FINMA) has confirmed that these measures are in principle suitable to warrant a capital requirement rebate under the current Swiss capital regulation. Therefore, the Group should qualify for a rebate on the gone concern requirements under the new Swiss TBTF proposal, which should result in lower overall capital requirements for the Group. The amount and timing of any such rebate will depend on the actual execution of these measures and can therefore only be specified once all measures have been implemented.

We continue to consider further changes to the Group’s legal structure in response to capital and other regulatory requirements, and in order to obtain any rebate in capital requirements for which the Group may be eligible. Such changes may include the transfer of operating subsidiaries of UBS AG to become direct subsidiaries of UBS Group AG, consolidation of operating subsidiaries in the European Union, 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.

 

 

 

 

  

 

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External reporting approach

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 Swiss Exchange and the NYSE, we have to prepare and publish consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) on at least a half-yearly basis. However, we have decided to publish our results on a quarterly basis in order to provide shareholders with more timely disclosures than required by law. Additionally, statutory financial statements are prepared annually as the basis for our Swiss tax return, the appropriation of retained earnings and a potential distribution of dividends, subject to shareholder 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 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 and compensation frameworks.

Our Annual Reports and Form 20-F

Information on UBS Group AG and on UBS AG is available on www.ubs.com/investors as follows

   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, and

   An Annual Report for UBS Group AG only.

 

The MD&A included in the combined Annual Report is on a UBS Group AG consolidated basis, unless otherwise specified. In particular, specific UBS AG (consolidated) information is provided with respect to risk profile, capital and leverage ratio, as well as corporate governance. Financial information for UBS AG (consolidated) does not differ materially from UBS Group AG on a consolidated basis. Refer to the table "Comparison UBS Group AG (consolidated) versus UBS AG (consolidated)" in the "Consolidated financial statements" section of this report for more information.

  

 

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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 satisfy Basel Pillar 3 disclosure requirements, respectively. A “triangle” symbol – ▲ – indicates the end of the signpost.

  

 


Operating environment and strategy
Current market climate

 

Current market climate

The global economy expanded in aggregate, but divergent growth trends were in evidence, and disinflationary factors persisted.

 

 

Global economic developments in 2015

2015 was a year of expanding global output, characterized by gradual improvement in advanced economies, set against a continued slowing in emerging economies.

Many large advanced economies – in particular, the eurozone and Japan – enjoyed a stronger pace of economic activity, underpinned by continued loose monetary policy. However, global inflation rates remained unexpectedly low, as a result of a rebalancing of the Chinese economy, ongoing deleveraging in corporate sectors with excessive debt and oversupply, and continued commodity price declines driven by supply / demand imbalances.

A number of macroeconomic and geopolitical shocks impacted the path of global economic expansion. Particularly noteworthy were the fear of a Greek exit from the eurozone, a first quantitative easing package from the European Central Bank, which was extended later in the year, extreme volatility in Chinese onshore equity markets, uncertainty around the timing and speed of US interest rate rises, and policy decisions by the Swiss National Bank (SNB).

Switzerland

In UBS's home market, the year began with a decision by the SNB to discontinue 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%.

This move created difficult conditions for Swiss franc depositors, and reduced the profitability of many financial market transactions in Swiss francs. In aggregate, continued Swiss franc strength against the euro, as well as the British pound, led to material deflationary pressures on the local economy and negatively affected the contribution of net exports and inventories to Swiss economic growth.

However, strong domestic consumption trends continued, aided in part by an annual population growth of 1.2%.

United States

The US economy expanded modestly and consumer spending remained the biggest contributor to economic growth. However, a strong US dollar dampened the growth contribution from net exports. Business sentiment and investment intentions remained cautious, given concerns over worldwide growth in demand.

US labor markets showed significant improvements, as the unemployment rate declined and real labor income increased. The Board of Governors of the Federal Reserve System (Federal Reserve) determined labor market and core inflation data to be sufficiently strong to raise the target range of the federal funds rate in December 2015 from 0-0.25% to 0.25-0.5%, the first interest rate hike in nine years.

Eurozone

In the eurozone, economic growth gained momentum, as monetary policy efforts fostered lending growth. The European Central Bank announced monetary policy-easing measures in January 2015, specifically a quantitative easing program of EUR 60 billion per month to lower economy-wide borrowing costs. The resulting euro depreciation also offered significant support to export-oriented eurozone economies.

Significant easing in financial conditions in the first quarter of 2015 supported stronger monetary growth and real activity. This was corroborated by stronger lending growth via the banking sector. However, despite these positive developments, concerns over the economic slowdown and rebalancing in emerging markets, notably China, led to some softening in real activity and confidence indicators in the latter half of the year. Fiscal conditions moved from significant austerity toward a neutral position with respect to growth impact.

 

 

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Japan

The pace of Japanese economic growth improved compared to the recession in 2014, but was constrained by relatively low wage growth. An increase in sales taxes implemented in April 2014 continued to weigh on consumer demand through 2015, and lower energy prices were not sufficient to offset slow wage growth. Additionally, the aforementioned sales tax increase did not raise core inflation, which lingered well below the Bank of Japan’s 2% target throughout the second half of 2015.

Concerns over the impact of slower growth in China, and the reluctance of the Bank of Japan to further loosen its monetary policy, also impacted international demand for Japanese goods and services.

China

In China, policymakers responded to private-sector debt imbalances and excess industrial capacity with material easing in monetary and banking financial conditions. However, GDP growth continued to slow compared with prior years.

High private-sector leverage, a large policy-induced switch from investment-driven to consumption-driven growth, and a deceleration in property market activity resulted in slowing industrial output, tightening of onshore financing conditions, and building domestic deflationary pressures. Lower demand for commodities also reflected global disinflationary forces, which were supplemented by a surprise devaluation of the Chinese yuan against the US dollar in August.

A mixture of tighter macroprudential policy and less state support for overindebted businesses led to higher credit spreads and sharp equity market declines as a speculation bubble in the stock market unwound. The Chinese authorities responded with several interest rate and reserve ratio requirement cuts, which resulted in some evidence of a stabilizing real economic growth trend, albeit at a lower level, by year-end.

In late November, the Chinese yuan was accepted for inclusion in the International Monetary Fund's Special Drawing Rights basket, with effect from October 2016.

Other emerging markets

Other major emerging markets continued to face challenges ranging from overly tight domestic financial conditions, inflation pressures arising from currency depreciation, and lower commodity prices.

Large depreciation in local currencies and higher costs of borrowing were seen in select emerging countries, as the prospect and eventual decision from the Fed to raise US interest rates resulted in a strengthening US dollar and elevated costs of external funding.

The Russian economy was particularly impacted by ongoing economic sanctions, negative ramifications of a lower oil price on government finances and the weakness of the Russian ruble against the US dollar. Local financial conditions remained tight, following the Central Bank of Russia’s moves to stem the declining international value of the currency by raising domestic policy interest rates late in 2014.

Geopolitical developments, such as corruption allegations in Brazil and tensions between oil-producing Saudi Arabia and Iran, highlighted the idiosyncratic risks of doing business and investing in emerging economies.

Economic and market outlook for 2016

Based on UBS Research’s economic models, we expect a modest slowing in the pace of global economic expansion in 2016, with significant underlying differences in growth rates dependent on the degree of economy-wide deleveraging.

The US, where private sector deleveraging is most advanced, should enjoy higher labor income gains and robust domestic consumer activity. However, inventory effects and lower investment due to oil price declines may offset this positive consumer outlook. Additionally, the US high-yield bond market may experience an increase in defaults, concentrated particularly in the energy sector.

In the eurozone, we observe persistent support from loose monetary policy and expect a rise in real disposable spending power, more readily available credit, and mildly expansionary fiscal policy. Together, these factors should support a moderate improvement in growth prospects.

Swiss economic growth should continue at a pace similar to 2015, and we expect downward pressure on year-on-year inflation to persist due to the ongoing impact of low commodity prices.

Japan's economic growth will likely remain heavily dependent on domestic demand. The negative impact of lower oil prices on consumer price inflation should abate, but inflation is expected to miss the Bank of Japan's 2% inflation target in 2016.

We expect emerging markets to stabilize in aggregate, but exhibit heterogeneous growth paths. We believe China is likely to avoid a hard landing as a result of continued monetary policy loosening and fiscal stimulus. However, the broader Asia region may remain under pressure from slower trade growth, high levels of debt, and disinflationary pressures.

We are closely monitoring a number of potential geopolitical risks. These include, but are not limited to, uncertainty over the UK's status in the EU; the impact of migration on European politics; disruptions to political systems driven by emergent political parties or organizations; an escalation of geopolitical tension in the Middle East and North Africa; and acts of terrorism or cyberattacks. The realization of any of these risks could pose wider challenges to the global economic outlook.

  

 

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Operating environment and strategy
Regulation and supervision

 

Regulation and supervision

The Swiss Financial Market Supervisory Authority 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 operations.

 

UBS Group AG and its subsidiaries are subject to consolidated supervision by the Swiss Financial Market Supervisory Authority (FINMA) under the Swiss Federal Law on Banks and Savings Banks (Banking Act), and the related ordinances which impose requirements, including minimum capital, liquidity, risk concentration and organizational requirements. Through UBS AG and UBS Switzerland AG, which are licensed as banks in Switzerland, we may engage in a full range of financial services activities in Switzerland and abroad, including personal banking, commercial banking, investment banking and asset management.

We are also subject to supervision and functional regulation in the markets in which we operate outside of Switzerland, including the US, the UK and the EU. Since the financial crisis of 2007–2009, regulation of financial services firms has been undergoing significant changes both in Switzerland and in the other countries where we operate. These changes, which continue to require significant resources to implement, have a significant effect on how we conduct our business and result in increased ongoing costs.

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

Regulation and supervision in Switzerland

Capital regulation

A revised banking ordinance and capital adequacy ordinance implementing the Basel III capital standards and the Swiss too big to fail (TBTF) law became effective on 1 January 2013.

In 2015, the Swiss Federal Council published proposed revisions to the Swiss TBTF framework. For Swiss systemically relevant banks (SRBs) that operate internationally, including UBS, the proposal would increase the existing Swiss SRB capital requirements based on risk-weighted assets (RWA) and the leverage ratio denominator and would establish an additional “gone concern” requirement, which, together with the going concern requirement, represents the total loss-absorbing capacity (TLAC) required for Swiss SRBs. The new requirements would be phased in and become fully applicable by 1 January 2020. The proposal would make the Swiss capital regime among the most demanding in the world. In addition, Swiss authorities have exercised authority to impose countercyclical capital buffers for real estate related exposures in Switzerland and we have agreed with FINMA to an incremental operational risk capital buffer.

The Basel Committee on Banking Supervision (BCBS) has issued far-reaching proposals on changes to the standardized approach to credit risk and to the calculation of operational risk, as well as a revised market risk framework. It has introduced mandatory disclosure of RWA based on a harmonized approach. It is also conducting a review of the risk-based capital framework and is expected to issue proposals on the design of a capital floor framework. We expect that Switzerland will incorporate the revisions to the BCBS framework in its capital requirements following completion of the proposals.

®   Refer to the "Regulatory and legal developments," "Risk factors" and "Capital management" sections of this report for more information.

Liquidity and funding

As a Swiss SRB, we are required to maintain a liquidity coverage ratio (LCR) of high-quality liquid assets to estimated stressed net short-term funding outflows, and will be required to maintain a net stable funding ratio (NSFR), 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.

®   Refer to the "Treasury management" and "Risk factors" sections of this report for more information.

Resolution planning and resolvability

The revised Swiss Banking Act and capital adequacy ordinances provide FINMA with additional powers to intervene in order to prevent a failure or resolve a failing financial institution, including UBS Group, UBS AG and UBS Switzerland AG. 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 possible 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 reduce business risk 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.

 

 

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Swiss TBTF requirements require Swiss SRBs, including UBS, 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 current Swiss TBTF law provides for the possibility of a limited rebate on capital requirements for Swiss SRBs that adopt measures to reduce resolvability risk beyond what is legally required. Such measures include changes to 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. The proposal for a revised TBTF ordinance also contemplates a limited rebate on the proposed TLAC requirement based on improvements to resolvability. However, there is no certainty with respect to timing or size of a potential rebate.

®   Refer to the “Regulatory and legal developments” section of this report for more information on proposed revisions to the Swiss TBTF framework

®   Refer to “If we experience financial difficulties, FINMA has the power to open resolution or liquidation proceedings or impose protective measures in relation to UBS Group AG, UBS AG or UBS Switzerland AG, and such proceedings or measures may have a material adverse effect on our shareholders and creditors” in the “Risk factors” section of this report for more information

®   Refer to the “The legal structure of UBS Group” section of this report for more information

Supervision

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.

As we are considered systemically relevant in Switzerland, we are subject to more rigorous supervision than most other Swiss banks. To promote supervisory cooperation and coordination, FINMA has implemented a Supervisory College and a Crisis Management College with US and UK authorities and an expanded General Supervisory College, including more than a dozen of our host regulators.

The Swiss National Bank (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 to assist in the regulation of Swiss systemically relevant banks.

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

Regulation and supervision outside of Switzerland

Regulation and supervision in the US

We maintain branches of UBS AG in the US and as a result, our operations in the US are subject to overall regulation and supervision by the Board of Governors of the Federal Reserve (Federal Reserve Board) under a number of laws. UBS AG has been designated a financial holding company under the Bank Holding Company Act of 1956, as amended (BHCA). 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. To maintain our financial holding company status, (i) the Group and UBS Bank USA (a Federal Deposit Insurance Corporation (FDIC)-insured depository institution subsidiary), are required to meet certain capital ratios, (ii) the US branches of UBS AG 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.

We are subject to Federal Reserve Board regulations issued under the Dodd-Frank Act that from 1 July 2016 will require foreign banking organizations (FBO) operating in the US to hold all US subsidiary operations through a single US intermediate holding company (IHC). The regulations require our IHC to meet risk-based capital, leverage ratio and liquidity requirements, subject the IHC to Federal Reserve Board stress test and capital plan requirements and impose governance requirements on the IHC and our operations in the US.

Regulations implementing the "Volcker Rule" became effective in July 2015. 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 they are conducted entirely outside the US and certain other conditions are met. We have established a global compliance and reporting framework to ensure compliance with the Volcker Rule and the available exemptions. Although the full effect of the Volcker Rule remains uncertain given the complexity of the implementing regulations and the required compliance framework, it could have a substantial impact on market liquidity and the economics of market-making activities.

 

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Operating environment and strategy
Regulation and supervision

 

UBS AG maintains branches and representative offices in several states, including Connecticut, Illinois, New York, California and Florida. These branches are authorized and supervised 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. We also maintain a trust company and UBS Bank USA, which are licensed and regulated by state regulators. 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 any single borrower and on transactions with affiliates.

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. These 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. If exercised, this federal power would 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 UBS’s US branches as a group, and then made available for application pursuant to any Swiss insolvency proceeding.

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 and futures business. These entities are regulated by a number of different government agencies and self-regulatory organizations, including the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority, the Commodities Futures Trading Commission (CFTC), the Municipal Securities Rulemaking Board and the exchanges of which it is 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 Asset Management (Americas) Inc. and our other US-registered investment advisor entities are regulated primarily by the SEC and are subject to regulations that cover all aspects of the investment advisory business. Some of these entities are also registered with the CFTC as commodity trading advisors (CTAs) and / or commodity pool operators (CPOs) and in connection with their activities as CTAs and / or CPOs 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.

®   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), 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.

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 and recovery planning and other related requirements from the Bank Recovery and Resolution Directive. These directives apply throughout the EU and are reflected in the regulatory regimes of the various member states.

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

Market regulation

Substantial changes in the laws and regulations governing markets and trading activity have been enacted or are being considered.

In June 2015, the Swiss Parliament adopted new regulation of the financial market infrastructure in Switzerland which came into effect on 1 January 2016 (subject to phase-in provisions) and mandates the clearing of over-the-counter (OTC) derivatives with a central counterparty.

 

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In the EU, similar changes have been introduced largely through the new Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR), that will make significant changes to the OTC derivative markets, to the regulation and operation of markets for other financial instruments, as well as to other related laws. These directives and more detailed implementing measures are expected to take effect in 2017. They will make significant changes to the provision of financial services in and into the European Economic Area, including increased pre- and post-trade transparency, further restrictions on the provision of inducements, introduction of a new discretionary trading venue with the aim of regulating broker crossing networks; increased regulation of 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.

In the US, several aspects of market regulation have been addressed in the Dodd-Frank Act and subsequent additional rulemaking by the SEC and CFTC, including money market mutual fund reforms, electronic trading platform disclosure, regulation imposing systems and controls requirements, and new cybersecurity requirements, under their respective authorities.

OTC derivatives regulation

In 2009, the G20 countries committed to require all standardized OTC derivative contracts to be traded on exchanges or trading facilities and cleared through central counterparties. 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. These market changes are likely to reduce the revenue potential of certain lines of business for market participants generally, and we may be adversely affected. 

UBS AG registered as a swap dealer with the 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 security-based swap dealer with the SEC, when its registration is required. Regulations issued by the CFTC and those proposed by the SEC 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 the CFTC and SEC regulations 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 put us at a competitive disadvantage to firms that are not required to register as swap dealers with the SEC or CFTC.

Anti-money laundering and anti-corruption

A major focus of US government policy relating to financial institutions in recent years has been combating money laundering and terrorist financing. The US Bank Secrecy Act and other laws and regulations applicable to UBS 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.

We are subject to laws and regulations in jurisdictions in which we operate, including the US Foreign Corrupt Practices Act and the UK Bribery Act, prohibiting corrupt or illegal payments to government officials and others. We maintain policies, procedures and internal controls intended to comply with these laws and regulations.

Data protection

We are subject to laws and regulations concerning the use and protection of customer, employee and other personal information and confidential information, including provisions under Swiss law, the EU Data Protection Directive and laws of other jurisdictions.

Compensation practices

We are subject to laws and regulations and regulatory oversight that significantly affect our compensation practices, including the Minder initiative in Switzerland, which requires a shareholder vote on the aggregate compensation of each of our Board of Directors and Group Executive Board, FINMA ordinances and EU regulation. These laws and regulations are intended to curb compensation deemed excessive or to ensure that the compensation structure of financial institutions does not encourage excessive risk-taking. We have made significant changes to the structure of our compensation arrangements to comply with these requirements and may make future changes as these requirements evolve.

  

 

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Operating environment and strategy
Regulatory and legal developments

 

Regulatory and legal developments

 

Key developments in Switzerland

EDTF | Proposed new requirements for Swiss systemically relevant banks

In December 2015, the Federal Department of Finance published for consultation a revised too big to fail (TBTF) ordinance based on the cornerstones announced by the Swiss Federal Council in October 2015. For Swiss systemically relevant banks (SRBs) that operate internationally, the proposal would revise existing Swiss SRB capital requirements and would establish additional gone concern requirements, which, together with the going concern requirement, represents the total loss-absorbing capacity, or TLAC. TLAC encompasses regulatory capital such as common equity tier 1 (CET1), additional tier 1 (AT1) and tier 2 capital as well as liabilities that can be written down or converted into equity in case of resolution or recovery measures. The proposal would make the Swiss capital regime among the most demanding in the world.

The proposed going concern capital requirements consist of basic requirements for all Swiss SRBs to maintain a leverage ratio of 4.5% and a ratio of capital to risk-weighted assets (RWA) of 12.9%. A progressive buffer would be added on top of the basic requirements, reflecting the degree of systemic importance. The progressive buffer for UBS is expected to be 0.5% of its leverage ratio denominator (LRD) and 1.4% of RWA, resulting in total going concern capital requirements of 5.0% of LRD and 14.3% of RWA (excluding countercyclical buffer requirements). The going concern leverage ratio proposal would require a minimum CET1 capital ratio of 3.5% of LRD and of up to 1.5% in high-trigger AT1 capital instruments. The minimum CET1 capital requirement will remain unchanged at 10% of RWA, and the balance of the RWA-based capital requirement, i.e., 4.3%, may be met with high-trigger AT1 instruments.

The gone concern requirements would be 5.0% of LRD and 14.3% of RWA for internationally active Swiss SRBs and may be met with senior debt that is TLAC eligible. Banks would be eligible for a reduction of the gone concern requirements if they demonstrate improved resolvability.

The proposal envisages transitional arrangements for outstanding low- and high-trigger tier 2 instruments to qualify as going concern capital until the earlier of 31 December 2019 or their maturity or first call date. Thereafter, they may be used to meet the gone concern requirement until one year before maturity. Low-trigger AT1 capital instruments will continue to qualify as going concern capital until the first call date and thereafter may also be used to meet the gone concern requirement. The proposed Swiss TBTF ordinance would permit a reduction of up to 2% of the LRD and 5.7% of RWA gone concern requirements for measures taken to improve resolvability. The amount and timing of any such reduction will be determined by FINMA as such measures are implemented.

The new capital rules are expected to come into force as of 1 July 2016. We intend to use the four-year phase-in period to fully implement the new requirements. We intend to meet the new CET1 leverage ratio requirement of 3.5% by retaining sufficient earnings while maintaining our commitment to total capital returns to shareholders of at least 50% of net profit attributable to shareholders, provided that we maintain a fully applied CET1 capital ratio of at least 13%, and consistent with our objective of maintaining a post-stress fully applied CET1 capital ratio of at least 10%. Furthermore, we plan to continue our issuance of AT1 instruments and TLAC-eligible senior debt to meet the new requirements without increasing overall liabilities.

®   Refer to “If we are unable to maintain our capital strength, this may adversely affect our ability to execute our strategy, client franchise and competitive position” in the “Risk factors” section of this report for more information

  

In addition to defining the new capital requirements, the Swiss Federal Council has proposed that the implementation of a Swiss emergency plan be completed by the end of 2019. The Swiss emergency plan defines the measures required to ensure a continuation of systemically relevant functions in Switzerland. ▲  

 

 

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Implementation of the global Automatic Exchange of Information standard underway

In December 2015, the Swiss Parliament adopted proposals to create the legal basis for the implementation of the global automatic exchange of information (AEI) standard in tax matters. At the same time, it ratified the joint Organization for Economic Cooperation and Development (OECD) and Council of Europe Convention on Mutual Administrative Assistance, as well as the Multilateral Competent Authority Agreement.

Separately, the Swiss Parliament rejected in December 2015 a draft law from the Swiss Federal Council for banks and other financial intermediaries in Switzerland to comply with enhanced due diligence requirements when accepting assets from clients resident in states without an AEI agreement.

In November 2015, the Swiss Federal Council submitted the EU-Swiss and the Australia-Swiss agreements on the AEI to Parliament for approval. In early 2016, consultations were initiated on the implementation of the AEI with the British crown dependencies of Jersey, Guernsey and the Isle of Man, as well as with Japan, South Korea, Canada, Iceland and Norway. In the past, we have experienced outflows of cross-border client assets from our Swiss booking center as a result of changes in local tax regimes or their enforcement.

®   Refer to the “Risk factors” section of this report for more information

 

 

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Operating environment and strategy
Regulatory and legal developments

 

Swiss Parliament adopts Financial Market Infrastructure Act

In June 2015, the Swiss Parliament adopted the Financial Market Infrastructure Act (FMIA). The FMIA changes the regulation of financial market infrastructure in Switzerland, to provide an international level playing field, and implements the G20 commitments on over-the-counter (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 other trading facility once this has been introduced in partner states. The FMIA also (i) introduces new licensing requirements for stock exchanges, multilateral and organized trading facilities, central counterparties, central securities depositaries, trade repositories and payment systems, (ii) imposes transparency requirements for securities trading on platforms and (iii) establishes a basis for regulating high-frequency trading. The FMIA also empowers the Swiss Federal Council to impose position limits for commodity derivatives, should this be deemed necessary at a later date. The new law entered into force in January 2016 together with the Swiss Federal Council's Financial Market Infrastructure Ordinance, the respective FINMA ordinance and amendments to the SNB's National Bank Ordinance. For some requirements, transitional periods are provided up to January and August 2017. The FMIA is expected to affect the way UBS trades securities and derivatives, particularly OTC derivatives, leading over time to standardized OTC derivatives being centrally cleared to reduce counterparty risk, and may have other effects on markets. In addition, the FMIA creates additional reporting obligations and will require foreign financial market infrastructure to obtain FINMA approval for providing services in Switzerland. UBS is taking the necessary steps to prepare for implementation, including the fulfillment of organizational requirements, risk mitigation and OTC trade reporting.

Financial Services Act and Financial Institutions Act to enter parliamentary debate

On 4 November 2015, the Swiss Federal Council adopted the dispatch on the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). Both items will jointly enter parliamentary debate in 2016. The FinSA primarily aims to improve client protection and has far-reaching consequences for the provision of financial services in Switzerland. The FinIA will provide a differentiated supervisory regime for financial institutions and introduce a prudential supervision of managers of individual client assets, managers of the assets of occupational benefits schemes, and trustees. A final assessment for both acts can only be made once the parliamentary debate has been concluded.


Key developments in the EU

Bank Recovery and Resolution Directive

The Bank Recovery and Resolution Directive (BRRD) came into force during 2014. This directive 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 Directive has been applicable from 1 January 2015, while the bail-in tool became applicable on 1 January 2016. UBS’s EU subsidiaries that are credit institutions or investment firms are subject to the requirements of the Directive, while EU member states have the right to apply the provisions of the Directive to UBS’s EU-based branches in certain circumstances.

The Single Resolution Mechanism (SRM) implements the BRRD in the eurozone. The SRM became fully operational on 1 January 2016. The SRM is an important step in the completion of the European Banking Union. The aim of the SRM is to ensure an orderly resolution of failing banks with minimum impact on the real economy and public finances of the participating member states and beyond. The SRM establishes uniform rules and procedures for the resolution of entities, removes obstacles to resolution in order to make the European banking system more secure, and ensures a unified decision-making process for resolution within the European Banking Union to foster market confidence. UBS (Luxembourg) S.A. is directly supervised by the European Central Bank (ECB) under the Single Supervisory Mechanism and thereby automatically falls under the SRM. The Single Resolution Board is expected to determine minimum requirements for eligible liabilities (MREL) for UBS (Luxembourg) S.A. over the course of 2016. As MREL are set on a case–by-case basis, the potential impact on UBS is not yet clear. It is possible that we will need to increase loss-absorbing capacity at the UBS (Luxembourg) S.A. level as a result of the new requirements.

In the UK, the Bank of England (BoE) issued a consultation paper in December 2015 on the UK implementation of the  BRRD's MREL. These requirements are expected to be established on a case-by-case basis and will apply directly to UBS Limited. The BoE states that where the resolution strategy of a UK subsidiary of a non-UK headquartered bank is based on the home resolution authority taking the lead with the BoE in a supporting role (as is the case for UBS Limited), it will set MREL for the subsidiary to reflect the agreed resolution strategy. MREL for such institutions will generally need to be satisfied through capital or subordinated liabilities issued to the foreign parent company and therefore will be subordinated to senior operating liabilities. UBS Limited is required to be fully compliant with its applicable MREL by 1 January 2020.

MREL is conceptually similar to the Financial Stability Board’s (FSB) total loss absorbing capacity (TLAC) standards and the two are broadly compatible although not identical.

 

 

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EU Markets in Financial Instruments Directive II and Regulation package application date expected to be delayed to January 2018

The European Commission (EC) has formally proposed a one-year delay to the EU Markets in Financial Instruments Directive II and Regulation package (MiFID II / MiFIR), postponing its application to 3 January 2018. Any delay is subject to the approval of the European Parliament and the Council of the EU. Once applied, MiFID II / MiFIR will have significant impact in five broad areas: (i) market structure, (ii) transparency, (iii) European Securities and Market Authority (ESMA) powers; (iv) conduct of business / investor protection, and (v) third-country market access. Final implementing measures are expected to be adopted by the EC in the first half of 2016. MiFID II / MiFIR is expected to significantly affect processes and practices in UBS's asset management, investment banking and wealth management businesses.

Areas of significant change include requirements for higher levels of non-equity transparency, restrictions on the volume of equity trading that can take place on a non-pre-trade transparent basis, increased levels of best execution transparency, potential restrictions on the current model for payment for investment research, increased product governance requirements, and the introduction of commodities position reporting. 

European Market Infrastructure Regulation clearing obligations and non-cleared derivative risk mitigation requirements to become applicable during 2016

The G20 leaders agreed in 2009 that all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through Central Counterparties (CCPs) by the end of 2012. In the EU, the clearing and reporting requirements are being implemented via European Market Infrastructure Regulation (EMIR), while the trading obligations are being implemented via the review of MiFID. EMIR came into force on 16 August 2012. On 21 December 2015, rules requiring mandatory clearing of OTC derivatives through a CCP came into force for certain OTC interest rate swaps. The clearing obligation will be phased in and will apply from 21 June 2016 for Category 1 counterparties, including UBS Limited. The rules include a three-year transitional period for intra-group transactions between an EU and a non-EU group counterparty. The EC has also adopted a clearing obligation for certain credit default swaps (CDSs). This proposed clearing obligation still requires approval by the European Parliament and the Council of the EU before it becomes applicable. UBS Limited and other UBS entities will be impacted by the clearing obligations, as we will be required to clear our own in-scope OTC derivative transactions as well as provide clearing services to some of our clients. The risk mitigation requirements for non-cleared derivatives (including mandatory exchange of initial margin and variation margin) will apply from 1 September 2016. These new requirements are expected to have a significant impact on the operations of, and collateral requirements for, UBS Limited.

Preliminary Agreement on Data Protection Regulation reached

In December 2015, the European Parliament and the Council of the EU reached a political agreement on the European Data Protection framework, which consists of a regulation on personal data protection and a directive dealing with data protection in law enforcement contexts. The new framework regulates the processing of personal data of our clients and employees located (i) in the EU, irrespective of whether or not we process the personal data in the EU, and (ii) outside the EU to the extent that such processing is effected by a natural or legal person, public authority, agency or any other body established in the EU. As such, it has extensive extraterritorial impact. The framework includes new rights for individuals, including a right to have personal data removed from records, and to request access to the data stored by banks at no cost and within a short timeframe. Moreover, significant financial penalties have been introduced for non-compliance with the new framework. The new framework is expected to become effective in the first quarter of 2018, and is likely to impact UBS's global data processing activities.

Agreement on EU Benchmarks Regulation reached

The European Parliament and Council of the EU have reached political agreement on the EU Benchmarks Regulation (EBR), which aims to improve the accuracy and integrity of benchmarks. New rules apply to administrators, contributors and users of benchmarks.

The regulation is likely to have a cross-divisional impact and potentially a cross-regional impact, as it affects UBS at three levels: (i) as administrator of UBS indices, (ii) as contributor to various benchmarks, and (iii) as a user of benchmarks. The definition of benchmarks is broad. The governance, control and transparency requirements for administrators and contributors may carry cost implications. The new authorization requirement and third-country regime may have a significant impact across the industry and will likely result in a reduction of available benchmarks for use in financial instruments and financial contracts. The use of EU benchmarks (captured by the EBR) in financial contracts or financial instruments, or to measure the performance of investment funds may impact our product strategy. The EBR is expected to enter into force in the third quarter of 2016 and become effective in 2018.

 

 

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Operating environment and strategy
Regulatory and legal developments

 

Senior Managers and Certification Regime to apply from March 2016

The UK Banking Reform Act, which entered into force in March 2015, implements key recommendations of the Parliamentary Commission on Banking Standards (PCBS). As part of implementing the PCBS recommendations, the UK Prudential Regulation Authority and the Financial Conduct Authority (FCA) are introducing the Senior Managers and Certification regimes (SMCR). The Senior Managers Regime will focus accountability on a small number of senior managers specified by the PRA or FCA, whether physically based in the UK or overseas. The Certification Regime will require relevant firms to assess the fitness and propriety of certain employees who could pose a risk of significant harm to the firm or any of its clients. The SMCR for banks applies from 7 March 2016. The SMCR applies directly to UBS Limited and the London branch of UBS AG.

Key developments in the US

US Securities and Exchange Commission releases final and proposed rules for security-based swaps

In 2015, the US Securities and Exchange Commission (SEC) finalized or proposed a number of rules relating to security-based swaps (SBSs).

In January 2015, the SEC proposed additional security-based swap (SBS) transaction reporting rules and guidance. The Reporting and Dissemination of Security-Based Swap Information Regulation (Regulation SBSR) outlines the information that must be reported and publicly disseminated for SBS transactions and assigns reporting duties. The final rules address the cross-border application of Regulation SBSR and specify that any SBS transaction involving a US person, registered SBS dealer or registered major SBS participant, whether as a direct counterparty or as a guarantor, must be reported regardless of where the transaction is executed. The compliance date for these new rules, which will increase reporting requirements and associated costs, will depend on the finalization of the proposed rule and on the date the first SBS data repository becomes effective.

In February 2016, the SEC finalized rules that apply registration, reporting, public dissemination and business conduct requirements to SBS transactions of non-US companies that use US personnel to arrange, negotiate or execute SBSs in connection with their dealing activity. The finalized rules specify, among other things, that such transactions be counted toward the requirement to register as an SBS dealer. The rules do not impose mandatory clearing or mandatory trade execution on an SBS between two non-US persons solely because one or both counterparties arrange, negotiate or execute the SBS using personnel located in the US.

In August 2015, the SEC finalized its rules describing the registration application process for SBS dealers. Among other things, the rules require non-resident SBS dealers to obtain a legal opinion that concludes that the SBS dealer can, as a matter of law, provide the SEC with access to its books and records and submit to on-site examination, as well as a certification that it can and will do so. UBS intends to register at least UBS AG as an SBS dealer.

SEC proposes clawback rules for incentive-based compensation

In July 2015, the SEC proposed rules that would require national securities exchanges and associations to establish additional listing standards. These would require listed companies, such as UBS, to develop and enforce clawback policies stipulating that if a listed company has to make a material restatement of its financial statements resulting from an error, it must reclaim incentive-based compensation from current and former executive officers that they would not have received on the basis of such restatement.

US Department of Labor re-proposes fiduciary rule

In April 2015, the US Department of Labor (DOL) re-proposed a fiduciary rule (first proposed in 2010) that would expand the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA). Under the revised proposal, all advisors, including broker-dealers, would be required to abide by an ERISA fiduciary standard in dealings with qualified retirement plans and individual retirement accounts. The revised proposal would result in a prohibition on a variety of customary transactions and fee arrangements in the financial services industry with respect to retirement investors. In addition to providing narrow carve-outs for certain activities, the DOL also issued exemptions from the prohibited transaction rules. Wealth Management Americas and Asset Management would be required to make material changes to their businesses, for example by implementing a new fee structure, if the rule is adopted as proposed.

US Federal Reserve Board proposes total loss-absorbing capacity rules, as well as long-term debt and clean holding company requirements

In October 2015, the Federal Reserve Board proposed a rule for total loss-absorbing capacity (TLAC) and long-term debt (LTD) requirements for covered bank holding companies and the Intermediate Holding Companies (IHCs) of foreign banks. The proposal would require IHCs, such as that of UBS, to hold internal LTD based on the greatest of 7% of RWA, 3% of total leverage exposure if subject to the supplementary leverage ratio (SLR), and 4% of average total consolidated assets. The internal TLAC requirement would depend on whether the IHC is a non-resolution entity or a resolution entity, as defined in the rule. Non-resolution IHCs, which require certification from the home country regulator, would be required to hold the greatest of 16% of RWA, 6% of total leverage exposure if subject to the SLR, and 8% of average total consolidated assets. Resolution IHCs would be required to hold the greatest of 18% of RWA, 6.75% of total leverage exposure if subject to the SLR, and 9% of average total consolidated assets. We intend to seek the certification necessary to classify our IHC as a non-resolution IHC.

 

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The proposal also applies an internal TLAC buffer of 2.5% plus any applicable countercyclical capital buffer. A breach would subject the IHC to restrictions on distributions and discretionary bonus payments. The proposal’s clean holding company requirements would prohibit or limit IHCs from entering into certain financial arrangements that could create obstacles to orderly resolution. The UBS IHC would be subject to the requirements under the proposal.

US regulators finalize margin rules for non-cleared swaps

The prudential regulators, including the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (together, Agencies) approved a final rule to establish margin and capital requirements for covered swap entities for non-cleared swaps. The rule establishes the minimum amount of initial and variation margin that a covered swap entity must exchange with its counterparties, based on the category of the counterparty, as defined in the rule. Under the rule, substituted compliance is allowed if the Agencies determine a foreign regulatory framework is comparable. The final rule differs from the proposal by creating specific rules for affiliate transactions. The rule will become effective as of 1 April 2016, but compliance dates will be phased in from September 2016 to September 2020. UBS will be subject to the Agencies’ final rules.

Far-reaching regulatory revisions and reform proposals on the international level

Basel Committee on Banking Supervision proposes changes to the standardized approach for credit risk

The Basel Committee on Banking Supervision (BCBS) released a second consultative document on revisions to the standardized approach for credit risk in December 2015. The proposal would reintroduce the use of external credit ratings for exposures to banks and corporates and would adopt a loan-to-value approach to risk weighting of real estate loans. The consultation ran until 11 March 2016 and the BCBS intends to finalize the revisions by the end of 2016.

BCBS issues revised market risk framework

In January 2016, the BCBS published a revised market risk framework, which defines minimum capital requirements for market risk exposures. The market risk framework includes stricter rules on the designation of instruments as either trading or banking book, a more prescriptive internal-model approach aimed at increasing consistency across banks, as well as a revised and more risk-sensitive standardized approach, which may also be used as a fall back to the internal-model approach. The BCBS will conduct further quantitative impact studies in order to monitor the effect of the capital requirements and to ensure consistency in the application of the framework. We expect Switzerland to finalize these changes in the domestic regulations no later than 1 January 2019, the deadline set by the BCBS.

BCBS continues review of risk-based capital framework

The BCBS also published two consultation papers during 2015 as part of its review of the capital framework to balance simplicity and risk sensitivity, and to promote comparability. The first paper is a consultation on the risk management, capital treatment and supervision of interest rate risk in the banking book, expanding upon and intending to ultimately replace the Basel Committee's 2004 principles for the management and supervision of interest rate risk. The second paper is a consultation on the Credit Valuation Adjustment (CVA) Risk Framework, intending to ensure that all important drivers of credit valuation adjustment risk and its hedges are covered in the Basel regulatory capital standard, in order to align the capital standard with the fair value measurement of CVA employed under various accounting regimes, and to ensure consistency with the proposed revisions to the market risk framework under the Basel Committee's fundamental review of the trading book.

In addition, as part of its quarterly review, the Bank for International Settlements (BIS) published a paper on the leverage ratio calibration. Subject to various caveats, the paper finds that there is considerable room to raise the leverage ratio requirement above its original 3% "test" level, to within a range of about 4-5%. The BCBS intends to complete the final calibration of the leverage ratio, and any further adjustments to its definition, by 2017, with a view to migrating to a Pillar 1 (minimum capital requirement) treatment on 1 January 2018.

Financial Stability Board defines a regulatory framework for haircuts on non-centrally cleared securities financing transactions

In November 2015, the Financial Stability Board (FSB) issued the final framework for haircuts on non-centrally cleared securities financing transactions, defining haircut floors to non-bank-to-non-bank transactions. This completes the FSB's policy recommendations in the framework for haircuts on certain non-centrally cleared securities financing transactions that were published in October 2014. The framework of numerical haircut floors applies to non-centrally cleared securities financing transactions in which financing against collateral other than government securities is provided to non-banks. The framework is intended to limit the build-up of excessive leverage outside the banking system.

 

 

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Operating environment and strategy
Regulatory and legal developments

 

BCBS and G20 work on corporate governance principles

The BCBS published updated principles on corporate governance for banks in July 2015. These principles are intended to provide a framework within which banks and supervisors should operate. The framework consists of 13 principles, describing the roles and responsibilities of the directors and senior management, including (i) the role of directors in overseeing the implementation of effective risk management systems, (ii) directors’ collective competence and obligation to dedicate sufficient time to their mandates, (iii) strengthen the guidance on risk governance and the importance of a sound risk culture , and (iv) compensation systems form a key component of the governance and incentive structure through which the board and senior management of a bank convey acceptable risk-taking behavior and reinforce the bank's operating and risk culture. The G20 finance ministers also endorsed the revised G20 / OECD Principles of Corporate Governance in September 2015. We continue to strive for and maintain a high standard of corporate governance. We note that national implementation of these standards and application of the standards to specific jurisdictions and entities, including the aforementioned senior management regimes in the UK and the governance regulations for our IHC, will present challenges to the overall governance of the Group.

  

 

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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. Capital strength is the foundation of our success. Our strategy builds on the strengths of all our businesses and focuses our efforts on areas in which we excel, while seeking to capitalize on the growth prospects in the businesses and regions in which we operate. Our strategy centers on our leading wealth management businesses and our premier universal bank in Switzerland, enhanced by our 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 an attractive structural growth and profitability outlook. Our strategic priorities are the continued execution of our strategy to enable us to deliver on our performance targets, improving our effectiveness and efficiency, and making further investments to take advantage of growth opportunities.

 

 

Who we are

We are the world's largest and fastest growing wealth manager and the only bank with a truly global wealth management franchise at the center of its strategy. Our footprint is unique, and we benefit from significant scale in an industry with attractive growth prospects in excess of GDP-growth and rising barriers to entry. We have a leading position across the attractive high net worth and ultra high net worth client segments. Our value proposition is highly scalable and can be tailored to our clients’ financial needs and preferences. The partnership between our wealth management businesses and Personal & Corporate Banking in Switzerland, Asset Management and the Investment Bank is a key differentiating factor and a competitive advantage of our wealth management franchise.


Strong capital position and capital efficient business model

Capital strength is the foundation of our success. It provides our clients and all other stakeholders with a strong sense of comfort, creating a distinct competitive advantage for our businesses. Our fully applied common equity tier 1 (CET1) capital ratio is the highest among our peer group of large global banks, and we are well-positioned to meet the proposed requirements of the revised Swiss too big to fail (TBTF) framework. Our highly capital-accretive and efficient business model helps us adapt to changes in regulatory requirements, while pursuing growth opportunities without the need for significant earnings retention. We believe that our business model can generate an adjusted return on tangible equity of more than 15%, which we aim to achieve in 2018.

 

 

 

 

 

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Operating environment and strategy
Our strategy

 

We are committed to an attractive capital returns policy

EDTF | Our earnings capacity, capital efficiency and low-risk profile support our objective to deliver sustainable and growing returns to our shareholders. We are committed to a total capital return to shareholders of at least 50% of net profit attributable to shareholders, provided that we maintain a fully applied CET1 capital ratio of at least 13% and consistent with our objective of maintaining a post-stress fully applied CET1 capital ratio of at least 10%. Total capital returns will consist of an ordinary dividend, which we intend to grow steadily over time, and other forms of capital returns. Our ordinary dividend was established at CHF 0.50 for the financial year 2014. For the financial year 2015, our Board of Directors intends to propose a total dividend payment of CHF 0.85 per share, comprised of an ordinary dividend of CHF 0.60 per share, up 20% compared with 2014, and a special dividend of CHF 0.25 per share, reflecting a significant net upward revaluation of deferred tax assets in 2015. The total dividend of CHF 0.85 per share represents a payout ratio of 52%. ▲ 

Industry trends

Business transformation

In response to the evolving market and regulatory environment, the industry is continuing to observe adjustments to strategies and business portfolios, particularly across large European banks. We communicated our strategy in 2011 and accelerated its execution in 2012. We focused on creating a business model that is better adapted to the new regulatory and market environment and that we believe results in more consistent and high-quality returns. Having completed our business transformation in 2014, we are now capitalizing on our strong strategic position by focusing on growing the profitability of our core businesses and delivering attractive returns to our shareholders. As a consequence, we believe we are well-positioned to adapt to the changing market environment and capture the benefits of new and evolving industry trends. We are confident with our capabilities and market position, but we will not be complacent.

Wealth accumulation

The wealth management industry offers fundamentally attractive economics with a forecast for robust wealth accumulation around the world. According to the Boston Consulting Group Global Wealth Report 2015, the ultra high net worth segment is expected to expand by about 11% annually from 2014 to 2019, and the high net worth segment by about 7% annually. Asia Pacific and the emerging markets are expected to be the fastest-growing regions, with an estimated average annual market growth rate of approximately 11% for the high net worth and ultra high net worth segments combined. Even mature markets, such as Western Europe and North America, are forecast to see wealth accumulation grow within the high net worth and ultra high net worth segments at an annual rate exceeding expected GDP growth. Despite the attractiveness of a capital-light and highly cash flow-generative business, we believe that wealth management is likely to remain a highly fragmented industry and barriers to entry are expected to increase, partly due to significant investments needed to meet current and proposed regulatory requirements.

Our unique investment engine is an essential component of our holistic wealth management offering and sets us apart from our peers. The combination of our strategic focus on wealth management, our unique footprint and capabilities, and our leading position across the attractive ultra high net worth and high net worth client segments, enable us to benefit from significant scale, which we expect will help us capture market growth and increase share of wallet.

Demographics, wealth transfer and retirement funding

Demographic changes, including the increasing average age of the world’s population, escalating costs associated with the care of an ageing population and the funding challenges faced by public pension systems, will be a key long-term driver for both wealth consumption and wealth transfer, which will also impact retirement funding. The strong reliance on public pension schemes will make reform especially urgent in certain countries. Although each country will follow its own regulatory agenda, a general and gradual shift from public to privately funded pension schemes seems inevitable.

 

 

 

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These developments are expected to benefit our businesses, as individuals and privately funded pension schemes seek investment advice and tailored service offerings with a relevant product range. Our strong capabilities in asset management, as well as our ability to tailor our service offerings to our clients’ financial needs and preferences, put us in a position of strength to address these emerging needs.

Digitalization

Over the last few years, investments in financial technology have multiplied, and the market expects continued digital disruption in the financial industry, driven by consumer preferences and expectations. We expect that core technologies, such as automated investment advice, mobile access to banking services, distributed ledger technology and natural language user interfaces, will be ready for application in the financial services industry in the near future. Digital capabilities are likely to play a significant role in transforming not only how banks operate internally, but also how banks interact with clients. The financial services industry will have to adapt to a new digital reality driven by evolving client needs, increasing demand for efficiency, accelerating technological innovation and the emergence of new market participants.

UBS acknowledged early on that there is a need for constant innovation, and has launched several initiatives to meet evolving client expectations in personalization, convenience and transparency. Our technology is used extensively by our clients, and it allows us to increase market share and customer loyalty, and to attract new business. We are focused on leveraging our technology not only to improve the services for our clients, but also to increase scalability by providing more efficient methods for delivering content, to directly access clients, to improve automation in the back office to increase efficiency, and to derive the most meaningful information from vast amounts of data to better manage our business.

We have also created innovation labs in London, Singapore and Zurich to research how UBS can further foster innovation as a key driver for business growth and improved efficiency. Recognizing that innovation is not something UBS can do on its own, we have engaged with a wide range of startup companies, venture capitalists and academic institutions, for example, with the "Future of finance" challenge, which involved 600 participants world-wide. In another example, UBS launched an initiative to explore blockchain technology, and has become one of the thought leaders in this fundamental new technology and its applications for financial services. Furthermore, in 2015, UBS, together with the SIX and Zürcher Kantonalbank, successfully launched the new peer-to-peer mobile payments application "Paymit" in Switzerland, winning the "Master of Swiss Apps" award.

Further adaptation of operating models

Operating models in the financial services industry are expected to continue to evolve, given an increase in operational cost pressure, reflecting higher regulatory costs, together with a subdued revenue environment. This persistent push for efficiency is forcing banks to reassess front-to-back processes, focus on identifying potential for standardization, and to rethink the ownership of value chain components, which will be supported by a continuous increase in straight-through processing capabilities and reduced repetitive human intervention. Over the past few years, a diverse network of suppliers has emerged that is both disaggregating the service and supply chain and changing the dynamics of demand and supply in the banking sector.

In 2015, we established UBS Business Solutions AG to act as the Group’s service company subsidiary and we plan to transfer the majority of our middle- and back-office processes into the service company structure. The transfer is a first step in enabling us to commercialize middle- and back-office processes and benefit from economies of scale. In addition, it allows us to take advantage of opportunities to share regulatory investments.

Banking intermediation

Against the backdrop of digitalization and new market participants, the banking sector’s role as a facilitator of economic policy and an enabler of domestic growth may come under threat, as well as renewed discussion and scrutiny. The combination of enhanced regulatory requirements, reduced risk appetite and subdued macroeconomic prospects continues to curb the lending appetite of banks. Other financial industry players, such as asset managers, insurers and hedge funds, are increasingly stepping into banking intermediation and risk-taking areas, even though they are currently still focused on more specific or niche areas, such as long-dated assets and high-risk lending. It is expected that this trend will continue with its extent and pace dependent on regulatory developments.

Despite these challenges, we believe banks still have the necessary capital and the competitive ability to preserve their core role in the economy and to have continued access to their traditional revenue sources.

 

 

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Operating environment and strategy
Our strategy

 

Regulation

There has been continuous regulatory pressure on the financial services industry to become simpler, more transparent and more resilient, and it is expected that regulation will remain a major driver of change for the industry.

We believe we have the right business model to comply with the new, more demanding regulations without the need to change our strategy. We have the highest fully applied CET1 capital ratio among our peer group of large global banks and we have made substantial progress in our efforts to improve resolvability. We are well prepared to meet the requirements of the proposed revised Swiss too big to fail framework over the phase-in period and by the effective date in 2020, and we intend to use the four-year period to fully implement the new requirements.

®   Refer to the "Regulatory and legal developments" section of this report for more information on the proposed revised Swiss too big to fail framework

Our strategic priorities

EDTF | We intend to build on our successful track record and focus on three key strategic priorities as set out below. ▲ 

1. Continue to execute our strategy and deliver on our performance targets

EDTF | The strategic change we initiated in 2011 was driven by our decision to focus on our strengths and by anticipation of more demanding regulation. We outlined a strategy that works in a number of business environments. Having successfully completed our transformation, we now continue to execute our strategy in a focused and disciplined manner. ▲ 


2. Improve effectiveness and efficiency

EDTF | At year-end 2015, we achieved CHF 1.1 billion of net cost reductions versus full-year 2013 and we remain fully committed to achieving our net cost reduction target of CHF 2.1 billion by year-end 2017. Our effectiveness and efficiency improvements are centered on creating the right infrastructure and cost framework for the future, including workforce and footprint. In addition, we will continue to invest heavily in technology, compliance and risk control, as our initiatives create more stable IT platforms, reduce the need for manual intervention, and enable faster upgrades and overall stronger controls. ▲ 

3. Invest for growth

EDTF | We will continue to build our capabilities in technology and digitalization with a focus on further strengthening our position, particularly in regions such as the Americas and Asia Pacific. Our investments in technology are attracting broad industry recognition, but, more importantly, they are used extensively by our clients and allow us to capture market share and attract business. We also remain committed to investing in the development of our existing employees and to hiring the best available talent. The ability to take advantage of growth opportunities in technology and our continued focus on attracting the right people and developing the talent we have in order to achieve their full potential will help us to better serve our clients. ▲ 

Our performance targets and expectations

The tables on the next page show our performance targets and expectations for the Group, the business divisions and Corporate Center for 2016 and beyond. The performance targets and expectations are calculated on an annual basis, except for adjusted pre-tax profit growth for our combined wealth management businesses, which represents a through the cycle target. Our performance targets and expectations are based on adjusted results that exclude items that management believes are not representative of the underlying performance of our businesses, such as restructuring expenses and gains and losses on sales of businesses and real estate, and assume constant foreign currency translation rates, unless otherwise indicated.

 

 

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Group

 

Business divisions and Corporate Center

 

 

  

 

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Operating environment and strategy
Measurement of performance

 

UBS – leading universal bank in Switzerland

 

 

 

 

 

UBS is the preeminent universal bank in Switzerland, the only country where we operate in all five of our business areas: personal banking, wealth management, corporate and institutional banking, investment bank 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 around 80% of banks domiciled in Switzerland. In 2015, Euromoney acknowledged our preeminent position in Switzerland with its prestigious Best Bank in Switzerland award for the fourth consecutive year.

 

Our universal bank model is central to our success. We differentiate ourselves by leveraging our strengths across all segments. Our management approach promotes cross-divisional thinking, enables effective collaboration across all business areas and allows us to utilize our resources efficiently. As a result, we are in an excellent position to meet our
clients’ needs with a comprehensive range of banking products and services drawn from across our business segments. Our universal bank model has proven itself to be highly effective and consistently contributes substantially to the Group.

 

Our distribution model is based on a multichannel strategy. We strive to offer a unique client experience, giving clients the choice in 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 continue to see a steadily rising number of users and client interactions. In 2015, users of our e-banking service exceeded the 1.5 million mark, while we reached the milestone of 500,000 downloads of our Mobile Banking app earlier in 2015.

  
 
 

We strengthened our segment-specific offering with the introduction of Wealth Management Online and Corporate Financial Management. We also increased the ways clients can interact with us by launching Live Chat and the new retirement calculators on ubs.com. The joint introduction of Paymit with SIX and Zürcher Kantonalbank has made UBS the leader in the Swiss mobile payment space: UBS Paymit achieved more than 150,000 downloads by the end of 2015, received excellent client feedback in the Apple App Store and earned external recognition with the ”Master of Swiss Apps 2015” award. We will continue to build on our position as the leading multi-channel bank in Switzerland and as an innovator in digital services to improve our client experience, capture market share and increase efficiency.

 

  

 

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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. 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.

     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.

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. ▲ 

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

New key performance indicators in 2016

EDTF | In 2016, the revised Swiss too big to fail going concern leverage ratio will replace the Swiss SRB leverage ratio as a Group KPI, as it is expected to become the relevant regulatory measure in 2016. ▲  


Client / invested assets reporting

We report two distinct metrics for client funds:

   The metric client assets encompasses all client assets managed by or deposited with us, including custody-only assets.

   The metric 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 the more important metric. 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. Wealth Management Americas also reports net new money including interest and dividend income, in line with historical reporting practice in the US market.

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 Asset Management and sold by Wealth Management or 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 185 billion of invested assets were double-counted as of 31 December 2015 (CHF 173 billion as of 31 December 2014).

®   Refer to “Note 35 Invested assets and net new money” in the “Consolidated financial statements” 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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Operating environment and strategy

 

  

 

40 


 

 

Wealth Management

Wealth Management provides wealthy private clients with investment advice and solutions tailored to their individual needs. At the end of 2015, we had a presence in more than 40 countries and invested assets of CHF 947 billion.

 

 

Business

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

Strategy and clients

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 and affluent markets. Our broad client base and strong global footprint put us in an excellent position to capture the growth opportunities across regions and segments.


We are the preeminent wealth manager globally and aim to provide our clients with comprehensive, tailored advice. We serve private clients, particularly in the ultra high net worth (generally considered to be clients with more than CHF 50 million in investable assets, with some market-driven differentiation), high net worth (generally considered to be clients with CHF 2 million to CHF 50 million in investable assets, with some market-driven differentiation) and affluent (generally considered to be clients with CHF 250 thousand to CHF 2 million in investable assets, with some market-driven differentiation) segments. We have unique scale, an industry-leading platform, and a broad-based setup, being active in the most diverse wealth management markets and segments.

We measure the performance of our business against five key performance indicators: pre-tax profit growth, cost / income ratio, net new money growth, gross margin on invested assets and net margin on invested assets. We also evaluate our performance against our annual performance targets, which comprise a cost / income ratio of 55–65%, a net new money growth rate of 3–5%, and together with Wealth Management Americas, a pre-tax profit growth of 10–15%, as defined in the “Our strategy” section of this report. We have defined a set of strategic priorities to enable us to drive profitable growth and be at the forefront of shaping the wealth management industry. As the industry transforms, our aim is to increasingly translate our competitive advantages into profitable market share gains.

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

 

 

 

 

   

 

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Operating environment and strategy
Wealth Management

 

Investment management and portfolio construction are 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. Clients 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. We aspire to reach a mandate penetration of approximately 40% of Wealth Management’s invested assets, to provide a greater selection of value-added services to our clients. Growing our mandates business also contributes to higher recurring revenues.

We seek to capitalize on our market-leading position in the ultra high net worth business and to increase share considerably in this high-growth segment. We also invest significantly in growing our high net worth and affluent client segments, especially by leveraging and further strengthening our leading competence in investment management, as well as investing in our digital capabilities.

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. Through our Global Family 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 leader in terms of how it uses state-of-the-art technology to systematically monitor client 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 provide our clients with the best of our investment management capabilities.

All clients can 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 Asset Management teams.

We invest significantly in digitalization and innovation to meet the evolving needs of our client base. To support the rapid development of state-of-the-art banking services and to ensure that these are delivered consistently, we are further consolidating and extending our IT platform globally. In addition, we are developing new solutions to deliver our leading content through digital channels. For example, in 2015, we launched Wealth Management Online, giving our clients electronic access to our offering, including our portfolio management and advisory services. We also introduced My House View, an interactive filter for our investment research, enabling users to easily find the content most relevant to them.

Our operating model is continually adapted to focus on efficiency, simplicity and digital innovation. For example, we will leverage our Swiss platform across our most important markets in Asia and Europe following successful deployment in Germany in 2015. In addition, we continue to make focused investments in our onshore businesses to capture growth opportunities.  

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

In Asia Pacific, we have accelerated our growth with a particular focus on Hong Kong and Singapore, the leading financial centers in the region, and China. In 2015, we opened a branch in Kowloon, our first branch in Hong Kong outside the central business district, and we continue to expand our local onshore presence in China to help capture long-term growth opportunities. We are also developing our presence in major onshore markets such as Japan and Taiwan.

In the emerging markets, we are focused on 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, aiming to serve 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 and the UK, as well as in the US through Wealth Management Americas.

In Europe, our long-established local presence in all major markets supports our growth ambition. We recognized the converging needs of clients early 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, enabling us to deal efficiently with increased regulatory and fiscal requirements.

In Switzerland, based on our integrated business model, we collaborate closely with our colleagues in the personal and corporate banking, 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 around 100 wealth management offices.

 

 

 

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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 2,000 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.

Organizational structure

Headquartered in Switzerland, we have a presence in more than 40 countries with approximately 190 offices, of which around 100 are in Switzerland. As of the end of 2015, we employed 10,239 people worldwide, of which 4,019 were 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 managed by the Chief Operating Officer, and shared services provided by Corporate Center.

Competitors

Our major global competitors include the private banking operations of Credit Suisse, JP Morgan, Deutsche Bank, BNP Paribas, HSBC, Citigroup and Julius Bär. In the European domestic markets, we primarily compete with the local private banking operations of large banks such as RBS in the UK, Deutsche Bank in Germany and UniCredit in Italy. In Asia Pacific, the private banking franchises of Citigroup, Credit Suisse and HSBC 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 approach focuses on a fundamental understanding of our clients’ lifecycle needs and financial objectives. Based on this approach, we seek to provide superior investment advice and solutions. 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. 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 lifecycle needs. With this comprehensive service, 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. All our client advisors must obtain the Wealth Management Diploma, a program accredited by Switzerland’s State Secretariat for Economic Affairs 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, known as "the UBS House View".

 

 

43 


Operating environment and strategy
Wealth Management

 

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 our clients’ wealth, and strives to ensure 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. To help our clients address the challenges of an increasingly complex financial world, we continue to develop innovative products. For example, in 2015, we introduced new discretionary investment solutions based on a new Chief Investment Office asset allocation framework.

Our products are aimed at achieving positive relative performance in various market scenarios. They are developed from a wide range of sources, including Investment Products and Services, 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 develops advice-based relationships through its financial advisors, who deliver a fully integrated set of wealth management solutions designed to address the needs of ultra high net worth and high net worth clients.

 

Business

We are one of the leading wealth managers in the Americas in terms of financial advisor productivity and invested assets. Our business includes UBS’s domestic US and Canadian wealth management businesses, 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 2015, invested assets totaled USD 1,033 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, provides 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 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.

 

 

 

45 


Operating environment and strategy
Wealth Management Americas

 

We measure the performance of our business against five key performance indicators: pre-tax profit growth, cost / income ratio, net new money growth, gross margin on invested assets and net margin on invested assets. We also evaluate our performance against our annual performance targets, which comprise a cost / income ratio of 75–85%, a net new money growth rate of 2–4% and, together with Wealth Management, a  pre-tax profit growth of 10–15%, as defined in the “Our strategy” section of this report.

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

 

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 7,140 financial advisors and over USD 1 trillion in invested assets, we are large enough to be meaningful, but focused enough to be nimble, which enables 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 access to wealth management research, our 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 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 2015, our strategy and focus led to continued retention of high-quality financial advisors and net new money growth. Building on this progress, we aim for continued growth in our business by developing our financial advisors’ focus toward 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 7,140 financial advisors as of 31 December 2015. 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 offers 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 collaborates with the Investment Bank and 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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Operating environment and strategy
Personal & Corporate Banking

 

Personal & Corporate Banking

As the leading personal and corporate banking business in Switzerland, our goal is to deliver comprehensive financial products and services to private, 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 private, 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 personal and corporate banking business generates stable profits which contribute substantially to the overall financial performance of the Group. We are among the leading players in the private and corporate loan market in Switzerland, with a well-collateralized lending portfolio of CHF 136 billion as of 31 December 2015, as shown in the “Loans, gross” chart below. This portfolio is managed conservatively, focusing on profitability and credit quality rather than market share.

Our personal and corporate banking business is a central element of UBS’s universal bank delivery model in Switzerland, supporting other business divisions by referring clients to them and assisting private 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 bank 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

Our strategy focuses on profitable and qualitative growth in Switzerland. In the personal banking business we continue to pursue our strategy of growing our business in high-quality loans moderately and selectively and to further leverage the potential from digitalization.

We aspire to be the bank of choice for private 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 4 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.

 

 

 

 

 

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We measure the performance of our business against four key performance indicators: pre-tax profit growth, cost / income ratio, net new business volume growth for personal banking and net interest margin. We also evaluate our performance against our annual performance targets, which comprise a cost / income ratio of 50–60%, a net new business volume growth rate of 1–4% for personal banking, and a net interest margin of 140–180 basis points, as defined in the “Our strategy” section of this report.

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

 

In the corporate and institutional business we focus on a qualitative growth strategy. Our key strategic focus is centered on continuous improvement of our profitability and capital efficiency. Through cross-divisional collaboration, we deliver our full value proposition to our clients, leveraging our capabilities across all business divisions.

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 more than 85% of the 1,000 largest Swiss corporations, one in three pension funds in Switzerland including 75 of the largest 100, and around 80% of banks domiciled in Switzerland. We strive to selectively expand our market share in Switzerland with a focus on 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. In 2015, for the fifth consecutive year, 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. Additionally, in 2015, UBS was rated as a leading asset servicing provider across several categories according to the R&M Survey, one of the industry’s most important client surveys, recognizing UBS as the “Best Custodian for Asset Managers”.

As the leading private 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. UBS is a front-runner in the Swiss market in terms of the certification of its client advisors and has set a standard with its state-accredited ISO certification program. Other banking groups in Switzerland have followed UBS in adopting the standard for their own certification programs.

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 private, corporate and institutional clients. Switzerland is the only country where we operate in private, 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 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.

 

 

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Operating environment and strategy
Personal & Corporate Banking

 

Products and services

Our private 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 and investment solutions to our corporate and institutional 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 2015, we implemented a number of product and service innovations. Examples include the launch of our innovative Corporate Financial Management for our small and medium-sized clients, the development of an electronic document presentation service for trade finance transactions, as well as the continued extension of our corporate banking capabilities targeted at subsidiaries and branches of Swiss clients in Singapore and Hong Kong. Additionally, we further extended our Multi-channel Center to optimally steer clients across digital and non-digital channels and to create a unique client experience. To best leverage our value proposition to clients, close collaboration with our investment bank and asset management businesses are key building blocks in our universal bank strategy. This enables us to offer capital market products, foreign exchange products, hedging strategies and trading capabilities, as well as to provide corporate finance advice through the Investment Bank and state-of-the-art fund solutions and portfolio management through Asset Management.

Our distribution model is based on a solid, balanced multi-channel strategy. Our expanding electronic and mobile banking offering is very well-regarded and we continue to see a steadily rising number of users and client interactions. The joint introduction of Paymit with SIX and Zürcher Kantonalbank has made UBS the leader in the Swiss mobile payment space. UBS Paymit achieved more than 150,000 downloads by the end of 2015. We will continue to build on our position as the leading multi-channel bank in Switzerland and as an innovator in digital services to improve client experience, capture market share and increase efficiency.

  

 

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Asset Management

Asset Management is a large-scale asset manager, with a presence in 22 countries. We offer investment capabilities and investment styles across all major traditional and alternative asset classes to institutions, wholesale intermediaries and wealth management clients around the world.

 

 

Business

We are a leading fund house in Europe, the largest mutual fund manager in Switzerland, the third-largest international asset manager in Asia, the second largest fund of hedge funds manager and one of the largest real estate investment managers in the world. We provide investment management products and services to a broad range of clients around the world, including: corporate and public pension plans; sovereign institutions such as governments and central banks; supranationals; endowments, municipalities and charities; insurance companies; wholesale intermediaries; financial institutions; and private clients.

Our global investment capabilities include equities, fixed income, currency, hedge funds, real estate, infrastructure and private equity, which can also be combined into customized solutions and multi-asset strategies. Complementing our investment offering, our fund services business provides administration services for traditional UBS and third-party funds.

We have a diverse client base located throughout the world. As of 31 December 2015, invested assets totaled CHF 650 billion and assets under administration were CHF 407 billion. Approximately 66% of invested assets were from institutional clients and the remainder was from wholesale clients, including UBS’s wealth management businesses and third parties.

 

 

 

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Operating environment and strategy
Asset Management

 

Approximately 30% of invested assets were managed in passive strategies, 9% were money market assets and the remaining 61% were managed in active, non-money market strategies.

Strategy and clients

We aspire to provide our clients with the best ideas and superior investment performance by drawing on the breadth and depth of our insights and capabilities to deliver high-quality solutions and services.

Our aim is to drive profitable and sustainable growth across our client segments. For third-party clients, 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 coverage and collaboration with UBS’s wealth management businesses to continue to deliver products that meet their clients’ needs.

Our global business model has proven resilient to challenging market conditions, and provides a solid foundation to capture growth opportunities despite shifting market dynamics.

In 2015 we sold our Alternative Fund Services (AFS) business to Mitsubishi UFJ Financial Group, as part of our strategy to focus on delivering best-in-class investment management capabilities to our clients.

We intend to build on our areas of strength in traditional, alternative and passive investments. In alternatives, we will continue to expand our established positions in real estate and hedge funds, leveraging our expertise and best practice across all investment areas. To further develop our solutions offering to meet client needs across alternative and traditional asset classes, we have brought together our customized client solutions capabilities. In passive investments, we continue to develop our well-established capabilities, including indexed strategies and exchange-traded funds (ETFs).

To support the successful execution of our strategy, we are investing in our operating platform and in attracting, developing and retaining world-class professionals.

We measure the performance of our business against five key performance indicators: pre-tax profit growth, cost / income ratio, net new money growth, gross margin on invested assets and net margin on invested assets. We also evaluate our performance against our annual performance targets, which include an annual pre-tax profit of CHF 1 billion in the medium term, a cost / income ratio of 60–70%, and 3–5% net new money growth, excluding money market flows, as defined in the “Our strategy” section of this report.

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

 

The asset management industry has seen continued asset inflows. The long-term outlook is positive, with three main drivers: (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 funding; and (iii) emerging regulation is creating opportunities for asset managers that have the scale to deliver new value-added services.

Organizational structure

Following the sale of our AFS business, at the end of 2015 we employed 2,277 personnel in 22 countries, and have our principal offices in Chicago, Frankfurt, Hartford, Hong Kong, London, New York, Singapore, Sydney, Tokyo and Zurich.

Effective 1 January 2016, our structure is organized around the following investment areas and functions:

   Investment and business areas: Equities, Multi-Asset & O’Connor; Fixed Income; Global Real Estate; Infrastructure and Private Equity; Solutions; and Fund Services. 

   Distribution: global and regional teams responsible for client servicing and coverage;

   Products: global and regional teams responsible for product development and lifecycle management

   Support functions, including the Chief Operating Officer area and shared services provided by Corporate Center.

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.

 

 

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Products and services

We offer clients a wide range of investment products and services in different asset class capabilities, which can be delivered through segregated, pooled or advisory mandates as well as registered investment funds in a variety of jurisdictions. Our active traditional and alternative capabilities are:

   Equities – investment strategies with varying risk and return objectives, including global, region-focused and thematic strategies, as well as high alpha, growth and quantitative styles.

   Multi-Asset – global and regional asset allocation and currency investment strategies across the risk / return spectrum.

   O’Connor – a global, relative value-focused, single-manager hedge fund platform providing investors with absolute and risk-adjusted returns.

   Fixed Income – global, regional and local market-based single-sector, multi-sector and extended sector strategies such as high yield and emerging market debt. The team also manages unconstrained fixed income and currency strategies.

   Global Real Estate – global and regional strategies across the major real estate sectors, mainly focused on core and value-added strategies, and also including other strategies across the risk / return spectrum.

   Infrastructure and Private Equity – direct infrastructure investment in core infrastructure assets globally, and multi-manager infrastructure and private equity strategies in broadly diversified fund of funds portfolios.

 

Our Solutions business offers:

   Multi-manager hedge fund solutions and advisory services, providing exposure to hedge fund investments with tailored risk and return profiles.

   Customized multi-asset solutions and advisory services, including risk-managed and structured strategies, manager selection, pension risk management, risk advisory and global tactical asset allocation.

 

Our passive capabilities include indexed, alternative beta and rules-based strategies across 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.

  

 

53 


Operating environment and strategy
Investment Bank

 

Investment Bank

The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovative solutions, execution and comprehensive access to international capital markets. We offer advisory services and provide in-depth 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.

 

Business

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

Corporate Client Solutions

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

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 includes 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 and clients

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 for our wealth management, personal & corporate banking and asset management businesses, 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 includes our advisory and capital markets businesses and financing solutions, which are geared toward industries and regions 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, we are one of the leading equities franchises in the world. The 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. In line with the equities and foreign exchange businesses, the rates and credit businesses serve our capital markets business through an intermediation model.

 

 

 

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To ensure the ongoing successful execution of our strategy, we continue to invest in technology and selectively recruit talent in key areas across the business. Furthermore, we remain focused on our ongoing cost reduction programs and on strengthening our operational risk framework. In 2015, we continued to further optimize 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 continue to take 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 considering the support and contribution they provide to each other.

We assess the performance of our business through five key performance indicators: pre-tax profit growth, cost / income ratio, return on attributed equity (RoaE), gross return on assets and average value-at-risk (VaR). We also evaluate our performance against our performance targets, which comprise a cost / income ratio of 70–80% and an annual pre-tax RoaE of greater than 15%, as defined in the “Our strategy” section of this report. In addition, we have short- to medium-term expectations for fully applied risk-weighted assets of CHF 85 billion, and a fully applied leverage ratio denominator of CHF 325 billion.

®       Refer to the “Our strategy” section of this report for more information on our targets and expectations

Organizational structure

At the end of 2015, we employed 5,243 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 and 2015 for UBS Limited.

Competitors

Competing firms are active in many of the businesses and markets in which we participate, but our Investment Bank’s strategy is unique. The main competitors of our equities, foreign exchange and corporate advisory businesses 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, financial sponsor clients and clients of 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, Corporate Client Solutions 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:

   Advisory provides bespoke solutions for our clients’ most complex strategic challenges. This includes domestic and cross-border mergers and acquisitions, as well as spin-offs, exchange offers, leveraged buyouts, joint ventures, exclusive sales, restructurings, takeover defense, corporate broking and other advisory services.

   Equity capital markets offers 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 private placements, equity-linked transactions and other strategic equities solutions.

   Debt capital markets works closely with 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 offers 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 solutions serves 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 management includes corporate lending and associated hedging activities.

 

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Operating environment and strategy
Investment Bank

 

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 one of the leading participants 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:

   Cash provides 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.

   Derivatives provides 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 services provides 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.


Foreign exchange, rates and credit

Foreign exchange, rates and credit consists of our foreign exchange franchise, which ranks in the top tier globally, 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 one of the leading foreign exchange market-makers in the professional spot, forwards and options markets. We provide clients worldwide with first-class execution facilities (voice, electronic, algorithmic) coupled with our robust 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 a 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.

Research

UBS Securities Research offers its clients key insights on multiple securities in major financial markets around the globe.

Designed to be closely aligned with the needs of its clients, UBS Securities Research’s approach to sell-side financial research starts with identifying the issues that drive market prices. In our flagship 'Q-series' reports, which are based on questions received from our clients, UBS Securities Research analysts, economists and strategists address issues with a coordinated perspective across regions, sectors, and asset classes.

With insightful evidence being a continued need for our clients, we have established UBS Evidence Lab, which is now the sell-side's largest team of experienced primary research experts. Working in collaboration with UBS Securities Research analysts, UBS Evidence Lab helps uncover new evidence on key issues that inform clients on investment decisions, facilitated by its cutting-edge toolkit of techniques.

  

 

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Corporate Center

Corporate Center is comprised of Services, Group Asset and Liability Management (Group ALM) and Non-core and Legacy Portfolio. Services includes the Group’s control functions and provides all logistics and support services to our businesses. Group ALM is responsible for centrally managing the Group’s liquidity and funding position, as well as providing other balance sheet and capital management services to the Group. 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.

 

Strategic priorities and initiatives

Achieving greater effectiveness and efficiency is the primary focus of our strategy across the whole of Corporate Center. At year-end 2015, we achieved CHF 1.1 billion of net cost reductions compared with full-year 2013 and we remain fully committed to achieving our net cost reduction target of CHF 2.1 billion by year-end 2017. We continue to focus our efforts on the strategic levers that can be categorized into workforce and footprint, organization and process optimization, and technology.

Today, 27% of employees and contractors are in offshore or nearshore locations compared with 18% two years ago. In addition to lower future personnel expenses, this allows us to tap growing talent pools and realize efficiencies by reducing our footprint in high-cost real estate locations.

Through organization and process optimization, we seek to increase effectiveness and efficiency by leveraging common capabilities and creating centralized functions. Within Group Technology, we continue to modernize our infrastructure and simplify our portfolio of applications.

Group Asset and Liability Management continues to focus on optimizing our asset and liability positions across the Group. The key drivers of these activities are the management of our structural risks, including foreign exchange sensitivity, counterparty credit risk and interest rate risk in the banking book; the ongoing evolution of the global regulatory landscape; and changes to the financial resource requirements of our business divisions.

Non-core and Legacy Portfolio continues a wind-down strategy that balances the further disciplined reduction of both our risk-weighted assets and our leverage ratio denominator, weighed against the ultimate benefit for shareholders.

®       Refer to the “Our strategy” section of this report for more information

Corporate Center – Services

At the end of 2015, 23,470 personnel were employed in Corporate Center – Services. Corporate Center – Services allocates the majority of its operating expenses associated with shared services functions to the business divisions and other Corporate Center units for which the respective services are performed based on service consumption, 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. Additionally, operating expense associated with control functions, including Group Finance, Group Risk and Group General Counsel, is allocated to the business divisions and other Corporate Center units based on utilization.

Each year, as part of the annual business planning cycle, Corporate Center – Services agrees with the business divisions, Non-core and Legacy Portfolio as well as Group ALM 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 service performed. However, as actual costs incurred may differ from those expected, Corporate Center – Services may recognize significant under- or over-allocations depending on various factors, including Corporate Center – Services' ability to manage the delivery of its services and achieve cost savings.

Operating expenses remaining in Corporate Center – Services after allocations relate mainly to Group governance functions and other corporate activities, certain strategic and regulatory projects and certain retained restructuring expenses.

 

 

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Operating environment and strategy
Corporate Center

 

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 also responsible for management and control of the Group’s tax affairs and for treasury and capital management, including management and control of our regulatory capital ratios, as well as funding and liquidity risk with independent oversight from the Group Chief Risk Officer (Group CRO). 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 Group Technology, Group Operations and Group Corporate Services. The Group COO is responsible for providing high-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 Group in enabling change and transition by 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 (Group CRO) 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 BoD, the Group CRO is responsible for the implementation of appropriate independent control frameworks for the Group’s credit, market, treasury, country, compliance and operational risks. 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 has approval authority for transactions, positions, exposures, portfolio limits and credit risk provisions / allowances in accordance with the risk control authorities delegated to this role. The Group CRO has management responsibility over the divisional, regional and firm-wide risk control functions, and monitors and challenges the bank’s risk-taking activities. Our Group Security Services function is also 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. In addition, the Group GC is responsible 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. The Group GC is also responsible for reporting legal risks and material litigation, as well as managing internal, special and regulatory investigations.

Corporate Center – Group ALM

Group ALM manages the structural risks of our balance sheet including pricing and managing the Group’s structural interest rate and currency risk, funding and liquidity risk, currency basis and interest rate basis risk and collateral risk. Group ALM also seeks to optimize the Group’s financial performance by better matching assets and liabilities within the context of the Group’s liquidity, funding and capital targets. Group ALM serves all business divisions and other Corporate Center units, and its risk management is fully integrated into the Group’s risk governance framework.

The results of certain hedging activities, including any non-economic volatility caused by the applicable accounting treatment, are retained by Group ALM.

Revenues generated by the Group ALM’s banking book interest rate risk management activities performed on behalf of Wealth Management and Personal & Corporate Banking are fully allocated to the originating business divisions. Funding and liquidity costs are allocated to the business divisions and other Corporate Center units based on their consumption, which is driven by various internal funding and liquidity models. The Group seeks to maintain liquidity and funding levels at, or above, the minimum regulatory requirements.

Corporate Center – Non-core and Legacy Portfolio

Corporate Center – Non-core and Legacy Portfolio is comprised of the positions from businesses that were part of the Investment Bank prior to its restructuring, and is overseen 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 positions are managed and exited over time with the objective of maximizing shareholder value, in line with our strategic plan.

  

 

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Risk factors

EDTF | Certain risks, including those described below, may impact our ability to execute our strategy or otherwise 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. In addition, these risks could 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. ▲ 

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 | We prepare our consolidated financial statements in Swiss francs. However, a substantial portion of our assets, liabilities, invested assets, revenues and expenses, equity of foreign operations and risk-weighted assets (RWA) are denominated in other currencies, particularly the US dollar, the euro and the British pound. Accordingly, changes in foreign exchange rates 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 common equity tier 1 (CET1) capital. These effects may adversely affect our income, balance sheet, capital, leverage and liquidity ratios.

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. Moreover, a significant portion of the equity of our foreign operations is denominated in US dollars, euros, British pounds and other foreign currencies. Therefore, the appreciation of the Swiss franc against other currencies generally has an adverse effect on our earnings and equity, including on deferred tax assets, in the absence of any mitigating actions.

Similarly, a significant portion of our capital and RWA is denominated in US dollars, euros, British pounds and other foreign currencies. In order to hedge the CET1 capital ratio, CET1 capital needs to have foreign currency exposure, leading to currency sensitivity of CET1 capital. As a consequence, it is not possible to simultaneously fully hedge the capital and the capital ratio. As the proportion of RWA denominated in foreign currencies outweighs the capital in these currencies, a significant appreciation of the Swiss franc against these currencies could benefit our capital ratios, while a significant depreciation of the Swiss franc against these currencies could adversely affect our Basel III capital ratios.

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. 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 exchange 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 also adopted a negative-interest-rate policy.

Swiss counterparties are, in general, highly reliant on the domestic economy and the economies to which they export, in particular the EU and the US. In addition, the EUR / CHF exchange rate is an important risk factor for Swiss corporates. The stronger Swiss franc may have a negative effect on the Swiss economy, particularly on exporters, which could adversely affect some of the counterparties within our domestic lending portfolio and lead to an increase in the level of credit loss expenses in future periods from the low levels recently observed.

Moreover, our equity and capital are also 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.

 

 

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Operating environment and strategy
Risk factors

 

A continuing low or negative interest rate environment would likely have an adverse effect on the repricing of UBS's assets and liabilities, and may significantly impact the net interest income generated from our wealth management businesses and Personal & Corporate Banking. The low or negative interest rate environment may affect customer behavior and hence the overall balance sheet structure. It may also affect the performance of our wealth management businesses, particularly given the associated cost of maintaining the high-quality liquid assets (HQLA) required to cover regulatory outflow assumptions embedded in the liquidity coverage ratio (LCR), which could be exacerbated by a reduction of the aforementioned SNB deposit exemption threshold for banks. Mitigating actions that we have taken, or may take in the future, to counteract these effects, such as the introduction of selective deposit fees or minimum lending rates, have resulted and could further result in the loss of customer deposits, a key source of our funding, net new money outflows and / or a declining market share in our domestic lending. ▲ 

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 subsequent 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 we currently use as required by the Swiss Financial Market Supervisory Authority (FINMA) under the Basel III framework;

   prudential adjustments to valuation of assets at the discretion of regulators;

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

   new or significantly enhanced liquidity and stable funding 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 or entity 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 significant 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 the dates of their effectiveness. In addition, the cumulative effect of the changes in laws and regulations in Switzerland and the other jurisdictions in which we operate remains uncertain. The implementation of such measures and further, more restrictive changes may materially affect our business and our ability to execute our strategic plans, impose additional implementation, compliance and other costs on us, or require us to increase prices for, or cease offering of, certain services and products.

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

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

 

 

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Regulatory and legislative changes in Switzerland

EDTF | Swiss regulatory changes with regards to capital, liquidity and other areas have generally proceeded more quickly than those in other major jurisdictions. 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.

Capital and TBTF regulationA 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 2015, the Swiss Federal Council published proposed revisions to the Swiss TBTF framework that would significantly increase our capital requirements based on RWA and impose a significantly higher leverage ratio requirement. In addition, the proposed revisions to the TBTF ordinance would impose a total loss absorbing capital requirement. Moreover, Swiss governmental authorities have, and have exercised, the authority to impose an additional countercyclical buffer capital requirement and have further required banks using the internal ratings-based (IRB) approach to use a bank-specific multiplier when calculating RWA for Swiss residential mortgages, income-producing residential and commercial real estate (IPRE) and credit exposures to corporates for the Investment Bank. In addition, UBS has 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 13.3 billion to our RWA as of 31 December 2015. There is no assurance that we will not be subject to increases in capital requirements in the future, from the imposition of further add-ons in the calculation of RWA or other components of minimum capital requirements.

Switzerland has implemented new Basel Committee on Banking Supervision (BCBS) requirements for the mandatory Pillar 3 disclosures of RWA based on a harmonized approach, and we expect it will implement, when finalized, the BCBS revisions relating to (i) modifications of the internal ratings-based approach for credit risk, (ii) the fundamental review of the trading book, including a standardized approach, for market risk, (iii) the standardized approach for credit risk, (iv) the introduction of a floor based on the standardized approach, and (v) the calculation of operational risks. The revisions to the BCBS standards are likely to increase our credit risk and market risk RWA and, based on initial analysis, also our operational risk RWA. Implementation of these revisions would result in significant implementation costs to us. In addition, a floor based on a standardized approach would likely be less risk sensitive and may result in significantly higher RWA.

Liquidity and funding: As a Swiss SRB, we are required to maintain an LCR of high-quality liquid assets to estimated stressed short-term net cash outflows, and we will also be required to maintain a net stable funding ratio (NSFR). Both of these requirements 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.

These requirements, together with liquidity and funding requirements imposed by other jurisdictions in which we operate, oblige us to maintain substantially higher levels of overall liquidity than was previously the case, or limit our efforts to optimize interest expense. Increased capital, funding and 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 resolvabilityThe Swiss banking act and capital adequacy ordinances provide FINMA with significant powers to intervene in order to prevent a failure of, or resolve, a failing financial institution. FINMA has considerable discretion 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. FINMA could also require us, directly or indirectly, for example, to alter our legal structure, including by separating 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 capital instruments and liabilities of UBS Group AG, UBS AG and UBS Switzerland AG in connection with a resolution. FINMA has broad powers and significant discretion in the exercise of its powers in connection with a resolution proceeding. Certain classes of creditors, such as Swiss deposits, are protected. As a result, holders of obligations of an entity subject to a Swiss restructuring proceeding may have their obligations extinguished or converted to equity even though obligations ranking on a parity with or junior to such obligations are not restructured.

Swiss TBTF requirements require Swiss SRBs, including UBS, to put in place viable emergency plans to preserve the operation of systemically important functions in the event of a failure of the institution, to the extent that such activities are not sufficiently separated in advance. The current Swiss TBTF law provides for the possibility of a limited reduction of capital requirements for Swiss SRBs that adopt measures to reduce resolvability risk beyond what is legally required. Such actions include changes to 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. The aforementioned proposal for a revised TBTF ordinance contemplates a limited reduction of the proposed gone concern requirement based on improvements to resolvability. However, there is no certainty with respect to timing or size of a potential rebate.

 

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Operating environment and strategy
Risk factors

 

Movement of businesses to subsidiaries, which we refer to in this section as subsidiarization, will require significant time and resources to implement. As also discussed below, subsidiarization in Switzerland and elsewhere may create operational, capital, liquidity, funding and tax inefficiencies and may increase our own and our counterparties' credit risk.

There can be no assurance that the execution of the changes we have undertaken, planned or may implement in the future, will result in a material reduction in capital or gone concern requirements or that these changes will satisfy existing or future requirements for resolvability or mandatory structural change in banking organizations.

Market regulation: In June 2015, the Swiss Parliament adopted new regulation of the financial market infrastructure in Switzerland which came into effect on 1 January 2016, subject to phase-in provisions, and mandates, among other things, the clearing of OTC derivatives with a central counterparty. These laws may 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. ▲ 

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: Regulatory and legislative changes may subject us to requirements to move activities from UBS AG branches into subsidiaries. Such subsidiarization can create operational, capital, liquidity, funding and tax inefficiencies, increase our aggregate credit exposure to counterparties as they transact with multiple entities within our Group, expose our businesses to local capital, liquidity and funding 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 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 very substantially increase 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.

We are subject to the US "Volcker Rule" under the Dodd-Frank Act and may become subject to other regulations substantively limiting the types of activities in which we may engage. We have incurred substantial costs to implement a compliance and monitoring framework to comply with the Volcker Rule and have been required to modify our business activities both inside and outside of the US to conform to its activity limitations. The Volcker Rule may also 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. This commitment is being implemented through Dodd-Frank in the US and corresponding legislation in the EU, Switzerland – where the new regulation came into effect on 1 January 2016 – 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. These market changes are likely to reduce the revenue potential of certain lines of business for market participants generally, and we may be adversely affected.

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 security-based swap dealer with the SEC, when its registration is required. Some of these regulations, including those relating to swap data reporting, recordkeeping, compliance and supervision, apply to UBS AG globally. The changes in OTC derivative regulation in the US, the EU, Switzerland and elsewhere continue to present a substantial implementation burden, and in some cases US rules will likely duplicate or conflict with legal requirements applicable to us elsewhere, including in Switzerland, and may place us at a competitive disadvantage to firms that are not required to register as swap dealers in the US with the SEC or CFTC.

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 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. A negative determination in certain jurisdictions could limit our access to the market in those jurisdictions and 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.▲ 

 

 

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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. If a recovery or resolution plan is determined by the relevant authority to be inadequate or not credible, relevant regulation may authorize the authority to place limitations on the scope or size of our business in that jurisdiction, oblige us to hold higher amounts of capital or liquidity, or to change our legal structure or business in order to remove the relevant impediments to resolution. 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 affect 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.

Regulatory requirements for banks to maintain minimum TLAC, such as those contemplated under the proposed revised Swiss TBTF ordinance, or requirements to maintain TLAC at subsidiaries, e.g., those proposed by the Federal Reserve Board for US IHC, 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, will likely increase our cost of funding and could potentially increase the total amount of funding required absent other changes in our business. ▲ 

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 will likely continue to be costly to implement. They could also have a negative effect 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. ▲ 

If we are unable to maintain our capital strength, this may adversely affect our ability to execute our strategy, client franchise and competitive position

EDTF | Our capital position, as measured by our risk-weighted capital and leverage ratios under Swiss SRB Basel III requirements, is determined by our RWA, our leverage ratio denominator and our eligible capital. RWA, leverage ratio denominator and eligible capital may fluctuate based on a number of factors.

RWA are credit, non-counterparty related, market and operational risk positions, measured and risk-weighted according to regulatory criteria. They are driven by our business activities and by changes in the risk profile of our exposures, as well as the effect of currency and methodology changes and regulatory requirements. For instance, substantial market volatility, a widening of credit spreads, which is 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 experienced losses recognized within net profit or 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. Refer to "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" above for more information on the effect on capital of changes to pension plan defined benefit obligations. 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. We have significantly reduced our market risk and credit risk RWA as we have executed our strategy, however, operational risk events, particularly those arising from litigation, regulatory and similar matters have resulted in significant increases in operational risk RWA. We have agreed on a supplemental analysis with FINMA that is used to calculate an incremental operational risk capital charge to be held for litigation, regulatory and similar matters and other contingent liabilities which as of 31 December 2015 was CHF 13.3 billion. There can be no assurance that UBS will be successful in settling these matters at existing or future provision levels, and reducing or eliminating the incremental operational risk component of RWA.

 

 

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Operating environment and strategy
Risk factors

 

The required levels and calculation of our regulatory capital and the calculation of our RWA are also subject, in Switzerland or in other jurisdictions in which we operate, to changes in regulatory requirements or their interpretation, as well as the exercise of regulatory discretion. Changes in the calculation of RWA, or, as already discussed above, the imposition of additional supplemental RWA charges or multipliers applied to certain exposures, or the imposition of a RWA floor based on the standardized approach or other methodology changes 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 counteract to some degree the benefit of our actions.

In addition to the risk-based capital requirements, we are subject to a minimum leverage ratio requirement for Swiss SRBs and expect to become subject to significantly higher leverage ratio-based capital and TLAC requirements under the proposed revisions to the Swiss TBTF framework. The leverage ratio operates separately from the risk-based capital requirements. It 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, and it may constrain our business activities even if we satisfy other risk-based capital requirements. Increases in the minimum leverage ratio or the imposition of other LRD-based requirements, such as in the current Swiss proposal, may adversely affect the profitability of some of our businesses, make these businesses less competitive and adversely affect our profitability. ▲ 

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

We may not be successful in completing our announced strategic plans

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. As part of our strategy, we have also announced annual performance expectations and targets for the Group, the business divisions and Corporate Center. In the third quarter of 2015 we amended some of these for 2016 and future years, in light of actual and forecasted changes in macroeconomic conditions, the announcement of the new Swiss TBTF proposal and the continuing costs of meeting new regulatory requirements. A risk remains that we may need to further amend our targets and expectations, that we may not succeed in executing the rest of our plans, that our plans may be delayed, that market events or other factors may adversely affect the implementation of our plans or that their effects may differ from those intended.

In particular, we have substantially reduced the RWA and LRD usage of our Non-core and Legacy Portfolio positions, but there is no assurance that we will continue to be able to exit the remaining positions 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 LRD usage associated with these exposures.

As part of our strategy, we also have a program underway to achieve significant incremental cost reductions. Delivering on our cost reduction initiatives is one of our key priorities, but a number of factors could negatively impact our plans. Higher permanent regulatory costs and business demand than we had originally anticipated have partly offset our gross cost reductions, and although we currently expect to achieve the net cost reduction that we had targeted for 2015 by around the middle of 2016, we could be further challenged in the execution of this and our further cost reduction plans. Moreover, the success of our strategy and our ability to reach some of our announced targets 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 our work force as a result of outsourcing, nearshoring or offshoring or staff reductions may introduce new operational risks that, if not effectively addressed could affect our ability to recognize the desired cost and other benefits from such changes or could result in operational losses. Changes in workforce location or reductions in workforce can lead to expenses recognized in the income statement well in advance of the cost savings intended to be achieved through such workforce strategy. For example, under International Financial Reporting Standards (IFRS) we are required to recognize provisions for real estate lease contracts when the unavoidable costs of meeting the obligations under the contracts exceed the benefits expected to be received under them. Additionally, closure or disposal of operations may result in foreign currency translation losses (or gains) previously recorded in other comprehensive income being reclassified to the income statement.

As we implement our effectiveness and efficiency programs we may also 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. ▲ 

 

 

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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 and inquiries, including matters related to our cross border business and licensing, trading practices, securities offerings including residential mortgage-backed securities, sales practices and suitability, accounting matters, anti-money laundering, sanctions and anti-corruption laws and investment management practices. 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 (NPA) with the US Department of Justice (DOJ) and UBS Securities Japan Co. Ltd. also pleaded guilty to one count of wire fraud relating to the manipulation of certain benchmark interest rates. In May 2015, the DOJ exercised its discretion to terminate the NPA based on its determination that we had committed a US crime in relation to foreign exchange matters. As a consequence, UBS AG has pleaded guilty to one count of wire fraud for conduct in the LIBOR matter, and has agreed to pay a USD 203 million fine and accept a three-year term of probation.

Our settlements with governmental authorities in connection with foreign exchange and 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 we were required to enter guilty pleas, 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 for us, the authorities considered the fact that it had in the recent past been determined that we had engaged in serious misconduct in several other matters.

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 consolidated financial statements included in this report 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. 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, 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.

Ever since our material losses arising from the 2007 to 2009 financial crisis, 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 those losses as well as 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. We are determined to address the issues that have arisen in these and other matters in a thorough and constructive manner. We are in active dialog 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. As a result of this history, our level of risk with respect to regulatory enforcement may be greater than that of some of our peers. ▲ 

®     Refer to “Note 22 Provisions and contingent liabilities” in the "Consolidated financial statements" of this report for more information

 

 

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Operating environment and strategy
Risk factors

 

Operational risks affect our business

EDTF | Our businesses depend 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. We also rely on access to, and on the functioning of, systems maintained by third parties, including clearing systems, exchanges, information processors and central counterparties. Failure of our systems or third party systems could have an adverse effect on us. 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.

We devote significant resources to maintain systems and processes that are designed to protect our systems, networks and software and to protect the confidentiality of information belonging to our customers and us. However, we and other financial services firms have been subject to breaches of security and to cyber and other forms of attack, some of which are sophisticated and targeted attacks intended to gain access to confidential information or systems, disrupt service or destroy data. It is possible that we may not be able to anticipate, detect or recognize threats to our systems or data or that our preventative measures will not be effective to prevent an attack or a security breach. A successful breach or circumvention of security of our systems or data could have significant negative consequences for us, including disruption of our operations, misappropriation of confidential information concerning us or our customers, damage to our systems, financial losses for us or customers, violations of data privacy and similar laws, litigation exposure and damage to our reputation.

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. We are also subject to laws and regulations related to corrupt and illegal payments to government officials by others, such as the US Foreign Corrupt Practices Act and the UK Bribery Act. We have implemented policies, procedures and internal controls that are designed to comply with such laws and regulations. Failure to maintain and implement adequate programs to combat money laundering, terrorist financing or corruption, or any failure of our programs in these areas, 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.

Our wealth and asset management businesses operate in an environment of increasing regulatory scrutiny and changing standards. Legislation and regulation have changed and are likely to continue to change fiduciary and other standards of care for asset managers and advisors and have increased focus on mitigating or eliminating conflicts of interest between a manager or advisor and the client. These changes have presented, 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, more stringent 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 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. ▲ 

 

 

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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. ▲ 

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

EDTF | Our businesses are materially affected by market and economic conditions. Adverse changes in interest rates, credit spreads, securities' prices, market volatility and liquidity, foreign exchange levels, commodity prices, and other market fluctuations, as well as changes in investor sentiment, can affect our earnings and ultimately our financial and capital positions.

     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, such as the ongoing European sovereign debt concerns or concerns around the potential exit from the EU by the UK or a significant slowing of economic growth in China 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. Macroeconomic and political developments can have unpredictable and destabilizing effects, as reflected in our Global Recession scenario, which we implemented in 2015 as the binding scenario in our combined stress-testing framework, and which assumes a hard landing in China leading to severe contagion of Asian and emerging markets economies and at the same time multiple debt restructurings in Europe, related direct losses for European banks and fear of a eurozone breakup severely affecting developed markets such as Switzerland, the UK and the US.

We have material exposures to a number of markets, both as a wealth manager and as an investment bank. Moreover, our strategic plans depend more heavily on our ability to generate growth and revenue in emerging markets, including China, causing us to be more exposed to the risks associated with them. Toward the end of 2015, uncertainties regarding macroeconomic developments in China, and emerging markets more broadly, as well as weakening of commodity prices, particularly oil, have given rise to increased market volatility, which could well persist throughout 2016.

A reduction in business and client activity and market volumes, as significant market volatility can determine and, as we have recently experienced, affects transaction fees, commissions and margins, particularly in our wealth management businesses and our Investment Bank. 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. On the other side, reduced market liquidity or volatility limits trading and arbitrage opportunities and impedes our ability to manage risks, impacting both trading income and performance-based fees. Additionally, deteriorating market conditions could cause a decline in the value of assets that we own and account for as investments or trading positions.

The regional balance of our business mix also exposes us to risk. Our Investment Bank equities business, for example, is more heavily weighted to Europe and Asia, and therein our derivatives business is more heavily weighted to structured products for wealth management clients, in particular with European and Asian underlyings. Turbulence in these markets can therefore affect us more than other financial service providers.

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. Moreover, negative interest rates announced by central banks in Switzerland or elsewhere may also affect client behavior. Also, changes to our deposit and lending pricing and structure that we have made and may make to respond to negative interest rates and client behavior may cause deposit outflows (as happened with Wealth Management’s balance sheet and capital optimization program in 2015), reduce business volumes or otherwise adversely affect our businesses, particularly given the associated cost of maintaining the high-quality liquid assets required to cover regulatory outflow assumptions embedded in the LCR.

 

 

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Operating environment and strategy
Risk factors

 

Credit risk is an integral part of many of our activities, including lending, underwriting and derivatives activities. Worsening economic conditions and adverse market developments could lead to impairments and defaults on credit exposures and on our trading and investment positions. Losses may be exacerbated by declines in the value of collateral we hold. We are exposed to risk in, among others, our prime brokerage, reverse repurchase and Lombard lending activities, as the value or liquidity of the assets against which we provide financing may decline rapidly.

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

We are a member of numerous securities and derivative exchanges and clearing houses. In connection with some of those memberships, we may be required to pay a share of the financial obligations of another member who defaults or we may be otherwise exposed to additional financial obligations.

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

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 and capital position. There are related risks that, as a result of the factors listed above, the carrying value of goodwill of a business unit might suffer impairment and deferred tax asset levels may need to be adjusted. ▲ 

We may not be successful in implementing changes in our wealth management businesses to meet changing market, regulatory and other conditions

EDTF | We are exposed to possible outflows of client assets in our asset-gathering businesses and to changes affecting the profitability of our wealth management businesses 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. However, long-term changes affecting the cross-border private banking business model will continue to affect client flows in the wealth management businesses 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, including emerging markets, is the heightened focus of fiscal authorities on cross-border investments. For the last several years, UBS has experienced net withdrawals in its Swiss booking center from clients domiciled elsewhere in Europe, in many cases related to the negotiation of tax treaties between Switzerland and other countries. Changes in local tax laws or regulations and their enforcement, the implementation of cross-border tax information exchange regimes, including international agreements for automatic tax information exchange, national tax amnesty or enforcement programs or similar actions, in Europe or elsewhere in the world, may affect the ability or the willingness of our clients to do business with us, and result in additional, and possibly material, cross-border outflows, or affect the viability of our strategies and business model.

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 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 will continue our efforts to adjust to client trends, regulatory and market dynamics as necessary, in an effort to overcome the effects of changes in the business environment on our profitability, balance sheet and capital positions, but there is no assurance that we will be able to counteract those effects. Moreover, initiatives we may carry out for this purpose may cause net new money outflows and reductions in client deposits, as happened with Wealth Management's balance sheet and capital optimization program in 2015. 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 is no assurance that we will be successful in our efforts to offset the adverse impact of these or similar trends and developments. ▲ 

®     Refer to “Wealth Management” in the "Financial and operating performance" section of this report for more information

 

 

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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 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 for members of the Group Executive Board, increased average deferral periods for stock awards, and expanded forfeiture, and to a more limited extent claw-back, provisions for certain awards linked to business performance.

In the EU we are subject to legislation that caps the amount of variable compensation in proportion to the amount of fixed compensation for employees in key risk-taker roles, and whose application could potentially extend to a wider group of employees, on the basis of the revised guidelines on sound remuneration policies published by the European Banking Authority in December 2015.

Moreover, from the 2015 annual general meeting, Swiss law requires UBS to submit to the binding vote of the shareholders the aggregate compensation of each of the board of directors and the executive board on an annual basis.

These requirements, 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 on 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. ▲ 

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 | Like other financial market participants, we 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 Swiss TBTF standards, we continue to hold substantial legacy risk positions, primarily in Corporate Center - 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.

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 the appreciation of the Swiss franc, the adoption of negative interest rates by the Swiss National Bank or other central banks or any return of crisis conditions within the eurozone, or the EU, and the potential implications of the 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. ▲ 

We depend on our risk management and control processes to avoid or limit potential losses in our businesses

EDTF | Controlled risk-taking is a major part of the business of a financial services firm. 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.

 

 

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Operating environment and strategy
Risk factors

 

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;

   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 expenses 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. ▲ 


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

EDTF | If available, the 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 valuation 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. ▲ 

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.

 

 

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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 and funding 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 the 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. ▲ 

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 International Accounting Standards Board (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. For example, IFRS 9, when fully adopted, will require us to record loans at inception net of expected losses instead of recording credit losses on an incurred loss basis. ▲ 


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 2015 indicated that our respective goodwill balances are 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 the goodwill in any one or more of our businesses may become impaired in the future, giving rise to losses in the income statement. ▲ 

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

EDTF | The deferred tax assets (DTAs) that we have recognized on our balance sheet as of 31 December 2015 based on prior years' tax losses reflect the probable recoverable level based on future 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 DTAs may need to be adjusted in the future. These adjustments may include write-downs of DTAs 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 DTAs can have a very significant effect on our reported results. If our performance is expected to improve, particularly in the US, or the UK, we could potentially recognize additional DTAs 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 DTAs are recognized and to increase our effective tax rate in future years. 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 DTAs 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.

 

 

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Operating environment and strategy
Risk factors

 

For 2016, notwithstanding the effects of any potential reassessment of the level of deferred tax assets, we expect the effective tax rate to be in the range of 22% to 25%. Consistent with past practice, we expect to revalue our deferred tax assets in the second half of 2016 based on a reassessment of future profitability taking into account updated business plan forecasts.  The full-year effective tax rate could change significantly on the basis of this reassessment. It could also change if aggregate tax expenses in respect of profits from branches and subsidiaries without loss coverage differ from what is expected. Part of the aforementioned reassessment of future profitability includes consideration of a possible further extension of the forecast period used for US deferred tax asset recognition purposes to eight years from the seven years used as of 31 December 2015.  The determination of whether to extend the forecast period by an additional year will be made on the basis of all relevant facts and circumstances existing at that time. Inasmuch as the ex-ante parameters we have established for further extending the forecast period are more challenging to satisfy than in prior years, it is therefore less probable that we will add an eighth year to the forecast period in 2016 for purposes of revaluing our US deferred tax assets.

UBS’s 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 DTAs.

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 UBS to materially differ from the amount accrued.

Moreover, we have undertaken, or are 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 relate to 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 DTAs associated with such tax losses could be written down through the income statement. ▲ 


As UBS Group AG is a holding company, its operating results, financial condition and ability to pay dividends and other distributions and / or to pay its obligations in the future depend on funding, dividends and other distributions received directly or indirectly from its subsidiaries, which may be subject to restrictions

EDTF | UBS Group AG's ability to pay dividends and other distributions and to pay its 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 AG in the future. The ability of such subsidiaries to make loans or distributions (directly or indirectly) to UBS Group AG may be restricted as a result of several factors, including restrictions in financing agreements, the requirements of applicable law and regulatory, fiscal or other restrictions. UBS Group AG's direct and indirect subsidiaries, including UBS AG, UBS Switzerland AG, UBS Limited and the US IHC (when designated) are subject to laws and regulations that restrict dividend payments, authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to UBS Group AG, or limit or prohibit transactions with affiliates. Restrictions and regulatory actions of this kind could impede access to funds that UBS Group AG may need to make payments.

In addition, UBS Group AG'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.

Subordinated debt and capital instruments issued by UBS Group AG that contribute to its regulatory capital contractually prevent UBS Group AG to propose the distribution of dividends to shareholders, other than in the form of shares, if we do not pay interest on these instruments.

UBS Group AG'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 AG on a standalone basis.

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

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

EDTF | We are committed to a total capital return to shareholders of at least 50% of net profit attributable to our shareholders, provided that we maintain a fully applied CET1 capital ratio of at least 13%, and consistent with our objective of maintaining a post-stress fully applied CET1 capital ratio of at least 10%.

 

 

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Our ability to maintain a fully applied CET1 capital ratio of at least 13% is subject to numerous risks, including the financial results of our businesses, changes to capital standards such as the changes currently proposed in Switzerland, methodologies and interpretation that may adversely affect the calculation of our fully applied CET1 capital ratio, and the imposition of risk add-ons or capital buffers. Refer to "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" and to "If we are unable to maintain our capital strength, this may adversely affect our ability to execute our strategy, client franchise and competitive position" above for more information on certain factors that could cause our capital ratios to fluctuate significantly, including the effect on capital of changes to pension plan defined benefit obligations.

Moreover, changes in the methodology, assumptions, stress scenario, market conditions, business volumes and other factors may result in material changes in our post-stress fully applied CET1 capital ratio. These factors may lead to material fluctuations in our post-stress fully applied CET1 capital ratio during any period. In assessing whether our post-stress fully applied CET1 capital ratio objective has been met at any time, we may consider both the current ratio and our expectation as to future developments in the ratio.

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 plan 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 fully applied 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 the calculation of our post-stress fully applied 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 post-stress fully applied CET1 capital ratio, or in the assumptions used in a particular scenario, may cause the post-stress fully applied CET1 capital ratio to fluctuate materially.

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 measurement methodologies are subject to inherent limitations, rely on numerous assumptions as well as on data which may have inherent limitations. In particular, certain data is 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 our post-stress fully applied CET1 capital ratio, as calculated using our methodology for any period, being materially higher or lower than the actual effect of a stress scenario. ▲ 

If we experience financial difficulties, FINMA has the power to open resolution or liquidation proceedings or impose protective measures in relation to UBS Group AG, UBS AG or UBS Switzerland AG, and such proceedings or measures may have a material adverse effect on our shareholders and creditors

EDTF | Under the Swiss Banking Act, FINMA is able to exercise broad statutory powers with respect to Swiss banks and Swiss parent companies of financial groups, such as UBS AG, UBS Group AG and UBS Switzerland AG, if there is justified concern that the entity is over-indebted, has serious liquidity problems or, after the expiration of any relevant deadline, no longer fulfils capital adequacy requirements. Such powers include ordering protective measures, instituting restructuring proceedings (and exercising any Swiss resolution powers in connection therewith), and instituting liquidation proceedings, all of which may have a material adverse effect on our shareholders and creditors or may prevent UBS Group AG or UBS AG from paying dividends or making payments on debt obligations.

Protective measures may include, but are not limited to, certain measures that could require or result in a moratorium on, or the deferment of, payments. We would have limited ability to challenge any such protective measures. Additionally, creditors would have no right under Swiss law or in Swiss courts to reject, seek the suspension of, or challenge the imposition of any such protective measures, including those that require or result in the deferment of payments owed to creditors.

 

 

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Operating environment and strategy
Risk factors

 

If restructuring proceedings are opened with respect to UBS Group AG, UBS AG or UBS Switzerland AG, the resolution powers, which FINMA may exercise, include the power to (i) transfer all or some of the assets, debt and other liabilities, and contracts of the entity subject to proceedings to another entity, (ii) stay for a maximum of two business days the termination of, or the exercise of rights to terminate, netting rights, rights to enforce or dispose of certain types of collateral or rights to transfer claims, liabilities or certain collateral, under contracts to which the entity subject to proceedings is a party, and/or (iii) partially or fully write down the equity capital and, if such equity capital is fully written down, convert into equity or write down the capital and other debt instruments of the entity subject to proceedings. Shareholders and creditors would have no right to reject, or to seek the suspension of, any restructuring plan pursuant to which such resolution powers are exercised. They would have only limited rights to challenge any decision to exercise resolution powers or to have that decision reviewed by a judicial or administrative process or otherwise.

Upon full or partial write-down of the equity and of the debt of the entity subject to restructuring proceedings, the relevant shareholders and creditors would  receive no payment in respect of the equity and debt that is written down, the write-down would be permanent, and the investors would not, at such time or at any time thereafter, receive any shares or other participation rights, or be entitled to any write-up or any other compensation in the event of a potential recovery of the debtor. If FINMA orders the conversion of debt of the entity subject to restructuring proceedings into equity, the securities received by the investors may be worth significantly less than the original debt and may have a significantly different risk profile, and such conversion would also dilute the ownership of existing shareholders. In addition, creditors receiving equity would be effectively subordinated to all creditors in the event of a subsequent winding up, liquidation or dissolution of the entity subject to restructuring proceedings, which would increase the risk that investors would lose all or some of their investment.

FINMA has broad powers and significant discretion in the exercise of its powers in connection with a resolution proceeding. Certain categories of debt obligations, such as certain types of deposits, are protected. As a result, holders of obligations of an entity subject to a Swiss restructuring proceeding may have their obligations written down or converted into equity even though obligations ranking on par with or junior to such obligations are not written down or converted.

Moreover, FINMA has expressed its preference for a "single-point-of-entry" resolution strategy for global systemically important financial groups, led by the bank's home supervisory and resolution authorities and focused on the top-level group company. This would mean that, if UBS AG or one of UBS Group AG's other subsidiaries faces substantial losses, FINMA could open restructuring proceedings with respect to UBS Group AG only and order a bail-in of its liabilities if there is a justified concern that in the near future such losses could impact UBS Group AG. In that case, it is possible that the obligations of UBS AG or any other subsidiary of UBS Group AG would remain untouched and outstanding, while the equity capital and the capital and other debt instruments of UBS Group AG would be written down and / or converted into equity of UBS Group AG in order to recapitalize UBS AG or such other subsidiary. ▲ 

  

 

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Financial and operating performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Financial and operating performance
Critical accounting policies

 

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 on estimates and assumptions that may involve significant uncertainty at the time they are made. Such judgments, including the underlying estimates and assumptions, which encompass historical experience, expectations of the future and other factors are regularly evaluated to determine their continuing relevance based on current conditions. 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 fairly present, in all material respects, the financial position of UBS as of 31 December 2015, and the results of our operations and cash flows for the period then ended in accordance with IFRS. 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, the results of our operations 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 “Consolidated financial statements” section of this report.

Fair value of financial instruments

We account for a significant portion of our 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 extent on unobservable inputs require a higher level of judgment to calculate a fair value than those based entirely on observable inputs. Substantially all of our 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 created 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.

Our valuation techniques 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 as Financial assets designated at fair value, to reflect counterparty credit risk. Correspondingly, a debit-valuation-adjustment approach is applied to incorporate our own credit risk, where applicable, in the fair value of derivative instruments. We incorporate funding valuation adjustments into the valuation estimates for certain OTC derivatives, reflecting the market cost of unsecured funding in the valuation of such instruments.

In 2015, we made further enhancements to our valuation methodology for the own credit component of fair value of financial liabilities designated at fair value. This change in accounting estimate resulted in a gain of CHF 260 million.

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

 

 

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As of 31 December 2015, financial assets and financial liabilities for which valuation techniques are used and whose significant inputs are considered observable (Level 2) amounted to CHF 216 billion and CHF 230 billion, respectively, (61% and 85% 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 9 billion and CHF 14 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 in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular position. While we believe our 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 2015, 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 809 million and CHF 640 million, respectively.

®   Refer to “Note 24 Fair value measurement” in the “Consolidated financial statements” 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 loan portfolio at the balance sheet date due to credit deterioration of the issuer or counterparty. The portion of the Group’s loan portfolio that is measured at amortized cost less impairment consists of financial assets presented on the balance sheet lines Due from banks and Loans

A credit loss expense is recognized if there is objective evidence that we 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 credit losses is reported as a reduction of the carrying value of the financial asset on the balance sheet.

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 such 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 2015, the gross loan portfolio was CHF 313 billion and the related allowances for credit losses amounted to CHF 0.7 billion, consisting of specific and collective allowances of CHF 683 million and CHF 6 million, respectively.

®     Refer to “Note 1a item 11 Allowances and provisions for credit losses,” “Note 10 Due from banks and loans (held at amortized cost),” and “Note 12 Allowances and provisions for credit losses” in the “Consolidated financial statements” section of this report for more information

®     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

We perform an impairment test on our goodwill assets on an annual basis, or when indicators of impairment exist. We consider 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, 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 three forecasted years and the terminal value.

 

 

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Financial and operating performance
Critical accounting policies

 

The carrying amount for each segment is determined by reference to our equity attribution framework described in the “Capital management” section of this report. Attributed equity equals the capital that a segment requires to conduct its business and is considered an appropriate starting point to determine the carrying value of the segments. The attributed equity methodology is aligned with the business planning process, the inputs from which are used in calculating the recoverable amounts of the respective cash-generating units.

Valuation parameters used within our 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 three, 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 with respect to the goodwill balances of any of our cash-generating units as of 31 December 2015.

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 is expected on the Group’s total capital ratios.

As of 31 December 2015, total goodwill recognized on the balance sheet was CHF 6.2 billion, of which CHF 1.3 billion, CHF 3.5 billion and CHF 1.4 billion was carried by Wealth Management, Wealth Management Americas and Asset Management, respectively. On the basis of the impairment testing methodology described above, we concluded that the year-end 2015 balances of goodwill allocated to our segments remain recoverable and thus were not impaired.

®     Refer to “Note 1a item 21 Goodwill and intangible assets,” “Note 2 Segment reporting” and “Note 17 Goodwill and intangible assets” in the “Consolidated financial statements” section of this report for more information

Deferred taxes

Deferred tax assets arise from a variety of sources, with the most significant being: (i) tax losses that can be carried forward and 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 under IAS 12, Income 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 when the business planning process is undertaken, 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 profits against which the deferred tax assets can be utilized.

If the estimated earnings and other assumptions in future periods deviate from the current outlook, the value of our deferred tax assets may become impaired in the future, giving rise to losses in the income statement. Recognition of any impairment of deferred tax assets would reduce IFRS equity attributable to UBS shareholders and net profit. It would not impact cash flows and, as tax loss carry-forward deferred tax assets, as well as temporary difference deferred tax assets in excess of 10% of common equity tier 1 (CET1) capital, are required to be deducted for the purposes of calculating Basel III fully-applied CET1 capital, the capital ratio may not be significantly affected. 

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. As of 31 December 2015, our deferred tax assets amounted to CHF 12.8 billion, which included CHF 7.1 billion in respect of tax losses carried forward and CHF 5.7 billion of deductible temporary differences (mainly in Switzerland and the US) that may be utilized to offset taxable income in future years.

®   Refer to “Note 1a item 22 Income taxes” and “Note 8  Income taxes” in the “Consolidated financial statements” section and “The effect of taxes on our financial results is significantly influenced by reassessments of our deferred tax assets” in the “Risk factors” section of this report for more information

 

 

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Provisions

Provisions are liabilities of uncertain timing or amount, and are recognized when we have 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. An established provision for an item or class is representative of the best estimate of the outflow of economic benefits required to settle the present obligation as of 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 for 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 for litigation, regulatory and 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 2015, total provisions amounted to CHF 4,164 million, of which CHF 2,983 million related to litigation, regulatory and similar matters. 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.

®     Refer to “Note 22 Provisions and contingent liabilities” and “Note 1a item 27 Provisions” in the “Consolidated financial statements” 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. If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The net defined benefit liability or 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 financial 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 and one of the US defined benefit pension plans, interest credits on retirement savings account balances. We regularly review the actuarial assumptions used in calculating our defined benefit obligations to ensure the most appropriate estimate of our obligation. As part of the review, we also consult with independent actuarial firms.

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 “Consolidated financial statements” section of this report.

The most significant plan is the Swiss pension plan. Consistent with 2014, life expectancy for this plan has been based on the 2010 BVG generational mortality tables. The assumption for the discount rate has changed to 1.09% in 2015 from 1.15% in the prior year. Additional information on the update to assumptions for both the Swiss and non-Swiss plans during the year are included in “Note 28 Pension and other post-employment benefit plans.” 

®     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 “Consolidated financial statements” section of this report for more information

 

 

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Financial and operating performance
Critical accounting policies

 

Equity compensation

We recognize share-based compensation 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. Certain performance shares issued by UBS to its employees have features that are not directly comparable with our shares 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 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 and share price volatility, as well as adjustments for certain non-vesting conditions. 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.

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

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.

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

  

 

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Significant accounting and financial reporting changes

Significant accounting changes

Own credit

In 2015, we further enhanced our valuation methodology for the own credit component of fair value of financial liabilities designated at fair value. This change in accounting estimate resulted in a gain of CHF 260 million.

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

Review of actuarial assumptions used in calculating defined benefit obligations

In 2015, we carried out a methodology review of the actuarial assumptions used in calculating our defined benefit obligation (DBO) for our Swiss pension plan and as a result, we enhanced our methodology for estimating the discount rate. Furthermore, we refined our approach to estimating the rate of salary increases, the rate of interest credit on retirement savings, the employee turnover rate, the rate of employee disabilities and the rate of marriage. These improvements in estimates resulted in a total net decrease of CHF 2.1 billion in the DBO of the Swiss pension plan and a corresponding gain of CHF 2.0 billion recognized within other comprehensive income (OCI) attributable to UBS Group AG shareholders.

Furthermore, we enhanced methodologies and refined approaches used to estimate various actuarial assumptions for our UK pension plan, which resulted in a total net decrease of CHF 0.2 billion in the DBO of the UK pension plan and a corresponding gain of CHF 0.2 billion recognized within OCI attributable to UBS Group AG shareholders.

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


Financial reporting changes

New structure of Corporate Center

As of 1 January 2015, Corporate Center – Core Functions was reorganized into two new units, Corporate Center – Services and Corporate Center – Group Asset and Liability Management (Group ALM). Therefore, we now report: (i) Corporate Center – Services, (ii) Corporate Center – Group ALM and (iii) Corporate Center – Non-Core and Legacy Portfolio separately, which enhances the transparency of Corporate Center activities.

Group ALM is responsible for centrally managing the Group’s liquidity and funding position, as well as providing other balance sheet and capital management services to the Group. Most of the income generated and expenses incurred by Group ALM from these activities continues to be allocated to the business divisions and other Corporate Center units. Own credit gains and losses on financial liabilities designated at fair value are presented in Group ALM.

Corporate Center – Services includes the Group’s control functions and all logistics and support functions serving the business divisions and other Corporate Center units. Most of the expenses of Corporate Center – Services are allocated to the business divisions and other Corporate Center units.

Service and personnel allocations from Corporate Center –Services to business divisions and other Corporate Center units

In 2015, we revised the presentation of service allocations from Corporate Center – Services to the business divisions and other Corporate Center units to better reflect the economic relationship between them. These cost allocations were previously presented within the Personnel expenses, General and administrative expenses and Depreciation and impairment of property, equipment and software line items and are newly presented in the Services (to) / from business divisions and Corporate Center line items. Prior-period information has been restated to reflect this change. This change in presentation did not affect total operating expenses or performance before tax of the business divisions and Corporate Center units for any period presented. Similarly, personnel of Corporate Center – Services are no longer allocated to the business divisions and other Corporate Center units. Prior-period information has been restated accordingly.

 

 

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Financial and operating performance
Significant accounting and financial reporting changes

 

Change in segment reporting related to fair value gains and losses on certain internal funding transactions

Consistent with changes in the manner in which operating segment performance is assessed, beginning in 2015, we have applied fair value accounting for certain internal funding transactions between Corporate Center – Group ALM and the Investment Bank and Corporate Center – Non-core and Legacy Portfolio, rather than applying amortized cost accounting. This treatment better aligns with the mark-to-market basis on which these internal transactions are risk managed within the Investment Bank and Corporate Center – Non-core and Legacy Portfolio. The terms of the funding transactions remain otherwise unchanged. Prior periods have been restated to reflect this change. As a result, the Investment Bank’s operating income and performance before tax decreased by CHF 37 million for the year ended 31 December 2014 and by CHF 162 million for the year ended 31 December 2013, with offsetting increases in Corporate Center. This change did not affect the Group’s total operating income or net profit for any period presented.

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

Retail & Corporate renamed Personal & Corporate Banking

Effective 2016, the business division Retail & Corporate was renamed Personal & Corporate Banking. This change is reflected throughout this report.

Global Asset Management renamed Asset Management

In 2015, the business division Global Asset Management was renamed Asset Management. This change is reflected throughout this report.

A&Q hedge fund solutions renamed Hedge Fund Solutions

In 2015, A&Q hedge funds solutions, the multi-manager hedge fund business, was renamed Hedge Fund Solutions (HFS). This business continues to be reported together with the O’Connor business under the business line name O’Connor and Hedge Fund Solutions, within the business division Asset Management.

Non-core and Legacy portfolio disclosures

Following a substantial reduction in risk exposure over the past years, we have merged our disclosures for Non-core and Legacy Portfolio and included them in the Corporate Center section of our reports, including the disclosures previously provided in the “Risk management and control” section. Details on risk-weighted assets, leverage ratio denominator and balance sheet assets for the remaining Non-core and Legacy Portfolio exposures are now provided in one combined table.


Change in Asset Management business lines

As of 1 January 2016, Asset Management was reorganized into the following business lines: (i) Equities, Multi-asset & O’Connor, (ii) Fixed Income, (iii) Global Real Estate, (iv) Infrastructure & Private Equity, (v) Solutions and (vi) Fund Services. In our first quarter 2016 report, we will reflect this change and provide more information.

Accounting for expected credit losses under IFRS 9, Financial Instruments  

EDTF | In July 2014, the IASB published the final version of IFRS 9, Financial Instruments, with a mandatory effective date of 1 January 2018. The standard reflects the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39, Financial instruments: Recognition and Measurement. The standard includes the introduction of a forward-looking expected credit loss (ECL) approach, replacing the incurred loss impairment approach for financial instruments in IAS 39, and the loss-provisioning approach for financial guarantees and lending commitments in IAS 37, Provisions, contingent liabilities and contingent assets.  

In November 2015, the Enhanced Disclosure Task Force (EDTF) published disclosure recommendations for IFRS 9 in its report “Impact of Expected Credit Loss Approaches on Bank Risk Disclosures.” Disclosures are recommended during the transition period and once IFRS 9 is fully adopted, to ensure that changes and impacts arising from using an expected loss model are transparent, understandable and consistently applied. We address these recommendations below. More granular information will be provided as we approach the adoption of IFRS 9 on 1 January 2018.

IFRS 9 is a key strategic initiative for UBS and is currently being implemented under the joint sponsorship of the Group Chief Risk Officer and the Group Chief Financial Officer. The implementation project structure has been defined to address the critical requirements of the standard and to manage the appropriate involvement of key stakeholders, including Risk Control, Finance, Group Technology and the business divisions. Steering and Operating Committees, a Technical Board and individual workstreams have been created to ensure a streamlined implementation with appropriate controls and governance over all decisions. We have finalized key technical accounting and risk methodology decisions and are currently focusing on model development, IT architecture, and consequential implementation work. We are also undertaking an impact assessment, and intend to perform a parallel run in 2017. ▲ 

 

 

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Moving from an incurred loss to an expected credit loss impairment approach

EDTF | Under the current incurred loss impairment approach in IAS 39, a financial asset or group of financial assets is impaired if there is objective evidence as a result of one or more events (so-called trigger events) having occurred since the financial asset was recognized, that we will be unable to collect all amounts under the contract. Once a trigger event has occurred, allowances for credit losses are established based on the difference between the carrying amount and the present value of future estimated cash flows.

IFRS 9 no longer requires a trigger event to have occurred before credit loss allowances are recognized. Instead, entities are required to recognize a 12-month, or less if the exposure period is less than 12 months, allowance for financial assets measured at amortized cost, debt instruments fair valued through other comprehensive income, lease receivables, financial guarantees and loan commitments from initial recognition. The ECL should reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes and that incorporates reasonable and supportable information about past events, current conditions, forecasts of future economic conditions and the time value of money.

If a significant increase in credit risk (SICR) arises after the instrument is initially recognized, a lifetime ECL allowance is required. Life-time ECL allowances are always recognized for credit-impaired financial assets.

A SICR may be assessed at an individual financial asset level, or, where appropriate, on a collective basis. Assessments on a collective basis will only be made where the in-scope financial instruments share the same credit risk characteristics.

We will determine whether a SICR has occurred at the reporting date by assessing changes in an instrument’s risk of default since initial recognition. A range of indicators will be considered, including, but not limited to, significant changes in the actual or expected credit rating of the borrower, internal indicators of credit risk and external market indicators of credit risk or general economic conditions.

The SICR assessment and the ECL calculation will use point in time (PIT) based parameters, including probability of default (PD), leveraging the respective parameters determined under the Basel III through the cycle (TTC) based approach, with adjustments made to account for current conditions and to incorporate forward-looking economic information which will include interest and foreign exchange rates, gross domestic product forecasts, unemployment rates, real estate price indices and other relevant risk parameters. Although ECL is not a stress loss concept, we plan to leverage our existing stress testing models to capture the effects of forward-looking economic information.

The definition and assessment of what constitutes a SICR, and in particular the incorporation of forward-looking information is inherently subjective and will involve the use of significant judgment. We are establishing effective and robust governance and controls around the ECL calculation process, including what constitutes a SICR and the use of forward-looking information. Our economists, risk methodology personnel and credit risk officers will be involved in developing the forward-looking macroeconomic assumptions to be used in the ECL calculation, which will be validated and approved through a new governance process that will provide for a consistent use of forward-looking information throughout UBS.

Implementation of the IFRS 9 ECL approach is generally expected to result in an increase in recognized credit loss allowances, as compared to the current incurred-loss approach. This is due in part to the 12-month ECL allowance that must be reported for all in-scope instruments, and to the lifetime ECL allowance that will apply to positions following a SICR and prior to an incurred credit loss event. Upon adoption, any change in credit loss allowances will be booked as an adjustment to retained earnings. In addition, increased income statement volatility is expected on an ongoing basis, due to the application of forward-looking assumptions and the SICR approach. We are currently assessing the impact of the IFRS 9 ECL requirements on our financial statements and we intend to disclose the potential impact no later than in our Annual Report 2017. In addition, we are monitoring the potential effects on our regulatory capital requirements. The Swiss Financial Market Supervisory Authority (FINMA) and the Basel Committee on Banking Supervision (BCBS) have not yet issued guidance on how IFRS 9 expected credit losses will be treated for regulatory capital purposes.

 

 

83 


Financial and operating performance
Significant accounting and financial reporting changes

 

The table below sets out certain key differences between the definitions we apply in determining expected losses under the current Basel III framework and those planned to be used in determining ECL for IFRS 9 purposes. We do not expect the definition of default under IFRS 9 to be different from the definition used for the purpose of our advanced internal ratings-based approach, and the term is therefore not included in the table below. ▲ 

®   Refer to “Credit risk models” in the “Risk management and control” section of this report for more information

 

 

  

 

84 


 

 

Group performance

Net profit attributable to UBS Group AG shareholders was CHF 6,203 million in 2015 compared with CHF 3,466 million in 2014. We recorded an operating profit before tax of CHF 5,489 million compared with CHF 2,461 million, largely reflecting an increase of CHF 2,578 million in operating income, mainly due to increased net interest and trading income in the Investment Bank and our wealth management businesses, as well as reduced losses in Corporate Center – Non-core and Legacy Portfolio. Operating expenses decreased by CHF 451 million, mainly driven by a CHF 1,507 million lower net charge for provisions for litigation, regulatory and similar matters, partly offset by higher restructuring expenses and increased personnel expenses. We recorded a net tax benefit of CHF 898 million compared with CHF 1,180 million, 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 million

 

31.12.15

31.12.14

31.12.13

 

31.12.14

Net interest income

 

6,732

6,555

5,786

 

3

Credit loss (expense) / recovery

 

(117)

(78)

(50)

 

50

Net interest income after credit loss expense

 

6,615

6,477

5,736

 

2

Net fee and commission income

 

17,140

17,076

16,287

 

0

Net trading income

 

5,742

3,842

5,130

 

49

of which: net trading income excluding own credit

 

5,190

3,551

5,413

 

46

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

 

553

292

(283)

 

89

Other income

 

1,107

632

580

 

75

Total operating income

 

30,605

28,027

27,732

 

9

of which: net interest and trading income

 

12,474

10,397

10,915

 

20

Personnel expenses

 

15,981

15,280

15,182

 

5

General and administrative expenses

 

8,107

9,387

8,380

 

(14)

Depreciation and impairment of property, equipment and software

 

920

817

816

 

13

Amortization and impairment of intangible assets

 

107

83

83

 

29

Total operating expenses

 

25,116

25,567

24,461

 

(2)

Operating profit / (loss) before tax

 

5,489

2,461

3,272

 

123

Tax expense / (benefit)

 

(898)

(1,180)

(110)

 

(24)

Net profit / (loss)

 

6,386

3,640

3,381

 

75

Net profit / (loss) attributable to preferred noteholders

 

 

142

204

 

(100)

Net profit / (loss) attributable to non-controlling interests

 

183

32

5

 

472

Net profit / (loss) attributable to UBS Group AG shareholders

 

6,203

3,466

3,172

 

79

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

Total comprehensive income

 

5,781

5,220

2,524

 

11

Total comprehensive income attributable to preferred noteholders

 

 

221

559

 

(100)

Total comprehensive income attributable to non-controlling interests

 

83

79

4

 

5

Total comprehensive income attributable to UBS Group AG shareholders

 

5,698

4,920

1,961

 

16

 

 

85 


Financial and operating performance
Group performance

 

Adjusted results¹˒²

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended 31.12.15

CHF million

 

Wealth Management

Wealth Management Americas

Personal & Corporate Banking

Asset Management

Investment Bank

CC ­ Services³

CC ­ Group ALM

CC ­ Non-core and Legacy Portfolio

UBS

Operating income as reported

 

8,155

7,381

3,877

2,057

8,821

241

277

(203)

30,605

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

 

 

 

 

 

 

 

553

 

553

of which: gains on sales of real estate

 

 

 

 

 

 

378

 

 

378

of which: gains on sales of subsidiaries and businesses⁵

 

169

 

 

56

 

 

 

 

225

of which: net foreign currency translation gain⁶

 

 

 

 

 

 

 

88

 

88

of which: gain related to our investment in the SIX Group

 

15

 

66

 

 

 

 

 

81

of which: gain from a further partial sale of our investment in Markit

 

 

 

 

 

11

 

 

 

11

of which: net losses related to the buyback of debt

 

 

 

 

 

 

 

(257)

 

(257)

Operating income (adjusted)

 

7,971

7,381

3,811

2,001

8,810

(137)

(107)

(203)

29,526

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as reported

 

5,465

6,663

2,231

1,474

6,929

1,059

(5)

1,301

25,116

of which: personnel-related restructuring expenses⁵

 

20

0

2

4

14

406

0

14

460

of which: non-personnel-related restructuring expenses⁵

 

38

0

0

11

7

719

0

0

775

of which: restructuring expenses allocated from CC ­ Services⁵

 

265

137

99

68

376

(986)

0

43

0

of which: gain related to a change to retiree benefit plans in the US⁷

 

 

(21)

 

 

 

 

 

 

(21)

of which: impairment of an intangible asset

 

 

 

 

 

11

 

 

 

11

Operating expenses (adjusted)

 

5,142

6,547

2,130

1,392

6,522

919

(5)

1,245

23,891

 

 

 

 

 

 

 

 

 

 

 

Operating profit / (loss) before tax as reported

 

2,689

718

1,646

584

1,892

(818)

282

(1,503)

5,489

Operating profit / (loss) before tax (adjusted)

 

2,828

834

1,681

610

2,288

(1,056)

(102)

(1,447)

5,635

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended 31.12.14

CHF million

 

Wealth Management

Wealth Management Americas

Personal & Corporate Banking

Asset Management

Investment Bank

CC ­ Services³

CC ­ Group ALM

CC ­ Non-core and Legacy Portfolio

UBS

Operating income as reported

 

7,901

6,998

3,741

1,902

8,308

37

2

(862)

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

8,313

(7)

(290)

(862)

27,696

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as reported

 

5,574

6,099

2,235

1,435

8,392

688

0

1,144

25,567

of which: personnel-related restructuring expenses⁵

 

18

0

4

19

64

221

0

1

327

of which: non-personnel-related restructuring expenses⁵

 

49

0

0

2

36

263

0

0

350

of which: restructuring expenses allocated from CC ­ Services⁵

 

119

55

60

30

161

(454)

0

29

0

of which: gain related to changes to retiree benefit plans in US⁷

 

0

(9)

0

(8)

(20)

0

0

(3)

(41)

Operating expenses (adjusted)

 

5,389

6,053

2,171

1,393

8,151

658

0

1,116

24,931

 

 

 

 

 

 

 

 

 

 

 

Operating profit / (loss) before tax as reported

 

2,326

900

1,506

467

(84)

(652)

2

(2,005)

2,461

Operating profit / (loss) before tax (adjusted)

 

2,511

946

1,570

509

162

(666)

(290)

(1,977)

2,766

 

 

86 


 

 

Adjusted results¹˒² (continued)

 

 

For the year ended 31.12.13

CHF million

 

Wealth Management

Wealth Management Americas

Personal & Corporate Banking

Asset Management

Investment Bank

CC ­ Services³

CC ­ Group ALM

CC ­ Non-core and Legacy Portfolio

UBS

Operating income as reported

 

7,563

6,538

3,756

1,935

8,438

178

(841)

166

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

 

 

 

 

 

 

 

(194)

27

(167)

of which: gains on sales of subsidiaries and businesses

 

 

 

 

34

55

 

 

 

89

of which: net foreign currency translation loss⁶

 

 

 

 

 

 

 

(24)

 

(24)

Operating income (adjusted)

 

7,563

6,538

3,756

1,901

8,383

(110)

(340)

139

27,829

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as reported

 

5,316

5,680

2,298

1,359

6,300

804

43

2,660

24,461

of which: personnel-related restructuring expenses⁵

 

40

0

0

2

(38)

129

0

23

156

of which: non-personnel-related expenses expenses⁵

 

35

0

0

2

1

578

0

0

616

of which: restructuring expenses allocated from CC ­ Services⁵

 

104

59

54

38

247

(714)

0

211

0

Operating expenses (adjusted)

 

5,138

5,621

2,244

1,316

6,090

810

43

2,425

23,689

 

 

 

 

 

 

 

 

 

 

 

Operating profit / (loss) before tax as reported

 

2,247

858

1,458

576

2,138

(626)

(884)

(2,494)

3,272

Operating profit / (loss) before tax (adjusted)

 

2,425

917

1,512

585

2,293

(920)

(383)

(2,286)

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, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period.    3 Corporate Center ­ Services operating expenses presented in this table are after service allocations to business divisions and other Corporate Center units.    4 Refer to “Note 24 Fair value measurement” in the “Consolidated financial statements” section of this report for more information.    5 Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information.    6 Related to the disposal of subsidiaries.    7 Refer to “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information.

 

 

 

87 


Financial and operating performance
Group performance

 

2015 compared with 2014 

Results

We recorded an operating profit before tax of CHF 5,489 million compared with CHF 2,461 million, largely reflecting an increase of CHF 2,578 million in operating income, mainly due to increased net interest and trading income in the Investment Bank and our wealth management businesses, as well as reduced losses in Corporate Center – Non-core and Legacy Portfolio. Operating expenses decreased by CHF 451 million, mainly driven by a CHF 1,507 million lower net charge for provisions for litigation, regulatory and similar matters, partly offset by higher restructuring expenses and increased personnel expenses.

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 2015, the items we excluded were an own credit gain of CHF 553 million, gains on sales of real estate of CHF 378 million which primarily related to the sale of a property in Geneva, Switzerland, net gains on sales of subsidiaries and businesses of CHF 225 million, a net foreign currency translation gain from the disposal of subsidiaries of CHF 88 million, a gain of CHF 81 million related to our investment in the SIX Group, a gain of CHF 11 million from a further partial sale of our investment in Markit, net losses related to the buyback of debt in a tender offer of CHF 257 million, net restructuring expenses of CHF 1,235 million, a gain of CHF 21 million related to a change to retiree benefit plans in the US and an impairment of an intangible asset of CHF 11 million. 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 expenses of CHF 677 million and a gain of CHF 41 million related to changes to retiree benefit plans in the US.

On this adjusted basis, profit before tax was CHF 5,635 million compared with CHF 2,766 million in the prior year.

Adjusted operating income increased by CHF 1,830 million to CHF 29,526 million, largely due to an increase of CHF 1,816 million in adjusted net interest and trading income, reflecting increases in the Investment Bank and our wealth management businesses, as well as reduced losses in Corporate Center – Non-core and Legacy Portfolio.

Adjusted operating expenses decreased by CHF 1,040 million to CHF 23,891 million, mainly due to a CHF 1,507 million lower net charge for provisions for litigation, regulatory and similar matters, partly offset by CHF 548 million higher personnel expenses.

As a result of ongoing efforts to optimize our legal entity structure, we anticipate that some foreign currency translation gains and losses previously booked directly into equity through other comprehensive income will be reclassified to the income statement in future periods due to the sale or closure of UBS AG branches and subsidiaries. In this respect, we currently expect to record net foreign currency translation losses of around CHF 130 million in the first quarter of 2016. These losses will be treated as adjusting items and recorded in Corporate Center – Group Asset and Liability Management (Group ALM). The reclassification of foreign currency translation losses to the income statement will not affect shareholders’ equity or regulatory capital.

Operating income

Total operating income was CHF 30,605 million compared with CHF 28,027 million. On an adjusted basis, total operating income increased by CHF 1,830 million to CHF 29,526 million. Adjusted net interest and trading income increased by CHF 1,816 million, reflecting increases in the Investment Bank and our wealth management businesses, as well as reduced losses in Corporate Center – Non-core and Legacy Portfolio. Net fee and commission income increased by CHF 64 million, mainly in Wealth Management Americas and Asset Management. Adjusted other income was broadly unchanged.

Net interest and trading income

Net interest and trading income increased by CHF 2,077 million to CHF 12,474 million. 2015 included an own credit gain on financial liabilities designated at fair value of CHF 553 million, compared with a gain of CHF 292 million. In 2015, we made further enhancements to our valuation methodology for the own credit component of fair value of financial liabilities designated at fair value. This change in accounting estimate resulted in a gain of CHF 260 million. Excluding the effect of own credit in both years, net interest and trading income increased by CHF 1,816 million to CHF 11,921 million, reflecting increases in the Investment Bank and our wealth management businesses, as well as reduced losses in Corporate Center – Non-core and Legacy Portfolio.

We will adopt the own credit presentation requirements of IFRS 9 in the first quarter of 2016. Under this aspect of IFRS 9, changes in the fair value of financial liabilities designated at fair value through profit and loss related to own credit will be recognized in other comprehensive income and will not be reclassified to the Income statement. We will adopt the other requirements of IFRS 9 as of the mandatory effective date of 1 January 2018.

®     Refer to the “Significant accounting and financial reporting changes” section for more information on the enhancements to our valuation methodology for own credit

 

 

88 


 

 

In Wealth Management, net interest and trading income increased by CHF 189 million. Net interest income increased by CHF 161 million, mainly due to higher lending revenues and an increase in allocated revenues from Group ALM, and net trading income increased by CHF 28 million.

In Wealth Management Americas, net interest and trading income increased by CHF 185 million to CHF 1,537 million, mainly due to higher net interest income, reflecting continued growth in loan and deposit balances.

In Personal & Corporate Banking, net interest and trading income increased by CHF 77 million to CHF 2,613 million, mainly due to higher net interest income from loans and deposits, reflecting our pricing measures.

In the Investment Bank, net interest and trading income increased by CHF 669 million to CHF 5,186 million, mainly due to higher revenues in our Foreign Exchange and Rates businesses within Investor Client Services, reflecting elevated client activity and higher volatility, particularly heightened following the Swiss National Bank’s actions of 15 January 2015. Furthermore, also within Investor Client Services, Financing services revenues were higher driven primarily by increased client activity in Prime Brokerage and Equity Financing.

Corporate Center – Group ALM net interest and trading income, excluding the effect of own credit in both years, increased by CHF 148 million, mainly reflecting higher income related to high-quality liquid assets.

In Corporate Center – Non-core and Legacy Portfolio, net interest and trading income improved by CHF 591 million, primarily reflecting reduced losses from novation and unwind activities. Furthermore, 2014 included a net loss of CHF 345 million related to funding and debit valuation adjustments (FVA/DVA) on derivatives, of which CHF 252 million was recorded upon the implementation of FVA.

®     Refer to “Note 3 Net interest and trading income” in the “Consolidated financial statements” section of this report for more information

®     Refer to the “Significant accounting and financial reporting changes” section for more information on a change in segment reporting related to fair value gains and losses on certain internal funding transactions

Credit loss expense / recovery

Net credit loss expense was CHF 117 million compared with CHF 78 million. The Investment Bank recorded a net credit loss expense of CHF 68 million, mainly related to the energy sector, compared with a net recovery of CHF 2 million. Net credit loss expense in Personal & Corporate Banking was CHF 37 million compared with CHF 95 million, predominantly due to lower expenses for newly impaired positions.

®     Refer to the “Investment Bank, Personal & Corporate Banking and Risk management and control” sections of this report for more information

 

 

Net interest and trading income

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.15

31.12.14

31.12.13

 

31.12.14

 

 

 

 

 

 

 

Net interest and trading income

 

 

 

 

 

 

Net interest income

 

6,732

6,555

5,786

 

3

Net trading income

 

5,742

3,842

5,130

 

49

Total net interest and trading income

 

12,474

10,397

10,915

 

20

Wealth Management

 

3,034

2,845

2,868

 

7

Wealth Management Americas

 

1,537

1,352

1,323

 

14

Personal & Corporate Banking

 

2,613

2,536

2,485

 

3

Asset Management

 

(5)

0

9

 

 

Investment Bank

 

5,186

4,517

4,852

 

15

of which: Corporate Client Solutions

 

1,001

1,030

1,146

 

(3)

of which: Investor Client Services

 

4,185

3,487

3,707

 

20

Corporate Center

 

110

(854)

(622)

 

 

of which: Services

 

(3)

34

(166)

 

 

of which: Group ALM

 

426

16

(535)

 

 

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

 

553

292

(283)

 

89

of which: Non-core and Legacy Portfolio

 

(313)

(904)

79

 

(65)

Total net interest and trading income

 

12,474

10,397

10,915

 

20

 

 

89 


Financial and operating performance
Group performance

 

Credit loss (expense) / recovery

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.15

31.12.14

31.12.13

 

31.12.14

Wealth Management

 

0

(1)

(10)

 

(100)

Wealth Management Americas

 

(4)

15

(27)

 

 

Personal & Corporate Banking

 

(37)

(95)

(18)

 

(61)

Investment Bank

 

(68)

2

2

 

 

Corporate Center

 

(8)

2

3

 

 

of which: Non-core and Legacy Portfolio

 

(8)

2

3

 

 

Total

 

(117)

(78)

(50)

 

50

 

 

Net fee and commission income

Net fee and commission income increased by CHF 64 million to CHF 17,140 million.

Portfolio management and advisory fees increased by CHF 515 million to CHF 7,858 million, primarily in Wealth Management Americas, largely due to an increase in managed account fees, reflecting higher invested asset levels. Portfolio management and advisory fees also increased in Wealth Management and Asset Management.

Underwriting fees decreased by CHF 224 million, reflecting lower equity and debt underwriting fees, largely in the Investment Bank.

Investment fund fees declined by CHF 150 million, primarily reflecting a decrease in mutual fund related fees in Wealth Management Americas and lower transaction-based income in Wealth Management. This was partly offset by an increase in Asset Management.

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

Other income

Other income was CHF 1,107 million compared with CHF 632 million. On an adjusted basis, other income decreased by CHF 12 million. Adjusted income related to associates and subsidiaries decreased by CHF 124 million, mainly as 2014 included a gain of CHF 65 million on an investment in an associate which was reclassified to a financial investment available-for-sale following its initial public offering, as well as a gain of CHF 58 million related to the release of a provision for litigation, regulatory and similar matters which was recorded as other income. This was partly offset by CHF 92 million higher adjusted income from financial investments classified as available-for-sale, primarily related to net gains on sales of equity investments in 2015, mainly within the Investment Bank.

®     Refer to “Note 5 Other income” in the “Consolidated financial statements” section of this report for more information

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

Recurring net fee income for Wealth Management, Wealth Management Americas and Personal & Corporate Banking 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 divisions’ 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 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.

®     Refer to the “Wealth Management,” “Wealth Management Americas” and “Personal & Corporate Banking” sections of this report for more information

 

 

Operating income Wealth Management, Wealth Management Americas and Personal & Corporate Banking

 

 

Wealth Management

 

Wealth Management Americas

 

Personal & Corporate Banking

 

 

For the year ended

CHF million

 

31.12.15

31.12.14

31.12.13

 

31.12.15

31.12.14

31.12.13

 

31.12.15

31.12.14

31.12.13

Net interest income

 

2,326

2,165

2,061

 

1,174

983

936

 

2,270

2,184

2,144

Recurring net fee income

 

3,820

3,783

3,567

 

4,623

4,294

3,796

 

544

556

511

Transaction-based income

 

1,778

1,928

1,887

 

1,555

1,678

1,800

 

959

1,022

1,034

Other income

 

231

25

57

 

31

30

33

 

140

75

86

Income

 

8,155

7,902

7,573

 

7,384

6,984

6,565

 

3,913

3,836

3,774

Credit loss (expense) / recovery

 

0

(1)

(10)

 

(4)

15

(27)

 

(37)

(95)

(18)

Total operating income

 

8,155

7,901

7,563

 

7,381

6,998

6,538

 

3,877

3,741

3,756

 

 

90 


 

 

Operating expenses

Total operating expenses decreased by CHF 451 million to CHF 25,116 million. Restructuring expenses were CHF 1,235 million compared with CHF 677 million, largely related to our transitioning activities to nearshore and offshore locations. Personnel-related restructuring expenses increased by CHF 133 million to CHF 460 million, while non-personnel-related restructuring expenses increased by CHF 425 million to CHF 775 million.

On an adjusted basis, excluding restructuring expenses and gains related to changes to retiree benefit plans in the US in both years and an impairment of an intangible asset in 2015, total operating expenses decreased by CHF 1,040 million to CHF 23,891 million. This decrease was mainly due to a CHF 1,507 million lower net charge for provisions for litigation, regulatory and similar matters, partly offset by CHF 548 million higher adjusted personnel expenses, primarily reflecting an increase in expenses for variable compensation.

®     Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information on restructuring expenses

Personnel expenses

Personnel expenses increased by CHF 701 million to CHF 15,981 million and included restructuring expenses of CHF 460 million compared with CHF 327 million, largely related to our transitioning activities to nearshore and offshore locations. On an adjusted basis, excluding restructuring expenses and gains related to changes to retiree benefit plans in the US, personnel expenses increased by CHF 548 million to CHF 15,542 million.

Expenses for salaries, excluding restructuring expenses, decreased by CHF 154 million to CHF 5,970 million, primarily reflecting a reduction in staff levels.

Excluding restructuring expenses, total variable compensation expenses increased by CHF 297 million. Expenses for current-year awards increased by CHF 272 million, reflecting improved business performance. Expenses relating to the amortization of prior years’ awards increased by CHF 24 million.

Financial advisor compensation in Wealth Management Americas increased by CHF 167 million to CHF 3,552 million, primarily due to unfavorable foreign currency translation effects.

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.15

31.12.14

31.12.13

 

31.12.14

Personnel expenses (adjusted)¹

 

 

 

 

 

 

Salaries

 

5,970

6,124

6,203

 

(3)

Total variable compensation

 

3,410

3,113

3,201

 

10

of which: relating to current year²

 

2,610

2,338

2,369

 

12

of which: relating to prior years³

 

799

775

832

 

3

Wealth Management Americas: Financial advisor compensation⁴

 

3,552

3,385

3,140

 

5

Other personnel expenses⁵

 

2,613

2,372

2,481

 

10

Total personnel expenses (adjusted)¹

 

15,542

14,994

15,026

 

4

Non-personnel expenses (adjusted)¹

 

 

 

 

 

 

General and administrative expenses

 

7,346

9,068

7,832

 

(19)

of which: provisions for litigation, regulatory and similar matters

 

1,087

2,594

1,701

 

(58)

of which: other general and administrative expenses

 

6,259

6,474

6,132

 

(3)

Depreciation and impairment of property, equipment and software

 

908

788

748

 

15

Amortization and impairment of intangible assets

 

94

81

83

 

16

Total non-personnel expenses (adjusted)¹

 

8,349

9,937

8,662

 

(16)

Total operating expenses (adjusted)¹

 

23,891

24,931

23,689

 

(4)

Adjusting items

 

1,225

636

772

 

93

of which: personnel-related restructuring expenses

 

460

327

156

 

41

of which: non-personnel-related restructuring expenses

 

775

350

616

 

121

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

 

(21)

(41)

 

 

(49)

of which: impairment of an intangible asset

 

11

 

 

 

 

Total operating expenses as reported

 

25,116

25,567

24,461

 

(2)

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 expenses 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 "Consolidated financial statements" section of this report for more information.    6 Refer to "Note 28 Pension and other post-employment benefit plans" in the "Consolidated financial statements" section of this report for more information.   

 

 

91 


Financial and operating performance
Group performance

 

Other personnel expenses, excluding restructuring expenses and the aforementioned gains related to changes to retiree benefit plans in the US, increased by CHF 241 million to CHF 2,613 million, mainly due to an increase of CHF 113 million in costs for pension and other post-employment benefits plans and CHF 113 million higher expenses for contractors.

®     Refer to “Note 6 Personnel expenses” in the “Consolidated financial statements” section of this report for more information

®     Refer to “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information

®     Refer to “Note 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of this report for more information

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

General and administrative expenses

General and administrative expenses decreased by CHF 1,280 million to CHF 8,107 million. Net restructuring expenses increased to CHF 761 million from CHF 319 million, largely related to our transitioning activities to nearshore and offshore locations. On an adjusted basis, excluding net restructuring expenses, general and administrative expenses decreased by CHF 1,722 million, mainly due to a CHF 1,507 million lower net charge for provisions for litigation, regulatory and similar matters.

At this point in time, we believe that the industry continues to operate in an environment in which expenses 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.

Excluding restructuring expenses, other general and administrative expenses decreased by CHF 215 million, primarily as 2014 included net expenses of CHF 120 million related to certain disputed receivables. Furthermore, occupancy costs and expenses for outsourcing of IT and other services decreased.

General and administrative expenses also included a net expense of CHF 166 million for the annual UK bank levy in 2015, mainly in the Investment Bank and in Non-core and Legacy Portfolio, compared with a net expense of CHF 123 million in 2014.

®     Refer to “Note 7 General and administrative expenses” in the “Consolidated financial statements” section of this report for more information

®     Refer to “Note 22 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information


Depreciation, impairment and amortization

Depreciation and impairment of property, equipment and software increased by CHF 103 million to CHF 920 million. Excluding restructuring expenses of CHF 12 million compared with CHF 29 million, depreciation expenses increased by CHF 120 million, largely driven by higher depreciation expenses related to internally generated capitalized software.

Amortization and impairment of intangible assets was CHF 107 million compared with CHF 83 million. On an adjusted basis, these expenses increased by CHF 13 million.

®     Refer to “Note 16 Property, equipment and software” in the “Consolidated financial statements” section of this report for more information

®     Refer to “Note 17 Goodwill and intangible assets” in the “Consolidated financial statements” section of this report for more information

Tax

We recognized a net income tax benefit of CHF 898 million for 2015, which included a net Swiss tax expense of CHF 569 million and a net non-Swiss tax benefit of CHF 1,467 million, primarily relating to the upward revaluation of US deferred tax assets.

The Swiss tax expense included a current tax expense of CHF 239 million related to taxable profits, against which no losses were available to offset, mainly earned by Swiss subsidiaries. In addition, it included a net deferred tax expense of CHF 330 million, which mainly reflected a net decrease in deferred tax assets previously recognized in relation to tax losses carried forward, partially offset by an increase in recognized deferred tax assets in relation to temporary differences.

The net non-Swiss tax benefit included a current tax expense of CHF 476 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 1,943 million, primarily due to an increase in our US deferred tax assets, reflecting updated profit forecasts and an extension of the relevant taxable profit forecast period used in valuing our deferred tax assets. Based on the performance of our businesses, and the accuracy of historical forecasts, the deferred tax asset forecast period for US taxable profits was extended to seven years from six. We also consider other factors in evaluating the recoverability of our deferred tax assets, including the remaining tax loss carry-forward period, and our confidence level in assessing the probability of taxable profit beyond the current forecast period. Estimating future profitability is inherently subjective and is particularly sensitive to future economic, market and other conditions which are difficult to predict.

 

 

92 


 

 

For 2016, notwithstanding the effects of any potential reassessment of the level of deferred tax assets, we expect the effective tax rate to be in the range of 22% to 25%. Consistent with past practice, we expect to revalue our deferred tax assets in the second half of 2016 based on a reassessment of future profitability taking into account updated business plan forecasts. The full-year effective tax rate could change significantly on the basis of this reassessment. It could also change if aggregate tax expenses in respect of profits from branches and subsidiaries without loss coverage differ from what is expected. Part of the aforementioned reassessment of future profitability includes consideration of a possible further extension of the forecast period used for US deferred tax asset recognition purposes to eight years from the seven years used as of 31 December 2015. The determination of whether to extend the forecast period by an additional year will be made on the basis of all relevant facts and circumstances existing at that time. Inasmuch as the ex-ante parameters we have established for further extending the forecast period are more challenging to satisfy than in prior years, it is therefore less probable that we will add an eighth year to the forecast period in 2016 for purposes of revaluing our US deferred tax asset.

On 16 March 2016, the UK Government announced a proposed change in law which would reduce the proportion of banks' annual taxable profits that can be offset by UK tax losses carried forward from 50% to 25% with effect from 1 April 2016. The proposed change in law would also reduce the UK corporate income tax rate from 18% to 17% with effect from 1 April 2020. To the extent that these changes are enacted in 2016, we would expect to incur a reduction in recognized deferred tax assets of approximately CHF 125 million.

®     Refer to “Note 8 Income taxes” in the “Consolidated financial statements” 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 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 within 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 2015, total comprehensive income attributable to UBS Group AG shareholders was CHF 5,698 million, reflecting net profit of CHF 6,203 million, partly offset by negative OCI of CHF 506 million.

In 2015, OCI related to cash flow hedges was negative CHF 509 million compared with positive CHF 689 million in 2014, primarily reflecting lower unrealized gains on hedging derivatives from decreases in long-term interest rates.

Foreign currency translation OCI was negative CHF 231 million, primarily resulting from the significant weakening of the euro and British pound against the Swiss franc, combined with the reclassification of net gains totaling CHF 90 million to the income statement.

OCI associated with financial investments classified as available-for-sale was negative CHF 63 million, mainly as previously unrealized net gains were reclassified from OCI to the income statement upon sale of investments, partly offset by net unrealized gains following decreases in long-term interest rates. We currently expect to recognize in the income statement gains of approximately CHF 100 million, deferred in OCI, during the first half of 2016, as transactions involving certain equity investments classified as available-for-sale are closed. These expected gains will be recorded in Personal & Corporate Banking and Wealth Management and, consistent with past practice, treated as adjusting items. The reclassification of gains from OCI to the income statement will not affect shareholders’ equity, but will increase CET1 capital.

Defined benefit plan OCI was CHF 298 million. In 2015, we carried out a methodology review of the actuarial assumptions used in calculating our defined benefit obligations (DBOs). This resulted in an OCI gain of CHF 2,002 million related to the Swiss pension plan and an OCI gain of CHF 188 million related to the UK pension plan. Total pre-tax OCI related to UK defined benefit plans was CHF 321 million, reflecting a net reduction in the DBO of CHF 444 million, primarily resulting from aforementioned changes in assumptions and an increase in the applicable discount rate, partly offset by a decrease of CHF 123 million in the fair value of the underlying plan assets. In addition, we recorded total net pre-tax OCI gains of CHF 53 million on our Swiss pension plan. This reflected an OCI gain of CHF 1,212 million related to a net DBO reduction, primarily due to aforementioned changes in assumptions, partly offset by a market-driven decline in the applicable discount rate, as well as an OCI gain of CHF 105 million due to an increase in the fair value of the underlying plan assets. These OCI gains were almost entirely offset by an OCI reduction of CHF 1,265 million representing the excess of the pension surplus over the estimated future economic benefit.

®     Refer to the “Significant accounting and financial reporting changes” section of this report for more information on our review of actuarial assumptions in calculating defined benefit obligations

®     Refer to the “Statement of comprehensive income” in the “Consolidated financial statements” section of this report for more information

®     Refer to “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information on OCI related to defined benefit plans

 

 

93 


Financial and operating performance
Group performance

 

Net profit attributable to preferred noteholders and non-controlling interests

Net profit attributable to preferred noteholders was zero in 2015 compared with CHF 142 million in the prior year. Subsequent to the exchange offer in the fourth quarter of 2014, the preferred notes issued by UBS AG were reclassified in 2015 to equity attributable to non-controlling interests in the UBS Group AG consolidated financial statements.

Net profit attributable to non-controlling interests was CHF 183 million in 2015 compared with CHF 32 million in the prior year. This mainly related to net profit attributable to non-controlling interests in UBS AG which was CHF 103 million in 2015. As a result of the completion of the SESTA procedure in the third quarter of 2015, UBS Group AG owns 100% of the issued shares of UBS AG. Since then, profits of UBS AG were fully attributable to UBS Group AG shareholders.

Furthermore, dividends of CHF 76 million were paid to preferred noteholders, for which no accrual was required in a prior period.

We currently expect to attribute net profit to non-controlling interests related to preferred notes issued by UBS AG of approximately CHF 80 million in 2016, all in the second quarter, approximately CHF 70 million in 2017 and less than CHF 10 million per year from 2018.

Key figures

Cost / income ratio

The cost / income ratio was 81.8% in 2015 compared with 91.0% in the prior year. On an adjusted basis, the cost / income ratio was 80.6% compared with 89.8% and was above our short- to medium-term expectation of 65% to 75%.

Return on tangible equity

The return on tangible equity (RoTE) was 13.7% in 2015 compared with 8.2% in the prior year. On an adjusted basis, the RoTE was 13.7% compared with 8.6% and was above our target of around 10% in 2015.

Common equity tier 1 capital ratio

Our fully applied CET1 capital ratio increased 1.1 percentage points to 14.5% as of 31 December 2015, exceeding our target ratio of 13.0%. This increase was driven by a CHF 9.0 billion decrease in risk-weighted assets and a CHF 1.1 billion increase in CET1 capital.

 

Return on equity

 

 

 

 

 

 

 

 

As of or for the year ended

 

% change from

CHF million, except where indicated

 

31.12.15

31.12.14

31.12.13

 

31.12.14

 

 

 

 

 

 

 

Net profit

 

 

 

 

 

 

Net profit attributable to UBS Group AG shareholders

 

6,203

3,466

3,172

 

79

Amortization and impairment of intangible assets

 

107

83

83

 

29

Pre-tax adjusting items¹

 

135

305

869

 

(56)

Tax effect on adjusting items²

 

(140)

(125)

(135)

 

12

Adjusted net profit attributable to UBS Group AG shareholders³

 

6,305

3,729

3,989

 

69

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Equity attributable to UBS Group AG shareholders

 

55,313

50,608

48,002

 

9

Less: goodwill and intangible assets⁴

 

6,568

6,564

6,293

 

0

Tangible equity attributable to UBS Group AG shareholders

 

48,745

44,044

41,709

 

11

 

 

 

 

 

 

 

Return on equity

 

 

 

 

 

 

Return on equity (%)

 

11.8

7.0

6.7

 

 

Return on tangible equity (%)

 

13.7

8.2

8.0

 

 

Adjusted return on tangible equity (%)

 

13.7

8.6

9.8

 

 

1 Refer to the table "Adjusted results" in this section for more information.    2 Generally reflects an indicative tax rate of 22% on pre-tax adjusting items, apart from own credit on financial liabilities designated at fair value, which has a lower indicative tax rate of 2%.    3 Net profit attributable to UBS Group AG shareholders excluding amortization and impairment of intangible assets, pre-tax adjusting items and tax effect on pre-tax adjusting items.    4 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.

  

 

 

94 


 

 

Risk-weighted assets

Our risk-weighted assets (RWA) decreased by CHF 9.0 billion to CHF 207.5 billion on a fully applied basis as of 31 December 2015, below our short- to medium-term expectation of around CHF 250 billion. Credit risk RWA decreased by CHF 4.2 billion, primarily due to derivative trade unwinds and novations in Corporate Center – Non-core and Legacy Portfolio. Market risk RWA decreased by CHF 4.4 billion driven by risk reductions due to market movements. Operational risk RWA decreased by CHF 1.6 billion driven by lower incremental operational risk RWA based on the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA.

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


Leverage ratio denominator

Our fully-applied LRD decreased by CHF 80 billion to CHF 898 billion as of 31 December 2015 from the pro forma comparative number of CHF 978 billion as of 1 January 2015 and was below our short- to medium-term expectation of around CHF 950 billion. The decrease during 2015 mainly reflected incremental netting and collateral mitigation benefits of CHF 39 billion, currency effects of CHF 24 billion and a decrease of CHF 13 billion related to methodology changes.

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

Net new money and invested assets

Management’s discussion and analysis on net new money and invested assets is provided in the “Wealth Management”, “Wealth Management Americas” and “Asset Management” sections of this report.

 

 

Net new money¹

 

 

 

 

 

 

For the year ended

CHF billion

 

31.12.15

31.12.14

31.12.13

Wealth Management

 

12.9

34.4

35.9

Wealth Management (adjusted)²

 

22.8

34.4

35.9

Wealth Management Americas

 

21.3

9.6

17.6

Asset Management

 

(5.4)

15.9

(19.9)

of which: excluding money market flows

 

(0.7)

22.6

(4.8)

of which: money market flows

 

(4.7)

(6.7)

(15.1)

1 Net new money excludes interest and dividend income.    2 Adjusted net new money excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital optimization program.

 

 

Invested assets

 

 

 

 

 

 

 

 

As of

 

% change from

CHF billion

 

31.12.15

31.12.14

31.12.13

 

31.12.14

Wealth Management

 

947

987

886

 

(4)

Wealth Management Americas

 

1,035

1,027

865

 

1

Asset Management

 

650

664

583

 

(2)

of which: excluding money market funds

 

592

600

518

 

(1)

of which: money market funds

 

58

64

65

 

(9)

 

 

 

95 


Financial and operating performance
Group performance

 

Regional performance

The operating regions shown in the “Regional performance” table below correspond to the regional management structure of the Group. The allocation of income and expenses to these regions reflects, and is consistent with, the basis on which the business is managed and its performance evaluated. These allocations involve assumptions and judgments that management considers to be reasonable, and may be refined to reflect changes in estimates or management structure.


The main principles of the allocation methodology are that client revenues are attributed to the domicile of the client, and trading and portfolio management revenues are attributed to the country where the risk is managed. This revenue attribution is consistent with the mandate of our country and regional Presidents. Expenses are allocated in line with revenues. Certain revenues and expenses, such as those related to Corporate Center – Non-core and Legacy Portfolio, certain litigation expenses and restructuring expenses and other items, are managed at the Group level. These revenues and expenses are included in the Global column.

 

 

Regional performance

 

  

Americas

 

Asia Pacific

 

Europe, Middle East and Africa

 

 

For the year ended

CHF billion

 

31.12.15

31.12.14

31.12.13

 

31.12.15

31.12.14

31.12.13

 

31.12.15

31.12.14

31.12.13

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

Wealth Management

 

0.5

0.5

0.4

 

2.1

1.9

1.7

 

3.8

4.0

3.9

Wealth Management Americas

 

7.4

7.0

6.5

 

0.0

0.0

0.0

 

0.0

0.0

0.0

Personal & Corporate Banking

 

0.0

0.0

0.0

 

0.0

0.0

0.0

 

0.0

0.0

0.0

Asset Management

 

0.7

0.7

0.7

 

0.3

0.3

0.3

 

0.4

0.4

0.4

Investment Bank

 

2.8

2.6

2.5

 

2.6

2.4

2.6

 

2.5

2.4

2.2

Corporate Center

 

0.0

0.0

0.0

 

0.0

0.0

0.0

 

0.0

0.0

0.0

Total operating income

 

11.3

10.7

10.2

 

5.0

4.6

4.5

 

6.8

6.8

6.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

Wealth Management

 

0.4

0.4

0.4

 

1.5

1.3

1.2

 

2.8

3.0

2.9

Wealth Management Americas

 

6.7

6.1

5.7

 

0.0

0.0

0.0

 

0.0

0.0

0.0

Personal & Corporate Banking

 

0.0

0.0

0.0

 

0.0

0.0

0.0

 

0.0

0.0

0.0

Asset Management

 

0.5

0.5

0.5

 

0.2

0.2

0.2

 

0.4

0.4

0.4

Investment Bank

 

2.1

2.0

2.0

 

1.7

1.7

1.6

 

2.1

1.9

1.8

Corporate Center

 

0.0

0.0

0.0

 

0.0

0.0

0.0

 

0.0

0.0

0.0

Total operating expenses

 

9.6

9.0

8.5

 

3.4

3.2

3.0

 

5.2

5.2

5.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit / (loss) before tax

 

 

 

 

Wealth Management

 

0.1

0.1

0.1

 

0.6

0.6

0.5

 

1.1

1.0

1.1

Wealth Management Americas

 

0.7

0.9

0.9

 

0.0

0.0

0.0

 

0.0

0.0

0.0

Personal & Corporate Banking

 

0.0

0.0

0.0

 

0.0

0.0

0.0

 

0.0

0.0

0.0

Asset Management

 

0.2

0.2

0.2

 

0.1

0.1

0.1

 

0.1

0.0

0.0

Investment Bank

 

0.7

0.6

0.6

 

0.9

0.7

1.0

 

0.4

0.5

0.4

Corporate Center

 

0.0

0.0

0.0

 

0.0

0.0

0.0

 

0.0

0.0

0.0

Operating profit / (loss) before tax

 

1.7

1.8

1.7

 

1.6

1.4

1.5

 

1.5

1.5

1.5

 

 

96 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Switzerland

 

Global

  

Total

For the year ended

31.12.15

31.12.14

31.12.13

 

31.12.15

31.12.14

31.12.13

 

31.12.15

31.12.14

31.12.13

 

 

 

 

 

 

 

 

 

 

 

1.6

1.5

1.5

 

0.2

0.0

0.1

 

8.2

7.9

7.6

0.0

0.0

0.0

 

0.0

0.0

0.0

 

7.4

7.0

6.5

3.9

3.7

3.8

 

0.0

0.0

0.0

 

3.9

3.7

3.8

0.6

0.5

0.5

 

0.1

0.0

0.0

 

2.1

1.9

1.9

1.0

1.0

1.1

 

(0.1)

(0.1)

0.0

 

8.8

8.3

8.4

0.0

0.0

0.0

 

0.3

(0.8)

(0.5)

 

0.3

(0.8)

(0.5)

7.1

6.8

6.8

 

0.5

(0.9)

(0.4)

 

30.6

28.0

27.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.9

0.9

0.8

 

0.0

0.0

0.0

 

5.5

5.6

5.3

0.0

0.0

0.0

 

0.0

0.0

0.0

 

6.7

6.1

5.7

2.2

2.2

2.3

 

0.0

0.0

0.0

 

2.2

2.2

2.3

0.3

0.3

0.3

 

0.0

0.1

0.0

 

1.5

1.4

1.4

0.6

0.7

0.7

 

0.4

2.1

0.3

 

6.9

8.4

6.3

0.0

0.0

0.0

 

2.4

1.8

3.5

 

2.4

1.8

3.5

4.0

4.1

4.1

 

2.8

4.1

3.8

 

25.1

25.6

24.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.7

0.7

0.6

 

0.2

0.0

0.0

 

2.7

2.3

2.2

0.0

0.0

0.0

 

0.0

0.0

0.0

 

0.7

0.9

0.9

1.6

1.5

1.5

 

0.0

0.0

0.0

 

1.6

1.5

1.5

0.2

0.2

0.2

 

0.0

(0.1)

0.0

 

0.6

0.5

0.6

0.4

0.3

0.4

 

(0.5)

(2.2)

(0.2)

 

1.9

(0.1)

2.1

0.0

0.0

0.0

 

(2.0)

(2.7)

(4.0)

 

(2.0)

(2.7)

(4.0)

3.1

2.7

2.7

 

(2.3)

(5.0)

(4.2)

 

5.5

2.5

3.3

 

 

97 


Financial and operating performance
Group performance

 

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 a CHF 893 million higher net charge 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 expenses of CHF 677 million and a gain 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 tender offers of CHF 167 million, gains on sales of subsidiaries and businesses of CHF 89 million, a net foreign currency translation loss from the disposal of subsidiaries of CHF 24 million and net restructuring expenses 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 a CHF 893 million higher net charge 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.

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 – Services. 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. Excluding the effect of own credit in both years and a gain related to the buyback of debt in tender offers 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.

In the Investment Bank, net interest and trading income decreased by CHF 335 million to CHF 4,517 million. Within Investor Client Services, Foreign Exchange, Rates and Credit net interest and trading income decreased by CHF 214 million, with lower revenues across most products as client activity and volatility levels decreased compared with 2013, reflecting the ongoing macroeconomic uncertainty. Corporate Client Solutions net interest and trading income declined by CHF 116 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.

In Corporate Center – Non-core and Legacy Portfolio, net interest and trading income decreased by CHF 983 million. Non-core net interest and trading income decreased by CHF 304 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. 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.

®     Refer to the “Significant accounting and financial reporting changes” section of this report for more information on a change in segment reporting related to fair value gains and losses on certain internal funding transactions

 

 

98 


 

 

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 Personal & Corporate Banking 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 due to 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 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.

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 excluding 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 gain 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 – Services, compared with a gain 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 classified as available-for-sale decreased by CHF 20 million.

Adjusted other income other than income related to associates and subsidiaries and from financial investments classified as 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 tender offers of CHF 194 million in 2013 and a gain on the sale of Asset Management’s Canadian domestic business of CHF 34 million in 2013.

Operating expenses

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

On an adjusted basis, excluding restructuring expenses in both years as well as gains 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 a CHF 893 million higher net charge 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.

 

 

99 


Financial and operating performance
Group performance

 

Personnel expenses

Personnel expenses increased by CHF 98 million to CHF 15,280 million and included CHF 327 million personnel-related restructuring expenses compared with CHF 156 million in the prior year. On an adjusted basis, excluding restructuring expenses and the aforementioned gains 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 restructuring expenses, 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 expenses for role-based allowances.

Excluding restructuring expenses, total variable compensation expenses decreased by CHF 88 million to CHF 3,113 million. Expenses for current year awards decreased by CHF 31 million and expenses for prior-year awards 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, excluding restructuring expenses and the aforementioned gains 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.

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 expenses 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 a CHF 893 million higher net charge for provisions for litigation, regulatory and similar matters, as well as higher costs for outsourcing of IT and other services and higher professional fees.

Outsourcing of IT and other services, excluding restructuring expenses, increased by CHF 240 million.

General and administrative expenses also included a net expense 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 expense of CHF 124 million in the prior year. Further, 2014 included net expenses 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.

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 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 in US deferred tax assets.

Total comprehensive income attributable to UBS Group AG shareholders

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.

In 2014, OCI included foreign currency translation gains of CHF 1,795 million, 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, mainly reflecting decreases in long-term interest rates across all major currencies. OCI associated with financial investments classified as available-for-sale was positive CHF 141 million, 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.