Docoh
Loading...

AMNA Ubs

Filed: 9 Mar 17, 7:00pm

 

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, 2016

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
600 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 2016:

 

UBS Group AG

Ordinary shares, par value CHF 0.10 per share: 3,850,766,389 ordinary shares

(including 138,441,772 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.

 

 

 

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

 

 

 

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

 

 

 

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

 

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® 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 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 Monthly Pay 2xLeveraged Diversified High Income ETN due November 12, 2043

NYSE Arca

ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN due December 10, 2043

NYSE Arca

ETRACS Monthly Reset 2xLeveraged S&P 500® Total Return ETN due March 25, 2044

NYSE Arca

ETRACS 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 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 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

 

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

NYSE Arca

 

ETRACS ProShares Daily 3x Long Crude ETN linked to the Bloomberg WTI Crude Oil Subindex ER due January 4, 2047

NYSE Arca

 

ETRACS ProShares Daily 3x Inverse Crude ETN linked to the Bloomberg WTI Crude Oil Subindex ER due January 4, 2047

NYSE Arca

 

 

 

 

 

 

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

 


 

 

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 the ongoing execution of its strategic plans, including its cost reduction and efficiency initiatives and its ability to manage its levels of risk-weighted assets (RWA) and leverage ratio denominator, liquidity coverage ratio and other financial resources, 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) 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 effects of economic conditions, market developments, and geopolitical tensions on the financial position or creditworthiness of UBS’s clients and counterparties as well as on client sentiment and levels of activity; (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 eligible for total loss-absorbing capacity (TLAC); (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, constraints on transfers of capital and liquidity and sharing of operational costs across the Group or other measures, and the effect these would have on UBS’s business activities; (v) uncertainty as to when and to what degree the Swiss Financial Market Supervisory Authority (FINMA) will approve, or confirm, limited reductions of gone concern requirements due to measures to reduce resolvability risk; (vi) the degree to which UBS is successful in implementing further 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, completing the implementation of a service company model, 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 jurisdictions for mandatory structural reform of banks or systemically important institutions and the extent to which such changes will have the intended effects; (vii) the uncertainty arising from the timing and nature of the UK exit from the EU and the potential need to make changes in UBS’s legal structure and operations as a result of it; (viii) 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; (ix) changes in the standards of conduct applicable to our businesses that may result from new regulation or new enforcement of existing standards, including recently enacted and proposed measures to impose new and enhanced duties when interacting with customers and in the execution and handling of customer transactions; (x) 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, as well as the effect that litigation, regulatory and similar matters have on the operational risk component of our RWA; (xi) 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; (xii) 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; (xiii) 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; (xiv) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial

 


 

models generally; (xv) whether UBS will be successful in keeping pace with competitors in updating its technology, including by developing digital channels and tools and in our trading businesses; (xvi) the occurrence of operational failures, such as fraud, misconduct, unauthorized trading, financial crime, cyber-attacks, and systems failures; (xvii) restrictions on the ability of UBS Group AG to make payments or distributions, including due to restrictions on the ability of its subsidiaries to make loans or distributions, directly or indirectly, or, in the case of financial difficulties, due to the exercise by FINMA or the regulators of UBS's operations in other countries of their broad statutory powers in relation to protective measures, restructuring and liquidation proceedings; (xviii) 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 (xix) 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.

 


 

 

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 2016 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 14 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 (626-630 and 649-653) and Statement of changes in equity (316-319 and 470-473)

 

The exchange rate for the Swiss franc on 3 March 2017, as reported by the Federal Reserve System (H.10 Weekly), was CHF 1.0118 per USD 1.  See page 649 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 (44-55) 

Item 4.  Information on the Company.

A – History and Development of the Company

1-3: Annual Report, Corporate information and Contacts (7) 

4: Annual Report, History (12), The legal structure of UBS Group (13-14), Our strategy (27-28), and pages 31-43

5-7: Not applicable

B – Business Overview.

1, 2, 5 and 7: Annual Report, 18-30, Note 2a to each set of Financial Statements (Segment reporting) (343-346 and 498-501),and Note 2b to each set of Financial Statements (Segment reporting by geographic location) (347 and 502).  See also Supplement, pages 13-14.

3: Seasonal characteristics (73) 

4: Not applicable

6: None

8: Regulation and supervision and Regulatory and legal developments (21-26)

Supplement (15)


 

 

C – Organizational Structure.

 

Annual Report, The legal structure of UBS Group (13-14) and Note 28 to each set of Financial Statements (Interests in subsidiaries and other entities) (439-447 and 592-600)

D – Property, Plant and Equipment.

 

Annual Report, Property, plant and equipment (631 and 654), Note 14 to each set of Financial Statements (Property, equipment and software) (364 and 520), Note 31 to each set of Financial Statements, Operating leases and finance leases (450 and 603)

Information required by Industry Guide 3

Annual Report, Information required by industry guide 3 (632-647 and 655-670) and Selected financial data (626-630 and 649-653)

Item 4A.  Unresolved Staff Comments.

None.

Item 5.  Operating and Financial Review and Prospects.

A – Operating Results.

Annual Report, UBS Group key figures (5), UBS AG (consolidated) key figures (460), Measurement of performance (29-30), Group performance (64-77), operating results by business division and Corporate Center (78-114), Currency management (182), Capital management (184-205), Risk factors (44-55), Current market climate and industry trends (18-20) and Regulatory and legal developments (23-26) 

B – Liquidity and Capital Resources.

Annual Report, Regulatory and legal changes may adversely affect our business and our ability to execute our strategic plans (44-47), 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 (54), Seasonal characteristics (73), Cash flows (183), Interest rate risk in the banking book (153-157), Balance sheet, liquidity and funding management (168-178), Capital management (184-205)Note 23a to each set of Financial Statements (Restricted financial assets) (405 and 561), Currency management (182), Note 13a to each set of Financial Statements (Financial assets available for sale) (364 and 519), Note 18 to each set of Financial Statements (Financial liabilities designated at fair value) (368-369 and 524-525), Note 19 to each set of Financial Statements (Debt issued held at amortized cost) (369-370 and 525-526) and Short-term borrowings (639 and 662).

 

We believe that our working capital is sufficient for the company’s present requirements. Liquidity and capital management is undertaken at UBS as an integrated asset and liability management function.

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

Not applicable

D—Trend Information.

Annual Report, Current market climate and industry trends (18-20) and Regulatory and legal developments (23-26) and Financial and operating performance (57-114)

E—Off-Balance Sheet Arrangements.

Annual Report, Off-balance sheet (179-181), Note 23 to each set of Financial Statements (Restricted and transferred financial assets) (405-407 and 561-563) and Note 31 to each set of Financial Statements, Operating leases and finance leases (450 and 603)

F—Tabular Disclosure of Contractual Obligations.

Annual Report, Contractual obligations (181) 

Item 6.  Directors, Senior Management and Employees.

A – Directors and Senior Management.

1, 2 and 3: Annual Report, 222-237

4, 5: None


 

 

B – Compensation.

1: Annual Report, 260-304, Note 27 to each set of Financial Statements (Equity participation and other compensation plans) (430-438 and 586-591) and Note 32 to each set of Financial Statements (Related parties) (451-453 and 604-606)

2: Annual Report, Note 26 to each set of Financial Statements (Pension and other post-employment benefit plans) (415-429 and 571-585)

C – Board practices.

1: Annual Report, 222-232

2: Annual Report, 260-304, and Note 32 to each set of Financial Statements (Related parties) (451-453 and 604-606)

3: Annual Report, Audit committee (228) and Compensation Committee (229) 

D—Employees.

Annual Report, Our employees (254-259) 

E—Share Ownership.

Annual Report, 298-300, Note 27 to each set of Financial Statements (Equity participation and other compensation plans) (430-438 and 586-591) and Note 32b to each set of Financial Statements (Equity holdings of key management personnel) (451 and 604)

Item 7.  Major Shareholders and Related Party Transactions.

A—Major Shareholders. 

Annual Report, Group structure and shareholders  (214-215), Capital structure (216-219) and Voting rights, restrictions and representation (220) 

 

The number of shares of UBS Group AG held by the respective shareholders listed on page 215 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

363,238,096

DTC (Cede & Co.), New York

255,024,349

Nortrust Nominees Ltd., London

149,368,883

 

The number of shares of UBS AG held by UBS Group AG as of 31 December 2016 was 3,858,408,466 shares.

B—Related Party Transactions.

Annual Report, Loans granted to GEB members (301), Loans granted to BoD members (301) , and Note 32 to each set of Financial Statements (Related parties) (451-453 and 604-606)

 

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 20 to each set of Financial Statements (Provisions and contingent liabilities) (371-382 and 527-538). 

For developments during the year, please see also the note Provisions and contingent liabilities in the Financial Information section in our respective quarterly reports for the First, Second and Third Quarters 2016, filed on Forms 6-K dated May 3, 2016, July 29, 2016 and October 28, 2016, respectively; as well as the Provisions and contingent liabilities section in the Fourth Quarter 2016 Report, filed on Form 6-K dated January 27, 2017.  The disclosures in each such Quarterly Report speak only as of their respective dates.

8: Annual Report, Our stated capital returns objective is based, in part, on capital ratios that are subject to regulatory change and may fluctuate significantly (54), We are committed to an attractive capital returns policy (27), Distributions to shareholders (219) 

B—Significant Changes.

Annual Report, Note 1 to each set of Financial Statements (Summary of significant accounting policies) (323-342 and 477-497) and Note 35 to each set of Financial Statements (Events after the reporting period) (455 and 608)

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 (209) 

B—Plan of Distribution.

Not applicable

C—Markets.

Annual Report, Listing of UBS Group AG shares (208)

D—Selling Shareholders.

Not applicable

E—Dilution.

Not applicable

F—Expenses of the Issue.

Not applicable

Item 10.  Additional Information.

A—Share Capital.

Not applicable

B—Memorandum and Articles of Association.

Annual Report, Elections and terms of office (227), Capital structure (216-219), Organizational principles and structure (227-231), Shareholders' participation rights (220-221), Significant shareholders (215) and Change of control and defense measures (238)

Supplement, 15-20

C—Material Contracts.

The Terms & Conditions of the several series of capital instruments issued to date, and to be issued pursuant to Deferred Capital Contingent Plans, are exhibits 4.1 through 4.12 to this Form 20-F.  These notes are described under Eligible capital and other instruments contributing to our loss-absorbing capacity on pages 185-186 of the Annual Report and Deferred Contingent Capital Plan on page 291 of the Annual Report.

 

The settlement agreements and orders filed as exhibits 4.13 through 4.17 are described in item 5 (Foreign exchange, LIBOR, and benchmark rates, and other trading practices) of Note 20 (Provisions and contingent liabilities) to each set of Financial Statements (379-381 and 535-537).

 

The Asset Transfer Agreement by which certain assets and liabilities of UBS AG were transferred to UBS Switzerland AG is filed as Exhibit 4.18, and is described under Joint liability of UBS Switzerland AG on page 611 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, 20-23

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 (148-158) 

(b) Qualitative Information About Market Risk.

Annual Report, Market risk (148-158) 

(c) Interim Periods.

Not applicable.

Item 12.  Description of Securities Other than Equity Securities.

A – Debt Securities

Not applicable.

B – Warrants and Rights

Not applicable.

C – Other Securities

Not applicable.

D – American Depositary Shares

Not applicable.

Item 13.  Defaults, Dividend Arrearages and Delinquencies.

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

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

None

Item 15.  Controls and Procedures.

(a)     Disclosure Controls and Procedures

Annual Report, US disclosure requirements (242), 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 (308 and 462)

(c) Attestation Report of the Registered Public Accounting Form

Annual Report, Reports of independent registered public accounting firm on internal control over financial reporting (309-310 and 463-464)

(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 (228) and Corporate governance  (212-213) 

 

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, Key principles and policies (245). The Code is published on our website under http://www.ubs.com/1/e/investors/corporategovernance/business_conduct.html

 No waiver from any provision of the Code of Business Conduct and Ethics (the “Code”) was granted to any employee in 2016. 

Item 16C.  Principal Accountant Fees and Services.

Annual Report, Auditors  (239-240) 

 

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 purchases (207) 

 

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  (212-213)

Item 16H. Mine Safety Disclosure.

Not applicable.

Item 17.  Financial Statements.

Not applicable

Item 18.  Financial Statements.

Annual Report, Financial Statements and the Notes to the Financial Statements  (305-670)

Item 19.  Exhibits

Supplement, 24-25

 

 


 

 

Supplemental information

 

Item 4. Information on the Company

B – Business Overview

 

Item 4.B.2.  Geographic breakdown of revenues

 

The operating regions shown in the table below correspond to the management structure of the Group. The allocation of operating income 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 which 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 regional Presidents. Certain revenues, such as those related to the Corporate Center – Non-core and Legacy Portfolio, are managed at the Group level. These revenues are included in the Global column.

 

 

CHF billion

 

 

Americas

Asia Pacific

EMEA

Switzerland

Global

Total

Wealth Management

2016

0.4

2.0

3.4

1.5

(0.0)

7.3

2015

0.5

2.1

3.8

1.6

0.2

8.2

2014

0.5

1.9

4.0

1.5

0.0

7.9

Wealth Management Americas

2016

7.8

0.0

0.0

0.0

0.0

7.8

2015

7.4

0.0

0.0

0.0

0.0

7.4

2014

7.0

0.0

0.0

0.0

0.0

7.0

Personal & Corporate Banking

2016

0.0

0.0

0.0

4.0

0.0

4.0

2015

0.0

0.0

0.0

3.9

0.0

3.9

2014

0.0

0.0

0.0

3.7

0.0

3.7

Asset Management

2016

0.7

0.3

0.4

0.6

0.0

1.9

2015

0.7

0.3

0.4

0.6

0.1

2.1

2014

0.7

0.3

0.4

0.5

0.0

1.9

Investment Bank

2016

2.8

1.9

2.3

0.8

(0.1)

7.7

2015

2.8

2.6

2.5

1.0

(0.1)

8.8

2014

2.6

2.4

2.4

1.0

(0.1)

8.3

Corporate Center

2016

0.0

0.0

0.0

0.0

(0.4)

(0.4)

2015

0.0

0.0

0.0

0.0

0.3

0.3

2014

0.0

0.0

0.0

0.0

(0.8)

(0.8)

Group

2016

11.7

4.1

6.1

6.8

(0.4)

28.3

2015

11.3

5.0

6.8

7.1

0.5

30.6

2014

10.7

4.6

6.8

6.8

(0.9)

28.0

 

 


 

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 (SDNs) blocked or otherwise restricted under U.S. or Swiss law.  In 2016, the gross revenues for this UN-related account were approximately USD 13,859.  We do not allocate expenses to specific client accounts in a way that enables us to calculate net profits with respect to any individual 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. 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 2016, 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 2016 were USD 3,113.  As there have been no transactions involving this account in 2016 other than general account fees, there are no gross revenues or net profits to report for 2016.


 

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 and 1.4, respectively, 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 of UBS Group AG (which we call the “Organization Regulations” throughout this document) 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 and Organization Regulations of UBS AG are substantially similar to the Articles and Organization Regulations 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 “— Share Register and Transfer of Shares”.

 

     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”).

 

     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, but will be entitled to dividends, pre-emptive and priority subscription rights, and liquidation proceeds.


 

     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 representing 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:

 

  • 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 votes 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 preferential 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 funded by equity capital, against contribution in kind or to fund acquisitions in kind and the granting of special privileges;
  • 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. Shareholders representing at least 3% of the votes represented may always request that a vote or election take place electronically or by a written ballot.

 

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, unless such corporation qualifies as a holding company.

 

     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.

 

     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 of at least two-thirds of the votes represented and an absolute majority of the nominal value of the shares represented at the meeting 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, provided that any such borrowing is entered into on arms’-length terms.

 

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 provide that, subject to exceptional circumstances in which the best interests of UBS dictate that the member of the BoD or senior management with a conflict of interest shall not participate in the discussions and decision-making involving the interest at stake, the member of the BoD or senior management with a conflict of interest shall participate in discussions and a double vote (meaning a vote with and a vote without the conflicted individual) shall take place.  A binding decision on the matter requires the same outcome in both votes.

 

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 disclose such own shares as negative items in our shareholders’ equity. 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, management 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 security 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.

 

Disclosure of Principal Shareholders

 

     Under the applicable provisions of the Swiss Financial Market Infrastructure 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 Financial Market Infrastructure 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 Financial Market Infrastructure 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.

 

     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%.

 

     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.

 

     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 the Swiss Federal Tax Administration at the address above or downloaded from the web page of the Swiss Federal tax Administration. The form must be filled out in triplicate with each copy duly completed and signed before a notary public in the United States. The form must be accompanied by evidence of the deduction of withholding tax withheld at the source.

 

Transfers of UBS Ordinary Shares  

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

 

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


 

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

 

Dividends and Distributions  

     Subject to the passive foreign investment company rules discussed below, 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.

 

     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.

 

 


 

Item 19.  Exhibits. 

 

 

Exhibit number

 

Description

 

 

1.1

Articles of Association of UBS Group AG dated 21 February 2017.

 

 

1.2

Articles of Association of UBS AG dated 4 May 2016.

 

 

1.3

Organization Regulations of UBS Group AG dated 1 January 2017. 

 

 

1.4

Organization Regulations of UBS AG dated 1 January 2017.

 

 

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. (Incorporated by reference to Exhibit 4.8 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2015)

 

 

4.9

Terms and Conditions of additional Tier 1 capital instruments to be issued pursuant to the Deferred Contingent Capital Plan 2015/16. (Incorporated by reference to Exhibit 4.9 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2015)

 

 

4.10

Terms and Conditions of USD 1.5 billion 6.875% Tier 1 Subordinated Notes issued by UBS Group AG on 21 March 2016

 

 

4.11

Terms and Conditions of USD 1.1 billion 7.125% Tier 1 Subordinated Notes issued by UBS Group AG on 10 August 2016

 

 

4.12

Terms and Conditions of additional Tier 1 capital instruments to be issued pursuant to the Deferred Contingent Capital Plan 2016/17.

 

 

4.13

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. (Incorporated by reference to Exhibit 4.10 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2015)

 

4.14

Financial Conduct Authority Final Notice issued 11 November 2014. (Incorporated by reference to Exhibit 4.11 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2015)

 

4.15

Swiss Financial Market Supervisory Authority Report on Foreign Exchange Trading at UBS AG dated 12 November 2014. (Incorporated by reference to Exhibit 4.12 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2015)

 

4.16

Plea Agreement between the Criminal Division of the US Department of Justice and UBS AG dated May 20, 2015. (Incorporated by reference to Exhibit 4.13 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2015)

 

4.17

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. (Incorporated by reference to Exhibit 4.14 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2015)

 

4.18

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 28 to each set of Financial Statements (Interests in subsidiaries and other entities), on pages 439-447 and 592-600 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

 

 

 


 

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

 

 

_/s/ Todd Tuckner_________________ 

Name: Todd Tuckner

Title: Group Controller and Chief Accounting

          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

 

 

_/s/ Todd Tuckner_________________ 

Name: Todd Tuckner

Title: Group Controller and Chief Accounting

          Officer

 

 

March 10, 2017

 

  


 

 

UBS Group AG and UBS AG

Annual Report 2016


  



Annual Report 2016
Letter to shareholders

Dear shareholders,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 was another challenging year for the industry and UBS, marked by macroeconomic uncertainty, geopolitical tensions and divisive politics, which adversely affected client sentiment. Combined with the implementation of stricter prudential standards and the unclear trajectory of the future regulatory landscape, these factors contributed to headwinds for our businesses.

 

In particular, economic conditions in the world’s major economic centers – the US, the eurozone and China – were mixed. The US grew more slowly than expected, and although consumption remained strong and unemployment fell, the Federal Reserve Board delayed raising interest rates until the end of the year. In the eurozone, exceptionally loose monetary policy, continuing negative interest rates, low oil prices and improving credit conditions supported a modest recovery. Emerging market economies were highly divergent, although the slowdown in China proved milder than anticipated. While the Swiss economy rebounded following the sharp appreciation of the Swiss franc in the prior year, negative interest rates continued to provide challenging conditions with unclear medium- to long-term consequences. The results of the US election and the UK’s vote to leave the EU produced the year’s biggest political surprises, creating additional volatility and concerns.


Despite these many challenges, which had a particularly strong impact on European banks, our results in 2016 were solid and once again demonstrated the benefits of our balanced business mix and geographic diversification. As the world’s largest and only truly global wealth manager, we have a significant presence in both mature and high-growth markets. We are the number one bank in Switzerland and have competitive and specialized Investment Bank and Asset Management businesses. 2016 was another example of the power of our business model, as strong results in the US and Switzerland partly offset headwinds in Asia and the rest of Europe.

 

For the year, Group net profit attributable to shareholders was CHF 3.2 billion, with profit before tax of CHF 4.1 billion, and adjusted1 profit before tax was CHF 5.3 billion, down 5% year on year. Our return on equity was 5.9% and our adjusted1 return on tangible equity was 9.0%. We generated CHF 42 billion of net new money in our wealth management businesses, while absorbing substantial cross-border outflows in Wealth Management.

2 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Wealth Management’s adjusted 1 profit before tax was CHF 2.4 billion, down 15% on the prior year as cost reductions only partly offset lower revenues caused by reduced client activity, the effects of cross-border outflows and shifts into retrocession-free products, and changes in clients’ asset allocation. Net new money was CHF 27 billion, despite cross-border outflows of CHF 14 billion. Wealth Management Americas delivered a record adjusted1 profit before tax of USD 1.3 billion, a 43% increase year on year, and net new money of USD 15 billion. Personal & Corporate Banking’s adjusted 1 profit before tax was CHF 1.8 billion, up 4% year on year, and the best result since 2008. Asset Management recorded an adjusted1 profit before tax of CHF 552 million, down 10% year on year. The Investment Bank maintained its disciplined resource utilization and delivered an adjusted1 profit before tax of CHF 1.5 billion, down 34% compared with a strong prior year. With an adjusted1 return on attributed equity of 19.6%, it continued to more than cover its cost of capital and added significant value to our wealth management, corporate and institutional client bases.

 


We made good progress toward achieving our ambitious cost targets, increasing our net cost savings by CHF 0.5 billion to CHF 1.6 billion, measured based on our year-end exit rate, and on course to achieve our CHF 2.1 billion net cost reduction target by the end of 2017. We achieved these savings while maintaining our focus on properly managing risk, serving our clients and selectively investing in our businesses. We also continued to absorb costs related to legacy issues and provisions for litigation, regulatory and similar matters, amounting to CHF 0.8 billion, down from CHF 1.1 billion in 2015.

 

Our capital position at the end of 2016 remains one of the strongest among large global banks, with a fully applied common equity tier 1 (CET1) capital ratio of 13.8%. We also reached the 2020 minimum CET1 leverage ratio of 3.5% in the fourth quarter of 2016. During the year, we issued CHF 14 billion of loss-absorbing debt, bringing our total loss-absorbing capacity to over CHF 73 billion, well ahead of Swiss and, in particular, international regulatory requirements. Our strong capital position and successful execution of our strategy resulted in rating upgrades from the three leading credit rating agencies, placing us among the top-rated global banks.

 

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

3 


Annual Report 2016
Letter to shareholders

In addition to the progress made on building our capital, we successfully executed a series of measures to improve the resolvability of the Group in response to regulatory requirements in Switzerland and other countries. In 2016, we completed the establishment of UBS Americas Holding LLC as our US intermediate holding company and implemented our Group service company. The measures taken over the last few years have made our bank stronger and more resolvable.

 

We continue to support effective and reasonable regulation. However, we believe further regulatory tightening would create additional costs for the financial system and the economy at large, with unclear benefits and a negative impact on the international competitive playing field.

 

Our solid results and leading capital position have allowed us to maintain our ordinary dividend at 2015 levels and reconfirm our dividend policy. We intend to propose a 2016 dividend of CHF 0.60 per share for approval at our next Annual General Meeting (AGM).

 

In 2016, we further strengthened our reputation for excellence. This was demonstrated by numerous awards and accolades for our businesses. In March, UBS was named the world’s number one investment banking house by Global Finance in its annual World’s Best Investment Banks Survey. UBS dominated the recently announced 2017 Euromoney Private Banking Survey, taking the top spot in over 180 categories, including Best Global Private Bank and in the two “Innovative Technology” categories, Client Experience and Back Office Systems. In October 2016, UBS was named Best Global Private Bank and Best Private Bank in Asia at the FT’s PWM/The Banker Awards. In July 2016, wealth management researcher Scorpio Partnership confirmed UBS as the world’s largest wealth manager.

 

UBS confirmed its reputation as a global sustainability leader when it was named Diversified Financials Industry Group leader in the Dow Jones Sustainability Indices for the second year running. As of 31 December 2016, sustainable investments by our clients totaled CHF 976 billion, representing over a third of total invested assets. As one of the first signatories of the UN Global Compact with one of the largest portfolios of sustainable investment products and services, UBS is actively engaged in supporting the UN Sustainable Development Goals (SDGs). The UBS Grand Challenge mobilized over 1,200 employees to develop innovative solutions for five of the SDGs. UBS also announced plans to direct at least USD 5 billion of client assets to support the SDGs over the next five years. UBS’s ongoing commitment to sustainable investing found expression in a number of groundbreaking initiatives, most notably the closing of the USD 471 million UBS Oncology Impact Fund. This is the largest amount ever raised for an impact fund dedicated to a single cause.

 

In 2016, our Community Affairs program benefited over 117,000 young people and entrepreneurs across all of the regions in which we operate. Our local volunteering programs saw over 30% of UBS employees record a total of over 155,000 volunteer hours in community engagement projects.

 

We would like to take this opportunity to thank both our clients and our shareholders for their continued support and our employees for their dedication and commitment over the year. Our focus remains on the disciplined execution of our strategy, staying close to our clients and delivering sustainable performance, while investing for growth. Our unique business model, successful track record of execution and strategic clarity position us well to deliver for our clients and generate shareholder value in a variety of market conditions.

 

We look forward to seeing you at this year’s AGM.

 

 

10 March 2017

 

Yours sincerely,

 

UBS

 

 

 

 


Axel A. Weber                          Sergio P. Ermotti

Chairman of the                      Group Chief Executive Officer

Board of Directors

 

 

 

 

  

4 


 

UBS Group key figures

 

 

 

As of or for the year ended

CHF million, except where indicated

 

31.12.16

31.12.15

31.12.14

 

 

 

 

 

Group results

 

 

 

 

Operating income

 

28,320

30,605

28,027

Operating expenses

 

24,230

25,116

25,567

Operating profit / (loss) before tax

 

4,090

5,489

2,461

Net profit / (loss) attributable to shareholders

 

3,204

6,203

3,466

Diluted earnings per share (CHF)¹

 

0.84

1.64

0.91

 

 

 

 

 

Key performance indicators²

 

 

 

 

Profitability

 

 

 

 

Return on tangible equity (%)

 

6.9

13.7

8.2

Return on assets, gross (%)

 

3.0

3.1

2.8

Cost / income ratio (%)

 

85.4

81.8

91.0

Growth

 

 

 

 

Net profit growth (%)

 

(48.3)

79.0

9.3

Net new money growth for combined wealth management businesses (%)³

 

2.1

2.2

2.5

Resources

 

 

 

 

Common equity tier 1 capital ratio (fully applied, %)⁴

 

13.8

14.5

13.4

Going concern leverage ratio (phase-in, %)⁵

 

6.4

 

 

 

 

 

 

 

Additional information

 

 

 

 

Profitability

 

 

 

 

Return on equity (RoE) (%)

 

5.9

11.8

7.0

Return on risk-weighted assets, gross (%)⁶

 

13.2

14.4

12.6

Resources

 

 

 

 

Total assets

 

935,016

942,819

1,062,478

Equity attributable to shareholders

 

53,621

55,313

50,608

Common equity tier 1 capital (fully applied)⁴

 

30,693

30,044

28,941

Common equity tier 1 capital (phase-in)⁴

 

37,788

40,378

42,863

Risk-weighted assets (fully applied)⁴

 

222,677

207,530

216,462

Common equity tier 1 capital ratio (phase-in, %)⁴

 

16.8

19.0

19.4

Going concern capital ratio (fully applied, %)⁵

 

17.9

 

 

Going concern capital ratio (phase-in, %)⁵

 

24.7

 

 

Common equity tier 1 leverage ratio (fully applied, %)⁷

 

3.5

3.3

2.9

Going concern leverage ratio (fully applied, %)⁵

 

4.6

 

 

Leverage ratio denominator (fully applied)⁷

 

870,470

897,607

997,822

Liquidity coverage ratio (%)⁸

 

132

124

123

Other

 

 

 

 

Invested assets (CHF billion)⁹

 

2,821

2,689

2,734

Personnel (full-time equivalents)

 

59,387

60,099

60,155

Market capitalization¹⁰

 

61,420

75,147

63,526

Total book value per share (CHF)¹⁰

 

14.44

14.75

13.94

Tangible book value per share (CHF)¹⁰

 

12.68

13.00

12.14

1 Refer to “Note 9 Earnings per share (EPS) and shares outstanding” in the “Consolidated financial statements” section of this report for more information.    2 Refer to the “Measurement of performance” section of this report for the definition of our key performance indicators.    3 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.    4 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.    5 Based on the revised Swiss SRB framework that became effective on 1 July 2016.    6 Based on fully applied risk-weighted assets.    7 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.    8 Figures reported for 31 December 2016 and 31 December 2015 represent a 3-month average. Refer to the “Treasury management” section of this report for more information. The figure reported for 31 December 2014 was calculated on a pro forma basis and represents a period-end number.    9 Includes invested assets for Personal & Corporate Banking.    10 Refer to the “UBS shares” section of this report for more information.   

 

The 2016 results and the balance sheet in this report differ from those presented in the unaudited fourth quarter 2016 report published on 27 January 2017 as a result of an adjusting event after the reporting period. Provisions for litigation, regulatory and similar matters increased reflecting an agreement in principle to resolve an RMBS matter related to the National Credit Union Association. This adjustment reduced 2016 net profit attributable to shareholders by CHF 102 million, and basic and diluted earnings per share by CHF 0.03 and CHF 0.02, respectively.

 

5 


 

  


 

Corporate information

UBS Group AG is incorporated and domiciled in Switzerland and operates under the Swiss Code of Obligations as an Aktiengesellschaft, a corporation limited by shares. 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 corporation limited by shares. 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.

Contacts

Switchboards

For all general inquiries.
www.ubs.com/contact

Zurich +41-44-234 1111
London +44-20-7568 0000
New York +1-212-821 3000
Hong Kong +852-2971 8888

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
UBS Group AG 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 2017 report:       Friday, 28 April 2017

Annual General Meeting 2017:                        Thursday, 4 May 2017

Publication of the second quarter 2017 report: Friday, 28 July 2017

Publication of the third quarter 2017 report:      Friday, 27 October 2017

 

Corporate calendar UBS AG

Publication of the first quarter 2017 report:            Wednesday, 3 May 2017

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 2017. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

7 


Annual Report 2016

Our Board of Directors as of 31 December 2016

8 


 

 

 

 

 

 

The Board of Directors (BoD) of UBS Group AG, under the leadership of the Chairman, consists of six to twelve members as per our Articles of Association. 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.

  

9 


Annual Report 2016

Our Group Executive Board as of 31 December 2016

10 


 

 

 

 

 

UBS Group AG operates 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

  

11 


Annual Report 2016

History

UBS has played a pivotal role in the development and growth of Swiss banking. Since the firm’s origins in the mid-19th century, UBS has evolved to become a global financial services firm that houses the world’s largest wealth manager, the number one bank in Switzerland, a specialized and successful investment bank and one of the world’s largest asset managers.

The scope and international reach of what UBS is today was largely shaped in the second half of the 20th century. In 1998, two of Switzerlands large banks, Union Bank of Switzerland and Swiss Bank Corporation (SBC), merged to form UBS. At the time of the merger, both banks were already well-established and successful in their own right. Union Bank of Switzerlands origins go back to the Bank in Winterthur founded in 1862. SBCs founding forebear, the Basler Bankverein, was established in 1872.

In the early 1990s, SBC and Union Bank of Switzerland were both commercial banks operating mainly out of Switzerland, and both shared the vision of becoming 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 organic growth. In contrast, SBC, then the third-largest Swiss bank, grew mainly through a combination of strategic partnerships and acquisitions, including O’Connor in 1992, Brinson Partners in 1994, and S.G. Warburg, the historical pillar of UBS’s Investment Bank, in 1995.

 

  

 


In 2000, UBS acquired PaineWebber, whose roots went back to 1879, establishing the firm as a significant player in the US. Over the last half century, UBS has largely organically built a strong presence in the Asia Pacific region, where it is the leading wealth manager and a top-tier investment bank.

During the financial crisis from 2007 to 2009, UBS incurred significant losses. In 2011, we initiated a strategic transformation of our firm toward a business model that focused on our core businesses of wealth management and personal and corporate banking in Switzerland.

We sought to revert to our roots, emphasizing a client-centric model that required less risk-taking and capital, and have successfully completed this transformation. The Pillars, Principles and Behaviors, which we launched in 2014, have been a foundation for our new corporate strategy, identity and culture.

We have also adapted our legal entity structure to improve our resolvability and to respond to the new regulatory environment.

Today, we are among the world’s best-capitalized large global banks with a balanced business mix and geographic diversification. We remain committed to executing our strategy with discipline and creating sustainable value for our clients and shareholders. 

®   Refer to www.ubs.com/history for more information

®   Refer to the “The legal structure of UBS Group” and “Our strategy” sections of this report for more information

 

  

12 


 

The legal structure of UBS Group

Since 2014, 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 became the holding company of the Group. During 2015, UBS Group AG 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 owns 100% of the outstanding shares of UBS AG.

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

Also in 2015, we implemented a more self-sufficient business and operating model for UBS Limited and established UBS Business Solutions AG as a direct subsidiary of UBS Group AG to act as the Group service company. 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.

 

13 


Annual Report 2016

 

In the second half of 2015, we transferred the ownership of the majority of our existing service subsidiaries outside the US to UBS Business Solutions AG, and we expect to transfer shared services functions in Switzerland and the UK from UBS AG to this entity during 2017. As of 1 January 2017, we completed the transfer of the shared service employees in the US to our US service company, UBS Business Solutions US LLC.

As of 1 July 2016, UBS Americas Holding LLC was designated as our intermediate holding company for our US subsidiaries as required under the enhanced prudential standards regulations pursuant to the Dodd-Frank Act. UBS Americas Holding LLC holds all of our US subsidiaries and is subject to US capital requirements, governance requirements and other prudential regulation.

In addition, we transferred the majority of the operating subsidiaries of Asset Management to UBS Asset Management AG during 2016. Furthermore, we merged our Wealth Management subsidiaries in Italy, Luxembourg (including its branches in Austria, Denmark and Sweden), the Netherlands and Spain into UBS Deutschland AG, which was renamed to UBS Europe SE, to establish our new European legal entity which is headquartered in Frankfurt, Germany.

We have established UBS Group Funding (Switzerland) AG, a wholly owned direct subsidiary of UBS Group AG, to issue future loss-absorbing additional tier 1 (AT1) capital instruments and total loss-absorbing capacity- (TLAC-) eligible senior unsecured debt, which will be guaranteed by UBS Group AG. We also intend to substitute the issuer of outstanding TLAC-eligible senior unsecured debt with UBS Group Funding (Switzerland) AG replacing UBS Group Funding (Jersey) Limited as the issuer. Outstanding loss-absorbing AT1 capital instruments issued by UBS Group AG may in the future be transferred to UBS Group Funding (Switzerland) AG, subject to further regulatory review. The Swiss Federal Council has requested the Swiss Federal Tax Administration to propose amendments to the current Swiss tax law in order to reduce the additional tax burden on debt issuances by bank top holding companies. When such changes become effective, we expect loss-absorbing AT1 capital instruments and TLAC-eligible senior unsecured debt to be issued directly out of UBS Group AG. At that point, we also expect to substitute UBS Group AG as issuer of outstanding capital and debt instruments issued by UBS Group Funding (Switzerland) AG. We expect the substitution of UBS Group Funding (Switzerland) AG as issuer of outstanding TLAC-eligible senior unsecured debt to be completed during the second quarter of 2017. Upon completion of the issuer substitution, outstanding TLAC-eligible senior unsecured debt will continue to be guaranteed by UBS Group AG, and investors’ seniority of claim against UBS Group AG will remain unchanged.

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 continue to consider further changes to the Group’s legal structure in response to regulatory requirements and other external developments, including the anticipated exit of the UK from the EU. Such changes may include the transfer of operating subsidiaries of UBS AG to become direct subsidiaries of UBS Group AG, further consolidation of operating subsidiaries in the EU 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.

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

 

Terms used in this report, unless the context requires otherwise

“UBS,” “UBS Group,” “UBS Group AG consolidated,” “Group,” “the Group,” “we,” “us” and “our”

UBS Group AG and its consolidated subsidiaries

“UBS AG consolidated”

UBS AG and its consolidated subsidiaries

“UBS Group AG” and “UBS Group AG standalone”

UBS Group AG on a standalone basis

“UBS AG” and “UBS AG standalone”

UBS AG on a standalone basis

“UBS Switzerland AG”

UBS Switzerland AG on a standalone basis

“UBS Limited”

UBS Limited on a standalone basis

“UBS Americas Holding LLC consolidated”

UBS Americas Holding LLC and its consolidated subsidiaries

  

14 


 

External reporting

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.

We have to prepare and publish consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) on a half-yearly basis, in line with the requirements of SIX Swiss Exchange and New York Stock Exchange, where our shares are listed. However, we also publish our results on a quarterly basis in order to provide shareholders with more frequent disclosures than required by law. Additionally, statutory financial statements for UBS Group AG 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. Management’s discussion and analysis (MD&A) complements our annual financial statements.

In preparing these disclosures, we consistently apply our financial disclosure principles, such as transparency and relevance to our stakeholders. We also continuously seek to improve our disclosures by benchmarking them against best practice examples, including those recommended by the Enhanced Disclosure Task Force (EDTF).

®   Refer to “Information policy” in the “Corporate governance” section of this report for more information

Our Annual Report 2016, Form 20-F and additional year-end disclosures

UBS Group AG

The UBS Group AG Annual Report 2016 is available at www.ubs.com/investors and includes:

   the aforementioned MD&A provided on a UBS Group AG consolidated basis, covering our strategy and the environment in which we operate, the financial and operating performance of our business divisions and Corporate Center, our risk, treasury and capital management and our corporate governance, corporate responsibility and compensation frameworks

   audited UBS Group AG consolidated financial statements in accordance with IFRS

   audited UBS Group AG standalone financial statements in accordance with the Swiss Code of Obligations

UBS Group AG and UBS AG

Also available at www.ubs.com/investors is the combined UBS Group AG and UBS AG Annual Report 2016. As financial information for UBS AG (consolidated) does not differ materially from UBS Group AG (consolidated), the MD&A included in the combined Annual Report 2016 is generally provided on a UBS Group AG consolidated basis. In addition, it includes information for UBS AG (consolidated) with respect to risk profile as well as capital and leverage ratios in line with the requirements for Swiss systemically relevant banks. UBS AG consolidated financial statements in accordance with IFRS are also part of the combined UBS Group AG and UBS AG Annual Report 2016.

This document, excluding the standalone financial statements of UBS Group AG and including the supplemental disclosures required under US Securities and Exchange Commission (SEC) regulations for both UBS Group AG (consolidated) and UBS AG (consolidated), forms the basis of our Form 20-F filing, which is available under “SEC filings” at www.ubs.com/investors.  

Basel III Pillar 3 disclosures for UBS Group AG

UBS Group AG (consolidated) disclosures required under Basel III Pillar 3 regulations are published as a separate report under “Pillar 3 disclosures” at www.ubs.com/investors

Legal entity disclosures

In accordance with Swiss Financial Market Supervisory Authority (FINMA) Circular 2016/01, Disclosure – banks, which requires disclosures for significant Pillar 3 entities and sub-groups, standalone legal entity financial and regulatory information for UBS AG, UBS Switzerland AG and UBS Limited as well as consolidated financial and regulatory information for UBS Americas Holding LLC is provided under “Disclosure for legal entities” at www.ubs.com/investorsThe documents for UBS AG and UBS Switzerland AG include audited standalone financial statements. In addition, audited standalone financial statements for UBS Limited will be made available in April 2017.

 Furthermore, legal entity-specific disclosures in accordance with Article 89 of the European Union Capital Requirements Directive IV (CRD IV) are provided under “EU CRD IV disclosures” at www.ubs.com/investors. Information as of 31 December 2016 will be published by the end of 2017.

 

 

  

 

 

  

15 



Operating environment and strategy

Management report

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Signposts

Throughout the Annual Report 2016, the Audited | signpost that is displayed at the beginning of a section, table or chart indicates that those items have been audited. A triangle symbol – ▲ – indicates the end of the signpost.

  


Operating environment and strategy
Current market climate and industry trends

Current market climate and industry trends

Global economic developments in 2016

Global growth slowed modestly in 2016. Each of the world’s major economic areas – the US, the eurozone and China – saw slower growth, primarily due to lower investment spending. Brazil and Russia experienced another year in recession, and Japan’s growth remained muted. India delivered very strong growth.

At a global level, economic uncertainty meant investment spending continued to fall short of pre-financial crisis levels, despite record low interest rates across much of the world. In 2016, the trend of slower investment spending was exacerbated by low energy prices, which led to further cutbacks in capital investment, particularly in the US and Russia. Oil prices saw an improvement toward the end of the year, primarily as a result of an OPEC decision to reduce production, but geopolitical and economic uncertainty poses a risk to a broad recovery in investment spending.

Despite these conditions, equity markets delivered generally positive performance. After a challenging start to 2016 on concerns about China and a decline in oil prices, global equity markets rallied to record highs, supported by the economic stimulus in China, and the Bank of England’s monetary easing policy in response to the rise in political uncertainty following the outcome of the UK referendum on EU membership.

Fixed income markets performed well through much of the year, although signs of rising US inflation and expectations of fiscal stimulus led to a sharp sell-off toward the year-end. Currency markets saw a recovery in the Brazilian real and the South African rand, while the British pound and Mexican peso declined sharply following the outcomes of the UK referendum on EU membership and the US presidential election, respectively.

US growth was lower than expected, primarily due to stagnation in business investment in the energy sector. Private consumption remained relatively robust, jobs growth was strong, unemployment decreased, and improving wage growth and credit availability proved supportive of consumer confidence. The US Federal Reserve Board raised interest rates just once toward the end of the year. Political and financial market uncertainty led the Federal Reserve Board to proceed with caution in 2016.

In Japan, growth remained positive due to positive net exports, but continued to show little response to the extensive monetary and fiscal stimulus put in place in recent years. Weak wage growth, uncertainty over social security, and a negative wealth effect resulting from an appreciating yen weighed on consumption.  

 The Bank of Japan introduced a new policy of yield curve control to cap longer-term interest rates, contributing to yen weakness in the latter months of the year.

In Europe, growth slowed a little, but proved resilient following the outcome of the UK referendum on EU membership. Exceptionally loose monetary policy, low oil prices and improving credit conditions supported growth in the eurozone. Meanwhile, UK growth was aided by the effects of stronger than expected household consumption following the referendum, as well as a weaker British pound and lower interest rates.

The Swiss economy recovered from the sharp appreciation of the Swiss franc in the prior year, with economic growth accelerating in 2016 to almost double the pace of 2015. Continued sound growth in key eurozone trading partners benefited exports, after a slowdown in 2015.

Growth in emerging markets was highly divergent. The slowdown in China proved milder than anticipated, as a rebound in real estate prices and construction stabilized the economy after an uncertain start in 2016. India saw another year of strong growth, driven largely by private consumption, although uncertainty related to the government’s action to take high-value banknotes out of circulation acted as a temporary brake on growth toward the end of the year. Brazil saw a second year of deep recession, with private consumption and investment continuing to suffer from high rates of inflation, interest rate hikes, and persistent political uncertainty. Russia’s economy contracted again, but less severely than in 2015, as the economy showed signs of adjustment to the drop in oil prices, with consumption recovering well in the latter half of the year.

Economic and market outlook for 2017

We expect a modest acceleration in global growth in 2017, supported by accelerating growth in the US, a beginning of recovering from the recessions in Brazil and Russia, and only modest slowdowns in Europe and China. Central bank policy globally is expected to remain broadly supportive, as the European Central Bank is likely to continue with quantitative easing, even if at a slower pace, even as the Federal Reserve Board continues to increase rates.

US consumption continues to benefit from an improving labor market, while a post-election rally in business sentiment bodes well for investment spending and deregulation could provide additional stimulus. Eurozone growth could slow modestly as political uncertainty weighs on investment spending and the positive effects of monetary easing begin to wane. A recovery in the euro and in oil prices might also slow exports and consumption, respectively. Switzerland is expected to see a continuation of steady growth, although uncertainty over corporate tax reform and the continued Swiss franc strength present headwinds. China is likely to see slower growth as the real estate and construction boom slows, but quasi-fiscal and credit stimuli are likely to keep growth steady. More stable commodity prices and currencies should prove helpful for Brazil and Russia.

18 


 

Major risks to growth and markets relate to uncertainty regarding the effect of higher US interest rates, the possibility of greater protectionism in response to changes in US trade policy, uncertainty raised by the commencement of the UK’s negotiation of its withdrawal agreement with the EU, and the potential for surprises from election outcomes in the Netherlands, France and Germany. China’s management of its rising debt levels and economic transition remains an important medium-term factor, as does the possibility of heightened geopolitical tensions in an uncertain global environment.  

Industry trends

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 2016, the ultra high net worth segment is expected to expand by about 9.5% annually from 2015 to 2020, and the high net worth segment by about 9.4% annually. Asia Pacific and the emerging markets are expected to be the fastest-growing regions, with an estimated annual market growth rate of 14.0% and 10.4% for the high net worth, and 16.0% and 12.4% for the ultra high net worth segments, respectively. 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 gross domestic product growth. We believe that wealth management is likely to remain a highly fragmented industry with high barriers to entry due to the significant investments needed to meet current and proposed regulatory requirements.  

Demographics, wealth transfer and retirement funding

Demographic changes, particularly escalating costs associated with the care of an aging population and the funding challenges faced by public pension systems, will be a key long-term driver for both wealth consumption and wealth transfer. Pressures on public pension schemes will make reform a pressing matter in several countries. Although change in public pension schemes will vary, a general and gradual shift from public to privately funded pension schemes seems inevitable.

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. We believe that 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 increased sharply. The market expects continued digital disruption in the financial industry, driven by consumer preferences and expectations. We strongly believe that core technologies, such as automated investment advice, mobile access to banking services and distributed ledger technology, will become mainstream in the financial services industry. Digital capabilities are likely to play a significant role in transforming how banks interact with clients and how they operate internally.

Further adaptation of operating models

Increases in operational cost pressure, reflecting higher regulatory costs and a subdued revenue environment, will drive financial services firms to seek more efficient operating models. This push for efficiency is forcing banks to reassess their front-to-back processes, focus on identifying potential for standardization, and reconsider the ownership of value chain components. Over the past few years, a diverse network of suppliers and service providers for different parts of the banking industry value chain has emerged, in particular by disrupting the traditional approach to process ownership, service and supply chain.

Consolidation

Increasing investment requirements along with constrained supply, a stronger refocus on core businesses and a subdued macro environment will continue to drive and accelerate efficiency efforts that are likely to span all functions in the banking business. A retrenchment of banks’ operations to their core markets is expected to continue, with banks curtailing or even abandoning completely some of their past international expansion efforts. This is expected to foster concentration in certain markets, but also increase competition in certain business lines in order to gain scale and more efficiency.  

Considering continuous cost pressures, the industry is likely to seek opportunities to achieve further increased efficiency of non-client-facing logistics and control functions, and the emergence of more utility-like models, for example, centralized providers of banking infrastructure or shared service companies, is increasingly probable. Moreover, we will continue to see banks focusing on their business portfolios, exiting their non-core products and geographies, and further crystallizing and sharpening their core value proposition in order to increase revenues, reduce costs and improve their balance sheets. This could lead to added pressure on profitability.

19 


Operating environment and strategy
Current market climate and industry trends

 

Banking intermediation developments

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 pressure, as well as be subjected to renewed public discussion and regulatory scrutiny. The combination of enhanced regulatory requirements, reduced risk appetite and subdued macroeconomic prospects continues to curb the lending appetite of banks. While banks are currently still active in more specific or niche areas, such as long-dated assets and high-risk lending, other financial industry players are increasingly stepping into banking intermediation and risk-taking areas. It is expected that this trend will continue with its extent and pace depending 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 sources of revenue.

Regulation

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

We believe we have the right business model to comply with new, more demanding regulations without the need to change our strategy. We have one of the highest fully applied CET1 capital ratios 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 revised Swiss too big to fail framework by the effective date in 2020, and we intend to use this period to fully implement the new requirements.   

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

  

20 


 

Regulation and supervision

The Swiss Financial Market Supervisory Authority (FINMA) is UBS’s home country regulator and consolidated supervisor. As a financial services provider with a global footprint, we are also regulated and supervised by the relevant authorities in each of the jurisdictions in which we conduct business, including the US, the UK and the rest of the EU. 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.

As we are a designated global systemically important bank (G-SIB) and considered systemically relevant in Switzerland, we are subject to more rigorous regulatory requirements and supervision than most other Swiss banks. 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 material effect on how we conduct our business and result in increased ongoing costs.

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

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

Regulation and supervision in Switzerland

Supervision

UBS Group AG and its subsidiaries are subject to consolidated supervision by FINMA under the Swiss Federal Law on Banks and Savings Banks (Swiss Banking Act) and the related ordinances that impose, among other requirements, minimum standards for capital, liquidity, risk concentration and organizational structure. FINMA fulfills its statutory supervisory responsibilities through licensing, regulation, monitoring and enforcement. FINMA is responsible for the prudential supervision and mandates audit firms to perform on its behalf a regulatory audit and certain other supervisory tasks.

Resolution planning and resolvability

The Swiss Banking Act and related ordinances provide FINMA with additional powers to intervene in order to prevent a failure or resolve a failing financial institution, including UBS Group AG, 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 as well as measures 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 provides FINMA with the ability to extinguish or convert to common equity the liabilities of the Group in connection with its resolution.

Furthermore, Swiss too big to fail requirements require Swiss systemically relevant banks, including UBS, to put in place viable emergency plans to preserve the operation of systemically important functions in case of a failure of the institution, to the extent that such activities are not sufficiently separated in advance. In response to these requirements in Switzerland, as well as to similar requirements in other jurisdictions, UBS has developed comprehensive recovery plans that provide the tools to manage a severe loss event. UBS also provides relevant authorities with resolution plans for restructuring or winding down certain businesses in the event the firm could not be stabilized. Alongside these measures, the bank has invested significantly in structural, financial and operational ring-fencing measures to improve the Group’s resolvability.

®   Refer to the “Capital management” section of this report for more information on the Swiss SRB framework and the Swiss too big to fail requirements

®   Refer to the “Treasury management” section of this report for more information on liquidity coverage ratio requirements

Regulation and supervision outside Switzerland

Regulation and supervision in the US

In the US, UBS is subject to overall regulation and supervision by the Board of Governors of the Federal Reserve (Federal Reserve Board) under a number of laws. Furthermore, our US operations are subject to additional oversight by the Federal Reserve Board’s Large Institution Supervision Coordinating Committee, which coordinates supervision of large or complex financial institutions.

UBS AG is a financial holding company under the Bank Holding Company Act and maintains several branches and representative offices in the US, which are authorized and supervised by either the Office of the Comptroller of the Currency or the state banking authority of the state in which the branch is located. UBS AG is currently registered as a swap dealer with the Commodity Futures Trading Commission (CFTC), and we expect to register it as a security-based swap dealer with the Securities and Exchange Commission (SEC) when such registration is required.

UBS Americas Holding LLC, the holding company for our non-branch operations in the US as required under the Dodd-Frank Act, is subject to risk-based capital, liquidity, Comprehensive Capital Analysis and Review, stress test, capital plan and governance requirements established by the Federal Reserve Board.

UBS Bank USA, a Federal Deposit Insurance Corporation-insured depository institution subsidiary, is licensed and regulated by state regulators in Utah.

UBS Financial Services Inc., UBS Securities LLC and several other US subsidiaries are subject to regulation by a number of different government agencies and self-regulatory organizations, including the SEC, the Financial Industry Regulatory Authority, the CFTC, the Municipal Securities Rulemaking Board and

21 


Operating environment and strategy
Regulation and supervision

national securities exchanges, depending on the nature of their business.

Regulation and supervision in the UK

Our operations in the UK are mainly regulated and supervised by the Prudential Regulation Authority (PRA), an affiliated authority of the Bank of England, and the Financial Conduct Authority (FCA). 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.

UBS Limited is a private limited company incorporated in the UK and is authorized by the PRA and regulated by the PRA and the FCA to conduct a broad range of banking and investment business.

UBS AG maintains a UK-registered branch in London that serves as a global booking center for our Investment Bank.

Financial services regulation in the UK is currently conducted in accordance with EU directives covering, among other topics, compliance with certain capital and liquidity adequacy standards, client protection requirements and business conduct principles. This may be subject to change depending on how the relationship between the UK and the EU evolves.

Regulation and supervision in Germany

UBS Europe SE, headquartered in Frankfurt, Germany, is supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and subject to EU and German laws and regulations. UBS Europe SE was established in the fourth quarter of 2016, following the merger of UBS Deutschland AG and our Wealth Management subsidiaries in Germany, Italy, Luxembourg (including its branches in Austria, Denmark and Sweden), the Netherlands and Spain.

Anti-money laundering and anti-corruption

A major focus of 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. 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 and confidential information, including provisions under Swiss law, the EU Data Protection Directive and laws of other jurisdictions.

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

  

22 


 

Regulatory and legal developments

Key international developments

Revisions of BCBS capital framework and ongoing consultations

Proposed revisions to the Pillar 1 requirements

The Basel Committee on Banking Supervision (BCBS) is currently finalizing a comprehensive reform package for the Basel III capital framework, the elements of which have been proposed in a series of separate consultation papers. High-level guidance on the revisions issued by the BCBS in November 2016 included: (i) the revised standardized approach to credit risk will be more risk-sensitive and more consistent with banks’ internal model-based approaches, which are subject to approval by the home country regulator; (ii) a revised standardized approach for operational risk will replace the existing approaches, including the advanced measurement approach, which is based on banks’ internal models and also subject to approval by the home country regulator; and (iii) a leverage ratio surcharge for global systemically important banks (G-SIBs) will be introduced. In addition, an aggregate output floor, in relation to the level of capital required, is expected to be part of the reform package. Final rules, which were expected to be issued in January 2017, have been delayed. We expect that if the proposals are adopted in their current form and implemented in Switzerland, the proposed changes to the capital framework will likely result in a significant increase in our overall RWA without considering the effect of mitigating measures.

Revisions to the Pillar 2 requirements

In April 2016, the BCBS revised its 2004 principles for the management and supervision of interest rate risk. The revised standards include guidance on the development of interest rate shock scenarios, enhanced quantitative disclosure requirements as well as an updated standardized framework, which banks could be mandated to follow. The impact of these revisions can only be determined once its implementation in national prudential regulations becomes clearer.

Revisions to the Pillar 3 requirements

FINMA has revised its Pillar 3 disclosure requirements to reflect changes to the BCBS Pillar 3 standards. Requirements relating to the 2015 BCBS revisions became effective for Swiss banking institutions on 31 December 2016 with additional requirements to be implemented during 2017. Further revisions to the Pillar 3 framework are expected as part of the finalization of the Basel III capital framework.

®   Refer to the “Significant accounting and financial reporting changes” section of this report and the “Basel III Pillar 3 UBS Group AG 2016” report under “Pillar 3, SEC filings & other disclosures” at www.ubs.com/investors for more information

Consultation on regulatory capital treatment of accounting provisions

In October 2016, the BCBS issued a consultative document and a discussion paper on the Basel III regulatory capital treatment of accounting provisions following the publication of IFRS 9, Financial Instruments, issued by the International Accounting Standards Board, and the Current Expected Credit Loss (CECL) model, issued by the US Financial Accounting Standards Board. The new rules require the use of expected credit loss models as opposed to the currently applied incurred credit loss impairment approach under IFRS and US GAAP. UBS will adopt the IFRS 9 requirements on 1 January 2018. The BCBS consultative document proposes to retain for an interim period the current regulatory treatment of accounting provisions. This would result in the impact of IFRS 9 on common equity tier 1 capital to be limited to the excess of expected credit losses over the current regulatory expected losses for banks applying the internal ratings-based (IRB) approach. The BCBS also considers the adoption of transitional arrangements to phase in this impact. The BCBS discussion paper sets out longer-term options that include retaining the current regulatory treatment and introducing an expected credit loss component to the standardized regulatory approach. The consultation period ended in January 2017.

®   Refer to the “Significant accounting and financial reporting changes” section of this report for more information

Developments on TLAC and MREL requirements

Following the publication of the Financial Stability Board’s (FSB) international total loss-absorbing capacity (TLAC) standard in November 2015, a number of major jurisdictions issued TLAC requirements during 2016.

Switzerland was the first jurisdiction to implement TLAC requirements as part of the revision of the Swiss Capital Adequacy Ordinance that became effective on 1 July 2016. Subject to a limited reduction of the gone concern requirement based on improvements to our resolvability, the TLAC requirements applicable to UBS as of 1 January 2020 are 28.6% of RWA (excluding countercyclical buffer requirements) and 10% of the leverage ratio denominator. The revised Capital Adequacy Ordinance requires that TLAC-eligible instruments be issued out of a holding company, which would increase the overall tax burden for the Group under the current Swiss tax law. The Swiss Federal Council has requested the Federal Tax Administration to propose amendments to the Swiss tax law in order to address this issue.

In November 2016, the Bank of England published the final UK Minimum Requirement for own Funds and Eligible Liabilities (MREL) rules, including minimum standards for domestic systemically important banks (D-SIBs) in the UK, such as UBS Limited. Starting as of 1 January 2020, D-SIBs will have to meet MREL requirements amounting to the greater of (i) a multiple, initially less than two and increasing to two as of 1 January 2022, of the Pillar 1 requirement of 8% and an institution-specific add-on, or (ii) if subject to a leverage ratio requirement, two times the applicable requirement of currently 3%.

23 


Operating environment and strategy
Regulatory and legal developments

 

Also in November 2016, the European Commission (EC) published a proposal to integrate the FSB TLAC standard into the EU MREL regime. The EC proposes to apply MREL requirements to global systemically important institutions (G-SIIs) calculated at 16% of RWA and 6% of the leverage exposure measure as of 1 January 2019, increasing to 18% and 6.75%, respectively, as of 1 January 2022. The proposal would also introduce internal MREL requirements for material subsidiaries of non-EU G-SIIs.

In December 2016, the Federal Reserve Board issued a final rule that will apply TLAC requirements, minimum long-term debt requirements and clean holding company requirements to all US G-SIBs and to foreign G-SIBs’ US intermediate holding companies (covered IHCs), including UBS Americas Holding LLC. The final rule will require covered IHCs to maintain debt to the parent G-SIB qualifying as TLAC (internal TLAC) of at least the greatest of 16% of RWA, 6% of leverage exposure or 9% of average total consolidated assets, plus a buffer, including eligible long-term debt of at least the greatest of 6% of RWA, 2.5% of leverage exposure or 3.5% of average total consolidated assets. The final rule prohibits covered IHCs from having liabilities to unrelated third parties that exceed 5% of its total TLAC (clean holding company requirement) unless all of its TLAC is contractually subordinated to third-party liabilities. It further prohibits a covered IHC from incurring short-term debt, entering into derivatives with unaffiliated parties and issuing certain guarantees. The rule becomes effective as of 1 January 2019.

®   Refer to the “Capital management” section of this report for more information on the revised Swiss SRB framework

Implementation of margin requirements for non-cleared OTC derivatives

The G20 commitments on derivatives call for adoption of mandatory exchange of initial and variation margin for uncleared over-the-counter (OTC) derivative transactions (margin rules).

Margin rules for the largest counterparties (phase 1 counterparties) became effective in the US, Canada and Japan on 1 September 2016 and in the EU, Switzerland and major jurisdictions in Asia in the first quarter of 2017. Margin requirements for the next group of counterparties, including significant numbers of end users, have generally become effective in these jurisdictions on 1 March 2017. In recognition of the low level of industry and end-user readiness for these requirements, regulators in many of these jurisdictions have issued supervisory guidance or other relief intended to allow market participants to continue to transact while proceeding as quickly as practicable to implement the requirements. This relief is generally effective until September 2017. The non-cleared margin requirements will have a significant operational and funding impact on the OTC derivatives activities of UBS and many of our clients. The delays in the completion of rulemaking have affected our ability to complete the execution of required documentation and operational processes with counterparties ahead of relevant compliance dates, which may limit our and other dealers’ ability to transact with clients until this is remedied.

Key developments in Switzerland

Implementation of the mass immigration initiative

In December 2016, the Swiss Parliament passed changes to the Foreign Nationals Act to implement the mass immigration initiative of February 2014. The rules aim to make better use of the domestic workforce by giving preferential treatment to the unemployed who are resident in Switzerland. In professions, industries or regions where unemployment is above average, employers will be required to advertise vacant positions to employment agencies and to select suitable agency-registered job seekers for interviews. However, employers will not be required to justify decisions not to hire such candidates. The Swiss Parliament deems the new rules compatible with the Agreement on the Free Movement of Persons between Switzerland and the EU.

The legislation is subject to an optional national referendum vote, for which 50,000 signatures of Swiss citizens would have to be collected by 7 April 2017. If there is no referendum vote, the rules will take effect after this deadline.

Corporate Tax Reform III rejected in referendum vote

In June 2016, the Swiss Parliament approved legislation to reform the Swiss corporate tax code. The reform aimed to align the individual cantonal corporate tax regimes with international standards by eliminating reduced holding company tax rates and other privileges and providing a set of both optional and mandatory measures for the cantons to mitigate the effect on the corporate tax burden.

The reform was rejected by popular referendum on 12 February 2017. The Federal Council announced that a new proposal will be drafted.

Company law reform

In November 2016, the Swiss Federal Council submitted a draft bill to Parliament proposing to reform Swiss company law. The revision is aimed at transferring the provisions of the Ordinance against Excessive Compensation in Listed Companies Limited by Shares into the relevant federal law. Moreover, the Federal Council included new proposals to balance gender representation at senior executive and board level in listed companies and to introduce transparency rules for payments to government authorities by commodity firms.

Under the current proposal, we expect the impact on UBS to concern mainly corporate governance and shareholder rights. However, the exact impact can only be determined once the final law has been passed.

Switzerland begins automatic exchange of information

Automatic exchange of information in tax matters (AEI) between Switzerland and all EU member states and a number of other countries took effect on 1 January 2017. The first exchange of information between Switzerland and tax authorities in these countries will begin in 2018 based on 2017 data. The Swiss Federal Department of Finance has initiated consultations to extend the standard to additional countries.

24 


 

We have experienced outflows of cross-border client assets as a result of changes in local tax regimes or their enforcement.

FINMA launches consultations on revision of Swiss Banking Insolvency Ordinance

In September 2016, the Swiss Financial Market Supervisory Authority (FINMA) conducted a consultation on revisions to the Banking Insolvency Ordinance, which governs restructuring proceedings and bankruptcy proceedings for Swiss banking institutions. The draft includes provisions on the requirement for banks to include in financial contracts that are subject to foreign laws or foreign places of jurisdiction contractual acknowledgment of FINMA’s ability to temporarily postpone exercise of remedies against banks. Such postponement is intended to ensure the continuation of key contractual relationships without interruption in crisis situations. Regulatory authorities in the UK, France, Germany, Japan, Switzerland and the US have adopted or proposed similar requirements to increase legal certainty in cross-border bank resolutions. Implementation of these requirements is likely to require us to amend the terms of a significant number of trading agreements.

FINMA issues final corporate governance guidelines for banks

In November 2016, FINMA issued a circular on corporate governance, risk management and internal controls at banks. The circular sets out the duties and responsibilities of boards of directors and executive board members and defines requirements for the design of the relevant group-wide risk management framework, the internal control framework and the internal audit function. At the same time, FINMA introduced new principles on IT and cyber risks in the circular on operational risk. We do not expect the aforementioned requirements to have a significant impact on us. In addition, FINMA revised the circular on remuneration schemes. The requirements will enter into force on 1 July 2017 and will also apply to UBS.

Switzerland launches consultation on data protection

In an effort to improve data protection and to reflect the new technological and social landscape in existing laws, the Swiss Federal Council launched a consultation on the proposed revision of the data protection law in December 2016. The Federal Council intends to increase the transparency of data processing and strengthen data privacy. To this end, individuals and institutions with access to personal data should be subject to increased transparency and information requirements. The revision would enable Switzerland to meet the requirements of the EU directive on data protection and to ratify the revised Council of Europe Convention on the Protection of Individuals with regard to Automatic Processing of Personal Data, both of which are key to ensuring that the EU continues to recognize Switzerland as having an adequate level of data protection and that cross-border data transmission will remain possible in the future. Implementation of new data protection requirements has required and will require significant investment by the Group.


Parliamentary debate on FinSA and FinIA

The Financial Services Act (FinSA) and Financial Institutions Act (FinIA), which were approved by the Swiss Federal Council in November 2015, have entered parliamentary debate. The two comprehensive acts will have far-reaching consequences for the provision of financial services in Switzerland. The FinSA primarily aims to improve client protection, while the FinIA will introduce a prudential supervision of managers of individual client assets, managers of the assets of occupational benefits schemes and trustees. The upper house of the Swiss Parliament made a number of major adjustments to the proposal by the Federal Council, e.g., by reducing the areas of expanded information, documentation and clarification duties. The lower house of Parliament starts its debate in the first quarter of 2017.

Key developments in the EU

EC proposes implementation rules for Basel III reforms

In November 2016, alongside its proposals to implement the FSB TLAC standard, the European Commission (EC) published proposals to implement the remaining elements of the Basel III reforms in the EU. The proposals would require non-EU G-SIBs with two or more EU entities to establish an EU-domiciled intermediate holding company. In addition, banks would be required to maintain a tier 1 leverage ratio of 3%, with the possibility of a G-SII add-on, and a minimum net stable funding ratio of 100%. The EC would also create a new asset class of non-preferred senior debt, which would rank below other senior debt in insolvency. The precise impact on UBS will depend on the final rules and their implementation at a national level.

UK referendum on EU membership

Following the result of the June 2016 referendum on the UK’s membership in the EU, the UK prime minister, Theresa May, has confirmed the UK will invoke Article 50 of the Treaty on European Union by no later than the end of March 2017 subject to passing the necessary legislation required by the Supreme Court judgment on 24 January 2017. This will trigger a two-year period, subject to extension, during which the UK will negotiate its withdrawal agreement with the EU. Barring any changes to this time schedule, it is expected that the UK will formally leave the EU in early 2019. The future of the UK’s relationship with the EU remains unclear, although the UK government has stated that the UK will leave the EU single market and will seek a phased period of implementation for the new relationship that could cover the legal and regulatory framework for the financial services industry.

Any future limitations on providing financial services into the EU from our UK operations could require us to make potentially significant changes to our operations in the UK and our legal structure. Potential effects of a UK exit from the EU and potential mitigating actions may vary considerably depending on the timing of withdrawal and the nature of any transition or successor arrangements.

25 


Operating environment and strategy
Regulatory and legal developments

 

Application of MiFID II/MiFIR package postponed until
January 2018

The EU Markets in Financial Instruments Directive II and Regulation package (MiFID II / MiFIR) came into force in July 2014. The bulk of the requirements were intended to become applicable on 3 January 2017, with transitional provisions in several areas. However, taking into account the significant technical implementation challenges faced by regulators and market participants, the application date has been postponed to 3 January 2018. MiFID II / MiFIR will affect many areas of our business in the Investment Bank, Wealth Management, Asset Management and Personal & Corporate Banking. We have a Group-wide implementation program in place for MiFID II / MiFIR.

EU Benchmarks Regulation entered into force

The EU Benchmarks Regulation (EBR), which aims to improve the accuracy and integrity of benchmarks, entered into force on 30 June 2016 and the majority of requirements will take effect as of 1 January 2018. New EU and third-country benchmarks may not be used in the EU after 1 January 2018 unless they comply with EBR. Existing benchmarks (financial indices used as a reference in financial instruments, contracts or investment funds on 1 January 2018) are subject to transitional provisions. The regulation will have a cross-divisional and a cross-regional impact, as it affects UBS at three levels: administrator of UBS benchmarks, contributor to various benchmarks, and as a user of benchmarks. The governance, control and transparency requirements for administrators and contributors will have cost implications. The application of EBR may have a significant effect across the industry as it may result in a reduction in benchmarks available for use in financial instruments and financial contracts or to measure the performance of investment funds.

Key developments in the US

US Department of Labor finalizes fiduciary rule

In April 2016, the US Department of Labor (DOL) adopted a rule that expands the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA). On 1 March 2017, the DOL proposed a 60 day extension of the current 10 April 2017 applicability date of the fiduciary rule and its exemptions. The proposed delay is intended to give the DOL time to commence an examination of the rule called for by a memorandum issued by President Donald Trump on 3 February 2017. That memo directed the DOL to review the fiduciary rule to “determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” The rule would require all advisors, including broker-dealers, to abide by an ERISA fiduciary standard in dealings with qualified retirement plans and individual retirement accounts. It would also prohibit various customary transactions and fee arrangements in the financial services industry with respect to retirement plan investors, unless certain exemption criteria are fully met. Wealth Management Americas and Asset Management would be required to materially change some of their business processes in response to the rule.

Changes to rules regulating systemic risks

UBS Americas Holding LLC, the intermediate holding company for our US subsidiaries, is subject to US capital requirements, governance requirements and other prudential regulation, including the Comprehensive Capital Analysis and Review (CCAR) process beginning in 2017. In January 2017, the Federal Reserve Board adjusted its capital plan and stress testing rules. Among other changes, the rules will decrease the amount of capital any firm subject to the quantitative requirements of CCAR can distribute to shareholders outside an approved capital plan without seeking prior approval from the Federal Reserve Board from 1% to 0.25%. This change will apply to UBS Americas Holding LLC for the 2017 CCAR cycle. As announced by Federal Reserve Board Governor Daniel Tarullo in September 2016, the Federal Reserve Board may further revise the CCAR process and make various changes to the modeling assumptions used in the CCAR scenarios. The revised CCAR process could, among other things, require firms to hold an additional stress capital buffer determined every year.

Separately, in March 2016, the Federal Reserve Board proposed a rule to impose new limits on significant single-counterparty credit exposures of large banking organizations, including large US bank holding companies and US operations of foreign banking organizations. The proposal would apply single-counterparty credit limits to US-domiciled bank holding companies with total consolidated assets of USD 50 billion or more. The proposed limits are designed to become more stringent as the systemic importance of a firm increases. Under the proposal, the exposure of UBS’s US operations to another systemically important financial firm would be limited to a maximum of 15% of our tier 1 capital, and exposure to any other single counterparty would be restricted to 25% of our tier 1 capital. In addition, the single-counterparty credit limits would apply separately to UBS Americas Holding LLC, based on its capital. If adopted as proposed, these limits may affect how UBS conducts its operations in the US, including the use of other financial firms for payments and securities clearing services and as transactional counterparties.

US incentive compensation regulation

In May 2016, US federal financial regulators, including the Board of Governors of the Federal Reserve (Federal Reserve Board), jointly proposed regulations that would, among other things, (i) prescribe mandatory deferral amounts and periods for incentive compensation based on the size of the financial institution and (ii) require downward adjustment, forfeiture and / or claw-back of incentive compensation in certain circumstances. The proposal would apply to incentive compensation plans of our principal operating entities in the US and would prescribe specific deferral and forfeiture requirements for executive officers, highly compensated employees and significant risk takers as defined in the proposal. If implemented as proposed, these regulations would require changes to our incentive compensation programs.

 

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

26 


 

Our strategy

Who we are

The world’s largest and only truly global wealth manager

Our strategy is centered on our leading wealth management businesses and our premier universal bank in Switzerland, which are enhanced by Asset Management and the Investment Bank. We focus on businesses that have a strong competitive position in their targeted markets, are capital efficient, and have an attractive long-term structural growth or profitability outlook. We are the worlds largest and only truly global wealth manager, with a strong presence in the largest and fastest growing markets. Our wealth management businesses benefit from significant scale in an industry with attractive growth prospects, increasingly high barriers to entry, and their leading position across the attractive high net worth and ultra high net worth client segments. We are the preeminent universal bank in Switzerland, the only country where we operate in all business divisions. Our leading position in our home market is central to UBSs global brand and profit stability. The partnership between our wealth management businesses and our other businesses is a key differentiating factor and a source of competitive advantage.

Strong capital position and capital efficient business model

Capital strength is the foundation of our strategy and provides another competitive advantage. Our fully applied common equity tier 1 (CET1) capital ratio is one of the highest among large global banks, and we are well-positioned to meet the revised fully applied Swiss too big to fail provisions as of 1 January 2020. Our 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% in a normalized market environment.


We are committed to an attractive capital returns policy

Our earnings capacity and capital efficiency support our objective to deliver sustainable and growing capital returns to our shareholders. We are committed to a total capital return 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. For the financial year 2016, our Board of Directors intends to propose a dividend payment of CHF 0.60 per share, which is in line with the ordinary dividend paid for 2015, and which represents a payout ratio of 71%.

Our priorities

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

The strategic change we initiated in 2011 was driven by our decision to focus on our strengths and our anticipation of more demanding regulation. Having successfully completed our strategic transformation in 2014, we intend to continue building on our successful track record and to focus on disciplined execution to deliver on our performance targets.

2. Improve effectiveness and efficiency

Our effectiveness and efficiency programs focus on creating the right infrastructure and cost framework for the future, including optimizing our global workforce and footprint. Delivering on our cost savings target is critical to offsetting the escalating costs associated with regulatory change and to achieve our return objectives.

3. Invest for growth

We continue to upgrade and enhance our capabilities in technology and digitalization with a focus on innovation, better serving our clients and further strengthening our competitive position. We are also committed to investing in the development of our employees and attracting the best available talent.

27 


Operating environment and strategy
Our strategy

 

Our performance targets, expectations and ambitions

The tables below show our performance targets, expectations and ambitions for the Group and business divisions. They are calculated on an annual basis, and represent our objectives for sustainable business performance over the cycle. Our performance targets, expectations and ambitions are based on adjusted results and assume constant foreign currency translation rates.

®   Refer to the “Group performance” section of this report for more information on adjusted results and adjusting items

 

 

 

  

28 


 

Measurement of performance

Performance measures

Key performance indicators

The Group and business divisions are managed on the basis of a KPI framework, which identifies profit and growth financial measures, in the context of sound risk and capital management objectives. When determining variable compensation, both Group and business division KPIs are taken into account.

We review the KPI framework on a regular basis, considering our strategy and the market environment in which we operate.

KPIs are disclosed in our quarterly and annual reporting to allow comparison of our performance over the reporting periods. For certain KPIs we have performance targets in place, which are defined in order to measure our performance against our strategy. Our KPIs are designed to be assessed on an over-the-cycle basis and are subject to seasonal patterns.

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


Changes to our key performance indicators in 2017

We have fully aligned our performance targets and our KPI framework as of 1 January 2017, and as a result our “Cost reduction” target will be classified as a KPI for the Group as of 2017. Furthermore, to simplify the KPI framework, “Average value-at-risk (1-day, 95% confidence, 5 years of historical data)” for the Investment Bank will be reported as “Additional information” rather than as a KPI, and “Return on assets, gross (%)” for the Group and the Investment Bank will be removed from the KPI framework, as these will no longer be used as strategic steering metrics. In addition, the going concern leverage ratio will change from a phase-in to a fully applied basis.

 

 

 

29 


Operating environment and strategy
Measurement of performance

2016 Group and business division key performance indicators

Key performance indicators

Definition

Group

Wealth Management

Wealth Management Americas

Personal & Corporate Banking

Asset Management

Investment

Bank

Net profit growth (%)

Change in net profit attributable to shareholders from continuing operations between current and comparison periods / net profit attributable to shareholders from continuing operations of comparison period

l

 

 

 

 

 

Pre-tax profit growth (%)

Change in business division operating profit before tax between current and comparison periods / business division operating profit before tax of comparison period

 

l

l

l

l

l

Cost / income ratio (%)

Operating expenses / operating income before credit loss (expense) or recovery

l

l

l

l

l

l

Return on tangible equity (RoTE) (%)

Net profit attributable to shareholders before amortization and impairment of goodwill and intangible assets (annualized as applicable) / average equity attributable to shareholders less average goodwill and intangible assets

l

 

 

 

 

 

Return on attributed equity (RoAE) (%)

Business division operating profit before tax (annualized as applicable) / average attributed equity

 

 

 

 

 

l

Return on assets, gross (%)¹

Operating income before credit loss (expense) or recovery (annualized as applicable) / average total assets

l

 

 

 

 

l

Going concern leverage ratio

(phase-in, %)¹

Total going concern capital / leverage ratio denominator

l

 

 

 

 

 

Common equity tier 1 capital ratio

(fully applied, %)

Common equity tier 1 capital / risk-weighted assets

l

 

 

 

 

 

Net new money growth (%)

Net new money for the period (annualized as applicable) / invested assets at the beginning of the period. Group net new money growth is reported as net new money growth for combined wealth management businesses. Asset Management net new money excludes money market flows

l

l

l

 

l

 

Gross margin on invested assets (bps)

Operating income before credit loss (expense) or recovery (annualized as applicable) / average invested assets

 

l

l

 

l

 

Net margin on invested assets (bps)

Business division operating profit before tax (annualized as applicable) / average invested assets

 

l

l

 

l

 

Net new business volume growth for personal banking (%)

Net new business volume (i.e., total net inflows and outflows of client assets and loans) for the period (annualized as applicable) / business volume (i.e., total of client assets and loans) at the beginning of the period

 

 

 

l

 

 

Net interest margin (%)

Net interest income (annualized as applicable) / average loans

 

 

 

l

 

 

Average VaR (1-day, 95% confidence,

5 years of historical data)¹

Value-at-risk (VaR) expresses maximum potential loss measured

to a 95% confidence level, over a 1-day time horizon and based

on five years of historical data

 

 

 

 

 

l

1 Removed from the key performance indicator framework in 2017.

 

New key performance indicators in 2017

Key performance indicators

Definition

Group

Wealth Management

Wealth Management Americas

Personal & Corporate Banking

Asset Management

Investment

Bank

Cost reduction

Net exit rate cost reduction¹

l

 

 

 

 

 

Going concern leverage ratio

(fully applied, %)

Total going concern capital / leverage ratio denominator

l

 

 

 

 

 

1 Exit rate compared with full-year 2013 adjusted operating expenses for Corporate Center and full-year 2015 adjusted operating expenses for business divisions. Cost reductions exclude expenses for provisions for litigation, regulatory and similar matters, foreign currency movements and temporary regulatory program costs. Business division adjusted operating expenses are before allocations and exclude items that are not representative of the underlying net cost reduction performance, mainly related to variable compensation expenses and compensation for financial advisors in Wealth Management Americas.

  

30 


 

Wealth Management

Business

Wealth Management provides comprehensive advice and tailored financial services to wealthy private clients around the world, except those served by Wealth Management Americas. Our clients benefit from the full spectrum of resources that UBS as a global firm can offer, including banking and lending solutions, wealth planning, investment management solutions, and corporate finance advice. 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

We are the preeminent wealth manager for private clients outside the US, particularly in the ultra high net worth, high net worth and affluent segments. We generally define ultra high net worth clients as those with investable assets of more than CHF 50 million, and high net worth clients as those with investable assets of between CHF 2 million and CHF 50 million. Affluent clients are those with investable assets between CHF 250,000 and CHF 2 million.

We believe the wealth management business has attractive long-term growth prospects and expect its growth to outpace that of global gross domestic product. From a client segment perspective, we believe the global ultra high net worth market, including family offices, has the highest growth potential, followed by the high net worth and affluent markets. We seek to capitalize on our market-leading position in the ultra high net worth business and to increase our market share considerably in this segment. We also invest significantly in growing our high net worth and affluent businesses, especially by leveraging and further strengthening our leading competence in investment management, as well as by investing in our digital capabilities.

Investment management and portfolio construction are at the heart of our offering. We aspire to provide our clients a wider selection of discretionary and advisory services, helping them to more effectively achieve their goals. This in turn would further increase our mandate penetration and contribute to higher recurring revenues. Our integrated client service model allows us to bundle capabilities across the Group to identify investment opportunities in varying market conditions and create solutions that suit individual client needs. For example, ultra high net worth clients benefit from tailored institutional coverage and global execution provided by dedicated specialist teams from Wealth Management and the Investment Bank through the Global Family Office Group. Furthermore, we have enhanced our coverage and offering by establishing a global distribution management function and a dedicated global ultra high net worth organization.

We have unique scale, an industry-leading platform and are active in the most diverse wealth management markets and segments. 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.

In Asia Pacific, we have accelerated our growth and expanded our onshore presence, with a particular focus on Hong Kong, Singapore and China, as well as on other major markets such as Japan and Taiwan, to capture long-term growth opportunities. In emerging markets, we continue to focus 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, as well as to make sure client needs for global diversification and local offerings are met.

In Europe, our long-established local presence in all major markets supports our growth ambition. We have combined our offshore and onshore businesses, creating economies of scale and enabling us to deal efficiently with increased regulatory and fiscal requirements. In December 2016, we established UBS Europe SE, an important step in simplifying our governance structure and in improving operational and capital efficiency across our European operations. UBS Europe SE was formed through the merger of UBS Deutschland AG and our Wealth Management subsidiaries in Germany, Italy, Luxembourg (including branches in other countries), the Netherlands and Spain. Further countries may be included in the future.

In Switzerland, Wealth Management collaborates 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 use UBS’s extensive branch network, which includes around 100 Wealth Management offices.

We offer extensive training to our client advisors, designed to enable the delivery of superior advice and solutions. All of our client advisors must obtain the Wealth Management Diploma, a program accredited by the Swiss Accreditation Service of the State Secretariat for Economic Affairs, which ensures a high level of knowledge and expertise. For our most senior client advisors, we offer extensive training through the Wealth Management Master program.

31 


Operating environment and strategy
Wealth Management

 

We are investing in digitalization and innovation to meet the evolving needs of our clients. The One Wealth Management Platform program is our signature business transformation strategy, through which we aim to deliver advisory, digital and back office capabilities to our clients around the world. We intend to standardize our operating model and deliver operating efficiencies across our global wealth management business. The program has already been rolled out in Switzerland and Germany and is currently being implemented in Hong Kong and Singapore. In addition, we are developing new solutions to deliver our services through digital channels. For example, in 2016, we launched UBS SmartWealth in the UK, which combines digital wealth management with UBS’s market-leading expert insight, offering clients tailored investment advice based on their personal goals, and online access to their investments at any time.

We evaluate our performance against key performance indicators and our performance targets.  

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

®   Refer to the “Measurement of performance” section of this report for information on our key performance indicators

Products and services

Our approach focuses on gaining an understanding of our clients’ financial objectives that enables us to provide proprietary and third-party solutions tailored to their individual needs. Clients benefit from a comprehensive set of capabilities and expertise, including planning, investing, lending, protection, philanthropy, corporate and banking services. Investment management capabilities are a core component of this value proposition.

Our Global Chief Investment Office, which serves both Wealth Management and Wealth Management Americas, synthesizes the research and expertise of UBS’s global network of economists, strategists, analysts and investment specialists across all business divisions. These experts closely monitor and assess financial market developments and form a clear, concise and consistent investment view, known as the UBS House View.

The UBS House View identifies and communicates investment opportunities and market risks to help protect and grow our clients’ wealth, which we apply to our clients’ portfolios and asset allocations, underpinning 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 the UBS House View. Clients can invest in a 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 our clients advice on structured lending and corporate finance.

To help our clients address the challenges of an increasingly complex financial world, we continue to develop innovative products. In 2016, we rolled out expanded investment mandate solutions based on our Chief Investment Office’s new asset allocation framework. These innovative investment solutions are designed to meet specific client needs and preferences beyond those addressed in our existing discretionary mandate offering. For example, our UBS Manage Advanced Systematic Asset Allocation mandate is a quantitatively driven investment concept that allows investors to participate fully in upward-trending equity markets and to reduce their exposure to equity risk in downward-trending and volatile equity markets.

By aggregating demand for private investments, we are able to offer our clients access to investment opportunities in the private markets space that are traditionally only available to institutional investors. In 2016, we expanded our private markets offering, most notably through a joint venture with Hamilton Lane, one of the largest independent alternative investment management firms globally.

We have also continued to invest significantly into our discretionary and advisory platform infrastructure, with a focus on customizing these offerings on a large scale and processing them more efficiently.  

Organizational structure

We are primarily organized along regional lines, with our business areas being Asia Pacific, Europe and Emerging Markets, Switzerland and Global Ultra High Net Worth.

We are governed by executive, risk and operating committees and operate mainly through UBS Switzerland AG and UBS AG branches. Headquartered in Switzerland, we have a presence in more than 40 countries with approximately 190 offices, of which around 100 are in Switzerland.

Competitors

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

 

  

32 


 

Wealth Management Americas

Business

Wealth Management Americas provides advice-based solutions through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of our clients. Our business is primarily domestic US but includes Canada and international business booked in the US. We believe we have attractive growth opportunities and a clear strategy focused on serving our target client segments, particularly the high and ultra high net worth segments.

Strategy and clients

Wealth Management Americas is one of the leading wealth managers in the Americas in terms of financial advisor productivity and invested assets by financial advisor. We offer a fully integrated set of products and services to meet the needs of our high net worth and ultra high net worth client segments, 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 select 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.

We evaluate our performance against key performance indicators and our performance targets.

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

®   Refer to the “Measurement of performance” section of this report for information on our key performance indicators

 

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 over 7,000 financial advisors and USD 1 trillion in invested assets, we have a distinctive opportunity to “feel small and play big” by combining the agility of a boutique firm with all of the capabilities of a premier, truly global wealth manager. To accomplish that, in 2016 we introduced a new Wealth Management Americas operating model designed to move decision-making closer to clients, better leverage the capabilities that our unrivaled global footprint can offer, invest in next-generation technology and achieve long-term sustainable organic growth through an increased focus on retaining and developing our financial advisors. 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 globally, including access to wealth management research, our global Chief Investment Office, and solutions from our other business divisions. 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 includes 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 client segments in terms of invested assets in the region. We plan to grow our business by enabling our financial advisors to focus on delivering holistic advice across the full spectrum of client needs through continued expansion of our cross-business collaboration throughout the firm, and delivering banking and lending services that complement our wealth management solutions. We also plan to continue investing in 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 productivity across our financial advisors.

Products and services

We offer clients a full array of solutions that focus on meeting their individual financial needs. Our financial advisors work closely with internal specialists to support evolving goals and expectations throughout the client life cycle, including comprehensive wealth planning and portfolio strategy and management. Our offering is designed to meet a wide variety of investment objectives, including wealth accumulation and preservation, income generation, portfolio diversification, legacy planning and philanthropy.

33 


Operating environment and strategy
Wealth Management Americas

 

We offer products and solutions including equities, fixed income, retirement services, annuities, alternative investments, managed accounts and structured products. Wealth Management Americas’ financial advisors are supported by a dedicated capital markets team collaborating with the Investment Bank and Asset Management in order to leverage the resources of the entire firm, as well as with third-party investment banks and asset management firms. To address the full range of our clients’ financial needs, the Wealth Management Americas Banking Group offers competitive lending and cash management services, such as securities-backed lending, resource management accounts, Federal Deposit Insurance Corporation (FDIC)-insured deposits, mortgages and credit cards. Wealth Management Americas clients also benefit from our commitment to close collaboration with our Wealth Management business. Our integrated Wealth Management Research Americas and Global Chief Investment Office Wealth Management organizations together provide market analysis, economic outlooks and research guidance through a global lens and deliver them in our UBS House View to help support investment decisions.  

For corporate and institutional clients, we offer a robust suite of solutions, including equity compensation, administration, investment consulting, defined benefit and contribution pension programs, and cash management services. For example, our UBS Equity Plan Advisory Services provides equity compensation plan services and advice to more than 180 US corporations, representing one million participants worldwide.


Organizational structure

Our business is primarily domestic US but includes Canada and international business booked in the US.

In the US and Puerto Rico, we operate primarily through UBS Financial Services Inc. and UBS Financial Services Incorporated of Puerto Rico through 208 branches. Our banking services in the US include those conducted through UBS Bank USA, an FDIC-insured depository institution subsidiary, and branches of UBS AG. Canadian wealth management and banking operations are conducted through UBS Bank (Canada). We are governed by executive, risk and operating committees.

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.

 

 

 

  

34 


 

Personal & Corporate Banking

Business

As the leading personal and corporate banking business in Switzerland, we provide comprehensive financial products and services to private, corporate and institutional clients in Switzerland. We are among the leading players in the private and corporate loan market in Switzerland, with a well-collateralized and conservatively managed lending portfolio.

Our business is a central element of UBS’s universal bank delivery model in Switzerland. We work with the Group’s wealth management, investment bank and asset management businesses to ensure that our clients receive the best products and solutions for their specific financial needs. We are also an important source of growth for our other business divisions in Switzerland through client referrals. In addition, we manage a substantial part of UBS’s Swiss infrastructure and banking products platform, both of which are leveraged across the Group.

Our distribution model is based on a multi-channel strategy. With a steadily rising number of users and client interactions for our expanding electronic and mobile banking offering, we continue to strengthen our position as the leading multi-channel bank in Switzerland.

Strategy and clients

Our strategy focuses on profitable and qualitative growth in Switzerland. We aim to provide stable and substantial profits for the Group and create revenue opportunities for other businesses within the firm.

In the personal banking business, we aspire to be the bank of choice for private clients in Switzerland. We continue to pursue our strategy of moderately and selectively growing our business in high-quality loans and to further leverage the potential of digitalization. Currently, we serve one in three Swiss households through our branch network, customer service centers and digital banking services. We are continuously expanding our multi-channel offering and continue to build on UBS’s long tradition as a leader and innovator in digital services to deliver a superior client experience, capture market share and increase efficiency and customer loyalty.

In the corporate and institutional business, we want to be our clients’ main bank. We aim to continuously improve our profitability and capital efficiency, striving to expand our market share in Switzerland with a focus on a qualitative growth strategy, centered on cash flow-based lending and our strategic advisory and trading business. Additionally, we are selectively expanding our international footprint to serve Swiss corporate clients abroad as well as global corporate clients headquartered in Switzerland.

Our clients value their relationship with us and our efforts to provide them with superior service. In 2016, for the sixth consecutive year, the international finance magazine Euromoney named UBS “Best Domestic Cash Manager Switzerland” based on a survey of cash managers and chief financial officers. Additionally, UBS was rated best asset servicing provider for asset managers and as the leading custodian bank in Switzerland and Europe, according to The R & M Survey, one of the industry’s most important client surveys.

Constant employee development is a crucial element of our divisional strategy, as this is our key to ensuring superior client service. UBS sets the pace in client advisor certification, specifically with the implementation of its state-accredited ISO certification program.

Moreover, we continuously strive to simplify structures and processes in order to improve client experience without compromising our risk standards.

We evaluate our performance against key performance indicators and our performance targets.

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

®   Refer to the “Measurement of performance” section of this report for information on our key performance indicators

Products and services

Our private clients have access to a comprehensive life cycle based offering and convenient digital banking, targeting the specific needs of day-to-day banking, retirement and investment goals, and real estate transactions. In 2016, new services such as digital account opening and UBS Safe, where clients can securely store electronic files, were introduced.

Our corporate and institutional clients benefit from our financing and investment solutions, notably regarding 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.

35 


Operating environment and strategy
Personal & Corporate Banking

 

In 2016, we implemented a number of product and service innovations, such as the launch of UBS Atrium, an innovative platform in the real estate business, where UBS acts as an intermediary in the market, connecting clients and institutional investors. UBS’s platform services focus on credit origination and servicing of brokered mortgages, thereby providing an attractive investment opportunity for institutional investors in a low-yield environment. Additionally, we enhanced our digital Asset Wizard, which gives clients comprehensive wealth oversight, including a new functionality that allows clients to create a wide range of reports tailored to their individual needs.

We collaborate closely with the Investment Bank to offer capital market and foreign exchange products, hedging strategies, trading capabilities, as well as corporate finance advice. Working with Asset Management, we also provide state-of-the-art fund and portfolio management solutions.

 

Organizational structure

Our business is organized into Personal Banking, Wealth Management Switzerland and Corporate & Institutional Clients. The Swiss network includes over 300 branches, covering 10 geographical regions.

We are governed by executive, risk and operating committees and operate mainly through UBS Switzerland AG.

Competitors

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

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

 

  

36 


 

Asset Management

Business

Asset Management provides investment management products and services, platform solutions and advisory support to institutions, wholesale intermediaries and wealth management clients around the world, with an onshore presence in 22 countries. We are a leading fund house in Europe, the largest mutual fund manager in Switzerland and one of the largest fund of hedge funds and real estate investment managers in the world. Our global investment capabilities include all major traditional and alternative asset classes.  

Strategy and clients

While market conditions and the low-yield environment in 2016 proved to be challenging for the industry, our global, diversified asset management business model continues to provide a solid foundation to capture growth opportunities in the shifting market dynamics.

The long-term outlook for the asset management industry remains positive, with three main drivers: (i) aging populations will lead to higher savings requirements; (ii) tighter government spending budgets will lead to increased private pension funding; and (iii) emerging regulation is creating opportunities for asset managers that have the necessary scale and expertise.

We have defined our current strategy with an overarching goal to deliver holistic investment and platform solutions to our clients, by leveraging our global reach and investment expertise.

Moreover, we are strengthening our institutional business and seeking to accelerate the growth of our wholesale business by building strategic partnerships, platforms and advisory support. This is a key area in which we intend to pursue growth in the coming years. Asset Management also continues to collaborate with the wealth management businesses to provide best-in-class products and services to meet private clients’ needs.

We aim to drive profitable and sustainable growth in key markets in Europe, Switzerland, the Americas and Asia Pacific, including China, where we also continue to expand our long-standing onshore presence.

To support our efforts to achieve growth and increase our operational efficiency, we continue to invest in our operating platform and have made significant progress transforming our organization to create a less complex and unified global platform. We completed the sale of our Alternative Fund Services business in 2015, and announced an agreement in 2017 to sell our fund administration servicing units in Luxembourg and Switzerland to Northern Trust. The transaction is expected to close in the second half of the year, subject to relevant approvals and other customary conditions.


We continue to develop our well-established passive capabilities, including indexed strategies and exchange-traded funds (ETFs), where we are building on our strong position in Asia Pacific, Europe and Switzerland. We also continue to expand our world-class fund-of-hedge-fund business.

We evaluate our performance against key performance indicators and our performance targets.

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

®   Refer to the “Measurement of performance” section of this report for information on our key performance indicators

Products and services

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

   Equities – investment strategies with varying risk and return objectives, including global, regional and thematic strategies, as well as a high alpha and 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, as well as unconstrained 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.

37 


Operating environment and strategy
Asset Management

 

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. We offer our products in various structures, including ETFs, pooled funds, structured funds and mandates.  

Organizational structure

Our business is organized by the products and services we offer, with principal offices located in Chicago, Frankfurt, Hartford, Hong Kong, London, New York, Singapore, Sydney, Tokyo and Zurich. We are governed by executive, risk and operating committees.

As part of UBS’s efforts to improve the resolvability of the Group, we have established UBS Asset Management AG, a subsidiary of UBS AG, to which we transferred the majority of Asset Management’s operating subsidiaries during 2016, excluding subsidiaries domiciled in the US, which were transferred to UBS Americas Holdings LLC.

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

 

In 2017, we aligned our businesses to enable us to better leverage our best investment processes, tools and systems to generate high alpha, systematic products and solutions for clients. Our Equities, Fixed Income and Solutions capabilities and hedge funds business were integrated within a new area named Investments.

In addition, our Global Real Estate and Infrastructure and Private Equity businesses were also combined to form a new area named Real Estate & Private Markets. We will continue to grow this business by developing integrated and innovative solutions, as well as expanding in key markets, such as Brazil, Canada and Japan.

Competitors

Our main competitors include global firms with wide-ranging capabilities and distribution channels, such as AllianceBernstein Investments, Amundi, BlackRock, Deutsche Bank Asset Management, Goldman Sachs Asset Management, Invesco, JPMorgan Chase Asset Management, Morgan Stanley Investment Management and Schroders.  

 

 

 

  

38 


 

Investment Bank

Business

The Investment Bank is present in over 35 countries, with principal offices in all major financial centers, providing investment advice, financial solutions and capital markets access. We serve corporate, institutional and wealth management clients across the globe and form a synergetic partnership with our wealth management, personal and corporate banking and asset management businesses.

The business division is organized into Corporate Client Solutions and Investor Client Services, and also includes UBS Securities Research. Our specialist teams work closely together, complementing our global product offering with their regional expertise. This enables us to understand our clients and provide services tailored to their investment and financing needs.

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 our intellectual capital and leveraging our award-winning electronic platforms. With our client-centric business model, we partner with our wealth management, personal and corporate banking and asset management businesses, and we believe we are well positioned to provide our clients with market insight, global coverage of markets and products, and execution services.

Our focus remains on our traditional strengths in advisory, capital markets, equities and foreign exchange businesses, complemented by a rates and credit platform, to deliver attractive and sustainable risk-adjusted returns. Using our powerful research and technology capabilities, we pioneer integrated solutions to support our clients as they adapt to evolving market structures, driven by changes to the regulatory, technological and economic landscape.

We continue to invest in talent and technology and to strengthen our operational risk framework. In 2016, we continued to implement our technology plan, aimed at enhancing the effectiveness of our platform for clients and simplifying our processes.


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. We evaluate our performance against key performance indicators and our performance targets.

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

®   Refer to the “Measurement of performance” section of this report for information on our key performance indicators

Products and services

Corporate Client Solutions

In Corporate Client Solutions, we advise our clients on strategic business opportunities and help them raise capital to fund their business activities. Together with Investor Client Services, we offer a full-service solution, which includes the distribution and risk management of capital markets products and financing solutions. Its main business lines are:

   Advisory consults clients on matters such as mergers and acquisitions, spin-offs, exchange offers, leveraged buyouts, joint ventures, exclusive sales, restructurings, takeover defense and corporate broking.

   Equity Capital Markets offers comprehensive equity capital-raising services, as well as related derivative products. This includes managing initial public offerings and private placements, as well as equity-linked transactions and other strategic equities solutions.

   Debt Capital Markets provides financing advice and helps clients raise various types of debt capital, as well as hedge resulting exposures.

   Financing Solutions provides 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.

Investor Client Services

In Investor Client Services, we enable our clients to buy and sell securities on capital markets across the globe and to manage their risk and liquidity. Its businesses are:

39 


Operating environment and strategy
Investment Bank

 

Equities

As one of the world’s largest equities houses and leading equity market participants in the primary and secondary markets, we distribute, structure, execute, finance and clear equity cash and derivative products. Our main business lines are:

   Cash offers trade execution and clearing for single stocks and portfolios through both traditional and electronic channels, along with investment advisory and consultancy services.

   Derivatives enables clients to manage risk and meet funding requirements through a wide range of listed and over-the-counter equity derivative instruments. We create and distribute structured products and notes, enabling our clients to optimize their investment returns.

   Financing Services provides our hedge fund and institutional clients with a fully integrated platform for financing transactions, which includes prime brokerage. 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 provides execution services and solutions with an emphasis on electronic trading and maintains high levels of balance sheet velocity. The main business lines are:

   Foreign Exchange helps our clients manage their currency exposures and is recognized as one of the leading foreign exchange market-makers as well as the market leader in the precious metals business.

   Rates and Credit encompasses sales, trading and market-making in a selected range of rates and credit products. 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.

UBS Securities Research

In UBS Securities Research, we offer clients key insights on securities in major financial markets around the globe. In our flagship Q series reports, experts from across the UBS research team respond to questions from clients, providing a coordinated perspective across regions, sectors and asset classes.

The UBS Evidence Lab is a team of experienced primary research experts and works closely with UBS Securities Research analysts to uncover new evidence that is not yet reflected in market prices.

Organizational structure

Our business is organized along the aforementioned products and services and has a global reach.

We are governed by executive, risk and operating 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.

Competitors

The main competitors are the major global investment banks, including Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase and Morgan Stanley.

 

 

 

  

40 


 

Corporate Center

Corporate Center is comprised of the functions that provide services to the Group, which we present from a reporting perspective organized under Services and Group Asset and Liability Management (Group ALM). Corporate Center also includes the Non-core and Legacy Portfolio unit.

Corporate Center – Services

Corporate Center – Services consists of the Group Chief Operating Officer area (Group Corporate Services, Group Operations, Group Sourcing, Group Technology), Group Finance (excluding Group ALM), Group Legal, Group Human Resources, Group Risk Control, Group Communications and Branding, Group Regulatory and Governance, and UBS and Society.

Corporate Center – Services allocates the majority of its operating expenses to the business divisions and other Corporate Center units based on service consumption. Each year, as part of the annual business planning cycle, Corporate Center – Services agrees with the business divisions and other Corporate Center units 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. In 2015 and 2016, where costs incurred were different from those expected, Corporate Center – Services recognized over- and under-recoveries. In 2017, costs will be allocated to the business divisions and other Corporate Center units based on actual costs incurred by Corporate Center – Services.

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.

Corporate Center – Group ALM

Group ALM manages the structural risks of our balance sheet, including interest rate risk in the banking book, currency risk and collateral risk, as well as the risks associated with the Group’s liquidity and funding portfolios. 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 through three main risk management areas, and its risk management is fully integrated into the Group’s risk governance framework.

Business division-aligned risk management activities performed on behalf of business divisions and other Corporate Center units include managing the interest rate risk in the banking book on behalf of Wealth Management and Personal & Corporate Banking and high-quality liquid asset (HQLA) portfolios on behalf of specific business divisions. Beginning in the third quarter of 2016, the area also includes Risk Exposure Management, which performs risk management over credit, debit and funding valuation adjustments for our over-the-counter derivatives portfolio. Net income generated by these activities is fully allocated to the associated business divisions and Corporate Center units.

Capital investment and issuance activities consist of managing the Group’s equity and capital instruments as well as instruments that contribute to our total loss-absorbing capacity (TLAC). Revenues from investing the Group’s equity and the incremental expenses of issuing capital and TLAC instruments at the UBS Group AG level (the holding company for the UBS Group) relative to issuing senior debt out of operating subsidiaries are fully allocated to the business divisions and other Corporate Center units based on their attributed portion of the Group’s equity.

Group structural risk management activities are performed to meet overall Group-wide risk management objectives. They include managing the Group’s HQLA and long-term debt portfolios. The net positive or negative income generated through these activities is allocated to the business divisions and other Corporate Center units based on their consumption of the underlying risks. This consumption is determined by various liquidity and funding models and, to reduce volatility, is allocated using stable, internal benchmark rates rather than actual income earned by Group ALM. Net positive or negative income not arising as a result of business division consumption is retained by Group ALM.

As part of its risk management activities, Group ALM enters into derivative hedges to manage the economic and the interest rate risk of the different portfolios. The results of certain hedging activities, including any non-economic volatility caused by the applicable accounting treatment, are retained by Group ALM.

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 chaired by the Group Chief Risk Officer.

Non-core and Legacy Portfolio pursues a primarily passive wind-down strategy, focusing on a disciplined reduction of risk-weighted assets, leverage ratio denominator and costs. Positions are managed and exited over time with the objective of maximizing shareholder value. Non-core and Legacy Portfolio also includes positions relating to legal matters arising from businesses that were transferred to it.

®   Refer to “Note 20 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information

41 


Operating environment and strategy
Corporate Center

Roles and responsibilities within Corporate Center – Services

Functional head

Responsibilities

Group Chief Financial Officer1

     Is responsible for ensuring transparency in, and the assessment of, the financial performance of the Group and business divisions, and for the Groups financial accounting, controlling, forecasting, planning and reporting processes

     Is responsible for treasury and capital management, including management and control of funding and liquidity risk with independent oversight from the Group Chief Risk Officer, and for UBSs regulatory capital ratios

     Ensures asset and liability management by balancing consumption of the firms financial resources through consolidation and management of the Groups structural risks enabling sustainable earnings generation

     Manages and controls the Groups tax affairs

     Manages the divisional and Group financial control functions

     Makes proposals to the Board of Directors (BoD) regarding the accounting standards adopted by the Group, and defines financial reporting and disclosure standards, after consultation with the Audit Committee of the BoD

     Provides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act of 2002

     Coordinates the working relationship with external auditors under the supervision of the Audit Committee of the BoD

     Supports the Group Chief Executive Officer (CEO) in strategy development and key strategic topics

     Provides advice on financial aspects of strategic projects and transactions

     Manages relations with investors and analysts, in coordination with the Group CEO

Group Chief Operating Officer

     Provides quality, cost-effective and differentiating Group-wide IT services and tools in line with the needs of the business divisions and Corporate Center functions

     Delivers a wide range of operational services across all business divisions and regions

     Supplies real estate infrastructure and general administrative services, directs and controls all supply and demand management activities, supports the firm with its third-party sourcing strategies and takes responsibility for the firms nearshore, offshore, outsourcing and supplier-related processes

     Formulates and agrees Group-wide operating strategies, objectives, and financial and execution plans for the Group Chief Operating Officer function in support of each business division and the Group functions

     Delivers cross-divisional operational initiatives to enhance the firms operating platform

Group Chief Risk Officer

     Manages the divisional, regional and firm-wide risk control functions and monitors and challenges the firms risk-taking activities

     Develops the Groups risk appetite framework, risk management and control principles, and risk policies

-     In accordance with the risk appetite framework approved by the BoD, is responsible for:

(i) implementing appropriate independent control frameworks for the Groups credit, market, treasury, country, compliance and operational risks

(ii) developing and implementing the frameworks for risk measurement, aggregation, portfolio controls and, jointly with the Group Chief Financial Officer, for risk reporting

(iii) authorizing transactions, positions, exposures, portfolio limits, and credit risk provisions and allowances in accordance with the risk control authorities delegated to this role

-     Maintains a control framework to ensure that UBS meets relevant regulatory and professional standards in the conduct of its business and coordinates in this respect with the Group General Counsel

Group General Counsel

     Is responsible for legal matters, policies and processes and for managing the Groups legal function

     Assumes responsibility for legal oversight in respect of the Groups key regulatory interactions and maintains relationships with our key regulators with respect to legal matters

     Reports legal risks and material litigation and manages litigation

Group Head Human Resources

     Defines and executes a human resources strategy aligned with UBSs objectives and positions the Group as an employer of choice

     Ensures cost-efficient operational and advisory services to employees as well as strategic advice to managers and executives, supporting them to attract, engage, develop and retain talent

     Maintains relationships with the Groups key regulators with respect to compensation matters

Group Head Communications and Branding

     Manages UBSs corporate and brand communication to its stakeholders in alignment with the Groups overall strategy

     Develops UBSs communications strategy, content and positioning with the primary purpose to build and protect the firms reputation and brand

     Manages and coordinates Group-wide marketing communications activities, including partnership marketing and sponsorship measures

     Provides shared service delivery of Group-wide communication channels

Group Head Regulatory and Governance

     Develops governmental policy and regulatory strategy and coordinates key external relationships

     Manages the Strategic Regulatory Initiatives portfolio and oversees the planning and execution of relevant initiatives

     Establishes global and local resolution planning and develops key resolvability improvement measures

     Designs the Groups legal entity structure and further develops coherent corporate governance standards

     Governs the Groups investigation portfolio and performs important investigations

Head UBS and Society

     Coordinates the Groups corporate responsibility and sustainability strategy activities

1 Relates to responsibilities for both Corporate Center – Services and Corporate Center – Group ALM.

42 


 

 

Priorities and initiatives

Our Corporate Center functions strive to provide best-in-class financial, risk, legal and shared services to the Group based on commercially sound service management principles, including transparency on both qualitative and quantitative components of the services offered. Moreover, we continue to focus on achieving greater effectiveness and efficiency through the strategic levers of workforce and footprint, organization and process optimization, and technology, and we remain fully committed to contributing to the Group’s net cost reduction.

As of 31 December 2016, 31% of Corporate Center employees and contractors were in offshore or nearshore locations compared with 18% three years earlier. In addition to lower personnel expenses, this allows us to tap growing talent pools and realize efficiencies by reducing our footprint in high-cost real estate locations.


We seek to increase value by leveraging common capabilities and creating centralized functions. Within Group Technology, we continue to modernize our infrastructure and simplify our portfolio of applications. In 2016, we began the transfer of the majority of shared service functions to our separate Group service companies, which, in addition to meeting regulatory requirements, allows us to further strengthen our approach to service management without losing efficiency in the way we operate.

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

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

  

43 


Operating environment and strategy
Risk factors

Risk factors

Certain risks, including those described below, may affect our ability to execute our strategy or our business activities, financial condition, results of operations and prospects. Because a broad-based international financial services firm such as UBS is inherently exposed to multiple risks many of which 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 adversely affect us. The order of presentation of the risk factors below does not indicate the likelihood of their occurrence or the potential magnitude of their consequences.

Continuing low or negative interest rates may have a detrimental effect on our capital strength, liquidity and funding position, and profitability

Low and negative interest rates in Switzerland and the eurozone negatively affected our net interest income in 2016 and a continuing low or negative interest rate environment may further erode interest margins and adversely affect the net interest income generated by our Personal & Corporate Banking and Wealth Management businesses. Our performance is also affected by the cost of maintaining the high-quality liquid assets required to cover regulatory outflow assumptions embedded in the liquidity coverage ratio (LCR). The Swiss National Bank permits Swiss banks to make deposits up to a threshold at zero interest. Any reduction in, or limitations on the use of this exemption from the otherwise applicable negative interest rates could exacerbate the effect of negative interest rates in Switzerland. Low and negative interest rates may also affect customer behavior and hence our overall balance sheet structure. Mitigating actions that we have taken, or may take in the future, such as the introduction of selective deposit fees or minimum lending rates, have resulted and may 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 business.

Our equity and capital are also affected by changes in interest rates. In particular, the calculation of our pension plan 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 pension plan deficits due to the long duration of corresponding liabilities. This would lead to a corresponding reduction in our equity and fully applied common equity tier 1 (CET1) capital.


Our global presence subjects us to risk from currency fluctuations

We prepare our consolidated financial statements in Swiss francs. However, a substantial portion of our assets, liabilities, invested assets, revenues and expenses, equity of foreign operations and risk-weighted assets (RWA) are denominated in US dollars, euros, British pounds and in other foreign currencies. Accordingly, changes in foreign exchange rates may adversely affect our profits, balance sheet, including deferred tax assets, and capital, leverage and liquidity ratios. In particular, the portion of our operating income denominated in non-Swiss franc currencies is greater than the portion of operating expenses denominated in non-Swiss franc currencies. Therefore, the appreciation of the Swiss franc against other currencies generally has an adverse effect on our profits, in the absence of any mitigating actions. Moreover, in order to hedge our 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 both the amount of capital and the capital ratio. As the proportion of RWA denominated in non-Swiss franc 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 capital ratios.

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.

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

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 are considering, have proposed or have adopted 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:

   significantly higher regulatory capital requirements, including changes in the definition and calculation of regulatory capital as well as in the calculation of RWA;

44 


 

 

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

   introduction of a more demanding leverage ratio as well as new or significantly enhanced liquidity and stable funding requirements;

   requirements to maintain liquidity and capital in jurisdictions in which activities are conducted and booked, and requirements to adopt risk, corporate and other governance structures at a local jurisdiction or entity level;

   limitations on principal trading and other activities and limitations on risk concentrations and maximum levels of risk;

   new licensing, registration and compliance regimes, and cross-border market access restrictions;

   taxes and government levies that would effectively limit balance sheet growth or reduce the profitability of trading and other activities;

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

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

 

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. There is also uncertainty as to whether the laws and regulations that have been adopted will be repealed or modified as a result of geopolitical developments, particularly in the US with its recent change in presidential administration.

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 like UBS. Swiss regulatory changes with regard to such matters as capital and liquidity have generally proceeded more quickly than those in other major jurisdictions, and the requirements for Swiss major international banks 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.

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, and may require us to increase prices for or cease to offer certain services and products. 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, liquidity and other resource inefficiencies, all of which may adversely affect 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.

Capital and TBTF regulation: As an internationally active Swiss systemically relevant bank (SRB), we are subject to capital and total loss-absorbing capacity (TLAC) requirements that are among the most stringent in the world. New Swiss SRB capital requirements impose significantly higher requirements based on RWA and a significantly higher leverage ratio requirement. In addition, a TLAC requirement has become applicable.

We may be subject to further increases in capital requirements in the future, from the imposition of further add-ons in the calculation of RWA or from other changes to other components of minimum capital requirements. The Basel Committee on Banking Supervision (BCBS) and other regulators are considering changes to the Basel III capital framework, including revisions related to the credit risk and operational risk frameworks, as well as the introduction of an output floor. If the proposed changes to the capital framework are adopted in their current form in Switzerland, we expect our overall RWA would significantly increase, absent any mitigating measures. We also expect that we would incur significant costs to implement the proposed changes.

Liquidity and funding: The requirements to maintain an LCR of high-quality liquid assets to estimated stressed short-term net cash outflows and a net stable funding ratio (NSFR), or other similar liquidity and funding requirements we are subject to, oblige us to maintain substantially higher levels of overall liquidity than was previously the case, may limit our efforts to optimize interest income and expense, make certain lines of business less attractive and reduce our overall ability to generate profits. Both the LCR and NSFR 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, and the relevant 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. Moreover, many of our subsidiaries must comply with minimum capital, liquidity and similar requirements and as a result UBS Group AG and UBS AG have contributed a significant portion of their capital and provide substantial liquidity to them. These funds are available to meet funding and collateral needs in the relevant jurisdictions, but are generally not readily available for use by the Group as a whole.

45 


Operating environment and strategy
Risk factors

 

Banking structure and activity limitations: We have undertaken and continue to undertake significant changes in our legal and operational structure to meet legal and regulatory requirements and expectations.

Changes to our legal and operational structure, particularly the transfer of operations to subsidiaries, require significant time and resources to implement and create operational, capital, liquidity, funding and tax inefficiencies. In addition, they may increase our aggregate credit exposure to counterparties as they transact with multiple entities within the UBS 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, limit our operational flexibility and negatively affect our ability to benefit from synergies between business units.

In the US, we have incurred substantial costs for implementing a compliance and monitoring framework in connection with the Volcker Rule under the Dodd-Frank Act. We have also been required to modify our business activities both inside and outside 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. We may incur additional costs in the short term if aspects of the Volcker Rule are repealed or modified. We may become subject to other similar regulations substantively limiting the types of activities in which we may engage or the way we conduct our operations. If adopted as proposed, the rule on single counterparty risk proposed by the US Federal Reserve Board may affect how we conduct our operations in the US, including our use of other financial firms for payments and securities clearing services and as transactional counterparties.

Resolvability and resolution and recovery planning: Under the Swiss TBTF framework, and similar requirements in other jurisdictions, we are required to put in place viable emergency plans to preserve the operation of systemically important functions in the event of a failure, to the extent that such activities are not sufficiently separated in advance. If we adopt measures to reduce resolvability risk beyond what is legally required, we are eligible for a limited rebate on the gone concern requirements. Such actions include changes to the legal structure of a bank group, such as the creation of separate legal entities, 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. Additionally, if a recovery or resolution plan that we are required to produce in a jurisdiction is determined by the relevant authority to be inadequate or not credible, relevant regulation may permit 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.

The Swiss Banking Act and implementing ordinances provide FINMA with significant powers to intervene in order to prevent a failure of, or to 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. FINMA also has the ability to write down or convert into common equity the capital instruments and other liabilities of UBS Group AG, UBS AG and UBS Switzerland AG in connection with a resolution. 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” below.

Market regulation: The implementation by the G20 countries of the commitment to require all standardized OTC derivative contracts to be traded on exchanges or trading facilities and cleared through central counterparties has had and will continue to have a significant effect on our OTC derivatives business, which is conducted primarily in the Investment Bank. 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. 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. Also, 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, and may cause us to incur material implementation costs. Margin requirements for non-cleared OTC derivatives will require significant changes to collateral agreements with counterparties and our clients’ operational processes. In some jurisdictions implementation is ongoing, while rule-making and implementation are delayed in others. This may result in market dislocation, disruption of cross-border trading, and concentration of counterparty trading. It also affects our ability to implement the required changes and may limit our ability to transact with clients

Some of the regulations applicable to UBS AG as a registered swap dealer with the Commodity Futures Trading Commission (CFTC) in the US, and certain regulations that will be applicable when UBS AG registers as a security-based swap dealer with the SEC, apply to UBS AG globally, including those relating to swap data reporting, recordkeeping, compliance and supervision. As a result, 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 in the US with the SEC or CFTC.

 

46 


 

 

In many instances, we provide services on a cross-border basis, and 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 based on determinations of equivalence of home country regulation, substituted compliance or similar principles of comity. A negative determination 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 such determinations are typically applied on a jurisdictional level rather than on an entity level, we will generally need to rely on jurisdictions’ willingness to collaborate.

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

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

Maintaining our capital strength is a key component of our strategy. It enables us to support the growth of our businesses as well as to meet potential regulatory changes in capital requirements. It provides comfort to our stakeholders, forms the basis for our capital return policy, and contributes to our credit ratings. Our capital ratios are determined primarily by RWA, eligible capital and leverage ratio denominator (LRD), all of which may fluctuate based on a number of factors, some of which are outside our control.

Our eligible capital may be reduced by losses recognized within net profit or other comprehensive income. Eligible capital may also be reduced for 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.

RWA are driven by our business activities, by changes in the risk profile of our exposures, changes in our foreign currency exposures and foreign exchange rates and by regulation. 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. We have significantly reduced our market risk and credit risk RWA in recent years. However, increases in operational risk RWA, particularly those arising from litigation, regulatory and similar matters, and regulatory changes in the calculation of RWA and regulatory add-ons to RWA have offset a substantial portion of this reduction. Changes in the calculation of RWA, or, as discussed above, the imposition of additional supplemental RWA charges or multipliers applied to certain exposures, or the imposition of an 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 the effects of our actions.

We are also subject to significantly higher leverage ratio-based capital and TLAC requirements under the revised Swiss Capital Adequacy Ordinance. The leverage ratio is a simple balance sheet measure and therefore limits balance sheet-intensive activities, such as lending, more than activities that are less balance sheet intensive, and it may constrain our business activities even if we satisfy other risk-based capital requirements. Our leverage ratio denominator is driven by, among other things, the level of client activity, including deposits and loans, foreign exchange rates, interest rates and other market factors. Many of these factors are wholly or partially outside our control.

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

We may not be successful in the ongoing execution of our strategic plans

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 RWA and further strengthening our capital position, and significantly reducing costs and improving efficiency. We also set targets and expectations for our performance. We have substantially completed the transformation of our business. However, the risk remains that we may not succeed in executing the rest of our plans, or may need to delay them, that market events or other factors may adversely affect their implementation or that their effects may differ from those intended. Macroeconomic conditions, geopolitical uncertainty, the changes to the Swiss TBTF framework and the continuing costs of meeting new regulatory requirements have prompted us to adapt our targets and expectations in the past and we may need to do so again in the future.

We have substantially reduced the RWA and LRD usage of our Corporate Center – 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.

47 


Operating environment and strategy
Risk factors

 

As part of our strategy, we also have a program underway to achieve significant incremental cost reductions, but a number of factors could negatively affect our plans. Higher permanent regulatory costs and business demand than we had originally anticipated have partly offset our gross cost reductions and delayed the achievement of cost reduction targets in the past, and we could continue to be challenged in the execution of our ongoing plans. Moreover, as is often the case with major effectiveness and efficiency programs, cost reduction plans involve significant risks, including that restructuring costs may be higher and may be recognized sooner than 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 workforce 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. Such changes can also 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, if provisions for real estate lease contracts need to be recognized or when, in connection with the closure or disposal of non-profitable operations, foreign currency translation losses previously recorded in other comprehensive income are 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, achieve our targeted returns or meet existing or new regulatory requirements and expectations.

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

As a global financial services firm operating in more than 50 countries, we are subject to many different legal, tax and regulatory regimes and we are subject to extensive regulatory oversight and exposed to significant liability risk. We are subject to a large number of claims, disputes, legal proceedings and government investigations, 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 non-financial consequences these matters may have when resolved. 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.

Our settlements with governmental authorities in connection with foreign exchange, LIBOR and benchmark interest rates starkly illustrate the significantly increased level of financial and reputational risk now associated with regulatory matters in major jurisdictions. In December 2012, we announced settlements totaling approximately CHF 1.4 billion in fines by and disgorgements to US, UK and Swiss authorities. We entered into a non-prosecution agreement (NPA) with the US Department of Justice (DOJ), and UBS Securities Japan Co. Ltd. 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 certain UBS employees had committed a US crime related 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 paid a USD 203 million fine and is subject to a three-year term of probation. The 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, 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.

Ever since our material losses arising from the 2007 – 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 to the unauthorized trading incident announced in September 2011, the effects on our reputation and relationships with regulatory authorities of the LIBOR-related settlements of 2012 and settlements with some regulators of matters related to our foreign exchange and precious metals business, have proven to be more difficult to overcome. 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 20 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information

48 


 

 

Operational risks affect our business

Our businesses depend on our ability to process a large number of transactions, many of which are complex, 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 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, cyberattacks, breaches of information security and failure of security and physical protection, are appropriately controlled. 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.

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 our customers, violations of data privacy and similar laws, litigation exposure and damage to our reputation.

A major focus of US and other countries’ governmental policies relating to financial institutions in recent years has been fighting money laundering and terrorist financing. We are required 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.

As a result of new and changed regulatory requirements and the changes we have made in our legal structure to meet regulatory requirements and improve our resolvability, the volume, frequency and complexity of our regulatory and other reporting has significantly increased. Regulators have also significantly increased expectations for our internal reporting and data aggregation. We have incurred and continue to incur significant costs to implement infrastructure to meet these requirements. Failure to timely and accurately meet external reporting requirements or to meet regulatory expectations for internal reporting could result in enforcement action or other adverse consequences for us.

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.

Our reputation is critical to the success of our business

Our reputation is critical to the success of our strategic plans, business and prospects. Reputational damage is difficult to reverse, and improvements tend to be slow and difficult to measure. Our very large losses during the financial crisis, the investigations into our cross-border private banking services to US private clients 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. 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.

49 


Operating environment and strategy
Risk factors

 

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

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 rates, 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, acts of violence, war or terrorism. Macroeconomic and political developments can have unpredictable and destabilizing effects and, because financial markets are global and highly interconnected, even local and regional events can have widespread impact well beyond the countries in which they occur. We are closely monitoring developments in Europe following the UK referendum on EU membership, with potential adverse consequences for the UK economy and for the recovery of a weak EU economy. 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 eurozone), we could suffer losses from enforced default by counterparties, be unable to access our own assets, and / or be impeded in, or prevented from, managing our risks.

We could be materially affected if a crisis develops, regionally or globally, as a result of disruptions in emerging markets or developed markets that are susceptible to macroeconomic and political developments, or as a result of the failure of a major market participant. 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 such markets. The binding scenario we use in our combined stress test framework reflects these aspects, and 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.

®   Refer to the “Risk measurement” section of this report for more information on our stress testing framework

 

We have material exposures to a number of markets, and the regional balance of our business mix also exposes us to risk. Our Investment Bank’s Equities business, for example, is more heavily weighted to Europe and Asia, and within this business 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.

A decrease in business and client activity and market volumes, for example, as a result of significant market volatility, adversely affects transaction fees, commissions and margins, particularly in our wealth management businesses and in the Investment Bank, as we experienced in 2016. A market downturn is likely to reduce the volume and valuations of assets that we manage on behalf of clients, reducing our asset and performance-based fees, and could also cause a decline in the value of assets that we own and account for as investments or trading positions. On the other hand, reduced market liquidity or volatility limit trading opportunities and impede our ability to manage risks, impacting both trading income and performance-based fees.

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 credit risk in activities, such as our prime brokerage, reverse repurchase and Lombard lending, as the value or liquidity of the assets against which we provide financing may decline rapidly. Macroeconomic developments, such as the continuing strength of the Swiss franc and its effect on Swiss exports, 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 and European Economic Area citizens, could also adversely affect the Swiss economy, our business in Switzerland in general and, in particular, our Swiss mortgage and corporate loan portfolios.

The aforementioned developments have in the past affected, and could materially affect, the financial performance of business divisions and of UBS as a whole, including through impairment of goodwill and the adjustment of deferred tax asset levels.

UK referendum on EU membership

Following the outcome of the June 2016 referendum on the UK’s membership in the EU, the UK government has stated that it intends to invoke Article 50 of the Treaty on European Union by no later than the end of March 2017. This will trigger a two-year period during which the UK will negotiate its withdrawal agreement with the EU. Barring any changes to this time schedule, the UK is expected to leave the EU in early 2019. The nature of the UK’s future relationship with the EU remains unclear. Any future limitations on providing financial services into the EU from our UK operations could require us to make potentially significant changes to our operations in the UK and our legal structure. We are evaluating the potential effects of a UK exit from the EU and potential mitigating actions, although the effects and actions may vary considerably depending on the timing of withdrawal and the nature of any transition or successor agreements with the EU.

50 


 

 

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

Our wealth and asset management businesses operate in an environment of increasing regulatory scrutiny and changing standards also with respect to fiduciary and other standards of care and the focus on mitigating or eliminating conflicts of interest between a manager or advisor and the client, which require effective implementation across the global systems and processes of investment managers and other industry participants. For example, the US Department of Labor has adopted a rule expanding the definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA), which will require us to comply with fiduciary standards under ERISA when dealing with certain retirement plans. We will likely be required to materially change business processes, policies and the terms on which we interact with these clients in order to comply with these rules if and when they become effective.

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.

We have experienced cross-border outflows over a number of years as a result of heightened focus by fiscal authorities on cross-border investment and fiscal amnesty programs, in anticipation of the implementation in Switzerland of the global automatic exchange of tax information, and as a result of the measures we have implemented in response to these changes. Further changes in local tax laws or regulations and their enforcement, the implementation of cross-border tax information exchange regimes, national tax amnesty or enforcement programs or similar actions may affect our clients’ ability or willingness to do business with us and result in additional cross-border outflows.

In recent years, our Wealth Management net new money inflows 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, has put downward pressure on our Wealth Management’s margins.

Initiatives that we may implement to overcome the effects of changes in the business environment on our profitability, balance sheet and capital positions give no assurance that we will be able to counteract those effects and may cause net new money outflows and reductions in client deposits, as happened with our 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 and other industry developments. These changes may adversely affect our margins on these products, and our 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 effect of these or similar trends and developments.

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

The financial services industry is characterized by intense competition, continuous innovation, restrictive, 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, and our digital channels and tools, or are unable to attract or retain the qualified people needed to carry them out.

The amount and structure of our employee compensation is affected not only by our business results but also by competitive factors and regulatory considerations.

In recent years, in response to the demands of various stakeholders, including regulatory authorities and shareholders, and in order to better align the interests of our staff with those of other stakeholders, we have made changes to the terms of compensation awards. Among other things, we have introduced individual caps on the proportion of fixed to variable pay for the GEB members, as well as certain other employees. We have increased average deferral periods for stock awards, expanded forfeiture provisions, and, to a more limited extent, introduced claw-back provisions for certain awards linked to business performance.

51 


Operating environment and strategy
Risk factors

 

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. 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 and may affect our business performance.

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

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.

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. The deterioration of financial markets since the beginning of the crisis was extremely severe by historical standards. 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 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. As a result, we recorded substantial losses on fixed income trading positions, particularly in 2008 and 2009. 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 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 is 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. In addition, we continue to hold substantial legacy risk positions, primarily in Corporate Center − Non-core and Legacy Portfolio. They remain illiquid in many cases, and we continue to be exposed to the risk that they may again deteriorate in value.

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 mentioned above. 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.

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 effect on our earnings.

Liquidity and funding management are critical to our ongoing performance

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. 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 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. A change in the availability of short-term funding could occur quickly.

Moreover, 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, the regulatory requirements to maintain minimum TLAC at holding company level and / or at subsidiaries level, 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 increase our cost of funding and could potentially increase the total amount of funding required absent other changes in our business.

52 


 

 

Reductions in our credit ratings may adversely affect the market value of the securities and other obligations and 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 its 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 rating changes could influence the performance of some of our businesses.

Our financial results may be negatively affected by changes to assumptions and valuations, as well as changes to accounting standards

We prepare our consolidated financial statements in accordance with IFRS. 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. This is the case, for example, with respect to the measurement of fair value of financial instruments, the recognition of deferred tax assets, or the assessment of the impairment of goodwill. 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, or failure to make the changes necessary to reflect evolving market conditions, may have a significant effect on the financial statements in the periods when changes occur. Moreover, if the estimates and assumptions in future periods deviate from the current outlook, our financial results may also be negatively affected.

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. 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 affect 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 and is generally expected to result in an increase in recognized credit loss allowances.

®   Refer to the “Critical accounting estimates and judgments” section and “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information


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

Our effective tax rate is highly sensitive both to our performance and our expectation of future profitability. Based on prior years’ tax losses, we have recognized deferred tax assets (DTAs) reflecting the probable recoverable level based on future taxable profit as informed by our business plans. If our performance is expected to produce diminished taxable profit in future years, particularly in the US or the UK, 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. Conversely, 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. We generally revalue our deferred tax assets in the second half of the financial year based on a reassessment of future profitability taking into account updated business plan forecasts. Our results in recent periods have demonstrated that changes in the recognition of DTAs can have a very significant effect on our reported results.

Our full-year effective tax rate could also change if aggregate tax expenses in respect of profits from branches and subsidiaries without loss coverage differ from what is expected, or in case of changes to the forecast period used for DTA recognition purposes as part of the aforementioned reassessment of future profitability. Moreover, tax laws or the tax authorities in countries where we have undertaken legal structure changes 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.

Our effective tax rate is also sensitive to any future reductions in statutory tax rates, particularly in the US and Switzerland, which 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. For example, for every percentage point reduction in the US federal corporate income tax rate, we would expect a CHF 0.2 billion decrease in the Group’s deferred tax assets. In addition, statutory and regulatory changes, as well as changes to the way in which courts and tax authorities interpret tax laws could cause the amount of taxes ultimately paid by us to materially differ from the amount accrued.

53 


Operating environment and strategy
Risk factors

 

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

Our capital return policy envisages 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%.

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, the effect of changes to capital standards such as those recently introduced in Switzerland, methodologies and interpretation that may adversely affect the calculation of our fully applied CET1 capital ratio, the imposition of risk add-ons or capital buffers, and the application of additional capital, liquidity and similar requirements to subsidiaries. Refer to the discussion of these risks earlier in this section and in particular to “Continuing low or negative interest rates may have a detrimental effect on our capital strength, liquidity and funding position, and profitability” above for more information on the effect on capital of changes to pension plan defined benefit obligations.

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.

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. Assumptions are also 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. 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 or prior-quarter data as an estimate. 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. 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 its future developments.

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

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 other subsidiaries. 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 and the requirements of applicable law and regulatory, fiscal or other restrictions. In particular, UBS Group AG’s direct and indirect subsidiaries, including UBS AG, UBS Switzerland AG, UBS Limited and UBS Americas Holding LLC, 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, could impact their ability to repay any loans made to, or other investments in, such subsidiary by UBS Group AG or another member of the Group, or limit or prohibit transactions with affiliates, and could be subject to additional restrictions in the future. 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.

Our capital instruments may contractually prevent UBS Group AG from proposing the distribution of dividends to shareholders, other than in the form of shares, if we do not pay interest on these instruments.

Furthermore, UBS Group AG may guarantee some of the payment obligations of certain of the Group’s 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.

The credit ratings of UBS Group AG or its subsidiaries used for funding purposes could be lower than the ratings of the Group’s operating subsidiaries, which may adversely affect the market value of the securities and other obligations of UBS Group AG or those subsidiaries on a standalone basis.

54 


 

 

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

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, UBS AG or UBS Switzerland 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, and creditors would have no right under Swiss law or in Swiss courts to reject them, seek their suspension, or challenge their imposition, including measures that require or result in the deferment of payments.

If restructuring proceedings are opened with respect to UBS Group AG, UBS AG or UBS Switzerland AG, the resolution powers that 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. Furthermore, certain categories of debt obligations, such as certain types of deposits, are subject to preferential treatment. 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 unaffected 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.

  

55 



Financial and operating performance

Management report

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

.


Financial and operating performance
Critical accounting estimates and judgments

Critical accounting estimates and judgments

In preparing our financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the Internal Accounting Standards Board (IASB), we apply judgment and make estimates and assumptions that may involve significant uncertainty at the time they are made. We regularly reassess those estimates and assumptions, which encompass historical experience, expectations of the future and other pertinent factors, to determine their continuing relevance based on current conditions and we update them as necessary. Changes in estimates and assumptions may have a significant impact on the financial statements. Furthermore, actual results may differ significantly from our estimates, which could result in significant losses to the Group, beyond what we anticipated or provided for.

Key areas involving a high degree of judgment and areas where estimates and assumptions are significant to the consolidated and individual financial statements include:

   Consolidation of structured entities

   Fair value of financial instruments

   Allowances and provisions for credit losses

   Pension and other post-employment benefit plans

   Income taxes

   Goodwill  

   Provisions and contingent liabilities

 


We believe that the judgments, estimates and assumptions we have made are appropriate under the circumstances and that our financial statements fairly present, in all material respects, the financial position of UBS as of 31 December 2016 and the results of our operations and cash flows for the year ended on 31 December 2016 in accordance with IFRS.

®   Refer to “Note 1a Significant accounting policies” in the “Consolidated financial statements” section of this report for more information

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

 

  

58 


 

Significant accounting and financial reporting changes

Significant accounting changes

Own credit

In 2016, we adopted the own credit presentation requirements of IFRS 9, Financial Instruments for financial liabilities designated at fair value through profit or loss. From this date onward, changes in the fair value of financial liabilities designated at fair value through profit or loss related to own credit are recognized in Other comprehensive income directly within Retained earnings

Balance sheet classification of newly purchased high-quality liquid debt securities

In 2016, we generally classified newly purchased debt securities held as high-quality liquid assets (HQLA) and managed by Corporate Center – Group Asset and Liability Management (Group ALM) as either financial assets designated at fair value through profit or loss or financial assets held to maturity.

Debt securities acquired prior to 2016 and held for liquidity purposes remain classified as financial assets available for sale.

Interest rate swaps converted to a settlement model

In 2016, we elected to convert our interest rate swaps (IRS) traded with the London Clearing House and Japan Securities Clearing Corporation from the previous collateral model to a settlement model. The IRS are now legally settled on a daily basis, resulting in derecognition of the associated assets and liabilities.

Derecognition of exchange-traded derivative client cash balances from the Group’s balance sheet

In 2016, we formally and legally waived certain rights available to us under the rules of the US Commodity Futures Trading Commission that had previously enabled us to invest certain client cash balances in other assets, making them a source of benefit to the Group. As a result, we derecognized related client cash balances.

 

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

Significant financial reporting changes

Revised regulatory framework for Swiss SRBs and change in equity attribution framework

On 1 July 2016, a revised regulatory framework, reflecting amendments to the too big to fail (TBTF) provisions applicable to Swiss systemically relevant banks (SRBs), became effective.


Effective 1 January 2017, we have revised our equity attribution framework to reflect the revision of these TBTF provisions.

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

Revised Pillar 3 disclosure requirements

During 2015, the Basel Committee on Banking Supervision (BCBS) issued revised Pillar 3 disclosure requirements that aim to improve comparability and consistency of disclosures by introducing harmonized templates. Moreover, FINMA published its associated Pillar 3 disclosure requirements for Swiss banking institutions in its Circular 2016/01, Disclosures - banks. The revised Pillar 3 disclosure requirements relate to information on risk management, the linkage between a bank's financial statements and its regulatory exposures, credit risk, counterparty credit risk, securitization and market risk. In August 2016, BCBS issued additional guidance on the revised Pillar 3 disclosure requirements in a Frequently asked questions document. In December 2016, FINMA issued additional disclosure requirements relating to the Swiss too big to fail provisions within its Circular 2016/01, Disclosures - banks. The Circular includes additional disclosure requirements effective as of 31 December 2016, as well as certain requirements that will become effective in 2017.

The disclosures in our Basel III Pillar 3 2016 report or in other documents referenced within this report are based on the revised requirements effective in 2016.

®   Refer to the Basel III Pillar 3 UBS Group AG 2016 report under “Pillar 3, SEC filings & other disclosures” at www.ubs.com/investors for more information

 

A consultative document issued by BCBS in March 2016 proposing further enhancements to the Pillar 3 framework for selective disclosure topics is subject to finalization.

Corporate Center – Group ALM

To further enhance the transparency of Corporate Center – Group ALM, effective 2016, Corporate Center – Group ALM’s results are disclosed for its three main risk management activities: (i) business division-aligned risk management, (ii) capital investment and issuance and (iii) Group structural risk management.

59 


Financial and operating performance
Significant accounting and financial reporting changes

 

Also, in 2016 we transferred the Risk Exposure Management function from Corporate Center – Non-core and Legacy Portfolio to Corporate Center – Group ALM.

®   Refer to the “Corporate Center” sections in “Operating environment and strategy” and in ”Financial and operating performance” of this report for more information

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

Implementation of IFRS 9, Financial Instruments  

In July 2014, the International Accounting Standards Board (IASB) issued the final International Financial Reporting Standard (IFRS) 9, Financial Instruments, which will become mandatory as of 1 January 2018. The standard reflects the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace the International Accounting Standard IAS 39, Financial instruments: Recognition and Measurement.

IFRS 9 requires all financial assets, except equity instruments, to be classified at amortized cost, fair value through other comprehensive income (OCI) or fair value through profit or loss, on the basis of the entity’s business model for managing the financial assets and its contractual cash flow characteristics. If a financial asset meets the criteria to be measured at amortized cost or at fair value through OCI, it can be designated at fair value through profit or loss under the fair value option if doing so would significantly reduce or eliminate an accounting mismatch. Equity instruments that are not held for trading may be accounted for at fair value through OCI, with no subsequent reclassification of realized gains or losses to the income statement, while all other equity instruments will be accounted for at fair value through profit or loss.

IFRS 9 classification and measurement requirements for liabilities are unchanged except that any gain or loss arising on a financial liability designated at fair value through profit or loss that is attributable to changes in the issuers own credit risk (own credit) is presented in OCI and not recognized in the income statement. We early adopted the own credit presentation change in 2016, as mentioned on the previous page.

IFRS 9 further introduces 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 loan 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 before transition and once IFRS 9 is fully adopted, to ensure that changes and effects arising from using an expected loss model are transparent, understandable and consistently applied. We began addressing these recommendations in our Annual Report 2015 and will continue to do so beyond the full adoption of IFRS 9 in 2018. In addition, we have considered and we address further guidance issued by relevant bodies, including “The implementation of IFRS 9 impairment requirements by banks – Considerations for those charged with governance of systemically important banks” issued in November 2016 by the Global Public Policy Committee (GPPC), which consists of representatives of the six largest accounting networks, and the Basel Committee on Banking Supervision (BCBS) guidelines related to expected credit losses.

IFRS 9 is a key strategic initiative for UBS and is implemented under the joint sponsorship of the Group Chief Risk Officer and the Group Chief Financial Officer. The implementation project structure is 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. The steering committee, operating committee, technical board and individual work streams continue to ensure a streamlined implementation with appropriate controls and governance over all key decisions. The program has identified the primary changes to existing systems, processes, data and models required for the purposes of meeting the IFRS 9 requirements and to allow for a sound front-to-back implementation. We made significant progress in 2016 toward achieving key milestones across all work streams.

We intend to perform a parallel run in 2017 and to disclose the potential financial effects of adopting IFRS 9 no later than in our Annual Report 2017. As permitted under IFRS 9, we do not intend to restate prior periods and will recognize the difference between carrying amounts as of 31 December 2017 and those on adoption of IFRS 9 on 1 January 2018 directly in retained earnings as of 1 January 2018.

Classification and measurement

Based on the revised classification and measurement requirements for financial instruments, we have assessed all material positions and do not expect significant effects on our financial statements. A number of debt instruments, mainly in the Investment Bank and in Corporate Center – Group Asset and Liability Management (Group ALM), no longer qualify for amortized cost accounting due to their cash flow characteristics or the underlying business model within which they are held and will be measured at fair value through profit or loss under IFRS 9. However, a significant change in carrying value is not expected as a majority of the respective instruments are collateralized short-term lending arrangements with no material differences between their amortized cost value and fair value. In addition, our financial assets currently designated at fair value will continue to be measured at fair value, albeit on a mandatory basis under IFRS 9, and we will elect the fair value option for certain liabilities to prevent an accounting mismatch with assets that are newly measured at fair value through profit or loss under IFRS 9.

60 


 

 

We are monitoring the IASBs project to amend IFRS 9 to the effect that basic lending arrangements with symmetrical break clauses continue to qualify for amortized cost accounting. These clauses are common features in Personal & Corporate Banking and Wealth Management private mortgage contracts as a consequence of Swiss Law as well as in corporate lending due to market practice and may result in compensation for early termination being paid by either the borrower or UBS. The IASB is expected to issue an exposure draft in April 2017, effective 1 January 2018 in line with IFRS 9s effective date. Based on these anticipated amendments, we expect that we can continue to measure our private mortgages and corporate loans at amortized cost.

Expected credit loss

Under the current incurred-loss impairment approach in IAS 39, a financial asset or group of financial assets held at amortized cost is impaired if there is objective evidence that we will be unable to collect all amounts under the contract. Once such evidence is obtained, we recognize credit losses based on the difference between the carrying value and the present value of estimated future cash flows.

IFRS 9 requires credit losses to be recognized irrespective of whether a loss event has occurred. Entities will be required to recognize a 12-month ECL for financial assets measured at amortized cost, debt instruments measured at fair value through OCI, lease receivables, financial guarantees and loan commitments from initial recognition. This 12-month ECL reflects cash shortfalls from default events expected to occur within 12 months from the reporting date. We refer to assets with a 12-month ECL as assets in stage 1. If there is a significant increase in credit risk (SICR) after the instruments initial recognition, a lifetime ECL is required to be recognized capturing cash shortfalls related to default events expected to occur over the life of an asset. Lifetime ECLs are always recognized for credit-impaired financial assets. We refer to financial assets with a lifetime ECL due to an SICR as assets in stage 2 and to credit-impaired financial assets as assets in stage 3. Where the period over which UBS is exposed to credit risk is shorter than 12 months, any ECL covers this shorter period.

The ECL must reflect an unbiased and probability-weighted estimate of credit losses, which is determined by evaluating a range of possible outcomes and which incorporates reasonable and supportable information about past events, current conditions, forecasts of future economic conditions and the time value of money.

The method we will use for measuring ECL is mainly based on a combination of the following principal factors: probability of default (PD), loss given default (LGD), exposure at default (EAD) and discounting. The ECL calculation will use point in time (PIT) based parameters, including PIT PD and PIT LGD, leveraging the respective parameters determined under the Basel III through the cycle (TTC) based approach. Adjustments will be made to account for current conditions and to incorporate forward-looking economic information, which will include gross domestic product forecasts, interest and foreign exchange rates, unemployment rates, real estate price indices and other relevant risk parameters. In addition, the prudential adjustments from Basel III, such as downturn LGD assumptions and floors, will be removed.

For the ECL calculation, we will consider the maximum contractual period over which we are exposed to credit risk, taking into account the counterparties’ contractual extension, termination and prepayment options. For certain master credit facilities, business current accounts and credit card facilities without a defined contractual end date, which are callable on demand and where the drawn and undrawn portions are managed as one unit, the period over which UBS is exposed to credit risk exceeds the contractual notice period and will therefore be used instead in the ECL calculation. For portfolios including Lombard loans and security financing transactions the period which is used in the ECL calculation may be shorter, but not longer than the contractual period of a position. This is driven by the fact that those types of portfolios are subject to specific credit risk monitoring processes, such as daily monitoring, margin calls and close-out processes, and therefore the period over which UBS is exposed to credit risk is limited to the period needed to execute any credit risk mitigation actions.

We will determine whether an SICR has occurred at the reporting date by assessing changes in an instrument’s risk of default since initial recognition based on the PIT PD, primarily at an individual financial asset level. Additional information will also be considered, including internal indicators of credit risk and external market indicators of credit risk or general economic conditions. Exception management will be applied allowing for individual and collective adjustments on exposures sharing the same credit risk characteristics to take into account specific situations which are not otherwise fully reflected.

In line with BCBS expectations, we do not intend to apply the low-credit-risk exemption practical expedient in determining whether an SICR has occurred. Furthermore, the 30-days-past-due SICR indicator will predominantly be used as a backstop, except for our retail credit portfolio where it will be the primary indicator. The 30-days-past-due presumption is only expected to be rebutted in rare circumstances.

The SICR process will have no effect on certain portfolios, mainly Lombard loans and reverse repurchase agreements, due to the risk management practices adopted, including regular margin calls. ECL on these positions is expected to be low. If margin calls are not satisfied, the position will be closed out immediately with any shortfall generally classified as a stage 3 position.

61 


Financial and operating performance
Significant accounting and financial reporting changes

 

We progressed throughout 2016 with respect to the development of material models. Existing internal ratings-based (IRB) Pillar 1 models are used as a basis to derive IFRS 9 relevant PDs on a PIT basis and are currently being significantly adjusted for the purposes of IFRS 9 to take into account forward-looking macroeconomic information. In addition, we are working on an appropriate selection of a range of scenarios to capture material non-linearity and asymmetries between different possible forward-looking scenarios and associated credit losses and we determine adequate weights to reflect a likelihood of their occurrence. Although the ECL concept is not a stress loss concept, we leverage our existing stress loss models for this purpose and develop scenarios that reflect a range of probable outcomes. We will align our baseline scenario selection with the baseline used for business planning purposes.

Implementation of the IFRS 9 ECL approach is generally expected to lead to an increase in recognized credit losses compared with the current incurred-loss approach. This is partly due to the 12-month ECL, which will have to be reported for all in-scope instruments, and to the lifetime ECL, which will apply to positions following an SICR and prior to an incurred credit loss event. In addition, we expect income statement volatility to increase, due to the use of uncertain forward-looking assumptions and the application of the SICR approach.

In 2016, we performed an initial ECL impact assessment in a prototype environment using preliminary models and scenarios. The calculations covered key portfolios that are expected to contribute to the loss impact, including mortgage loans and corporate lending in Personal & Corporate Banking and Wealth Management and corporate lending in the Investment Bank. We observed sensitivities to changes in the economic environment through a range of expected credit loss outcomes, which will be further analyzed for continued model development and refinement. The ECL results calculated in the prototype environment indicate an increase in credit losses, which should not have a significant impact on equity on adoption, due to the relatively short contractual maturities, the high quality of our loan book and the current benign credit environment. Actual results as of 1 January 2018 may differ significantly, given the preliminary status of the models and data included in the prototype and the possibility of changes in the macroeconomic environment. We continue to monitor the potential effects of IFRS 9 on our regulatory capital requirements but do not expect a material impact.

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

 

The definition and assessment of what constitutes an SICR, and the incorporation of forward-looking information are inherently subjective and will involve the use of significant judgment. Therefore, we focus on developing effective and robust governance over the ECL calculation process and on defining a front-to-back control framework in compliance with the Sarbanes-Oxley Act requirements.

Our economists, risk methodology personnel and credit risk officers are involved in developing the forward-looking macroeconomic assumptions to be used in the ECL calculation. Those assumptions will be validated and approved through a new governance process, which will also provide for a consistent use of forward-looking information throughout UBS, including our business planning process. New models will be approved as part of our existing model validation and oversight processes. Governance will also specifically be established around exception handling given the extent of management involvement required. We intend to build a risk simulation engine to test ECL and SICR inputs in a controlled environment.

Significant new complex disclosures will be required, including a reconciliation of any changes in the expected loss allowances and provisions during the reporting period. We will disclose required information at an appropriate level of granularity considering respective transactions and their risk characteristics.

The IFRS 9 determination of whether an asset is credit-impaired follows the same principles as determining impairment under IAS 39. Therefore, we do not expect credit-impaired financial assets under IFRS 9 to differ significantly from impaired assets under IAS 39. However, the ECL for credit-impaired financial assets under IFRS 9 may differ from the impairment loss under IAS 39 due to additional scenario considerations to be made under IFRS 9. We also do not expect the definition of credit-impaired under IFRS 9 to differ from the definition of default used for the purpose of our advanced internal ratings-based approach.

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.  

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

Hedging

IFRS 9 includes an optional revised hedge accounting model, which further aligns the accounting treatment with risk management practices. We are currently assessing the changes but do not expect any significant effects, and intend to conclude our adoption decision during the first half of 2017.

Irrespective of the adoption of the revised hedge accounting model, new mandatory hedge accounting disclosures will be adopted on 1 January 2018 as required, providing additional information on the hedging strategies by the hedged risk and hedge type. 

 

62 


 

 

 

 

Current Basel III (advanced internal ratings-based approach)

IFRS 9 treatment

Scope

The Basel III advanced internal ratings-based (A-IRB) treatment applies to most credit risk exposures. It includes transactions measured at amortized cost, at fair value through profit or loss and at fair value through other comprehensive income (OCI).

The IFRS 9 expected loss calculation mainly applies to financial assets measured at amortized cost and debt instruments measured at fair value through OCI, as well as loan commitments and financial guarantee contracts not at fair value through profit or loss.

12-month versus lifetime expected loss

The Basel III A-IRB approach takes into account lifetime expected losses resulting from expected default events over a 12-month period.

In the absence of an SICR event, IFRS 9 takes into account lifetime expected losses considering expected default events over a maximum period of 12 months from the reporting date. Once an SICR event has occurred, expected default events over the life of a transaction have to be considered.

Exposure at default

(EAD)

EAD is the amount we expect a counterparty to owe us at the time of a possible default. For banking products, the EAD equals the book value as of the reporting date, whereas for traded products, such as securities financing transactions, the EAD is modeled. The EAD is expected to remain constant over the 12-month period. For loan commitments, a credit conversion factor is applied to model expected future drawdowns over the 12-month period.

For IFRS 9 purposes, the EAD is generally calculated on the basis of the cash flows that are expected to be outstanding at the individual points in time during the period over which UBS is exposed to credit risk, discounted to the reporting date using the effective interest rate. For loan commitments, a credit conversion factor is applied to model expected future drawdowns over the period that UBS is exposed to credit risk, which is capped at 12 months, unless an SICR were to occur.

Probability of default

(PD)

PD estimates are determined on a TTC basis. They represent historical average PDs, taking into account observed losses over a prolonged historical period, and are therefore less sensitive to movements in the underlying economy.

PD estimates will be determined on a PIT basis, based on current conditions and incorporating forecasts for future economic conditions at the reporting date.

Loss given default

(LGD)

LGD includes prudential adjustments, such as downturn LGD assumptions and floors. Similar to PD, LGD is determined on a TTC basis.

LGD should reflect the losses that are reasonably expected and prudential adjustments should therefore not be applied. Similar to PD, LGD is determined on the basis of a PIT approach.

Use of scenarios

N/A

Multiple forward-looking scenarios have to be taken into account to determine a probability-weighted ECL.

  

63 


Financial and operating performance
Group performance

Group performance

Income statement

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.16

31.12.15

31.12.14

 

31.12.15

Net interest income

 

6,413

6,732

6,555

 

(5)

Credit loss (expense) / recovery

 

(37)

(117)

(78)

 

(68)

Net interest income after credit loss expense

 

6,376

6,615

6,477

 

(4)

Net fee and commission income

 

16,397

17,140

17,076

 

(4)

Net trading income

 

4,948

5,742

3,842

 

(14)

of which: net trading income excluding own credit

 

4,948

5,190

3,551

 

(5)

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

 

 

553

292

 

(100)

Other income

 

599

1,107

632

 

(46)

Total operating income

 

28,320

30,605

28,027

 

(7)

of which: net interest and trading income

 

11,361

12,474

10,397

 

(9)

Personnel expenses

 

15,720

15,981

15,280

 

(2)

General and administrative expenses

 

7,434

8,107

9,387

 

(8)

Depreciation and impairment of property, equipment and software

 

985

920

817

 

7

Amortization and impairment of intangible assets

 

91

107

83

 

(15)

Total operating expenses

 

24,230

25,116

25,567

 

(4)

Operating profit / (loss) before tax

 

4,090

5,489

2,461

 

(25)

Tax expense / (benefit)

 

805

(898)

(1,180)

 

 

Net profit / (loss)

 

3,286

6,386

3,640

 

(49)

Net profit / (loss) attributable to preferred noteholders

 

 

 

142

 

 

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

 

82

183

32

 

(55)

Net profit / (loss) attributable to shareholders

 

3,204

6,203

3,466

 

(48)

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

Total comprehensive income

 

2,170

5,781

5,220

 

(62)

Total comprehensive income attributable to preferred noteholders

 

 

 

221

 

 

Total comprehensive income attributable to non-controlling interests

 

352

83

79

 

324

Total comprehensive income attributable to shareholders

 

1,817

5,698

4,920

 

(68)

64 


 

 

Performance by business division and Corporate Center unit – reported and adjusted¹˒²

 

 

For the year ended 31.12.16

CHF million

 

Wealth

Manage-

ment

Wealth Manage-

ment

Americas

Personal &

Corporate

Banking

Asset

Manage-

ment

Investment

Bank

CC ­

Services³

CC ­

Group

ALM

CC ­ Non-

core and

Legacy

Portfolio

UBS

Operating income as reported

 

7,291

7,782

3,984

1,931

7,688

(102)

(219)

(36)

28,320

of which: gains on sale of financial assets available for sale⁴

 

21

10

102

 

78

 

 

 

211

of which: gains on sales of real estate

 

 

 

 

 

 

120

 

 

120

of which: gains related to investments in associates

 

 

 

21

 

 

 

 

 

21

of which: net foreign currency translation losses⁵

 

 

 

 

 

 

 

(122)

 

(122)

of which: losses on sales of subsidiaries and businesses

 

(23)

 

 

 

 

 

 

 

(23)

Operating income (adjusted)

 

7,293

7,772

3,861

1,931

7,610

(222)

(97)

(36)

28,113

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as reported

 

5,343

6,675

2,224

1,479

6,684

747

(1)

1,078

24,230

of which: personnel-related restructuring expenses⁶

 

53

7

4

15

154

518

0

1

751

of which: non-personnel-related restructuring expenses⁶

 

55

0

0

15

14

623

0

0

706

of which: restructuring expenses allocated from CC ­ Services⁶

 

339

132

113

70

410

(1,084)

0

21

0

Operating expenses (adjusted)

 

4,896

6,536

2,107

1,379

6,107

690

(1)

1,057

22,772

of which: expenses for provisions for litigation, regulatory and similar matters

 

69

96

3

(2)

42

2

0

584

795

 

 

 

 

 

 

 

 

 

 

 

Operating profit / (loss) before tax as reported

 

1,948

1,107

1,760

452

1,004

(849)

(218)

(1,114)

4,090

Operating profit / (loss) before tax (adjusted)

 

2,397

1,236

1,754

552

1,503

(912)

(96)

(1,093)

5,341

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended 31.12.15

CHF million

 

Wealth

Manage-

ment

Wealth Manage-

ment

Americas

Personal &

Corporate

Banking

Asset

Manage-

ment

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 value⁷

 

 

 

 

 

 

 

553

 

553

of which: gains on sales of real estate

 

 

 

 

 

 

378

 

 

378

of which: gains on sales of subsidiaries and businesses

 

169

 

 

56

 

 

 

 

225

of which: net foreign currency translation gains⁵

 

 

 

 

 

 

 

88

 

88

of which: gains related to investments in associates

 

15

 

66

 

 

 

 

 

81

of which: gains on sale of financial assets available for sale⁴

 

 

 

 

 

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 expenses⁶

 

20

0

2

4

14

406

0

14

460

of which: non-personnel-related restructuring expenses⁶

 

38

0

0

11

7

719

0

0

775

of which: restructuring expenses allocated from CC ­ Services⁶

 

265

137

99

68

376

(986)

0

43

0

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

 

 

(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

of which: expenses for provisions for litigation, regulatory and similar matters

 

104

351

(2)

(3)

2

15

0

620

1,087

 

 

 

 

 

 

 

 

 

 

 

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

65 


Financial and operating performance
Group performance

 

Performance by business division and Corporate Center unit – reported and adjusted (continued)¹˒²

 

 

For the year ended 31.12.14

CHF million

 

Wealth

Manage-

ment

Wealth Manage-

ment

Americas

Personal &

Corporate

Banking

Asset

Manage-

ment

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 value⁷

 

 

 

 

 

 

 

292

 

292

of which: gains on sales of real estate

 

 

 

 

 

 

44

 

 

44

of which: losses on sale of financial assets available for sale⁴

 

 

 

 

 

(5)

 

 

 

(5)

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 expenses⁶

 

18

0

4

19

64

221

0

1

327

of which: non-personnel-related restructuring expenses⁶

 

49

0

0

2

36

263

0

0

350

of which: restructuring expenses allocated from CC ­ Services⁶

 

119

55

60

30

161

(454)

0

29

0

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

 

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

of which: expenses for provisions for litigation, regulatory and similar matters

 

394

163

59

55

1,855

(125)

0

193

2,594

 

 

 

 

 

 

 

 

 

 

 

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

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 CC ­ Services operating expenses presented in this table are after service allocations to business divisions and other Corporate Center units.    4 Includes gains on partial sales of our investment in IHS Markit in 2016, 2015 and 2014 in the Investment Bank, a gain on the sale of our investment in Visa Europe in 2016 in Wealth Management and Personal & Corporate Banking as well as an impairment of an investment in the Investment Bank in 2014.    5 Related to the disposal of foreign subsidiaries and branches.    6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information.    7 Refer to the “Significant accounting and financial reporting changes” section of this report for more information on own credit.

 

66 


 

 

2016 compared with 2015 

Results

We recorded net profit attributable to shareholders of CHF 3,204 million in 2016, which included a net tax expense of CHF 805 million. In 2015, net profit attributable to shareholders was CHF 6,203 million, which included a net tax benefit of CHF 898 million.

Profit before tax was CHF 4,090 million in 2016 compared with CHF 5,489 million in the prior year. Operating income decreased by CHF 2,285 million or 7%, mainly due to CHF 1,113 million lower combined net interest and trading income, primarily in the Investment Bank and Corporate Center – Group Asset and Liability Management (Group ALM), and a decline of CHF 743 million in net fee and commission income, primarily in Wealth Management. Operating expenses decreased by CHF 886 million or 4%, mainly due to CHF 673 million lower general and administrative expenses and a decline of CHF 261 million in personnel expenses.

As of 31 December 2016, the Group achieved CHF 1.6 billion of annualized net cost savings, an improvement from CHF 1.1 billion at year-end 2015. We measure our net cost saving as the difference between our year-end exit cost on an adjusted basis and further excluding temporary regulatory costs and provisions for litigation, regulatory and similar matters compared with full year costs in 2013 for Corporate Center and 2015 for the business divisions.

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 the purpose of determining adjusted results for 2016, we excluded gains of CHF 211 million on sale of financial assets available for sale, gains on sales of real estate of CHF 120 million, gains of CHF 21 million related to investments in associates, net foreign currency translation losses of CHF 122 million, losses on sales of subsidiaries and businesses of CHF 23 million and net restructuring expenses of CHF 1,458 million. For 2015, we excluded an own credit gain of CHF 553 million, gains on sales of real estate of CHF 378 million, gains on sales of subsidiaries and businesses of CHF 225 million, net foreign currency translation gains of CHF 88 million, gains of CHF 81 million related to investments in associates, gains of CHF 11 million on sale of financial assets available for sale, 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.

On this adjusted basis, profit before tax was CHF 5,341 million in 2016 compared with CHF 5,635 million in the prior year, reflecting CHF 1,413 million lower operating income, largely offset by CHF 1,119 million lower operating expenses.


Operating income

Total operating income was CHF 28,320 million compared with CHF 30,605 million. On an adjusted basis, total operating income decreased by CHF 1,413 million or 5% to CHF 28,113 million, mainly reflecting a decrease of CHF 743 million in net fee and commission income and CHF 560 million lower combined net interest and trading income.

Net interest and trading income

Total combined net interest and trading income decreased by CHF 1,113 million to CHF 11,361 million. Excluding the own credit gain of CHF 553 million in 2015, adjusted net interest and trading income decreased by CHF 560 million.

In Wealth Management, net interest and trading income decreased by CHF 36 million to CHF 2,998 million, mainly reflecting reduced client activity.

Wealth Management Americas net interest and trading income increased by CHF 302 million to CHF 1,839 million, primarily due to an increase in net interest income, reflecting higher short-term interest rates as well as growth in loan and deposit balances.

In Personal & Corporate Banking, net interest and trading income declined by CHF 81 million to CHF 2,532 million, mainly due to lower treasury-related income from Corporate Center – Group ALM and lower deposit-related income.

In the Investment Bank, net interest and trading income decreased by CHF 909 million to CHF 4,277 million, primarily due to a CHF 513 million decline in Equities, with lower revenues in Derivatives and Financing Services. In addition, net interest and trading income decreased by CHF 217 million in our Foreign Exchange, Rates and Credit businesses, mainly as 2015 benefited from higher volatility and client activity levels following the Swiss National Bank’s actions in January 2015.

Corporate Center – Group ALM net interest and trading income, excluding the effect of own credit, improved by CHF 23 million.

In Corporate Center – Non-core and Legacy Portfolio, net interest and trading income improved by CHF 251 million, primarily as the prior year included higher losses related to unwind and novation activities.

®   Refer to the “Significant accounting and financial reporting changes” section of this report for more information on own credit

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

67 


Financial and operating performance
Group performance

Net interest and trading income

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.16

31.12.15

31.12.14

 

31.12.15

 

 

 

 

 

 

 

Net interest and trading income

 

 

 

 

 

 

Net interest income

 

6,413

6,732

6,555

 

(5)

Net trading income

 

4,948

5,742

3,842

 

(14)

Total net interest and trading income

 

11,361

12,474

10,397

 

(9)

Wealth Management

 

2,998

3,034

2,845

 

(1)

Wealth Management Americas

 

1,839

1,537

1,352

 

20

Personal & Corporate Banking

 

2,532

2,613

2,536

 

(3)

Asset Management

 

(29)

(5)

0

 

480

Investment Bank

 

4,277

5,186

4,517

 

(18)

of which: Corporate Client Solutions

 

822

1,001

1,030

 

(18)

of which: Investor Client Services

 

3,455

4,185

3,487

 

(17)

Corporate Center

 

(256)

110

(854)

 

 

of which: Services

 

(89)

(3)

34

 

 

of which: Group ALM

 

(104)

426

16

 

 

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

 

 

553

292

 

(100)

of which: Non-core and Legacy Portfolio

 

(62)

(313)

(904)

 

(80)

Total net interest and trading income

 

11,361

12,474

10,397

 

(9)

 

 

Credit loss expense / recovery

The net credit loss expense was CHF 37 million compared with CHF 117 million. The Investment Bank recorded a net credit loss expense of CHF 11 million compared with CHF 68 million in the prior year, reflecting lower expenses related to the energy sector. Net credit loss expense in Personal & Corporate Banking was CHF 6 million compared with CHF 37 million, mainly due to higher net recoveries on existing impaired positions.

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

 

 

 

Credit loss (expense) / recovery

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.16

31.12.15

31.12.14

 

31.12.15

Wealth Management

 

(5)

0

(1)

 

 

Wealth Management Americas

 

(3)

(4)

15

 

(25)

Personal & Corporate Banking

 

(6)

(37)

(95)

 

(84)

Investment Bank

 

(11)

(68)

2

 

(84)

Corporate Center

 

(13)

(8)

2

 

63

of which: Non-core and Legacy Portfolio

 

(13)

(8)

2

 

63

Total

 

(37)

(117)

(78)

 

(68)

68 


 

 

Net fee and commission income

Net fee and commission income decreased by CHF 743 million to CHF 16,397 million.

Investment fund fees declined by CHF 412 million to CHF 3,155 million, mainly in Wealth Management, primarily due to the effects of cross-border outflows and shifts into retrocession-free products, as well as changes in clients’ asset allocation.

Underwriting fees decreased by CHF 300 million to CHF 946 million due to lower equity underwriting revenues, predominantly in the Investment Bank.

Net brokerage fees declined by CHF 276 million to CHF 2,784 million, mainly in Wealth Management and the Investment Bank, largely driven by reduced client activity.

Portfolio management and advisory fees increased by CHF 177 million to CHF 8,035 million, primarily in Wealth Management Americas, mainly due to increased managed account fees, reflecting higher invested asset levels.

®   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 599 million compared with CHF 1,107 million. Excluding certain gains on sales of financial assets available for sale and real estate, gains related to investments in associates, net foreign currency translation gains and losses, and gains and losses on sales of subsidiaries and businesses, adjusted other income decreased by CHF 189 million. This decline was mainly due to lower gains on sale of financial assets available for sale.

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

Operating expenses

Total operating expenses decreased by CHF 886 million or 4% to CHF 24,230 million. Net restructuring expenses were CHF 1,458 million compared with CHF 1,235 million, reflecting an increase of CHF 291 million in personnel-related restructuring expenses, mainly related to our transitioning activities to nearshore and offshore locations, partly offset by a decrease of CHF 69 million in non-personnel-related restructuring expenses.

Adjusted total operating expenses decreased by CHF 1,119 million or 5% to CHF 22,772 million. This decrease was mainly due to a decline of CHF 607 million in adjusted general and administrative expenses, of which CHF 292 million related to net expenses for provisions for litigation, regulatory and similar matters, and a decrease of CHF 573 million in adjusted personnel expenses, primarily due to lower expenses for salaries and variable compensation.

®   Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information on restructuring expenses


Personnel expenses

Personnel expenses decreased by CHF 261 million to CHF 15,720 million and included net restructuring expenses of CHF 751 million compared with CHF 460 million, largely related to our transitioning activities to nearshore and offshore locations and our cost reduction programs. On an adjusted basis, personnel expenses decreased by CHF 573 million to CHF 14,969 million.

Adjusted expenses for salaries decreased by CHF 175 million to CHF 5,795 million, mainly reflecting our cost reduction programs.

Adjusted expenses for total variable compensation decreased by CHF 331 million, reflecting a decrease of CHF 361 million in expenses for current-year awards.

Adjusted other personnel expenses decreased by CHF 217 million, largely due to CHF 149 million lower pension costs for our Swiss pension plan, reflecting the effect of changes to demographic and financial assumptions, and a decline of CHF 76 million in social security expenses.

Financial advisor compensation in Wealth Management Americas increased by CHF 145 million to CHF 3,697 million, mainly due to currency effects and higher expenses for compensation commitments, reflecting the recruitment of financial advisors.

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

®   Refer to “Note 6 Personnel expenses,” “Note 26 Pension and other post-employment benefit plans” and “Note 27 Equity participation and other compensation plans” in the “Consolidated financial statements” section of this report for more information

 

General and administrative expenses

General and administrative expenses decreased by CHF 673 million to CHF 7,434 million. Excluding net restructuring expenses of CHF 695 million compared with CHF 761 million, adjusted general and administrative expenses decreased by CHF 607 million, primarily reflecting CHF 292 million lower net expenses for provisions for litigation, regulatory and similar matters, a decrease of CHF 95 million in professional fees and CHF 79 million lower expenses for outsourcing of IT and other services. Also, the net expense for the annual UK bank levy was CHF 123 million compared with CHF 166 million, primarily related to currency effects. This net expense was mainly recorded in the Investment Bank and Corporate Center – Non-core and Legacy Portfolio.

69 


Financial and operating performance
Group performance

 

Operating expenses

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.16

31.12.15

31.12.14

 

31.12.15

 

 

 

 

 

 

 

Operating expenses as reported

 

 

 

 

 

 

Personnel expenses

 

15,720

15,981

15,280

 

(2)

General and administrative expenses

 

7,434

8,107

9,387

 

(8)

Depreciation and impairment of property, equipment and software

 

985

920

817

 

7

Amortization and impairment of intangible assets

 

91

107

83

 

(15)

Total operating expenses as reported

 

24,230

25,116

25,567

 

(4)

 

 

 

 

 

 

 

Adjusting items

 

 

 

 

 

 

Personnel expenses

 

751

439

286

 

 

of which: restructuring expenses¹

 

751

460

327

 

 

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

 

 

(21)

(41)

 

 

General and administrative expenses²

 

695

761

319

 

 

Depreciation and impairment of property, equipment and software²

 

11

12

29

 

 

Amortization and impairment of intangible assets

 

0

13

2

 

 

of which: restructuring expenses¹

 

0

2

2

 

 

of which: impairment of an intangible asset

 

 

11

 

 

 

Total adjusting items

 

1,458

1,225

636

 

 

 

 

 

 

 

 

 

Operating expenses (adjusted)³

 

 

 

 

 

 

Personnel expenses

 

14,969

15,542

14,994

 

(4)

of which: salaries

 

5,795

5,970

6,124

 

(3)

of which: total variable compensation

 

3,079

3,410

3,113

 

(10)

of which: relating to current year⁴

 

2,249

2,610

2,338

 

(14)

of which: relating to prior years⁵

 

832

799

775

 

4

of which: Wealth Management Americas ­ Financial advisor compensation⁶

 

3,697

3,552

3,385

 

4

of which: other personnel expenses⁷

 

2,396

2,613

2,372

 

(8)

General and administrative expenses

 

6,739

7,346

9,068

 

(8)

of which: expenses for provisions for litigation, regulatory and similar matters

 

795

1,087

2,594

 

(27)

of which: other general and administrative expenses

 

5,944

6,259

6,474

 

(5)

Depreciation and impairment of property, equipment and software

 

974

908

788

 

7

Amortization and impairment of intangible assets

 

91

94

81

 

(3)

Total operating expenses (adjusted)

 

22,772

23,891

24,931

 

(5)

1 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information.    2 Consists of restructuring expenses.    3 Adjusted results are non-GAAP financial measures as defined by SEC regulations.    4 Includes expenses relating to performance awards and other variable compensation for the respective performance year.    5 Consists of amortization of prior years’ awards relating to performance awards and other variable compensation.    6 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of 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 that are subject to vesting requirements.    7 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.

 

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. The outcome of many of these matters, the timing of a resolution, and the potential effects of resolutions on our future business,

financial results or financial condition, are extremely difficult to predict.

®   Refer to “Note General and administrative expenses” and “Note 20 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 65 million to CHF 985 million, largely driven by higher depreciation expenses related to internally generated capitalized software.

Amortization and impairment of intangible assets was CHF 91 million compared with CHF 107 million. On an adjusted basis, these expenses were broadly unchanged.

®   Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Consolidated financial statements” section of this report for more information on the estimated useful life of certain IT hardware and software

®   Refer to “Note 14 Property, equipment and software” and “Note 15 Goodwill and intangible assets” in the “Consolidated financial statements” section of this report for more information

70 


 

Tax

We recognized a net income tax expense of CHF 805 million for 2016, which included a net Swiss tax expense of CHF 1,094 million and a net non-Swiss tax benefit of CHF 289 million.

The Swiss tax expense included a current tax expense of CHF 459 million related to taxable profits, mainly earned by Swiss subsidiaries, against which no losses were available to offset. In addition, it included a deferred tax expense of CHF 635 million, which reflected a decrease in deferred tax assets previously recognized in relation to tax losses carried forward and temporary differences.

The net non-Swiss tax benefit included a current tax expense of CHF 353 million related to 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 642 million, primarily due to an increase in our US deferred tax assets, reflecting updated profit forecasts.

We recognized a tax expense in 2016 compared with a tax benefit in 2015, mainly due to an upward revaluation of US deferred tax assets in 2015 in relation to the extension of the forecast period for US taxable profits to seven years from six. In 2016, there was no extension of the forecast period.

We consider the performance of our businesses and the accuracy of historical forecasts and other factors in evaluating the recoverability of our deferred tax assets, including the remaining tax loss carry-forward period, and our assessment of expected future taxable profits in the forecast period used for recognizing deferred tax assets. Estimating future profitability is inherently subjective and is particularly sensitive to future economic, market and other conditions, which are difficult to predict.

For 2017, we forecast a full-year tax rate of approximately 25%, excluding the effects of any change in the level of deferred tax assets resulting from their reassessment or any statutory tax rate changes. Consistent with past practice, we expect to revalue our deferred tax assets in the second half of 2017 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. Furthermore, any change in statutory tax rates could significantly impact the level of our deferred tax assets, when the law change is enacted. For every percentage point reduction in the US federal corporate income tax rate, we would expect a CHF 0.2 billion decrease in the Group’s deferred tax assets.

®   Refer to “Note 8 Income taxes” in the “Consolidated financial statements” section of this report for more information

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


Total comprehensive income attributable to shareholders

In 2016, total comprehensive income attributable to shareholders was CHF 1,817 million, reflecting net profit of CHF 3,204 million, partly offset by negative OCI of CHF 1,386 million.

Defined benefit plan OCI was negative CHF 824 million compared with positive CHF 298 million. In 2016, we updated and refined certain actuarial assumptions used in calculating our defined benefit obligations (DBOs). This resulted in net OCI gains of CHF 319 million related to the Swiss defined benefit plan and an OCI gain of CHF 63 million related to the UK pension plan.

Total pre-tax OCI related to UK defined benefit plans was negative CHF 615 million, reflecting an OCI loss of CHF 928 million due to a net increase in the DBO, mainly due to a decrease in the applicable discount rate, partly offset by the aforementioned gain of CHF 63 million from changes in assumptions. The OCI loss related to the net increase in the DBO was partly offset by OCI gains of CHF 312 million from an increase in the fair value of the underlying plan assets.

Total pre-tax OCI related to the Swiss defined benefit plan was a loss of CHF 105 million. This reflected an OCI loss of CHF 477 million related to a net DBO increase and a loss of CHF 452 million representing an increase in the excess of the pension surplus over the estimated future economic benefit, largely offset by an OCI gain of CHF 824 million due to an increase in the fair value of the underlying plan assets. The OCI loss of CHF 477 million related to the net DBO increase was mainly due to an experience loss of CHF 438 million, reflecting the effects of differences between the previous actuarial assumptions and what actually occurred, and a loss of CHF 433 million from a decline in the applicable discount rate, partly offset by the aforementioned net gain of CHF 319 million from changes in assumptions.

OCI related to cash flow hedges was negative CHF 666 million, which primarily reflected a decrease in unrealized gains on hedging derivatives due to an increase in US dollar long-term interest rates. In 2015, OCI related to cash flow hedges was negative CHF 509 million.

OCI related to own credit on financial liabilities designated at fair value was negative CHF 115 million in 2016, mainly reflecting a downward shift in LIBOR curves.

OCI associated with financial assets available for sale was negative CHF 73 million compared with negative CHF 63 million and primarily reflected the reclassification of net gains from OCI to the income statement upon sale of assets, partly offset by net unrealized gains following decreases in the respective long-term interest rates.

71 


Financial and operating performance
Group performance

Foreign currency translation OCI was CHF 292 million, mainly resulting from the strengthening of the US dollar against the Swiss franc, partly offset by the significant weakening of the British pound against the Swiss franc. In addition, net losses totaling CHF 126 million were reclassified to the income statement following the disposal of foreign subsidiaries and branches.

®   Refer to the “Significant accounting and financial reporting changes” section of this report for more information on own credit

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

®   Refer to “Note 26 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information on defined benefit plans

Sensitivity to interest rate movements

As of 31 December 2016, we estimate that a parallel shift in yield curves by +100 basis points could lead to a combined increase in annual net interest income of approximately CHF 0.7 billion in Wealth Management, Wealth Management Americas and Personal & Corporate Banking. Of this increase, approximately CHF 0.4 billion would result from changes in US dollar interest rates. Including the estimated impact related to pension fund assets and liabilities, the immediate effect of such a shift on shareholders’ equity would be a decrease of approximately CHF 1.6 billion recognized in OCI, of which approximately CHF 1.3 billion would result from changes in US dollar interest rates. Since the majority of this negative OCI impact on shareholders’ equity is related to cash flow hedges, which is not recognized for the purposes of calculating regulatory capital, the immediate impact on regulatory capital would be an increase of approximately CHF 0.3 billion. The aforementioned estimates are based on an immediate increase in interest rates, equal across all currencies and relative to implied forward rates applied to our banking book and available-for-sale portfolios.

We estimate that if interest rates implied by forward rates at the end of 2016 were to materialize over the next three years, our net interest income in Wealth Management, Wealth Management Americas and Personal & Corporate Banking would increase compared with 2016 levels by around CHF 0.2 billion in 2017 and by around CHF 1.1 billion cumulatively for 2017 to 2019. This increase would primarily be driven by Wealth Management and Wealth Management Americas, which would benefit most from an increase in US dollar interest rates, and would more than offset a decline in Personal & Corporate Banking, whose net interest income is mostly generated in Swiss francs and where forward rates imply continued negative interest rates.


Should interest rates remain constant at the levels prevailing at the end of 2016, the corresponding cumulative increase in net interest income for 2017 to 2019 compared with 2016 levels would be around CHF 0.2 billion.

The above estimates further assume no change to balance sheet size and structure, constant foreign exchange rates and no management action.

Net profit attributable to non-controlling interests

Net profit attributable to non-controlling interests was CHF 82 million in 2016 compared with CHF 183 million in the prior year. This mainly related to dividends of CHF 79 million that were paid to preferred noteholders, for which no accrual was required in a prior period.

For 2017, we currently expect to attribute approximately CHF 70 million of net profit to non-controlling interests, of which CHF 45 million in the first quarter and CHF 25 million in the fourth quarter. From 2018, we expect to attribute less than CHF 10 million per year.

Key figures

Cost / income ratio

The cost / income ratio was 85.4% compared with 81.8%. On an adjusted basis, the cost / income ratio was 80.9% compared with 80.6% and was above our target range of 60–70%.

Return on tangible equity

The return on tangible equity (RoTE) was 6.9% compared with 13.7%. On an adjusted basis, the RoTE was 9.0% compared with 13.7% and was below our target of more than 15% in a normalized market environment.

Common equity tier 1 capital ratio / risk-weighted assets

Our fully applied CET1 capital ratio decreased 0.7 percentage points to 13.8% as of 31 December 2016, exceeding our target ratio of 13.0%. The decrease primarily reflected a CHF 15 billion increase in risk-weighted assets (RWA), partly offset by a CHF 0.7 billion increase in CET1 capital.

Our RWA increased by CHF 15 billion to CHF 223 billion on a fully applied basis as of 31 December 2016. Credit risk RWA increased by CHF 8 billion, primarily driven by methodology and policy changes. Market risk RWA and operational risk RWA both increased by CHF 3 billion.

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

72 


 

 

Leverage ratio / leverage ratio denominator

As of 31 December 2016, our fully applied going concern leverage ratio was 4.6%, of which the common equity tier 1 leverage ratio was 3.5%.

Our fully applied LRD decreased by CHF 27 billion to CHF 870 billion as of 31 December 2016, mainly reflecting incremental netting and collateral mitigation.

®   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.


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.

 

 

 

Return on equity

 

 

 

 

 

 

As of or for the year ended

CHF million, except where indicated

 

31.12.16

31.12.15

31.12.14

 

 

 

 

 

Net profit

 

 

 

 

Net profit attributable to shareholders

 

3,204

6,203

3,466

Amortization and impairment of intangible assets

 

91

107

83

Pre-tax adjusting items¹˒²

 

1,251

135

305

Tax effect on adjusting items³

 

(275)

(140)

(125)

Adjusted net profit attributable to shareholders

 

4,271

6,305

3,729

 

 

 

 

 

Equity

 

 

 

 

Equity attributable to shareholders

 

53,621

55,313

50,608

Less: goodwill and intangible assets⁴

 

6,556

6,568

6,564

Tangible equity attributable to shareholders

 

47,065

48,745

44,044

 

 

 

 

 

Return on equity

 

 

 

 

Return on equity (%)

 

5.9

11.8

7.0

Return on tangible equity (%)

 

6.9

13.7

8.2

Adjusted return on tangible equity (%)¹

 

9.0

13.7

8.6

1 Adjusted results are non-GAAP financial measures as defined by SEC regulations.    2 Refer to the "Performance by business division and Corporate Center unit ­ reported and adjusted" table in this section for more information.    3 Generally reflects an indicative tax rate of 22% on pre-tax adjusting items. 2015 and 2014 included own credit on financial liabilities designated at fair value as an adjusting item with an indicative tax rate of 2%.    4 Goodwill and intangible assets used in the calculation of tangible equity attributable to shareholders as of 31 December 2014 have been adjusted to reflect the non-controlling interests in UBS AG.

  

 

73 


Financial and operating performance
Group performance

 

Net new money¹

 

 

 

 

 

 

For the year ended

CHF billion

 

31.12.16

31.12.15

31.12.14

Wealth Management

 

26.8

12.9

34.4

Wealth Management (adjusted)²

 

26.8

22.8

34.4

Wealth Management Americas

 

15.4

21.3

9.6

Asset Management

 

(15.5)

(5.4)

15.9

of which: excluding money market flows

 

(22.5)

(0.7)

22.6

of which: money market flows

 

7.0

(4.7)

(6.7)

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

 

Invested assets

 

 

 

 

 

 

 

 

As of

 

% change from

CHF billion

 

31.12.16

31.12.15

31.12.14

 

31.12.15

Wealth Management

 

977

947

987

 

3

Wealth Management Americas

 

1,131

1,035

1,027

 

9

Asset Management

 

656

650

664

 

1

of which: excluding money market funds

 

591

592

600

 

0

of which: money market funds

 

66

58

64

 

14

74 


 

 

2015 compared with 2014 

Results

We recorded a 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 CHF 1,507 million lower net expenses 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 the purpose of determining adjusted results for 2015, we excluded an own credit gain of CHF 553 million, gains on sales of real estate of CHF 378 million, gains on sales of subsidiaries and businesses of CHF 225 million, net foreign currency translation gains of CHF 88 million, gains of CHF 81 million related to investments in associates, gains of CHF 11 million on sale of financial assets available for sale, 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, we excluded an own credit gain of CHF 292 million, gains on sales of real estate of CHF 44 million, losses of CHF 5 million on sale of financial assets 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 CHF 1,507 million lower net expenses for provisions for litigation, regulatory and similar matters, partly offset by CHF 548 million higher personnel expenses.


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.

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.

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.

75 


Financial and operating performance
Group performance

 

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.

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 asset 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 that was recorded as other income. This was partly offset by CHF 92 million higher adjusted income from financial assets available for sale, primarily related to net gains on sales of equity investments in 2015, mainly within the Investment Bank.

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 CHF 1,507 million lower net expenses 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.


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.

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.

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 CHF 1,507 million lower net expenses for provisions for litigation, regulatory and similar 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 compared with CHF 123 million.  

76 


 

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, mainly earned by Swiss subsidiaries, against which no losses were available to offset. 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, partly 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.

Total comprehensive income attributable to shareholders

Total comprehensive income attributable to 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 assets 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.

Defined benefit plan OCI was CHF 298 million. In 2015, we carried out a methodology review of the actuarial assumptions used in calculating our 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 the 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 the 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 decrease of CHF 1,265 million representing the excess of the pension surplus over the estimated future economic benefit.

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 have been 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.

 

  

77 


Financial and operating performance
Wealth Management

Wealth Management

Wealth Management¹

 

 

As of or for the year ended

 

% change from

CHF million, except where indicated

 

31.12.16

31.12.15

31.12.14

 

31.12.15

 

 

 

 

 

 

 

Results

 

 

 

 

 

 

Net interest income

 

2,331

2,326

2,165

 

0

Recurring net fee income²

 

3,548

3,820

3,783

 

(7)

Transaction-based income³

 

1,397

1,778

1,928

 

(21)

Other income

 

20

231

25

 

(91)

Income

 

7,296

8,155

7,902

 

(11)

Credit loss (expense) / recovery

 

(5)

0

(1)

 

 

Total operating income

 

7,291

8,155

7,901

 

(11)

Personnel expenses

 

2,349

2,532

2,467

 

(7)

General and administrative expenses

 

640

637

918

 

0

Services (to) / from Corporate Center and other business divisions

 

2,348

2,289

2,180

 

3

of which: services from CC – Services

 

2,256

2,209

2,122

 

2

Depreciation and impairment of property, equipment and software

 

2

5

4

 

(60)

Amortization and impairment of intangible assets

 

4

3

5

 

33

Total operating expenses⁴

 

5,343

5,465

5,574

 

(2)

Business division operating profit / (loss) before tax

 

1,948

2,689

2,326

 

(28)

 

 

 

 

 

 

 

Adjusted results⁵

 

 

 

 

 

 

Total operating income as reported

 

7,291

8,155

7,901

 

(11)

of which: gains / (losses) on sales of subsidiaries and businesses

 

(23)

169

 

 

 

of which: gains related to investments in associates

 

 

15

 

 

 

of which: gains on sale of financial assets available for sale⁶

 

21

 

 

 

 

Total operating income (adjusted)

 

7,293

7,971

7,901

 

(9)

Total operating expenses as reported

 

5,343

5,465

5,574

 

(2)

of which: personnel-related restructuring expenses

 

53

20

18

 

 

of which: non-personnel-related restructuring expenses

 

55

38

49

 

 

of which: restructuring expenses allocated from CC – Services

 

339

265

119

 

 

Total operating expenses (adjusted)

 

4,896

5,142

5,389

 

(5)

Business division operating profit / (loss) before tax as reported

 

1,948

2,689

2,326

 

(28)

Business division operating profit / (loss) before tax (adjusted)

 

2,397

2,828

2,511

 

(15)

 

 

 

 

 

 

 

Key performance indicators⁷

 

 

 

 

 

 

Pre-tax profit growth (%)

 

(27.6)

15.6

3.5

 

 

Cost / income ratio (%)

 

73.2

67.0

70.5

 

 

Net new money growth (%)

 

2.8

1.3

3.9

 

 

Gross margin on invested assets (bps)

 

77

86

85

 

(10)

Net margin on invested assets (bps)

 

21

28

25

 

(25)

 

 

 

 

 

 

 

Adjusted key performance indicators⁵˒⁷

 

 

 

 

 

 

Pre-tax profit growth (%)

 

(15.2)

12.6

3.5

 

 

Cost / income ratio (%)

 

67.1

64.5

68.2

 

 

Net new money growth (%)

 

2.8

2.3

3.9

 

 

Gross margin on invested assets (bps)

 

77

84

85

 

(8)

Net margin on invested assets (bps)

 

25

30

27

 

(17)

78 


 

 

Wealth Management (continued)¹

 

 

As of or for the year ended

 

% change from

CHF million, except where indicated

 

31.12.16

31.12.15

31.12.14

 

31.12.15

 

 

 

 

 

 

 

Additional information

 

 

 

 

 

 

Recurring income⁸

 

5,880

6,146

5,949

 

(4)

Recurring income as a percentage of income (%)

 

80.6

75.4

75.3

 

 

Average attributed equity (CHF billion)⁹

 

3.5

3.5

3.4

 

0

Return on attributed equity (%)

 

56.1

77.4

67.9

 

 

Risk-weighted assets (fully applied, CHF billion)¹⁰

 

25.8

25.3

25.4

 

2

Return on risk-weighted assets, gross (%)¹¹

 

28.1

31.7

34.5

 

 

Leverage ratio denominator (fully applied, CHF billion)¹²

 

115.5

119.0

138.3

 

(3)

Goodwill and intangible assets (CHF billion)

 

1.3

1.3

1.4

 

0

Net new money (CHF billion)

 

26.8

12.9

34.4

 

 

Net new money adjusted (CHF billion)¹³

 

26.8

22.8

34.4

 

 

Invested assets (CHF billion)

 

977

947

987

 

3

Client assets (CHF billion)

 

1,157

1,122

1,160

 

3

Loans, gross (CHF billion)

 

101.9

105.2

112.7

 

(3)

Due to customers (CHF billion)

 

192.3

172.3

191.3

 

12

Personnel (full-time equivalents)

 

9,721

10,239

10,337

 

(5)

Client advisors (full-time equivalents)

 

3,859

4,019

4,250

 

(4)

1 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.    2 Recurring net fee income consists of 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 client assets.    3 Transaction-based income consists of the non-recurring portion of net fee and commission income, mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income.    4 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses.    5 Adjusted results are non-GAAP financial measures as defined by SEC regulations.    6 Reflects a gain on the sale of our investment in Visa Europe.    7 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators.    8 Recurring income consists of net interest income and recurring net fee income.    9 Refer to the “Capital management” section of this report for more information.    10 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.    11 Based on fully applied RWA.    12 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.    13 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.

 

 

Regional breakdown of key figures¹˒²

As of or for the year ended 31.12.16

Europe

Asia Pacific

Switzerland

Emerging markets

of which: ultra high net worth

of which: Global Family Office³

Net new money (CHF billion)

8.1

20.8

5.0

(6.2)

27.3

11.2

Net new money growth (%)

2.4

7.6

2.9

(4.0)

5.4

14.7

Invested assets (CHF billion)

353

292

180

149

552

94

Gross margin on invested assets (bps)

69

72

86

96

52

 47⁴ 

Client advisors (full-time equivalents)

1,317

1,016

744

681

 805⁵ 

 

1 Refer to the "Measurement of performance” section of this report for the definitions of our key performance indicators.    2 Based on the Wealth Management business area structure and excluding minor functions with 101 client advisors, CHF 3 billion of invested assets, and CHF 0.9 billion of net new money outflows in 2016.    3 Joint venture between Wealth Management and the Investment Bank. Global Family Office is reported as a sub-segment of ultra high net worth and is included in the ultra high net worth figures.    4 Gross margin includes income booked in the Investment Bank. Gross margin only based on income booked in Wealth Management is 28 basis points.    5 Represents client advisors who exclusively serve ultra high net worth clients. In addition to these, other client advisors may also serve certain ultra high net worth clients, but not exclusively.

79 


Financial and operating performance
Wealth Management

 

2016 compared with 2015 

Results

Profit before tax decreased by CHF 741 million or 28% to CHF 1,948 million and adjusted profit before tax decreased by CHF 431 million or 15% to CHF 2,397 million, reflecting lower operating income, partly offset by decreased operating expenses.

Operating income

Total operating income decreased by CHF 864 million or 11% to CHF 7,291 million. 2016 included a loss on the sale of subsidiaries and businesses of CHF 23 million and a gain of CHF 21 million on the sale of our investment in Visa Europe. 2015 included net gains of CHF 169 million on the sale of subsidiaries and businesses and a CHF 15 million gain related to our investment in the SIX Group. Excluding these items, adjusted operating income decreased by CHF 678 million or 9% to CHF 7,293 million, mainly due to lower transaction-based income and recurring net fee income.

Net interest income increased by CHF 5 million to CHF 2,331 million, mainly due to higher deposit revenues, partly offset by lower treasury-related income from Corporate Center – Group Asset and Liability Management (Group ALM).

Recurring net fee income decreased by CHF 272 million to CHF 3,548 million due to the effects of cross-border outflows and shifts into retrocession-free products, changes in clients’ asset allocation and the effect of our exit from the Australian and Belgian domestic businesses. This was partly offset by the effects of increases in discretionary and advisory mandate penetration and pricing measures.

Transaction-based income decreased by CHF 381 million to CHF 1,397 million across all regions and most products, mainly due to reduced client activity, most notably in Asia Pacific and emerging markets. Additionally, 2015 included a fee of CHF 45 million received from Personal & Corporate Banking for the shift of clients, as a result of a detailed client segmentation review.

Other income decreased by CHF 211 million to CHF 20 million, mainly related to the aforementioned net gains on the sale of subsidiaries and businesses in 2015.

Operating expenses

Total operating expenses decreased by CHF 122 million or 2% to CHF 5,343 million and adjusted operating expenses decreased by CHF 246 million or 5% to CHF 4,896 million.

Personnel expenses decreased by CHF 183 million to CHF 2,349 million and adjusted personnel expenses decreased by CHF 216 million to CHF 2,296 million, driven by a decrease in staff levels and lower variable compensation expenses, as well as lower pension costs for our Swiss pension plan, reflecting the effect of changes to demographic and financial assumptions.

General and administrative expenses increased by CHF 3 million to CHF 640 million, and adjusted general and administrative expenses decreased by CHF 14 million to CHF 585 million. This was driven by a CHF 35 million decrease in net expenses for provisions for litigation, regulatory and similar matters, partly offset by higher professional fees.

Net expenses for services from Corporate Center and other business divisions increased by CHF 59 million to CHF 2,348 million and adjusted net expenses for services decreased by CHF 15 million to CHF 2,009 million, mainly reflecting lower expenses from Group Operations partly offset by higher occupancy expenses from Group Corporate Services.

Net new money

Net new money was CHF 26.8 billion compared with adjusted net new money of CHF 22.8 billion in the prior year, which excluded the negative effect of CHF 9.9 billion from our balance sheet and capital optimization program. The net new money growth rate was 2.8% compared with an adjusted growth rate of 2.3%, and was below our target range of 3% to 5%. Net new money was driven predominantly by inflows in Asia Pacific, but also Europe and Switzerland, partly offset by outflows in emerging markets, mainly due to cross-border outflows. Total cross-border outflows were CHF 14 billion compared with CHF 8 billion, mainly driven by outflows in emerging markets. On a global basis, net new money from ultra high net worth clients was CHF 27.3 billion compared with adjusted net new money of CHF 23.4 billion.

Invested assets

Invested assets increased by CHF 30 billion to CHF 977 billion, primarily reflecting net new money of CHF 27 billion and positive market performance of CHF 19 billion, partly offset by a CHF 13 billion decrease due to the sale of subsidiaries and businesses that did not affect net new money, and negative foreign currency translation effects of CHF 1 billion. Discretionary and advisory mandate penetration increased to 26.9% from 26.4%.

Cost / income ratio

The cost / income ratio increased to 73.2% from 67.0%. On an adjusted basis, the ratio increased to 67.1% from 64.5% and was above our target range of 55% to 65%.

Personnel

Wealth Management employed 9,721 personnel compared with 10,239. The number of client advisors decreased by 160 to 3,859 and the number of non-client facing staff decreased by 358 to 5,862, both driven by our cost reduction programs and our exit from the Australian domestic business. Of the aforementioned decrease in client advisors, 82 were related to our exit from the Australian domestic business.

80 


 

 

2015 compared with 2014

Results

Profit before tax increased by CHF 363 million or 16% to CHF 2,689 million and adjusted profit before tax increased by CHF 317 million or 13% to CHF 2,828 million, reflecting lower operating expenses and higher operating income.

Operating income

Total operating income increased by CHF 254 million or 3% to CHF 8,155 million. Excluding net gains of CHF 169 million on the sale of subsidiaries and businesses and a CHF 15 million gain related to our investment in the SIX Group, adjusted operating income increased by CHF 70 million or 1% to CHF 7,971 million, mainly due to higher net interest income and recurring net fee income, partly offset by lower transaction-based income.

Net interest income increased by CHF 161 million to CHF 2,326 million, mainly due to higher lending revenues and an increase in allocated revenues from Corporate Center – Group Asset and Liability Management (Group ALM).

Recurring net fee income increased by CHF 37 million to CHF 3,820 million, reflecting the positive effects of a continued increase in discretionary and advisory mandate penetration and pricing measures, partly offset by lower income due to the ongoing effects of cross-border outflows.

Transaction-based income decreased by CHF 150 million to CHF 1,778 million across all regions, mainly due to reduced client activity, most notably in Europe and emerging markets. The overall decrease was mainly related to investment funds, fixed income cash products and structured products, partly offset by higher foreign exchange trading and mandate revenues. Transaction-based revenues allocated from Group ALM also decreased. These decreases were partly offset by a fee of CHF 45 million received from Personal & Corporate Banking for the shift of clients as a result of a detailed client segmentation review.

Other income increased by CHF 206 million to CHF 231 million, mainly related to the aforementioned net gains.

Operating expenses

Total operating expenses decreased by CHF 109 million or 2% to CHF 5,465 million and adjusted operating expenses decreased by CHF 247 million or 5% to CHF 5,142 million, mainly as net expenses for provisions for litigation, regulatory and similar matters declined to CHF 104 million from CHF 394 million.

Personnel expenses increased by CHF 65 million to CHF 2,532 million and adjusted personnel expenses increased by CHF 63 million to CHF 2,512 million, mainly due to higher pension-related costs and increased expenses for variable compensation, as well as salary increases, partly offset by favorable foreign currency translation effects and the effect of personnel reductions.

General and administrative expenses decreased by CHF 281 million to CHF 637 million, and adjusted general and administrative expenses decreased by CHF 271 million to CHF 599 million, mainly due to the aforementioned decreased net expenses for provisions for litigation, regulatory and similar matters.

Net expenses for services from other business divisions and Corporate Center increased by CHF 109 million to CHF 2,289 million and adjusted net expenses for services decreased by CHF 37 million to CHF 2,024 million, mainly due to lower expenses from Group Operations and Group Corporate Services, partly offset by higher expenses from Group ALM.

Net new money

Adjusted net new money, which excludes net outflows of CHF 9.9 billion from our balance sheet and capital optimization program, was CHF 22.8 billion and was driven by inflows in Asia Pacific, Switzerland and Europe, partly offset by outflows in emerging markets. This resulted in an adjusted net new money growth rate of 2.3% compared with 3.9%, below our target range of 3% to 5%. Adjusted net new money was negatively affected by client deleveraging and cross-border outflows. On a global basis, adjusted net new money from ultra high net worth clients was CHF 23.4 billion compared with CHF 29.8 billion. On a reported basis, total net new money was CHF 12.9 billion from CHF 34.4 billion.

Invested assets

Invested assets decreased by CHF 40 billion to CHF 947 billion due to foreign currency translation effects of CHF 25 billion, a CHF 16 billion reduction due to the aforementioned sale of subsidiaries and businesses that did not affect net new money and negative market performance of CHF 9 billion, partly offset by net new money inflows of CHF 13 billion, which included net outflows of CHF 10 billion from our balance sheet and capital optimization program. Discretionary and advisory mandate penetration increased to 26.4% compared with 24.4%.

Cost / income ratio

The cost / income ratio was 67.0% compared with 70.5%. On an adjusted basis, the cost / income ratio was 64.5% compared with 68.2% and was within our target range of 55% to 65%.

Personnel

Wealth Management employed 10,239 personnel as of 31 December 2015 compared with 10,337 as of 31 December 2014.

The number of client advisors decreased by 231 to 4,019 with reductions in Europe, Asia Pacific and emerging markets, mainly due to a reduction in the number of lower-producing advisors and the reclassification of certain staff from client advisors to non-client facing staff.

The number of non-client facing staff increased by 133 to 6,220, mainly due to hiring for our strategic and regulatory priorities, the shift of a team of real estate financing experts from Personal & Corporate Banking to Wealth Management, and the aforementioned reclassification, partly offset by the effect of the sale of subsidiaries and businesses in 2015.

  

81 


Financial and operating performance
Wealth Management Americas

Wealth Management Americas

Wealth Management Americas – in US dollars¹

 

 

As of or for the year ended

 

% change from

USD million, except where indicated

 

31.12.16

31.12.15

31.12.14

 

31.12.15

 

 

 

 

 

 

 

Results

 

 

 

 

 

 

Net interest income

 

1,484

1,215

1,067

 

22

Recurring net fee income²

 

4,880

4,795

4,666

 

2

Transaction-based income³

 

1,474

1,614

1,825

 

(9)

Other income

 

35

32

33

 

9

Income

 

7,873

7,657

7,590

 

3

Credit loss (expense) / recovery

 

(3)

(4)

16

 

(25)

Total operating income

 

7,871

7,653

7,606

 

3

Personnel expenses

 

4,874

4,746

4,741

 

3

Financial advisor compensation⁴

 

2,931

2,921

2,944

 

0

Compensation commitments with recruited financial advisors⁵

 

808

761

733

 

6

Salaries and other personnel costs

 

1,135

1,064

1,063

 

7

General and administrative expenses

 

576

845

597

 

(32)

Services (to) / from Corporate Center and other business divisions

 

1,250

1,252

1,234

 

0

of which: services from CC – Services

 

1,236

1,236

1,217

 

0

Depreciation and impairment of property, equipment and software

 

2

3

0

 

(33)

Amortization and impairment of intangible assets

 

50

53

52

 

(6)

Total operating expenses⁶

 

6,752

6,899

6,625

 

(2)

Business division operating profit / (loss) before tax

 

1,118

754

981

 

48

 

 

 

 

 

 

 

Adjusted results⁷

 

 

 

 

 

 

Total operating income as reported

 

7,871

7,653

7,606

 

3

of which: gains on sale of financial assets available for sale

 

10

 

 

 

 

Total operating income (adjusted)

 

7,861

7,653

7,606

 

3

Total operating expenses as reported

 

6,752

6,899

6,625

 

(2)

of which: personnel-related restructuring expenses

 

7

0

0

 

 

of which: non-personnel-related restructuring expenses

 

0

0

0

 

 

of which: restructuring expenses allocated from CC – Services

 

134

141

59

 

 

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

 

 

(21)

(10)

 

 

Total operating expenses (adjusted)

 

6,610

6,779

6,576

 

(2)

Business division operating profit / (loss) before tax as reported

 

1,118

754

981

 

48

Business division operating profit / (loss) before tax (adjusted)

 

1,250

874

1,030

 

43

 

 

 

 

 

 

 

Key performance indicators⁸

 

 

 

 

 

 

Pre-tax profit growth (%)

 

48.3

(23.1)

5.8

 

 

Cost / income ratio (%)

 

85.8

90.1

87.3

 

 

Net new money growth (%)

 

1.5

2.1

1.0

 

 

Gross margin on invested assets (bps)

 

73

74

76

 

(1)

Net margin on invested assets (bps)

 

10

7

10

 

43

 

 

 

 

 

 

 

Adjusted key performance indicators⁷˒⁸

 

 

 

 

 

 

Pre-tax profit growth (%)

 

43.0

(15.1)

3.9

 

 

Cost / income ratio (%)

 

84.1

88.5

86.6

 

 

Net new money growth (%)

 

1.5

2.1

1.0

 

 

Gross margin on invested assets (bps)

 

73

74

76

 

(1)

Net margin on invested assets (bps)

 

12

8

10

 

50

82 


 

 

Wealth Management Americas – in US dollars (continued)¹

 

 

As of or for the year ended

 

% change from

USD million, except where indicated

 

31.12.16

31.12.15

31.12.14

 

31.12.15

 

 

 

 

 

 

 

Additional information

 

 

 

 

 

 

Recurring income⁹

 

6,364

6,010

5,733

 

6

Recurring income as a percentage of income (%)

 

80.8

78.5

75.5

 

 

Average attributed equity (USD billion)¹⁰

 

2.6

2.6

2.9

 

0

Return on attributed equity (%)

 

43.0

29.3

33.8

 

 

Risk-weighted assets (fully applied, USD billion)¹¹

 

23.4

21.9

21.8

 

7

Return on risk-weighted assets, gross (%)¹²

 

33.9

34.0

29.4

 

 

Leverage ratio denominator (fully applied, USD billion)¹³

 

66.9

62.8

63.7

 

7

Goodwill and intangible assets (USD billion)

 

3.7

3.7

3.8

 

0

Net new money (USD billion)

 

15.4

21.4

10.0

 

 

Net new money including interest and dividend income (USD billion)¹⁴

 

40.8

47.8

37.2

 

 

Invested assets (USD billion)

 

1,111

1,033

1,032

 

8

Client assets (USD billion)

 

1,160

1,084

1,087

 

7

Loans, gross (USD billion)

 

51.6

48.7

44.6

 

6

Due to customers (USD billion)

 

89.2

83.1

73.5

 

7

Recruitment loans to financial advisors

 

3,033

3,179

2,925

 

(5)

Other loans to financial advisors

 

462

418

374

 

11

Personnel (full-time equivalents)

 

13,526

13,611

13,322

 

(1)

Financial advisors (full-time equivalents)

 

7,025

7,140

6,997

 

(2)

1 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.    2 Recurring net fee income consists of 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 client assets.    3 Transaction-based income consists of the non-recurring portion of net fee and commission income, mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income.    4 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, assets and other variables.    5 Compensation commitments with recruited financial advisors represents expenses related to compensation commitments granted to financial advisors at the time of recruitment that are subject to vesting requirements.    6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses.    7 Adjusted results are non-GAAP financial measures as defined by SEC regulations.    8 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators.    9 Recurring income consists of net interest income and recurring net fee income.    10 Refer to the “Capital management” section of this report for more information.    11 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.    12 Based on fully applied RWA.    13 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.    14 Presented in line with historical reporting practice in the US market.

83 


Financial and operating performance
Wealth Management Americas

 

2016 compared with 2015 

Results

Profit before tax increased by USD 364 million or 48% to USD 1,118 million, and adjusted profit before tax increased by USD 376 million or 43% to USD 1,250 million due to higher operating income and lower operating expenses.

Operating income

Total operating income increased by USD 218 million or 3% to USD 7,871 million. Adjusted operating income increased by USD 208 million or 3% to USD 7,861 million, due to higher net interest income and recurring net fee income, partly offset by lower transaction-based income.

Net interest income increased by USD 269 million to USD 1,484 million, due to higher short-term interest rates and growth in loan and deposit balances. The average mortgage portfolio balance increased 12% and the average securities-backed lending portfolio balance increased 6%.

Recurring net fee income increased by USD 85 million to USD 4,880 million, mainly due to increased managed account fees, reflecting higher invested asset levels.

Transaction-based income decreased by USD 140 million to USD 1,474 million, primarily due to lower client activity levels.

Operating expenses

Operating expenses decreased by USD 147 million or 2% to USD 6,752 million and adjusted operating expenses decreased by USD 169 million or 2% to USD 6,610 million, due to USD 260 million lower net expenses for provisions for litigation, regulatory and similar matters, partly offset by higher adjusted personnel expenses.  

Personnel expenses increased by USD 128 million to USD 4,874 million and adjusted personnel expenses increased by USD 101 million to USD 4,867 million, mainly due to higher salary costs and other personnel costs due to an increase in support staff, as well as higher expenses for compensation commitments, reflecting the recruitment of financial advisors.

General and administrative expenses decreased by USD 269 million to USD 576 million, mainly due to the aforementioned reduction in net expenses for provisions for litigation, regulatory and similar matters.

Cost / income ratio

The cost / income ratio was 85.8% compared with 90.1%. On an adjusted basis, the cost / income ratio was 84.1% compared with 88.5% and was within our target range of 75% to 85%.

Net new money

Net new money was USD 15.4 billion compared with USD 21.4 billion, reflecting lower inflows from financial advisors employed with UBS for more than one year. The net new money growth rate was 1.5% compared with 2.1%, and was below our target range of 2% to 4%.

Invested assets

Invested assets increased by USD 78 billion to USD 1,111 billion, reflecting positive market performance of USD 62 billion and net new money inflows of USD 15 billion. Managed account assets increased by USD 35 billion to USD 386 billion and comprised 34.7% of invested assets compared with 34.0%.  

Personnel

As of 31 December 2016, Wealth Management Americas employed 13,526 personnel, a decrease of 85 from 31 December 2015. Financial advisor headcount decreased by 115 to 7,025, due to attrition. Non-financial advisor headcount increased by 30 to 6,501.  

 

84 


 

 

2015 compared with 2014 

Results

Profit before tax was USD 754 million compared with USD 981 million, mainly reflecting higher net expenses for provisions for litigation, regulatory and similar matters. Adjusted profit before tax decreased to USD 874 million from USD 1,030 million.

Operating income

Total operating income increased by USD 47 million to USD 7,653 million due to higher net interest income and continued growth in managed account fees, partly offset by lower transaction-based income and a net credit loss expense in 2015 compared with a net credit loss recovery in 2014.

Net interest income increased by USD 148 million to USD 1,215 million, reflecting continued growth in loan and deposit balances. The average mortgage portfolio balance increased 16% and the average securities-backed lending portfolio balance increased 12%.

Recurring net fee income increased by USD 129 million to USD 4,795 million, mainly due to increased managed account fees, reflecting higher invested asset levels.

Transaction-based income decreased by USD 211 million to USD 1,614 million, primarily due to lower client activity.

We incurred a net credit loss expense of USD 4 million compared with a net recovery of USD 16 million. The 2014 net recovery included 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.

Operating expenses

Operating expenses increased by USD 274 million or 4% to USD 6,899 million. Adjusted operating expenses increased by USD 203 million or 3% to USD 6,779 million, primarily due to USD 178 million higher net expenses for provisions for litigation, regulatory and similar matters, and an increase in other provisions and legal fees, partly offset by lower expenses from Corporate Center – Services.

Personnel expenses increased by USD 5 million to USD 4,746 million and adjusted personnel expenses increased by USD 18 million to USD 4,766 million, mainly due to higher compensation commitments for recruited financial advisors, partly offset by lower financial advisor compensation, reflecting lower compensable revenues.

General and administrative expenses increased by USD 248 million to USD 845 million, mainly as the net expenses for provisions for litigation, regulatory and similar matters increased to USD 356 million from USD 178 million. Furthermore, we recorded higher expenses for other provisions and increased legal fees.

Net expenses for services from Corporate Center and other business divisions increased by USD 18 million to USD 1,252 million and adjusted net expenses for services decreased by USD 64 million to USD 1,113 million, reflecting lower expenses from Corporate Center – Services.  

Cost / income ratio

The cost / income ratio was 90.1% compared with 87.3%. On an adjusted basis, the cost / income ratio was 88.5% compared with 86.6% and was above our target range of 75% to 85%.

Net new money

Net new money was USD 21.4 billion, reflecting strong inflows from advisors who have been with the firm for more than one year, as well as net inflows from newly recruited advisors. Net new money growth was 2.1% compared with 1.0%, within our target range of 2% to 4%.

Invested assets

Invested assets increased by USD 1 billion to USD 1,033 billion, reflecting strong net new money inflows of USD 21 billion, mostly offset by negative market performance of USD 20 billion. Managed account assets increased by USD 5 billion to USD 351 billion and comprised 34% of invested assets, unchanged from 31 December 2014.

Personnel

As of 31 December 2015, Wealth Management Americas employed 13,611 personnel, an increase of 289 from 31 December 2014. Financial advisor headcount increased by 143 to 7,140, reflecting the hiring of experienced financial advisors and continued low financial advisor attrition. Non-financial advisor headcount increased by 146 to 6,471, due to an increase in financial advisor support staff.

85 


Financial and operating performance
Wealth Management Americas

 

Wealth Management Americas – in Swiss francs¹

 

 

As of or for the year ended

 

% change from

CHF million, except where indicated

 

31.12.16

31.12.15

31.12.14

 

31.12.15

 

 

 

 

 

 

 

Results

 

 

 

 

 

 

Net interest income

 

1,467

1,174

983

 

25

Recurring net fee income²

 

4,825

4,623

4,294

 

4

Transaction-based income³

 

1,458

1,555

1,678

 

(6)

Other income

 

35

31

30

 

13

Income

 

7,785

7,384

6,984

 

5

Credit loss (expense) / recovery

 

(3)

(4)

15

 

(25)

Total operating income

 

7,782

7,381

6,998

 

5

Personnel expenses

 

4,819

4,579

4,363

 

5

Financial advisor compensation⁴

 

2,898

2,817

2,710

 

3

Compensation commitments with recruited financial advisors⁵

 

799

735

675

 

9

Salaries and other personnel costs

 

1,122

1,027

979

 

9

General and administrative expenses

 

570

822

550

 

(31)

Services (to) / from Corporate Center and other business divisions

 

1,235

1,209

1,137

 

2

of which: services from CC – Services

 

1,221

1,193

1,121

 

2

Depreciation and impairment of property, equipment and software

 

2

3

0

 

(33)

Amortization and impairment of intangible assets

 

50

51

48

 

(2)

Total operating expenses⁶

 

6,675

6,663

6,099

 

0

Business division operating profit / (loss) before tax