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AMNA Ubs

Filed: 8 Mar 18, 7:00pm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 

Washington, D.C. 20549  

FORM 20-F  

(Mark One)

 

 

 

 

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

OR

 

 

 

 

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

For the fiscal year ended December 31, 2017

OR

 

 

 

 

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

For the transition period from            to                .

OR

 

 

 

 

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

 

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 4-5.

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.

1 


 

Indicate the number of outstanding shares of each of each issuer’s classes of capital or common stock as of 31 December 2017:

 

UBS Group AG

Ordinary shares, par value CHF 0.10 per share:

3,853,096,603 ordinary shares

(including 132,301,550 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 ☑ 

 

 

 

 

 

 

 

 

 

2


 

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 or an emerging growth company. See definition of “accelerated filer and large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check One):

 

 

UBS Group AG

 

 

Large accelerated filer ☑ 

 

Accelerated filer o  

 

Non-accelerated filer ☐

Emerging growth company ☐

 

 

 

UBS AG

 

 

Large accelerated filer  ☐

 

Accelerated filer ☐

 

Non-accelerated filer ☑ 

Emerging growth company ☐

 

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 

 

3 


 

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

Title of each class

Name of each exchange on

which registered

Ordinary Shares (par value of CHF 0.10 each)

New York Stock Exchange

UBS AG

Title of each class

Name of each exchange on

which registered

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

NYSE Arca

 

UBS AG FI Enhanced Large Cap Growth ETN due June 19, 2024

NYSE Arca

UBS AG FI Enhanced Europe 50 ETN due February 12, 2026

NYSE Arca

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

NYSE Arca

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 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

 

4


 

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

VelocitySharesTM VIX Tail Risk ETN linked to the S&P 500 VIX Futures Tail Risk Index TR – Short Term due July 18, 2046

NYSE Arca

VelocitySharesTM VIX Variable Long/Short ETN linked to the S&P 500 VIX Futures Variable Long/Short Index TR – Short Term due July 18, 2046

NYSE Arca

VelocitySharesTM VIX Short Volatility Hedged ETN linked to the S&P 500 VIX Futures Short Volatility Hedged Index TR – Short Term due July 18, 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

VelocitySharesTM 1X Long VSTOXX Futures ETN linked to the VSTOXX Short-Term Futures Investable Index due May 3, 2047

BATS BZX

VelocitySharesTM 1X Daily Inverse VSTOXX Futures ETN linked to the VSTOXX Short-Term Futures Inverse Investable Index due May 3, 2047

BATS BZX

 

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

None

 

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

None

5 


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS  

This report contains statements that constitute “forward-looking statements,” including but not limited to management’s outlook for UBS’s financial performance and statements relating to the anticipated effect of transactions and strategic initiatives on UBS’s business and future development. While these forward-looking statements represent UBS’s judgments and expectations concerning the matters described, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s expectations. These factors include, but are not limited to: (i) the degree to which UBS is successful in 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), including to counteract regulatory-driven increases, leverage ratio denominator, liquidity coverage ratio and other financial resources, and the degree to which UBS is successful in implementing changes to its 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 have imposed, or resulted in, or may do so in the future, more stringent or entity-specific 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 will or would have on UBS’s business activities; (v) 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, 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, to proposals in Switzerland and other jurisdictions for mandatory structural reform of banks or systemically important institutions or to other external developments, and the extent to which such changes will have the intended effects; (vi) uncertainty as to the extent to which the Swiss Financial Market Supervisory Authority (FINMA) will confirm limited reductions of gone concern requirements due to measures to reduce resolvability risk; (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, including from changes to US taxation under the Tax Cuts and Jobs Act; (xiv) UBS’s ability to implement new technologies and business methods, including digital services and technologies and ability to successfully compete with both existing and new financial service providers, some of which may not be regulated to the same extent; (xv) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (xvi) the occurrence of operational failures, such as fraud, misconduct, unauthorized trading, financial crime, cyberattacks, 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 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.

6


 

Cross-reference table

 

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

 

  • Annual Report refers to the Annual Report 2017 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 6 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 (622-626 and 645-649),  Statement of changes in equity (318-321 and 466-469) and UBS shares (205) 

 

The exchange rate for the Swiss franc on 2 March 2018, as reported by the Federal Reserve System (H.10 Weekly), was CHF 0.9378 per USD 1. See page 622 and 645 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 (45-56) 

Item 4.  Information on the Company.

A – History and Development of the Company

1-3: Annual Report, Corporate information and Contacts (7). The registrants' agent is David Kelly, 600 Washington Boulevard, Stamford, CT  06901.

4: Annual Report, Our evolution (12-13), Our strategy (30-31), and pages 34-44

5: Refer to our management discussion and analysis for a description of material acquisitions and divestitures in Annual Report, Global Wealth Management, Personal & Corporate Banking, Asset Management, Investment Bank and Corporate Center (34-44), as applicable; also refer to Note 14 to each set of Financial Statements (Property, equipment and software) (369 and 519)

6-7: Not applicable

B – Business Overview.

1, 2, 5 and 7: Annual Report, 18-33, Note 2a to each set of Financial Statements (Segment reporting) (348-351 and 497-500),and Note 2b to each set of Financial Statements (Segment reporting by geographic location) (352 and 501).  See also Supplement (13).

3: Seasonal characteristics (68) 

4: Not applicable

6: None

8: Regulation and supervision (21-22) and Regulatory and legal developments (23-26)

Supplement (14)

 

7 


 

C – Organizational Structure.

 

Annual Report, Our evolution  (12-13) and Note 28 to each set of Financial Statements (Interests in subsidiaries and other entities) (436-444 and 584-592)

D – Property, Plant and Equipment.

 

Annual Report, Property, plant and equipment (627 and 650), Note 14 to each set of Financial Statements (Property, equipment and software) (369 and 519), Note 31 to each set of Financial Statements (Operating leases and finance leases(447 and 595)

Information required by Industry Guide 3

Annual Report, Information required by industry guide 3 (628-643 and 651-666) and Selected financial data (622-626 and 645-649)

Item 4A.  Unresolved Staff Comments.

None.

Item 5.  Operating and Financial Review and Prospects.

A – Operating Results.

Annual Report, Our key figures (5), UBS AG (consolidated) key figures (456), Measurement of performance (32-33), Group performance (59-72), operating results by business division and Corporate Center (73-110), Currency management (181), Capital management (183-207), Risk factors (45-56), Current market climate and industry trends (18-20) Regulatory and legal developments (23-26) and Note 30 to each set of Financial Statements (Changes in organization and disposals) (445-446 and 593-594)

B – Liquidity and Capital Resources.

Annual Report, Substantial changes in the regulation of our businesses may adversely affect our business and our ability to execute our strategic plans (Higher capital and total loss-absorbing capacity requirements increase our costs and Liquidity and funding) (46), 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 (55), Seasonal characteristics (68), Cash flows (182), Interest rate risk in the banking book (153-157), Balance sheet, liquidity and funding management (167-177), Capital management (183-207)Note 23a to each set of Financial Statements (Restricted financial assets) (403 and 553), Currency management (181), Note 13a to each set of Financial Statements (Financial assets available for sale) (369 and 518), Note 18 to each set of Financial Statements (Financial liabilities designated at fair value) (373-374 and 523-524), Note 19 to each set of Financial Statements (Debt issued held at amortized cost) (374-375 and 524-525), Short-term borrowings (635 and 658), Note 12 to each set of Financial Statements (Derivative instruments and hedge accounting) (362-368 and 511-517) and Note 14 to each set of Financial Statements (Property, equipment and software) (369 and 519).

 

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), Risk Factors (45-56) and Financial and operating performance (57-110), Global Wealth Management (34-35) 

E—Off-Balance Sheet Arrangements.

Annual Report, Off-balance sheet (178-180)Note 28c) to each set of Financial Statements (Interests in unconsolidated structured entities) (440-444 and 588-592)Note 23 to each set of Financial Statements (Restricted and transferred financial assets) (403-405 and 553-555) and Note 31 to each set of Financial Statements, Operating leases and finance leases (447 and 595)

F—Tabular Disclosure of Contractual Obligations.

Annual Report, Contractual obligations (180) 

Item 6.  Directors, Senior Management and Employees.

A – Directors and Senior Management.

1, 2 and 3: Annual Report, 220-236

4, 5: None

 

8


 

B – Compensation.

1: Annual Report, 262-306, Note 27 to each set of Financial Statements (Employee benefits: variable compensation) (428-435 and 578-583) and Note 32 to each set of Financial Statements (Related parties) (448-450 and 596-598)

2: Annual Report, Note 26 to each set of Financial Statements (Pension and other post-employment benefit plans) (413-427 and 563-577)

C – Board practices.

1: Annual Report, 220-231. The term of office for members of the Board of Directors and its Chairman expires after completion of the next Annual General Meeting. The next Annual General Meeting is scheduled on 3 May 2018.

2: Annual Report, 262-306, and Note 32 to each set of Financial Statements (Related parties) (448-450 and 596-598)

3: Annual Report, Audit committee (226) and Compensation Committee (227) 

Refer to the Supplement (18) for information on UBS AG's Board of Directors' executive sessions.

D—Employees.

Annual Report, Our employees (256-261) and Financial and operating performance (57-110)

E—Share Ownership.

Annual Report, 300-303, Note 27 to each set of Financial Statements (Employee benefits: variable compensation) (428-435 and 578-583) and Note 32b to each set of Financial Statements (Equity holdings of key management personnel) (448 and 596)

Item 7.  Major Shareholders and Related Party Transactions.

A—Major Shareholders. 

Annual Report, Group structure and shareholders  (212-213), Capital structure (214-217) and Voting rights, restrictions and representation (218) 

 

The number of shares of UBS Group AG held by the respective shareholders listed on page 213of the Annual Report as holding 3% or more of total share capital is as follows:

 

Shareholder

Number of shares held

Chase Nominees Ltd., London

430,067,754

DTC (Cede & Co.), New York

255,878,120

Nortrust Nominees Ltd., London

158,270,547

 

The number of shares of UBS AG held by UBS Group AG as of 31 December 2017 was 3,858,408,466 shares.

B—Related Party Transactions.

Annual Report, Loans granted to GEB members (304), Loans granted to BoD members (304) and Note 32 to each set of Financial Statements (Related parties) (448-450 and 596-598)

 

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

 

9 


 

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) (376-383 and 526-533). 

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 2017, filed on Forms 6-K dated April 28, 2017 (UBS Group AG) and May 3, 2017 (UBS AG), July 28, 2017 (UBS Group AG) and August 3, 2017 (UBS AG) and October 27, 2017 (UBS Group AG) and November 1, 2017 (UBS AG), respectively; as well as the Provisions and contingent liabilities section in the Fourth Quarter 2017 Report, filed on Form 6-K dated January 22, 2018.  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 (55), Distributions to shareholders (217) 

B—Significant Changes.

Annual Report, Note 1 to each set of Financial Statements (Summary of significant accounting policies) (325-347 and 473-496) and Note 35 to each set of Financial Statements (Events after the reporting period) (452 and 600)

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 (207) 

B—Plan of Distribution.

Not applicable

C—Markets.

Annual Report, Listing of UBS Group AG shares (207)

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 (225), Capital structure (214-217), Organizational principles and structure (225-228), Shareholders' participation rights (218-219), Significant shareholders (212-213), Change of control and defense measures (237), Board of Directors (8-9; 220-231), Our compensation governance framework (282-284) and 2017 compensation for the Board of Directors (279-281)

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 4.16 to this Form 20-F. These notes are described under Capital and other instruments contributing to our total loss-absorbing capacity on page 185 of the Annual Report and Deferred Contingent Capital Plan on page 293 of the Annual Report.

 

The settlement agreements and orders filed as exhibits 4.17 through 4.21 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 (381-383 and 531-533).

 

The Asset Transfer Agreement by which certain assets and liabilities of UBS AG were transferred to UBS Switzerland AG is filed as Exhibit 4.22, and is described under Joint liability of UBS Switzerland AG on page 603 of the Annual Report.

 

10


 

D—Exchange Controls.

Other than in relation to economic sanctions, there are no restrictions under the Articles of Association of UBS Group AG or UBS AG, nor under 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, nor restrictions affecting the remittance of dividends, interest or other payments to non-resident holders of UBS securities. The Swiss federal government may impose sanctions on particular countries, regimes, organizations or persons which may create restrictions on exchange of control. A current list, in German, French and Italian, of such sanctions can be found at www.seco-admin.ch. UBS may also be subject to sanctions regulations from other jurisdictions where it operates imposing further restrictions.

E—Taxation.

Supplement (20-22)

F—Dividends and Paying Agents.

Not applicable

G—Statement by Experts.

Not applicable

H—Documents on Display.

UBS files periodic reports and other information with the Securities and Exchange Commission. You may read and copy any document that we file with the SEC on the SEC’s website, www.sec.gov, or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 (in the United States) or at +1 202 551 8090 (outside the United States) for further information on the operation of its public reference room. Much of this information may also be found on the UBS website at www.ubs.com/investors.  

I—Subsidiary Information.

Not applicable

Item 11.  Quantitative and Qualitative Disclosures About Market Risk.

(a) Quantitative Information About Market Risk.

Annual Report, Market risk (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 Group 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 (241), 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 (311 and 458)

(c) Attestation Report of the Registered Public Accounting Firm

Annual Report, Reports of the independent registered public accounting firm on internal control over financial reporting (312 and 459)

(d) Changes in Internal Control over Financial Reporting

None

 

 

11 


 

Item 15T.  Controls and Procedures.

Not applicable

Item 16A.  Audit Committee Financial Expert.

Annual Report, Audit Committee (226) and Differences from corporate governance standards relevant to US-listed companies (210-211) 

 

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 (244). UBS's Code of Conduct and Ethics ("the Code") is published on our website under https://www.ubs.com/global/en/about_ubs/about_us/code_of_conduct.html

The Code is regularly reviewed to make sure it is consistent with the rest of UBS's policies, as well as the law. In 2017, the principles and practices concerning client relationships were amended to strengthen UBS's approach to providing clients with appropriate products and services in a manner that prioritizes clients' interests.

No waiver from any provision of the Code was granted to any employee in 2017. 

Item 16C.  Principal Accountant Fees and Services.

Annual Report, Auditors   (238-239)

 

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 (206)

 

UBS does not currently have a share repurchase program, but has announced a program for the period 2018-2020. Annual Report, UBS own share exposure (158)

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

Not applicable

Item 16G.  Corporate Governance.

Annual Report, Differences from corporate governance standards relevant to US-listed companies (210-211)

Item 16H. Mine Safety Disclosure.

Not applicable.

Item 17.  Financial Statements.

Not applicable

Item 18.  Financial Statements.

Annual Report, Consolidated financial statements (307-614), Significant regulated subsidiary and sub-group information (616-617) and Additional regulatory information (621-666)

Item 19.  Exhibits 

Supplement (23-24)

 

12


 

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 regional 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 is evaluated. These allocations involve assumptions and judgments that management considers to be reasonable, and may be refined to reflect changes in estimates or management structure.

 

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

 

 

CHF billion

Business Division

FY

Americas

Asia Pacific

EMEA

Switzerland

Global

Total

Wealth Management

2017

0.3

2.2

3.5

1.6

0.0

7.6

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

Wealth Management Americas

2017

8.3

0.0

0.0

0.0

0.0

8.3

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

Personal & Corporate Banking

2017

0.0

0.0

0.0

3.8

0.0

3.8

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

Asset Management

2017

0.5

0.4

0.4

0.7

0.1

2.0

 20161

0.5

0.4

0.4

0.7

0.0

1.9

 20151

0.6

0.4

0.4

0.7

0.0

2.1

Investment Bank

2017

2.8

2.0

2.1

0.8

(0.1)

7.7

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

Corporate Center

2017

0.0

0.0

0.0

0.0

(0.5)

(0.5)

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

Group

2017

12.0

4.7

6.0

6.9

(0.4)

29.1

2016

11.5

4.2

6.1

6.9

(0.5)

28.3

2015

11.2

5.1

6.8

7.2

0.4

30.6

 

1  The geographical allocation of Total operating income has been restated to reflect a refinement in the allocation methodology.

13 


 

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 2017, the gross revenues for this UN-related account were approximately USD 15,580.  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. UBS also maintains a rental surety (effectively a rental security deposit) account in relation to the Government of Iran's UN Mission premises in Geneva; there were no revenues for this account.

 

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 2017, 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 2017 were USD 3,367. There have been no transactions involving this account in 2017 other than general account fees. The gross revenues to report for 2017 are USD 11.

 

14


 

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 relevant Swiss laws, in particular 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, except where indicated that it refers to only one of the companies.

 

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, and there is no liability of shareholders to further capital calls by the company. 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 the company, 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” below.

 

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.

 

Shares and Shareholders

Share Register and Transfer of Shares  

 

UBS Group AG’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 Association of UBS Group AG and UBS AG require UBS 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 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.

 

The transfer of shares which exist in the form of intermediary-held securities is effected by entries in securities accounts in accordance with applicable law. The transfer of uncertificated securities is effected by way of a written declaration of assignment and requires notice to the issuer.

  

In order to register shares in the share register, a purchaser must file a share registration form with the 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.

 

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.

15 


 

General 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 20 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.

 

Unless otherwise provided by law or the Articles (as indicated in this section), resolutions 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 (except for the changes requiring a higher quorum as indicated below);
  • 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) of UBS Group AG, 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% of the average of total annual compensation paid or granted to the Group Executive Board during the previous three years 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 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 is required in order to 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.

 

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 these supermajority requirements.

 

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.

 

UBS AG follows the abovementioned statutory quorum rules in lieu of the quorum requirement of Rule 14.10(f)(3) of Bats BZX Exchange, Inc.

 

16


 

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.

 

Disclosure of Principal Shareholders

 

Under the applicable provisions of the Swiss Financial Market Infrastructure Act, anyone who directly or indirectly or acting in concert with third parties reaches, exceeds or falls 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, 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 the notes to the balance sheet the identity of any shareholders who own in excess of 5% of its shares.

 

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.

 

Mandatory Tender Offer  

 

Under the applicable provisions of the Swiss Financial Market Infrastructure Act, anyone who directly or indirectly or acting in concert with third parties acquires 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.

 

17 


 

Board of Directors  

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.

 

Swiss law requires that the Articles determine the amount of loans that UBS Group AG, as a listed company, may grant to members of its BoD. The Articles restrict UBS Group AG's ability to grant loans to BoD members as follows: First, loans to the independent members of the BoD shall be made in accordance with the customary business and market conditions. Second, loans to the non-independent members of the BoD shall be made in the ordinary course of business on substantially the same terms as those granted to UBS employees. Third, the total amount of such loans shall not exceed CHF 20 million per member.

 

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.

 

Retirement of Board members

 

There is no age-limit requirement for retirement of the members of the BoD. The term of office for each Board member is one year, and no Board member may serve for more than 12 consecutive terms of office. In exceptional circumstances the Board can extend this limit.

 

Executive sessions

 

UBS AG's Organization Regulations require one-third of the members of the Board of Directors of UBS AG to be independent. While neither Swiss law applicable to UBS AG nor the Organization Regulations require regularly scheduled meetings of UBS AG's independent directors, the Organization Regulations of UBS Group AG require independent members of the Board of Directors of UBS Group AG to meet, without the participation of the Chairman, at least twice a year. All members of UBS Group AG’s Board of Directors are also members of UBS AG’s Board of Directors and the meetings are held as combined meetings of UBS Group AG and UBS AG's Board of Directors so that they have the same frequency and length for the two companies. As a result, the practice currently in place at UBS AG is that the independent members regularly meet in executive-only sessions.

18


 

The Company

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, such own shares must be disclosed 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.

 

Sinking fund provisions

There are no provisions in the Swiss law or in the Articles requiring the company to put resources aside for the exclusive purpose of redeeming bonds or repurchasing shares.

 

Registration and Business Purpose  

 

UBS Group AG was incorporated and registered as a corporation limited by shares (Aktiengesellschaft) under the laws of Switzerland. UBS Group AG 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 article 2 of its Articles, is the acquisition, holding, management and sale of direct and indirect participations in enterprises of any kind, in particular in the area 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 corporation limited by shares (Aktiengesellschaft) under the laws of Switzerland. It was entered into the commercial registers of Canton Zurich and Canton Basel-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 article 2 of 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. UBS AG is a wholly owned subsidiary of UBS Group AG.

 

Duration and Liquidation

 

UBS Group AG and UBS AG have unlimited duration.

 

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.

19 


 

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 Group AG's ordinary shares (defined as "UBS ordinary shares " in this section) 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 ordinary 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 combined voting power of the voting stock of UBS Group AG or of the total value of stock of UBS Group AG, 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 ordinary 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.

 

20


 

(a) Ownership of UBS Ordinary Shares - Swiss Taxation  

 

Dividends and Distributions  

Dividends paid by UBS Group AG 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 Group AG 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. However, UBS Group AG does not expect to calculate earnings and profits in accordance with U.S. federal income tax principles. Accordingly, a U.S. shareholder should expect to generally treat distributions we make as dividends.

 

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 Group AG with respect to the ordinary shares will generally be qualified as 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 generally be "passive" 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.

 

21 


 

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 Group AG 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 Group AG 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 Group AG 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 Group AG 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 Group AG 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 Group AG would not be eligible for the preferential tax rate applicable to qualified dividend income if UBS Group AG 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.

 

22


 

Item 19.  Exhibits.

Exhibit number

Description

1.1

Articles of Association of UBS Group AG dated 21 February 2017. (Incorporated by reference to Exhibit 1.1 to UBS Group AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2016)

1.2

Articles of Association of UBS AG dated 4 May 2016. (Incorporated by reference to Exhibit 1.2 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2016)

1.3

Organization Regulations of UBS Group AG dated 1 March 2018

1.4

Organization Regulations of UBS AG dated 1 March 2018.

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

Fiscal agency agreement dated 17 August 2012 between UBS AG, acting through its Stamford Branch, and U.S. Bank N.A. (Incorporated by reference to Exhibit 4.2 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2012)

4.2

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)

4.3

Terms and Conditions of Tier 2 capital instruments issued pursuant to the Deferred Contingent Capital Plan 2013/14.

4.4

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)

4.5

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)

4.6

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)

4.7

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)

4.8

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)

4.9

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

4.10

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)

4.11

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

4.12

Terms and Conditions of USD 1.5 billion 6.875% Tier 1 Subordinated Notes issued by UBS Group AG on 21 March 2016. (Incorporated by reference to Exhibit 4.10 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2016)

 

23 


 

4.13

Terms and Conditions of USD 1.1 billion 7.125% Tier 1 Subordinated Notes issued by UBS Group AG on 10 August 2016. (Incorporated by reference to Exhibit 4.11 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2016)

4.14

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

4.15

Terms and Conditions of additional Tier 1 capital instruments issued pursuant to the Deferred Contingent Capital Plan 2017/18.

4.16

Terms and Conditions of USD 2 billion 5.0% Tier 1 Subordinated Notes issued on 31 January 2018 by UBS Group Funding (Switzerland) AG and guaranteed by UBS Group AG

4.17

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)

4.18

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)

4.19

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)

4.20

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)

4.21

 

 

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)

4.22

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 436-444 and 584-592 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

101

Interactive Data Files (sections of the Annual Report formatted in XBRL (Extensible Business Reporting Language)). Furnished electronically herewith.

24


 

SIGNATURES

 

 

The registrants hereby certify that they meet all of the requirements for filing on Form 20-F and that              they have duly caused the undersigned to sign this annual report on their 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: President of the Executive Board

 

 

_/s/ Kirt Gardner __________________

Name: Kirt Gardner

Title: Chief Financial Officer

 

 

_/s/ Todd Tuckner_________________ 

Name: Todd Tuckner

Title: Group Controller and Chief Accounting

          Officer

 

 

March 9, 2018

 

  

25 


 

     

 

UBS Group AG and UBS AG

Annual Report 2017

 


 

  

 


 

Contents


 

 


Annual Report 2017
Letter to shareholders

Dear shareholders,

 

For our shareholder letter this year, we have chosen a format that answers a series of questions that we are regularly asked by different stakeholders of the bank.

 

What are the financial highlights of the past year?

2017 was an excellent year for us, with profit before tax up 29% to CHF 5.3 billion. We also delivered on our CHF 2.1 billion net savings program. That said, at UBS performance is not just judged by annual financial results. One of our firm's three Principles – along with Client Focus and Excellence – is Sustainable Performance, which we define as focusing on the long term and providing consistent returns to our stakeholders.

 

Why was your net profit attributable to shareholders far lower in 2017 than it was in 2016?

Like many of our peers, we were affected by a net write-down of our US deferred tax assets, due to the new US tax law. We had been able to write up these deferred tax assets in the past few years, as a result of our strong profitability in the US, and they remain in place for future utilization. The write-down in 2017 had no impact on our fully applied CET1 capital and does not affect our ability to return capital. Excluding the effects of these US tax law changes, net profit was CHF 4 billion, up 22%.

 

Is UBS's capital position still a competitive advantage?

Yes, definitely. Capital strength continues to be a key pillar of our strategy. Our fully applied CET1 ratios are comfortably above the 2020 requirements. Since 2012, we've substantially reduced risk and balance sheet exposures, while increasing our total loss-absorbing capacity by around CHF 50 billion to almost CHF 80 billion. Our progress and overall resilience is reflected in our valuation compared to peers, our credit ratings and, most importantly, the trust our clients place in us. At the same time, the greater visibility on future capital requirements provided by the Basel Committee at the end of 2017 enabled us to update our capital returns policy and plan more meaningfully for the future.

 

What are the details of your updated capital returns policy?

Our aim is to further increase returns to shareholders while building on our strong capital position. Going forward, our priority is to pay an ordinary dividend, growing at mid-to-high single-digit percentage per annum, while considering supplementary returns, most likely in the form of share buybacks. For 2017, we intend to propose a dividend to UBS Group AG shareholders, for approval at our May 3rd Annual General Meeting (AGM), of CHF 0.65 per share, an 8% increase on the prior year. We'll also initiate a share repurchase program of up to CHF 2 billion over three years, including up to CHF 550 million in 2018.


Did the UBS share price develop as you thought it would in 2017?

While we don't set specific absolute targets for our share price, our aim is that the unique value of our franchise – which is more than the sum of its parts – is properly reflected. A good measure is our valuation on a relative basis. From that perspective – looking at the ratio of our share price to our tangible book value – we've been trading at a ratio above one for the past six years and remain in a strong position compared to many peers. Relative share price performance is influenced by a number of factors including business models and geographic exposure. In 2017, peers with greater overall US presence and less influenced by low and negative interest rates in Europe and Switzerland were operating in a much more favorable macroeconomic setting. Combined with the changing regulatory environment in the US, this is reflected in relative transatlantic share price performance. Looking ahead, we've set ambitious return and efficiency targets for the next three years to drive further valuation growth.

 

Your strategy has remained the same for quite a while – is it time to change it?

While we continuously adjust and improve to adapt to a changing environment, our strategic focus on global wealth management and universal banking in Switzerland enhanced by focused and competitive Investment Bank and Asset Management businesses is right for UBS. Sustainable performance is only possible with a long-term strategy. We're the clear leader in global wealth management and in Switzerland, with the most sophisticated capabilities. The global wealth management market is forecast to grow at twice GDP and as the firm with the most diversified geographic footprint, we are in the best position to benefit from this development. Now that we have more regulatory clarity on future capital and liquidity requirements, we are sharpening our focus on growth across our businesses and making further investments to continue increasing returns to shareholders.

 

Are your other businesses less important given your focus on wealth management?

No, the UBS franchise is unique and not just about wealth management. Our diversified business model also benefits from Personal & Corporate Banking, the Investment Bank and Asset Management. All are successful businesses in their own right. Together, they make a significant contribution to earnings, diversify revenues and generate high-quality returns. Without them, our Global Wealth Management business would not be what it is today, nor could it deliver on its aspirations. And our Swiss roots and UBS brand continue to be a huge advantage – both in our home market and in growth regions such as Asia Pacific.

 

2


         

Axel A.Weber Chairman of the Board of Directors and Sergio P.ErmottiGroup Chief Executive Officer

 

 

Where do you expect to grow and invest going forward?

From a geographic standpoint, we have a clear ambition to grow in the Americas and to reinforce our leadership in our home market Switzerland. And we are big believers in the Asia Pacific opportunity, especially China, where wealth creation continues to accelerate and we are in a very strong competitive position. In the Europe, Middle East and Africa region, we want to leverage our capabilities to grow our share in a market that is more and more likely to consolidate. To shape our digital future, we intend to keep investing at least 10% of the Group's revenues in technology, adding around CHF 1 billion in tech spend over the next three years. We'll focus these investments on enhancing and differentiating the client experience and product excellence UBS offers, while also accelerating effectiveness and efficiency. 

 


Is your workforce prepared for these technology investments, which may automate many of their current tasks?

That's an existential question all companies are faced with when considering the fourth industrial revolution. On one hand, automation will be necessary, as from a demographic point of view more people will be retiring than entering the workforce. On the other hand, however, it's not just about technology, but about how we'll work in the future. Companies that have succeeded in the past can't be complacent – they'll need to help their staff adapt. One way we do that at UBS is by providing learning and development opportunities to our employees. In 2017, they participated in approximately 765,500 training activities. And our own UBS University offers more than 2,400 e-learning and classroom-based trainings. It's our responsibility, but also that of our employees, to invest in their capabilities so that they stay agile and flexible.

 

 

3


Annual Report 2017
Letter to shareholders

Why have you not announced a new cost savings program?

We're no longer in restructuring mode, so efficiency has moved from being a program to how we run the bank day to day. And the fact that we just completed a cost savings program delivering CHF 2.1 billion in net savings does not mean efficiency is no longer on the agenda. We've set quite demanding internal targets for our business divisions and Corporate Center to drive positive operating leverage – so to increase revenues while reducing costs. We've also said that we're targeting a cost/income ratio of below 75% for the Group. What we've refrained from doing, however, is to go public with a big, aggregated savings number to be achieved in a number of years. While such an approach may attract headlines and please some in the analyst community, it can lead to behavior that runs contrary to our long-term approach and, for example, jeopardize client service and risk management, ultimately undermining sustainable performance.

 

Who does UBS create value for?

Clients, shareholders and employees are the primary stakeholders we create value for. Our role as a bank is to finance economic growth by facilitating investment and credit. And we support people and businesses with the financial services they need to reach their goals. As a firm, we contribute by directly employing over 60,000 people, by consuming products and services and by paying taxes.

 

Is UBS paying taxes again in Switzerland?

Yes, we're actually a top taxpayer in the country. UBS's corporate tax payments over the last 20 years add up to around CHF 13 billion, including CHF 3.5 billion post-crisis. But being a good corporate citizen is about far more than just paying taxes. It also means acting responsibly, and our stakeholders expect nothing less.

 


How else does UBS create positive value for society?

We are strongly committed to being – and remaining – a leader in the field of sustainability. Our cross-divisional organization UBS and Society focuses the firm on this direction. It covers our activities and capabilities related to sustainable investing and philanthropy with clients, our environmental and human rights policies governing client and supplier relationships, our environmental footprint and our community investments. And, we're happy to report that we're being recognized for our work across these areas. Among others, the Dow Jones Sustainability Indices, which are the most widely respected sustainability ratings, confirmed UBS as the industry leader for the third year running in 2017.

 

How do you make sure your corporate culture supports long-term value creation?

Over the past six years we've brought a more traditional banking mentality to UBS, really focused on our clients, sustainable performance and excellence in everything we do. We've incentivized behaviors that underline the importance not only of what is achieved, but also how it's achieved. And we've set targets that drive long-term success. To capture the opportunities ahead, we'll continue to do just that.

 

Thank you for your ongoing support. We look forward to your feedback and also to welcoming you at our AGM on 3 May 2018 in Basel.

 

 

9 March 2018

 

Yours sincerely,

 

   

Axel A. Weber                                Sergio P. Ermotti

Chairman of the                            Group Chief Executive Officer

Board of Directors

 

  

4


         

Our key figures

 

 

As of or for the year ended

CHF million, except where indicated

 

31.12.17

31.12.16

31.12.15

 

 

 

 

 

Group results

 

 

 

 

Operating income

 

29,067

 28,320 

 30,605 

Operating expenses

 

23,800

 24,230 

 25,116 

Operating profit / (loss) before tax

 

5,268

 4,090 

 5,489 

Net profit / (loss) attributable to shareholders

 

1,053

 3,204 

 6,203 

Diluted earnings per share (CHF)1

 

0.27

 0.84 

 1.64 

 

 

 

 

 

Key performance indicators2

 

 

 

 

Profitability

 

 

 

 

Return on tangible equity (%)

 

2.4

 6.9 

 13.7 

Cost / income ratio (%)

 

81.5

 85.4 

 81.8 

Growth

 

 

 

 

Net profit growth (%)

 

(67.1)

 (48.3) 

 79.0 

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

 

 2.1 

 2.1 

 2.2 

Resources

 

 

 

 

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

 

13.8

 13.8 

 14.5 

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

 

3.7

 3.5 

 3.3 

Going concern leverage ratio (fully applied, %)5

 

4.7

 4.6 

 

 

 

 

 

 

Additional information

 

 

 

 

Profitability

 

 

 

 

Return on equity (%)

 

2.0

 5.9 

 11.8 

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

 

12.6

 13.2 

 14.4 

Return on leverage ratio denominator, gross (%)6

 

3.3

 3.2 

 

Resources

 

 

 

 

Total assets

 

915,642

 935,016 

 942,819 

Equity attributable to shareholders

 

51,214

 53,621 

 55,313 

Common equity tier 1 capital (fully applied)4

 

32,671

 30,693 

 30,044 

Common equity tier 1 capital (phase-in)4

 

35,494

 37,788 

 40,378 

Risk-weighted assets (fully applied)4

 

237,494

 222,677 

 207,530 

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

 

14.9

 16.8 

 19.0 

Going concern capital ratio (fully applied, %)5

 

17.6

 17.9 

 

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

 

21.7

 24.7 

 

Gone concern loss-absorbing capacity ratio (fully applied, %)5

 

15.3

 13.2 

 

Leverage ratio denominator (fully applied)4

 

886,116

 870,470 

 897,607 

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

 

5.8

 6.4 

 

Gone concern leverage ratio (fully applied, %)5

 

4.1

 3.4 

 

Liquidity coverage ratio (%)7

 

143

 132 

 124 

Other

 

 

 

 

Invested assets (CHF billion)8,9

 

3,179

 2,810 

 2,678 

Personnel (full-time equivalents)

 

61,253

 59,387 

 60,099 

Market capitalization10

 

69,125

 61,420 

 75,147 

Total book value per share (CHF)10

 

13.76

 14.44 

 14.75 

Tangible book value per share (CHF)10

 

12.04

 12.68 

 13.00 

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 definitions 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 Swiss systemically relevant bank (SRB) framework. 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. Refer to the “Capital management” section of this report for more information.    6 Calculated as operating income before credit loss / average fully applied risk-weighted assets and average fully applied leverage ratio denominator, respectively.    7 Refer to the “Balance sheet, liquidity and funding management” section of this report for more information.    8 Includes invested assets for Personal & Corporate Banking.    9 Certain account types were corrected during 2017. As a result, invested assets as of 31 December 2016 and 31 December 2015 were corrected by CHF 12 billion and CHF 11 billion, respectively.    10 Refer to “UBS shares” in the “Capital management” section of this report for more information.

 

Events subsequent to the publication of the unaudited fourth quarter 2017 report

The 2017 results and the balance sheet as of 31 December 2017 differ from those presented in the unaudited fourth quarter 2017 report published on 22 January 2018 as a result of events adjusted for after the balance sheet date. Provisions for litigation, regulatory and similar matters increased, which reduced 2017 operating profit before tax by CHF 141 million, 2017 net profit attributable to shareholders by CHF 112 million, and both basic and diluted earnings per share by CHF 0.03.

 

5


Annual Report 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

6


         

Corporate information

UBS Group AG is incorporated and domiciled in Switzerland and operates under art. 620ff. of 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 Group AG owns 100% of the outstanding shares of UBS AG.


UBS AG is incorporated and domiciled in Switzerland and operates under art. 620ff. of 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 Krakow.

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


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 2018 report:       Monday, 23 April 2018

Annual General Meeting 2018:                        Thursday, 3 May 2018

Publication of the second quarter 2018 report: Tuesday, 24 July 2018

Publication of the third quarter 2018 report:      Tuesday, 23 October 2018

 

Corporate calendar UBS AG

Publication of the first quarter 2018 report:       Friday, 23 April 2018

Publication of the second quarter 2018 report: Friday, 24 July 2018

Publication of the third quarter 2018 report:      Friday, 23 October 2018

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 2018. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

7


Annual Report 2017

Our Board of Directors

 

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 establishing a clear Group governance framework to provide 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 2017

Our Group Executive Board

 

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 2017

Our evolution

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 UBS today were 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, a US brokerage and asset management firm 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 of 2008, 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. Our Pillars, Principles and Behaviors, launched in 2014, are the foundation for our corporate strategy, identity and culture.

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

 

In 2014, we began adapting our legal entity structure to improve the resolvability of the Group in response to too big to fail (TBTF) requirements in Switzerland and recovery and resolution regulation in other countries in which the Group operates. In December 2014, UBS Group AG became the holding company of the Group. In 2015, we transferred our Personal & Corporate Banking and Wealth Management businesses booked in Switzerland from UBS AG to the newly established UBS Switzerland AG and we implemented a more self-sufficient business and operating model for UBS Limited. In 2016, we designated UBS Americas Holding LLC as our intermediate holding company for our US subsidiaries and we merged our Wealth Management subsidiaries in various European countries into UBS Europe SE. Additionally, we transferred the majority of Asset Management’s operating subsidiaries to UBS Asset Management AG. UBS Business Solutions AG, a direct subsidiary of UBS Group AG, was established in 2015 and acts as the Group service company. The chart on the next page provides an overview of the principal legal entities and structure of UBS as of 31 December 2017.

 

 

12


         

 

Changes in 2017

In 2017, we transferred shared services functions in Switzerland and the UK from UBS AG to UBS Business Solutions AG, which is our Group service company and a wholly owned subsidiary of UBS Group AG. We also completed the transfer of shared services functions in the US to our US service company, UBS Business Solutions US LLC, a wholly owned subsidiary of UBS Americas Holding LLC.

We established UBS Group Funding (Switzerland) AG in 2016 as a wholly owned direct subsidiary of UBS Group AG to issue loss-absorbing additional tier 1 (AT1) capital instruments and total loss-absorbing capacity (TLAC)-eligible senior unsecured debt, which are guaranteed by UBS Group AG. In the first half of 2017, we transferred our then outstanding TLAC-eligible senior unsecured debt to UBS Group Funding (Switzerland) AG as the issuer. Outstanding loss-absorbing AT1 capital instruments issued by UBS Group AG may in the future also be transferred to UBS Group Funding (Switzerland) AG, subject to further regulatory review. The Swiss Federal Council has proposed amendments to Swiss tax law in order to reduce the additional tax burden on debt issuances by bank top holding companies. Should 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.

Further legal structure changes

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 further consolidation of operating subsidiaries in the EU and adjustments to the booking entity or location of products and services.

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

 

  

13


Annual Report 2017

Our external reporting approach

General requirements

Our external reporting requirements and the scope of our external reports are defined by general accounting law and principles, relevant stock and debt listing rules, specific legal and regulatory requirements, as well as by our own financial reporting policies.

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 IFRS financial statements.

The Basel III capital adequacy framework requires us to publish a range of Pillar 3 disclosures, mainly covering risk, capital, leverage, liquidity and remuneration. These Pillar 3 disclosures are supplemented by specific additional requirements of the Swiss Financial Market Supervisory Authority (FINMA) and voluntary disclosures on our part. We are also required to disclose certain regulatory information for our significant regulated subsidiaries and sub-groups, i.e., UBS AG standalone, UBS Switzerland AG standalone and UBS Limited standalone, as well as UBS Americas Holding LLC consolidated.

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.

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


Our Annual Report 2017, Form 20-F and additional
year-end disclosures

Our year-end 2017 financial information is available on www.ubs.com/investors and includes:

   the Annual Report 2017 – Group;

   the Annual Report 2017 – combined, containing information for UBS Group AG and UBS AG that is the basis for our US Securities and Exchange Commission (SEC) Form 20-F filing;

   Auszug aus dem Geschäftsbericht, the German translation of selected sections of our Annual Report 2017 – Group;

   31 December 2017 Pillar 3 report – Group and significant regulated subsidiaries and sub-groups; and

   legal entity disclosures, including standalone financial statements for UBS AG and UBS Switzerland AG, as well as selected financial and regulatory information for our significant regulated subsidiaries and sub-groups.

 

In addition, other 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 2017 will be published by the end of 2018. Information for UBS Group Funding (Switzerland) AG is available under “Other subsidiaries” at www.ubs.com/investors

Furthermore, we have published a consolidated Global Reporting Initiative (GRI) Document, providing comprehensive disclosures on environmental, social and governance (ESG) factors and including the disclosures on non-financial information required by German law implementing the EU Directive 2014/95 (CSR-Richtlinie-Umsetzungsgesetz / CSR-RUG). The GRI Document is available under “Annual reporting” at www.ubs.com/investors

As financial information for UBS AG consolidated does not differ materially from UBS Group AG consolidated, the MD&A included in the Annual Report 2017 – combined is generally provided on a UBS Group AG consolidated basis. In addition, we provide in the combined report UBS AG consolidated financial statements in accordance with IFRS, information with respect to UBS AG consolidated’s risk profile and Swiss systemically relevant bank capital and leverage ratios for UBS AG consolidated.

Beginning with the Annual Report 2017, we will include in our Form 20-F filing, and publish on our website, Extensible Business Reporting Language (XBRL) interactive financial data, as required for non-US private issuers that prepare financial statements in accordance with IFRS.

®   Refer to “Annual reporting,” “Pillar 3 disclosures,” “Holding company and significant regulated subsidiaries and sub-groups” and “SEC filings” at www.ubs.com/investors, where the documents mentioned above are available

 

14


         

Overview of our external reporting documents

The table below provides an overview of our external reporting documents that are published on our Investor Relations website to comply with applicable legal and regulatory reporting requirements for UBS Group AG and UBS AG as well as for our significant regulated subsidiaries and sub-groups, as defined by FINMA. Specific local regulatory reporting requirements and related documents of UBS Limited and UBS Americas Holding LLC are not reflected in this overview.

 

 

  

15


 

 


 

Operating environment and strategy

Management report

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Signposts

Throughout the Annual Report 2017, 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 2017

In 2017, the world economy grew at the fastest rate since 2011: global GDP expanded 3.9%, from a rate of 3.2% in 2016, with each member of the G20 seeing economic growth – the first time since 2010.

Economic activity increased worldwide amid a recovery in Chinese property construction, Russia and Brazil emerging from multi-year recessions and renewed US energy sector investment in response to higher oil prices.

Equity markets responded, aided by higher corporate earnings growth and low real interest rates. Global equities rose by more than 20%, with emerging market stocks outperforming their developed market peers. European markets lagged in local currency terms, in part due to the euro’s strength. The year was also notable for a lack of equity market volatility: at no point did global equities register a greater than 2.0% decline from their prior highs.

Government bond yields generally remained stable in spite of accelerating global growth. Rising US interest rates primarily affected short-dated US dollar-denominated bonds, resulting in the flattest US government bond yield curve in more than a decade. Euro- and Swiss franc-denominated bonds were largely unaffected by US rate moves.

The US dollar depreciated by around 10% on a trade-weighted basis, losing ground against most other global currencies. The euro strengthened significantly to rank as the best-performing major currency, as markets began pricing in reduced monetary stimulus from the European Central Bank.

US growth accelerated, as widely expected, thanks to robust consumption, energy investment and export growth. Reduced government expenditure proved to be the only significant drag. Despite three rate hikes from the US Federal Reserve Board, financial conditions eased throughout the year.

Eurozone growth accelerated to its fastest pace since 2007. Improved business sentiment spurred capital expenditure and private consumption remained robust alongside declining unemployment. UK growth slowed but proved more resilient to uncertainty from the UK’s withdrawal from the EU than initially expected, with investment accelerating and exports benefiting from a weak British pound.

Switzerland’s headline growth was disappointing, but fundamentals remained sound. Business confidence surveys rose to multi-year highs, the Swiss franc depreciated relative to the euro and falling unemployment benefited consumption.


Japan prospered, with improved trade performance helping drive the fastest pace of economic expansion since 2013. Higher rates of inflation suggest that the country’s multi-year monetary stimulus program may be beginning to bear results.

In emerging markets, China’s reported growth accelerated for the first time since 2010. This was largely driven by the country’s property sector, which increased import demand and helped other economies in the region. Brazil emerged from a deep two-year recession, with falling inflation contributing to a significant improvement in private consumption. Russia also returned to growth after two years of contraction, driven by a recovery in energy prices, good domestic demand and lower interest rates. The economies of South Korea, Taiwan and Indonesia all grew, while India and Mexico were the only large emerging markets to decelerate. South Africa saw faster growth, although it remains at a low level.

Economic and market outlook for 2018

We forecast little change in the economic outlook. We expect growth of 4.1% in 2018, similar to the healthy 3.9% global GDP growth rate recorded last year. Slight slowdowns in Europe and China should be offset by higher growth in the US, India and Brazil.

US economic activity should be buoyed by the passage of corporate tax cuts, which should boost consumption and corporate earnings in 2018. European growth should remain above its long-term trend rate, broadly similar to 2017, although uncertainties over the UK’s withdrawal from the EU could weigh on the UK’s growth. A weaker Swiss franc bodes well for Switzerland, where exports also stand to benefit from a solid global growth outlook. Cooling property construction will likely decelerate China’s growth rate, but resilient consumption and exports should prevent too sharp of a slowdown.

The primary risks to the outlook relate to uncertainty over the impact of central banks’ withdrawal of quantitative easing, the threat of greater protectionism in US trade policy, a more rapid increase in inflation rates that might lead to faster-than-expected interest rate hikes, a continued increase in energy prices and geopolitical instability, in particular in relation to the Middle East and North Korea. China’s management of its rising debt levels and economic transition remains an important medium-term factor.

 

18


 

Industry trends

Trends by UBS business divisions

Global Wealth Management

Industry estimates suggest that global private wealth will grow by 6% per annum until 2021, with the higher wealth segments expected to grow at over 10% per annum during the same period. From a geographical perspective, the strongest growth is expected to come from Asia Pacific, with estimated annual market growth of 9.9%, according to the Boston Consulting Group Global Wealth Report 2017. Developed markets are expected to grow in line with or below the global growth rate (e.g., 5.6% per annum for North America and 3.5% per annum for Western Europe). We expect this growth profile to be favorable for our strategy of focusing on the largest and fastest-growing markets, which informed our early push to build up our capabilities in Asia and the ultra high net worth segments. We are the largest foreign wealth management firm by assets under management in key Asia Pacific markets as a result of our early entry into the region. We are also well positioned in the ultra high net worth segment, where we leverage the capabilities of our wealth management business and the Investment Bank as well as Asset Management.

Personal & Corporate Banking

Our home market, Switzerland, is an attractive market for personal and corporate banking. Switzerland is one of the wealthiest countries in the world, with average net wealth per person of approximately CHF 185,000 according to our research. However, sustained negative interest rates in Swiss francs have put pressure on banks’ net interest income. From a corporate banking perspective, Switzerland is home to a significant number of large multinational corporations and exporters that have performed well despite pressure related to the strength of the Swiss franc in recent years. UBS has built a leading position with personal as well as corporate and institutional clients in Switzerland. Our objective from here is to strengthen that position through comprehensive digitalization efforts aiming to deliver a superior client experience.


Asset Management

The asset management industry is forecast to grow by approximately USD 20 trillion over the next four years, primarily driven by increases in private provision for retirement and wealth accumulation in emerging middle classes. The biggest growth is expected to come from passive assets and customized solutions, with only moderate growth in actively managed strategies. Due to our diversified offering, ranging from our passive and differentiated traditional active investment strategies to our industry-leading alternative capabilities, we believe that we are well positioned to benefit from this trend. With a view toward further strengthening our position in the market, we continue to expand initiatives in line with our clients’ needs, such as our Platform Services offering, sustainable and impact investing, and our extensive offering in China.‎ 

Investment Bank

The shift in global revenue pools from investment banks to other capital markets players (i.e., custodians, buy-side firms, information providers and exchanges) observed in recent years is expected to ease. Specifically, an external survey forecasts that investment banks’ market share will stabilize at about 34% of global industry revenues in 2020, corresponding to USD 249 billion, i.e., a 2% compound annual growth rate from 2016 through 2020. M&A will likely be a material revenue driver for investment banks as a consequence of the Tax Cuts and Jobs Act signed in December 2017, which may cause corporations to allocate capital to deal-making. We believe UBS is well positioned to capture the value generated from this expected increase in activity due to its client-centric business model and global M&A infrastructure.

Wealth transfers

Demographic and socioeconomic developments continue to generate shifts in wealth among age and gender groups. As a result, the client base of the wealth management industry is becoming increasingly diverse. The industry is therefore likely to adapt its services and offerings to meet the specific needs and expectations of growing client groups. UBS strives to become the preferred wealth manager of these clients through its active segment management strategy. This includes bespoke product offerings, such as UBS Unique, which focuses on improving female client satisfaction. Additionally, we offer wealth planning expertise that is supported by dedicated intergenerational wealth transfer services for all segments, such as Great Wealth for ultra high net worth clients.

 

19


Operating environment and strategy
Current market climate and industry trends

Retirement funding

Over recent years, the pension industry has faced two key challenges: fundamental demographic shifts, such as aging populations, and lower expected returns.

Beyond structural answers to these challenges, such as the progressive shift from defined benefit to defined contribution pensions, we believe pension funds are reassessing their asset allocation approach. Indeed, many pension funds are now allocating a higher share of their portfolios to alternative investments such as private equity, hedge funds, real estate and infrastructure in a search for higher-yielding exposures.

We see this development as positive for UBS as these funds will likely need further support to define their investment strategy and target portfolio allocation. In addition, our private banking and wealth management clients are expected to need further financial and retirement planning advice, which we are able to provide holistically through our wealth planning services.

Digitalization

Technology is transforming the way banks operate and is expected to remain the key change driver for the financial industry in the years to come. While IT spend used to be considered a means to make banks more efficient, it has now become an imperative to stay relevant in the face of competition from other banks as well as non-traditional financial services providers.

Banks are increasingly leveraging digital technology to provide a more compelling client experience. Additionally, client advisors benefit from integrated IT solutions that reduce the time required for administrative tasks and increase capacity for value-adding activities for clients and for UBS.

We believe that technology-driven changes in bank operations will allow efficiency gains through automation. Technologies such as artificial intelligence and robotics can be used to automate selected back- and middle-office processes, thus reducing error rates and increasing efficiency.

Consolidation

We expect further consolidation in the financial services industry. In many regions and business areas, there are many small players and, as a result, the search for scale and cost efficiencies will be a key M&A driver in such markets. Additionally, many banks are seeking exposure to regions with attractive growth profiles, such as Asia and emerging markets, through local acquisitions. Lastly, the increased focus on core capabilities or geographical footprints and the ongoing simplification of operating models to decrease operational and compliance risks should also lead to asset sales.

New competitors

Our competitive environment is also evolving. In addition to our traditional competitors in the asset-gathering businesses, new entrants, including fintechs and other companies targeting selected components of the value chain, present new competitive challenges. A fundamental unbundling of the value chain and client relationships, ultimately resulting in the disintermediation of banks by fintechs or other competitors, has not yet materialized. Over the longer term, we believe the entry of large platform companies into the financial services industry could result in a significant competitive threat due to their strong franchise and access to a large base of clients and client data.

Regulation

The flow of new regulations has been gradually slowing and there has been initial movement to reduce some of the regulatory burdens, primarily in the US. Nevertheless, a number of post-financial crisis reforms, such as the Basel III finalization, are expected to continue to increase risk-weighted assets. Additionally, the revised Markets in Financial Instruments Directive (MiFID II) will have an impact on the way we do business. The investor protection component of MiFID II requires us to review suitability and appropriateness and enhance transparency toward clients with extended disclosures, e.g., on costs and charges, and reporting. The market structure component of MiFID II will lead to increased pre- and post-trade transparency requirements across a broad range of asset classes, including derivatives and bonds, in addition to enhanced record-keeping and transaction reporting obligations.

Over the past years, we have adapted our business model and believe that we are well positioned to operate efficiently while absorbing upcoming changes to the regulatory environment.

®   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 an international footprint, we are also regulated and supervised by the relevant authorities in each of the jurisdictions where we conduct business, including the US, the UK and other member states 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 a systemically relevant bank (SRB) in Switzerland, we are subject to more rigorous regulatory requirements and supervision than most other Swiss banks. Since the financial crisis of 2008, regulation of financial services firms has been undergoing significant changes globally. These changes, which continue to require significant resources to implement, have had a material effect on how we conduct our business and have led to increased costs.

®   Refer to the “Our evolution” 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 prudential supervision and mandates audit firms to perform on its behalf a regulatory audit and certain other supervisory tasks.

Liquidity and capital adequacy

As an internationally active Swiss SRB, we are subject to capital and total loss-absorbing capacity requirements, which are based on both risk-weighted assets and leverage ratio denominator and are among the most stringent in the world. We are also required to maintain a minimum liquidity coverage ratio of high-quality liquid assets to estimated stressed short-term net cash outflows. Following the postponed implementation of the net stable funding ratio requirements and subject to finalization of
the rules, we will be required to maintain a minimum net stable funding ratio.

®   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

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 our 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 provisions require Swiss SRBs, including UBS, to put in place a viable emergency plan to preserve the operation of systemically important functions in case of a failure of the institution. 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, we have invested significantly in structural, financial and operational ring-fencing measures to improve the Group’s resolvability.

Regulation and supervision outside Switzerland

Regulation and supervision in the US

In the US, UBS is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (Federal Reserve Board) under a number of laws. UBS Group AG and UBS AG are both subject to the Bank Holding Company Act as foreign banking organizations, under which the Federal Reserve Board has supervisory authority over our US operations. Furthermore, our US operations are subject to oversight by the Federal Reserve Board’s Large Institution Supervision Coordinating Committee, which coordinates supervision of large or complex financial institutions.

 

21


Operating environment and strategy
Regulation and supervision
 

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

UBS Americas Holding LLC, the intermediate holding company for our non-branch operations in the US as required under the Dodd-Frank Act, is subject to requirements established by the Federal Reserve Board related to risk-based capital, liquidity, the Comprehensive Capital Analysis and Review (CCAR) stress testing and capital planning process, resolution planning and governance. Beginning in 2018, the Federal Reserve Board will publish its CCAR assessment for UBS Americas Holding LLC and other large foreign banking organizations subject to CCAR.

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

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

Regulation and supervision in the UK

Our regulated operations in the UK are mainly subject to the authority of the Prudential Regulation Authority (PRA), which is part of the Bank of England, and the Financial Conduct Authority (FCA). We are also subject to the rules of the London Stock Exchange and other securities and commodities exchanges of which UBS AG and UBS Limited are members.

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 businesses.

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

In addition, our regulated subsidiaries in the UK that provide asset management services are authorized and regulated mainly by the FCA, with one entity being also subject to the authority of the PRA.

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 as a result of the UK’s decision to leave the EU.

 


Regulation and supervision in Germany

UBS Europe SE, headquartered in Frankfurt, Germany, is prudentially supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority – BaFin) and subject to EU and German laws and regulations. In addition to Germany, UBS Europe SE has branches in Austria, Denmark, Italy, Luxembourg, Spain and Sweden and it is subject to conduct supervision by local authorities in all of these countries. An additional branch in the Netherlands is currently being wound down.

Anti-money laundering and anti-corruption

Combating money laundering and terrorist financing has been a major focus of government policy relating to financial institutions in recent years. 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 reputation risk.

Additionally, we are subject to laws and regulations in jurisdictions in which we operate prohibiting corrupt or illegal payments to government officials and others, including the US Foreign Corrupt Practices Act and the UK Bribery Act. 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 General Data Protection Regulation (GDPR), which provides significant new data protection, and laws of other jurisdictions.

If implemented as proposed, we will become subject to the revised Swiss data protection law (Swiss Federal Act on Data Protection), which seeks to improve data protection for individuals by, among other measures, enhancing the transparency and accountability rules applicable to companies processing data. This change in the law would align Swiss data regulation with revised European legislation, including the EU GDPR, and is intended to ensure the equivalence necessary for the continued cross-border transmission of data. We expect the revised law to take effect in 2019.

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

  

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Regulatory and legal developments

Significant tax law changes enacted in the US

In December 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. The act includes a reduction in the federal corporate tax rate to 21% from 35%. The rate reduction resulted in a CHF 2.9 billion net write-down in the Group’s deferred tax assets (DTAs) in the fourth quarter of 2017. The net decrease in DTAs had a negligible impact on our fully applied CET1 capital.

The TCJA also introduced a new minimum tax regime, referred to as the base erosion and anti-abuse tax (BEAT), which targets US businesses benefiting from deductible payments made to non-US related parties. The BEAT rate, which is 6% for banks in 2018, increasing to 11% in 2019 and to 13.5% in 2026, applies if BEAT, calculated on a modified taxable income base, is higher than the regular federal corporate tax in a given year. We currently expect that BEAT could increase our current tax expense by up to CHF 60 million in 2018. We are considering options to mitigate its effects and awaiting guidance from the US Department of Treasury on key aspects of the new tax law. Additionally, the enactment of the TCJA, and the narrowing of the window between the end of the forecast period and the expiry of our US net operating losses, may lead us to review our approach to periodically remeasuring our US DTAs and the timing for recognizing deferred tax in our income statement. For 2018, we currently forecast a full-year tax rate of approximately 25%, including the effects of BEAT, and excluding the effects from any periodic remeasurement of DTAs and any change in the manner in which we remeasure DTAs.

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


US Department of Labor fiduciary rule becomes effective

Following various delays, the US Department of Labor (DOL) fiduciary rule became effective on 9 June 2017. Since then, UBS has been operating under the rule, which expands the circumstances that cause a person to become a fiduciary subject to the Employee Retirement Income Security Act of 1974 (ERISA) in relation to corporate and individual retirement plans. Under ERISA, UBS is required to adhere to strict standards of prudence and loyalty when dealing with affected retirement accounts and is prohibited from entering into transactions where there is a conflict of interest unless an exemption applies. Exemptions applicable to our wealth management business in the US under the rule require compliance with impartial conduct principles. Moreover, the exemptions require compliance with significant additional technical conditions. In November 2017, the DOL extended the transition period and delayed the applicability of these technical conditions to 1 July 2019 while it continues to consider potential changes to the exemptions. Absent further changes to the rule, we would be required to make significant investments in order to comply with these technical conditions.

Swiss corporate tax reform

Following the rejection of the Swiss corporate tax reform by popular referendum in February 2017, the Swiss Federal Council consulted on a revised proposal from September to December 2017. The new proposal has been modified in response to the referendum outcome, while maintaining the overall objective of the original reform proposals, seeking to align the respective cantonal corporate tax regimes with international standards by, among other things, eliminating reduced holding company tax rates and other privileges. The final proposal by the Federal Council is expected to be submitted to the Swiss Parliament in spring 2018. The effect of the proposed reform on UBS will depend on the final federal legislation and the subsequent cantonal implementation.

 

23


Operating environment and strategy
Regulatory and legal developments

Financial services regulation

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 non‑cleared over-the-counter (OTC) derivative transactions (margin rules). Margin rules for the largest counterparties have been in effect in major jurisdictions since early 2017, with phase-in periods, by counterparty size, lasting through 2020. In September 2018, initial margin requirements will apply to the next group of counterparties (phase 3) in the US, the EU, Switzerland, Japan and other major jurisdictions in Asia Pacific. These requirements, along with differences in the timing of implementation across jurisdictions, will likely continue to require ongoing operational effort by us and our clients.

Developments related to the implementation of MiFID II / MiFIR

In the EU, the revised Markets in Financial Instruments Directive and the associated Regulation (MiFID II / MiFIR) took effect on 3 January 2018. MiFID II, among other things, introduces substantial new regulation of exchanges and trading venues, including new pre-trade and post-trade transparency requirements, a ban on the practice of using commission on transactions to compensate for research services and substantial new conduct requirements for financial services firms when dealing with clients.

In December 2017, the European Commission made equivalence determinations for trading venues in Switzerland, the US, Australia and Hong Kong. The equivalence decisions were necessary to permit EU-domiciled institutions and clients to continue to execute transactions on non-EU-domiciled trading venues. The Swiss equivalence decision is limited to one year and is linked to the progress of negotiations on the future establishment of an EU-Swiss institutional agreement. Compliance with the new requirements has required significant investment and changes to operations for us, our clients and other financial services firms. Given the scale of the change and, in some cases, the short time between finalization of requirements and the effective date, we expect that the changes introduced by MiFID II will result in changes to relevant markets and businesses, which may include a reduction in commission rates and trading margins. We continue to assess the effect on our businesses, in particular the requirement to price research and execution services separately, and whether these changes affect the timing of recognition of certain fee income

Developments related to LIBOR benchmarks and other benchmarks and reference rates

Efforts to transition from the London Interbank Offered Rate (LIBOR) benchmarks to alternative benchmark rates are under way in several jurisdictions. The UK Financial Conduct Authority announced in July 2017 that it will not intervene beyond 2021 to sustain LIBOR and urged users to plan the transition to alternative reference rates. In April 2017, the Working Group on Sterling Risk-Free Reference Rates selected the Sterling Overnight Index Average as the recommended British pound risk-free rate. In the US, the Alternative Reference Rates Committee has recommended a broad Treasuries repo financing rate as the new US dollar secured risk-free rate, which is expected to be available in 2018. The Federal Reserve Bank of New York has launched a consultation on the construction of this and two other Treasury repurchase agreement-derived rates. The European Central Bank (ECB) has also recently announced its decision to develop, before 2020, a euro unsecured overnight interest rate based on transaction data already reported to the ECB by banks.

From 1 January 2018, the EU Benchmarks Regulation (EBR) became fully applicable. The EBR regulates the administration of, contribution to and usage of benchmarks falling within the scope of the regulation. The regulation covers benchmarks on interest rates, currencies, securities, commodities and indices as well as on other reference prices.

UBS has significant contractual rights and obligations referenced to LIBOR and other benchmark rates. Discontinuance of, or changes to, benchmark rates as a result of these developments or other initiatives or investigations, as well as uncertainty about the timing and manner of implementation of such changes or discontinuance, may require adjustments to agreements that are referenced to current benchmarked rates by us, our clients and other market participants as well as to our systems and processes.

 

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Developments related to recovery and resolution

A number of developments have further shaped the regulatory framework on recovery and resolution for banks.

In Switzerland, FINMA published a partial revision of its Banking Insolvency Ordinance, which became effective on 1 April 2017. The amendments require banks to include a contractual acknowledgment of FINMA’s ability to temporarily postpone the exercise of remedies against banks in financial contracts that are subject to foreign laws or foreign places of jurisdiction. Such postponement is intended to ensure the continuation of key contractual relationships without interruption in crisis situations. According to the revised ordinance, contracts entered into by non-Swiss entities within a group will only be subject to the rule if the respective financial contract was guaranteed or otherwise secured by a bank or securities dealer domiciled in Switzerland. In addition, FINMA has granted exceptions for contracts with individuals and extended the implementation period to April 2018 for contracts with banks and securities dealers, and to October 2018 for contracts with other counterparties.

In November 2017, similar rules on resolution stays were published In the United States by the Office of the Comptroller of the Currency. The rules address concerns relating to the exercise of default rights in financial contracts that could interfere with the orderly resolution of systematically important financial institutions.

In the UK, in July 2017, the Bank of England (BoE) consulted on its policy for setting minimum requirements for own funds and eligible liabilities (MREL) within groups. It proposes to require internal MREL at between 75% and 90% of the Pillar 1 external MREL requirement, which will be phased in between 1 January 2019 and 1 January 2022. The BoE also proposes to take into account the equivalent requirements used in other jurisdictions, which could result in a required internal MREL level at the higher end of the range. We expect that UBS Limited will be subject to these requirements. In addition, firms would need to hold loss-absorbing capacity for operational continuity for each provider of critical services within the group calibrated at 25% of total operating costs. This proposal could apply to a number of UBS entities in different jurisdictions that provide services to UBS Limited and is expected to take effect on 1 January 2019. The exact impact of these changes can only be determined once the BoE finalizes its policy.


In November 2017, the Financial Stability Board opened consultations on bail-in execution and on funding in resolution. The consultation on bail-in proposes principles to make resolution strategies operational, including disclosures on the instruments and liabilities within the scope of bail-in, the valuation process, governance issues and market and creditor communications. The consultation on funding in resolution proposes guidelines to support the monitoring, reporting and estimation of funding needs in resolution and to facilitate execution of the funding strategy.

Changes to the Swiss prudential regulatory framework

Regulators made further changes to strengthen the Swiss prudential regulatory framework and to align it with Basel IIII rules. Based on the biennial review of systemically important banks (SIBs) concluded in June 2017, the Swiss Federal Department of Finance (FDF) initiated a consultation in February 2018, proposing the introduction of gone concern requirements for domestically focused SIBs. These requirements would be conceptually similar to those in effect since July 2016 for the two largest Swiss banks, including UBS. However, they would be limited to 40% of the going concern capital requirements, would be phased in over seven years and could be met by a cantonal guarantee or similar mechanism.

In February 2018, the Swiss Federal Council proposed amendments to the participation relief provisions under current Swiss tax law that, if enacted, would reduce the additional tax burden on debt issuances by bank top holding companies. The proposed tax law changes would permit SIBs, such as UBS, to issue debt directly from their holding companies, as is contemplated under the international capital framework and the Swiss Capital Adequacy Ordinance, without incurring significant corporate tax disadvantages, as is the case today under Swiss tax law. As a next step, the proposal will be subject to debate in the Swiss Parliament.

 

25


Operating environment and strategy
Regulatory and legal developments

Separately, Switzerland has been moving ahead with the implementation of existing Basel Committee on Banking Supervision (BCBS) standards. In October 2017, FINMA issued a consultation on the implementation of changes to Basel III rules, covering interest rate risk in the banking book, disclosure requirements, credit risk and eligible capital. These changes are expected to take effect on 1 January 2019. Also, the Swiss Federal Council adopted revisions to the Capital Adequacy Ordinance that will introduce a more restrictive treatment of risk concentrations. From 1 January 2019, risk concentration limits for exposures with global systemically important banks will be lowered and calculated on the basis of tier 1 capital, excess capital will no longer be able to be used to compensate for exposures above the limit and the standardized approach for calculation of exposures will be required. In addition, direct and indirect exposures will need to be aggregated at counterparty level.

Swiss Federal Council proposes changes to the depositor protection scheme

In February 2017, the Swiss Federal Council proposed changes to the Swiss depositor protection scheme. The proposed changes include introducing a target level for depositor protection, set at 1.6% of the value of the protected deposits in the Swiss financial system, using the current cap of CHF 6 billion as a floor, and significantly shortening the time within which payments to depositors must be made in the event of a bank insolvency. These changes would replace the current requirement that each bank has to hold 50% of its commitment to the depositor protection scheme as high-quality liquid assets with a requirement to pledge collateral equal to 50% of its commitment. The Federal Council also intends to issue new rules for banks to segregate custody assets from own assets through the entire domestic custody chain. The proposed changes may require UBS to make adjustments to operational processes and funding. The FDF is expected to issue a draft consultation by the end of August 2018.


Finalization of the Basel III capital framework

In December 2017, the BCBS announced the finalization of the Basel III reforms. The most significant changes include:

   placing floors on certain model inputs under the internal ratings-based (IRB) approach to calculate credit risk risk-weighted assets (RWA);

   requiring the use of standardized approaches for calculation of credit valuation adjustment and for operational risk RWA;

   placing an aggregate output floor on the Group RWA equal to 72.5% of the RWA calculated using a revised standardized approach; and

   revising the leverage ratio denominator (LRD) calculation and introducing a leverage ratio surcharge for global systematically important banks.

 

The revised standards will take effect from 1 January 2022, with a phase-in period of five years for the aggregate output floor.

We currently estimate that the introduction of the revised Basel III framework will likely lead to a net increase in RWA of around CHF 35 billion, before taking into account mitigation actions. These estimates are based on our current understanding of the relevant standards and may change as a result of new or changed regulatory interpretations, implementation of the Basel III standards into national law, changes in business growth, market conditions and other factors. We will update our common equity tier 1 (CET1) ratio guidance when further details on the implementation of the final Basel III standards become available.

In addition, over the next three years, as a result of other known regulatory changes and estimated business growth, we estimate our RWA may increase by around CHF 40 billion and our LRD may rise by around CHF 85 billion. Actual increases may vary depending on growth opportunities, market conditions and mitigation actions. As a consequence, and based on the estimates above, we may build approximately CHF 4 billion of additional fully applied CET1 capital over the next three years, subject to market conditions, as well as RWA and LRD development.

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

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

 

  

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Significant accounting and financial reporting changes in 2018

IFRS 9, Financial Instruments

We adopted IFRS 9, Financial Instruments from 1 January 2018. IFRS 9 imposes expected credit loss (ECL) requirements that change the accounting and reporting for the majority of our credit exposures. Additionally, IFRS 9 introduces new classification and measurement guidelines that require a consideration of the contractual cash flow characteristics of financial assets and the associated business models under which we operate, and eliminate, among other things, the previous accounting and reporting treatment of investments classified as available for sale and held to maturity.

We also early adopted the Amendment to IFRS 9, Prepayment Features with Negative Compensation, which allows us to continue to apply amortized cost accounting to Swiss private mortgages and corporate loans that provide for two-way compensation if a prepayment occurs. We did not adopt the optional IFRS 9 hedge accounting requirements pending completion of the International Accounting Standards Board’s (IASB) project on macro hedge accounting strategies.

We will recognize the estimated pre-tax transition impact from adopting IFRS 9 of approximately CHF 0.7 billion, as well as a tax credit of CHF 0.1 billion, as a CHF 0.6 billion reduction in our IFRS consolidated equity as of 1 January 2018, which will be reflected in our first quarter 2018 report. Approximately half of this amount is attributable to mark-to-market adjustments on certain loans and securities that no longer qualify for amortized cost accounting due to their cash flow characteristics or underlying business model. These instruments will now be measured at fair value through profit or loss under IFRS 9. The remainder of the reduction results from recognizing ECL, primarily on financial assets measured at amortized cost, financial guarantees and loan commitments.

Our fully applied common equity tier 1 (CET1) capital is expected to be reduced by approximately CHF 0.3 billion as of 1 January 2018, predominantly due to the reclassification of certain loans and securities from amortized cost to fair value through profit or loss, with no material impact on our capital ratios.

®   Refer to “Note 1c International Financial Reporting Standards and Interpretations to be adopted in 2018 and later and other changes” in the “Consolidated financial statements” section of this report for more information

Transition

IFRS 9 is a key strategic initiative for UBS and has been implemented under the joint sponsorship of the Group Chief Financial Officer and the Group Chief Risk Officer. As part of our implementation program, we have performed an assessment of the population of financial instruments impacted by the classification and measurement requirements of IFRS 9 and developed an impairment methodology to support the calculation of the ECL allowance.

Our ECL calculation, including the processes to derive appropriate forward-looking information, and the related reporting processes and controls have been tested through parallel runs.

Detailed transition disclosures, including a full reconciliation on the changes arising from adopting IFRS 9, will be provided in our first quarter 2018 report.

Classification

IFRS 9 requires all financial assets, except equity instruments, to be classified at amortized cost, at fair value through other comprehensive income (OCI) or at fair value through profit or loss, based on the business model for managing the respective assets and their contractual cash flow characteristics.

Expected credit losses

IFRS 9 introduces a forward-looking ECL approach, which is intended to result in an earlier recognition of credit losses compared with the incurred-loss impairment approach for financial instruments under IAS 39, Financial Instruments: Recognition and Measurement and the loss-provisioning approach for financial guarantees and loan commitments under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The new impairment model applies to financial assets measured at amortized cost, investments in debt instruments measured at fair value through OCI, lease receivables, loan commitments and financial guarantee contracts that are not measured at fair value through profit or loss. The majority of the ECL calculated as of the transition date relates to our private and commercial mortgage portfolio in Switzerland within our Personal & Corporate Banking division. Under IFRS 9, a maximum 12-month ECL must be recognized from initial recognition on in-scope instruments, referred to as instruments within stage 1. Lifetime ECL must be recognized if a significant increase in credit risk (SICR) arises after the instrument was originally recognized, referred to as instruments in stage 2, or if the instrument is credit impaired, referred to as instruments in stage 3.

Measurement of expected credit losses

The methodology we apply to calculate an individual probability-weighted unbiased ECL in line with IFRS 9 is aligned with the complexity, structure and risk profile of relevant portfolios and 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 to the reporting date, with respective parameters generally determined on a transaction basis.

 

27


Operating environment and strategy
Significant accounting and financial reporting changes in 2018

PDs and LGDs used in the IFRS 9 ECL calculation are point in time (PIT) based. To derive the PIT-based parameters, we leverage our existing Pillar 1 internal ratings-based (IRB) models and Pillar 2 stress loss models. We make certain necessary adjustments to account for current conditions and to incorporate forward-looking economic information, which includes 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, are removed.

We have selected a range of scenarios (upside, baseline, mild downside, and downside) to capture material non-linearity and asymmetries between different possible forward-looking scenarios and associated credit losses, and we apply scenario weights to reflect the likelihood of their occurrence. We have aligned our baseline scenario selection with the baseline used for business planning purposes.

For ECL calculation purposes, we consider the maximum contractual period over which we are exposed to credit risk, taking into account the respective counterparty’s contractual extension, termination and prepayment options. For certain 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 therefore this longer period is used within the ECL calculation.

Determination of a significant increase in credit risk

Qualitative and quantitative criteria are used to determine whether the credit risk on an instrument has significantly increased from the date of initial recognition, with the primary assessment based on a comparison of the annualized forward-looking and scenario-weighted lifetime PIT-based PDs at inception of the instrument, and at the reporting date. This assessment is made at an individual financial asset level, with specific criteria and thresholds applied based on the applicable portfolio. Qualitative factors are additionally considered, including internal indicators of credit risk such as days-past-due information, external market indicators of credit risk and general economic conditions. We generally consider that an SICR occurs no later than when the asset is 30 days past due.

Lombard loans, securities financing transactions and certain other asset-based lending transactions that are subject to daily risk management and monitoring processes with strict margining requirements are not subject to the SICR determination process given the transactions are closed out immediately if margin calls are not satisfied, whereupon they move directly from stage 1 into stage 3 as defaulted positions.


Governance

The incorporation of forward-looking information in the ECL calculation and the definition and assessment of what constitutes an SICR are inherently subjective and involve the use of significant judgment. Therefore, we have developed a front-to-back governance framework over the ECL calculation process jointly owned by the Group Chief Financial Officer and the Group Chief Risk Officer and have designed controls to be in compliance with the requirements of the Sarbanes-Oxley Act.

Our economists, risk methodology personnel and credit risk officers are involved in developing the forward-looking macroeconomic assumptions used in the ECL calculation. Assumptions and scenarios are validated and approved through a scenario committee and an operating committee, which have been established as part of a new governance process. This process also facilitates a consistent use of forward-looking information throughout UBS, including in our business planning process. New models have been approved as part of our existing model validation and oversight processes. Governance has also specifically been established around the SICR decision process given management judgment is required. We test ECL and SICR inputs in a controlled environment and determine sensitivities with a risk simulation engine.

Group regulatory capital and IFRS 9

The table on the next page sets out key differences in the scope and factors applied in determining expected losses (EL) under the current Basel III advanced internal ratings-based approach and those 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

 

In March 2017, the Basel Committee on Banking Supervision (BCBS) finalized guidance on an interim approach for the regulatory treatment of accounting provisions and defined standards for transitional arrangements, following the introduction of IFRS 9. The BCBS confirmed that for an interim period the current treatment of accounting provisions, under both the standardized approach and the IRB approach, should continue to be applied until the longer-term treatment is confirmed. The BCBS recommended that jurisdictions issue guidance to categorize new accounting provisions as general provisions or specific provisions for regulatory purposes. Additionally, jurisdictions may implement transitional arrangements to spread the adoption impacts over time, using either a static or a dynamic approach, including limiting the transition period to a maximum of five years. The consultation period on the related FINMA guidance ended on 31 January 2018. It includes the option of phasing the initial effect of adopting the new accounting provisions into regulatory capital, using a static approach. The final guidance is expected to be published during 2018 with an effective date of 1 January 2019.

 

 

28


 

Comparison of IFRS 9 ECL with Basel III EL

 

 

Basel III (advanced internal ratings-based approach)

IFRS 9

Scope

The Basel III advanced internal ratings-based (A-IRB) approach 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 OCI, including loan commitments and financial guarantees.

The IFRS 9 expected credit 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 expected losses resulting from expected default events occurring within the next 12 months.

In the absence of an SICR event, a maximum 12-month ECL is recognized to reflect lifetime cash shortfalls that will result if a default event occurs in the 12 months after the reporting date (or a shorter period if the expected lifetime is less). Once an SICR event has occurred, a lifetime ECL is recognized considering expected default events over the life of the transaction.

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, irrespective of the actual maturity of a particular transaction. The credit conversion factor includes downturn adjustments.

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 life of the transaction, 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 life of the transaction without including downturn assumptions. In both cases the time period is capped at 12 months, unless an SICR has occurred.

Probability of default

(PD)

PD estimates are determined on a through the cycle (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.

 

IFRS 9 and our significant regulated subsidiaries and sub-groups

FINMA’s plan to implement ECL under Swiss GAAP has been deferred. We will continue to apply the incurred loss model in the UBS AG standalone and UBS Switzerland AG standalone financial statements, which are prepared in accordance with Swiss GAAP (FINMA Circular 2015 / 1 and the Banking Ordinance).

UBS Limited prepares standalone financial statements in accordance with IFRS, and adopted IFRS 9 on 1 January 2018.

UBS Americas Holding LLC expects to early adopt Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments on 1 January 2020 for its consolidated financial statements to align with the mandatory effective date for some of its subsidiaries.

IFRS 15, Revenue from Contracts with Customers

We adopted IFRS 15, Revenue from Contracts with Customers from 1 January 2018. The new standard will affect when certain revenue can be recognized, with some performance-based fees in Asset Management and research revenues in the Investment Bank deferred until it is certain that the fee has been earned. In addition, IFRS 15 requires a change to the presentation of certain revenues and expenses in the income statement, with enhanced disclosures. The cumulative effect of initially applying the standard will be recognized as an adjustment to our IFRS consolidated equity as of 1 January 2018 and, as permitted by the standard, we will not restate prior-period information. The transition effect will not be material and we also do not expect a material effect on the Group’s annual revenues and expenses going forward.

Potential change of functional and presentation currency

In light of cumulative changes in our legal structure, business activities and evolving changes to our structural currency management strategy, we anticipate that during the second half of 2018 we may conclude under IAS 21, The Effects of Changes in Foreign Exchange Rates, that the functional currency of UBS Group AG and UBS AG’s Head Office in Switzerland will change from Swiss francs to US dollars, and the functional currency of UBS AG’s London Branch operations will change from British pounds to US dollars, where such changes would be made on a prospective basis. If such determinations are made, we would also expect to change the presentation currency of UBS Group AG’s consolidated and UBS AG’s consolidated financial statements from Swiss francs to US dollars, with prior periods restated. Assets, liabilities and total equity would be converted to US dollars at historic closing rates prevailing on the respective balance sheet dates. No material changes are expected to our capital ratios nor are material changes expected to our other key performance indicators.

  

29


Operating environment and strategy
Our strategy

Our strategy

Who we are

The world’s largest and only truly global wealth manager

Our strategy is centered on our leading Global Wealth Management business 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. We have a strong presence in the largest market, the United States, and a leading position in the fastest-growing regions, including Asia Pacific and the other emerging markets. Our wealth management business benefits from significant scale in an industry with attractive growth prospects and increasingly high barriers to entry, and from its 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 of our business lines: wealth management, personal & corporate banking, asset management and investment banking. Our leading position in our home market is central to UBSs global brand and profit stability. The partnership between our wealth management business and our other business divisions 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. We are well positioned to meet the fully applied Swiss too big to fail capital and total loss-absorbing capacity requirements when they become effective on 1 January 2020. Our capital-accretive and capital-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 (excluding deferred tax expense / benefit and deferred tax assets) of around 15% in normal market conditions.

We have an attractive and flexible capital returns policy

Our earnings capacity and capital efficiency support our objective to deliver sustainable and increasing capital returns to our shareholders. We aim to increase our ordinary dividend per share at a mid-to-high single-digit percent per annum. We may also return excess capital, after accruals for ordinary dividends, most likely in the form of share repurchases, after considering our outlook and subject to regulatory approval.


Our priorities

1. Drive profitable growth in Global Wealth Management

In Global Wealth Management, we target 10–15% adjusted profit before tax growth annually over the cycle, while growing net new money at 2–4% per annum and aiming to operate within an adjusted cost / income ratio range of 65–75%. The creation of the integrated business division on 1 February 2018 aims to further enhance the client experience and our product offering in line with an increasingly global client base. We expect to more effectively capture the purchasing power of Global Wealth Management’s CHF 2.3 trillion invested asset base and generate greater synergies across technology, innovation and other areas of investment. Regional variations in the client service model will be maintained, while middle- and back-office functions will be more closely aligned and integrated.

2. Maintain focused leadership and grow profits in Asset Management, Investment Bank and Personal & Corporate Banking

Our strength in Global Wealth Management also relies on the stand alone strength of our other businesses. Together, they make a significant contribution to earnings, diversify revenues and generate high-quality returns.

3. Enhance diversification by capturing superior growth in Asia Pacific and the Americas, leverage our Europe, Middle East and Africa capabilities and reinforce our leadership position in Switzerland

From a geographic standpoint, we aim to grow in the Americas and to reinforce leadership in our home market in Switzerland. In Europe, Middle East and Africa, we want to leverage our capabilities to grow our market share during likely consolidation. Asia Pacific, and particularly China, presents a significant growth opportunity, given the economic expansion and rate of increase in the number of billionaires. UBS’s competitive position in Asia Pacific is strong and we are well positioned to capture opportunities in the region across our businesses.

4. Invest in technology with a focus on superior client experience, product capabilities, efficiency and effectiveness

We will continue to invest in technology to drive growth, better serve our clients and improve efficiency and effectiveness. We intend to secure our position as a leader in the digital age by maintaining expenditure on technology of at least 10% of the Group’s revenues for the foreseeable future.

 

 

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Performance targets and capital guidance 2018–2020

The table below shows our performance targets and capital guidance for the Group and the business divisions for the 2018–2020 period. The targets and guidance reflect what we believe can be achieved in normal market conditions.

All targets are measured on an annual basis, except our adjusted profit before tax growth targets for Global Wealth Management and Asset Management, which represent the average annual growth we aim to deliver over the cycle.

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

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

®   Refer to the “Risk factors” section of this report for more information on factors that may affect our ability to deliver on our strategy

 

 

 

 

 

Cost / income ratio1

Profitability and growth1

Capital and resource guidance

Group

<75%

~15% RoTE excluding DTAs2

~13% common equity tier 1 capital ratio3

~3.7% common equity tier 1 leverage ratio3

Global Wealth Management

65–75%

10–15% pre-tax profit growth4

 

2–4% net new money growth

 

Personal & Corporate Banking

50–60%

1–4% net new business volume
(personal banking)

 

 

150–165 bps net interest margin

 

Asset Management

60–70%

~10% pre-tax profit growth4, 5

 

3–5% net new money growth,
excluding money market flows

 

Investment Bank

70–80%

>15% RoAE6

RWA and LRD around one-third of the Group total7

1 Annual targets; cost / income ratio, pre-tax profit growth and return targets are on an adjusted basis.    Return on tangible equity (RoTE) excluding deferred tax expense / benefit and deferred tax assets (DTAs); calculated as adjusted net profit / loss attributable to shareholders excluding deferred tax expense / benefit, such as the net write-down due to the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017, divided by average tangible equity attributable to shareholders excluding any DTAs that do not qualify as fully applied CET1 capital.    Based on fully applied CET1 capital.    4 Over the cycle.    5 Excluding the impact of business exits.    Return on attributed equity.    Including risk-weighted assets (RWA) and leverage ratio denominator (LRD) directly associated with activity that Corporate Center – Group ALM manages centrally on the Investment Bank’s behalf; proportion may fluctuate around this level due to factors such as equity market levels and FX rates.

 

  

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Operating environment and strategy
Measurement of performance

Measurement of performance

Performance measures

Key performance indicators

The Group and business divisions are managed on the basis of a key performance indicator (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 2018

We reviewed our performance targets and KPI framework in January 2018, taking into account the developments in the regulatory environment and the achievement of our CHF 2.1 billion net cost reduction target by the fourth quarter of 2017. We will introduce “Common equity tier 1 leverage ratio (%)” as a KPI for the Group alongside the existing “Going concern leverage ratio (%)” KPI. The existing “Return on tangible equity (RoTE) (%)” KPI will be complemented by “RoTE excluding deferred tax assets (RoTE ex DTAs) (%).”

“Gross margin on invested assets (bps)” for the Group, Wealth Management and Asset Management will be removed from the KPI framework as this will no longer be used as a strategic steering metric. Cost control will remain in focus through the cost / income ratio, which remains a KPI and performance target for the Group and all business divisions.

From 1 February 2018, performance targets and KPIs for Wealth Management and Wealth Management Americas were merged and are reported for the Global Wealth Management business.

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2017 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 (%)1

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) (%)2

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) (%)2

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

 

 

 

 

 

l

Going concern leverage ratio (%)3

Total going concern capital / leverage ratio denominator as of period end

l

 

 

 

 

 

Common equity tier 1 capital ratio (%)3

Common equity tier 1 capital / risk-weighted assets as of period end

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)2, 4

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

 

l

l

 

l

 

Net margin on invested assets (bps)2

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

 

 

Cost reduction4

Net exit rate cost reduction

l

 

 

 

 

 

1 Excluding the impact of business exits, for Asset Management only.    2 Denominator based on a five-point average of quarter-end values with the beginning and end values weighted with a factor of 0.5 for the full-year calculations and based on a simple average for the quarterly calculations.    3 Based on fully applied CET1 capital.    4 Removed from the key performance indicator framework in 2018.

 

New key performance indicators in 2018

Key performance indicators

Definition

 

Group

Global Wealth Management

Personal & Corporate Banking

Asset Management

Investment

Bank

Return on tangible equity excluding deferred tax assets (RoTE ex DTAs) (%)1, 2

Adjusted net profit attributable to shareholders before amortization and impairment of goodwill and intangible assets and before deferred tax expense / benefit (annualized as applicable) / average equity attributable to shareholders less average goodwill and intangible assets and less average deferred tax assets that do not qualify as fully applied CET1 capital

l

 

 

 

 

Common equity tier 1 leverage ratio (%)3

Common equity tier 1 capital / leverage ratio denominator as of period end

l

 

 

 

 

1 Excluding deferred tax expense / benefit such as the net write-down due to the Tax Cuts and Jobs Act enacted in the fourth quarter of 2017.    2 Denominator based on a five-point average of quarter-end values with the beginning and end values weighted with a factor of 0.5 for the full-year calculations and based on a simple average for the quarterly calculations.    3 Based on fully applied CET1 capital.

 

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Operating environment and strategy
Global Wealth Management

Global Wealth Management

Integration of our wealth management businesses

On 1 February 2018, Wealth Management and Wealth Management Americas were combined into the unified business division Global Wealth Management. The creation of the integrated business division aims to further enhance our superior client experience and product offering in line with an increasingly global client base. Global Wealth Management provides our clients with broader access to more diversified global products and services and an integrated multi-shore offering. Our clients benefit from the scale and insights of a truly global business, while we retain the distinct client service models that we believe are best suited to each of the regions in which we operate. We believe that our platform, combined with a global suite of products and services, bolsters our ability to attract the strongest investment talent, both inside and outside of UBS, to best serve our clients. We want to leverage our scale to generate greater synergies through joint investments in technology, new products, new business lines and our people.

Business

Global Wealth Management provides comprehensive advice and tailored financial services to wealthy private clients around the world. Our clients benefit from the full spectrum of resources that a global firm can offer, including investment management, wealth planning, banking and lending, and corporate financial advice. Our model gives clients access to a wide range of products from the world’s leading third-party institutions that complement our own offerings.

Strategy and clients

We are the global leader in wealth management for private clients, particularly in the ultra high net worth and high net worth segments.

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 core affluent businesses.

Wealth planning, investment management and portfolio construction are at the heart of our offering. We aspire to provide our clients with 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. Where possible, 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 Global Wealth Management and the Investment Bank through the Global Family Office Group.

We continue to invest in our digital capabilities to offer clients a combination of market-leading investment advice tailored to their personal goals and innovative digital service solutions.

We have unique scale and a global footprint with booking centers across the globe. These give us a strong local presence allowing us to serve our clients and book their assets in multiple locations, according to client preferences.

In Asia Pacific, we have further strengthened our position as the largest wealth manager. Capturing growth opportunities in China is central to our strategy. We have accelerated our growth and expanded our business across the region, with a particular focus on Hong Kong and Singapore, as well as onshore markets, for example, Japan, China and Taiwan.

The Americas region covers both North America and Latin America. In North America, we continue to execute on our distinct 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. We continue to execute on our operating model to move decision-making closer to clients, better leverage global capabilities and invest in next-generation technology. We expect these efforts to enable us to achieve higher levels of client satisfaction, strengthen our client relationships, increase productivity of our financial advisors and support the organic growth of our franchise. In Latin America, we continue to leverage our global booking model capabilities. We regularly assess our local presence to ensure proximity to our clients in key markets and to make sure we meet our clients’ needs for global diversification and local offerings. In 2017, we enhanced our presence in Brazil with the acquisition of Consenso Investimentos, the country’s largest independent multi-family office. This transaction demonstrates our long-standing strategic priority to grow in this key market.

In Europe, Middle East and Africa, our Western Europe business has a long-established local presence in all major markets. In 2017, and early 2018, we announced the acquisition of businesses in Europe that are complementary to our strategy. The acquisition will enable us to grow our presence in Europe and further build our position as a key wealth manager for Nordic clients in Europe. In line with our strategy to focus on our main markets, we sold our domestic wealth management operations in the Netherlands in August 2017. Outside Western Europe, we focus on key emerging markets, for example, Russia, Turkey and Israel.

 

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In Switzerland, we collaborate closely with our colleagues in Personal & Corporate Banking, Asset Management and the Investment Bank. This creates opportunities to expand our business through client referrals and generates efficiencies by enabling us to use UBS’s extensive branch network.

We evaluate our performance against key performance indicators and our respective 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 approach to clients focuses on understanding their financial objectives and providing solutions tailored to their individual needs. Clients benefit from a comprehensive set of capabilities and expertise, including wealth planning, investing, lending, protection, philanthropy and corporate and banking services. Investment management is a core component of this value proposition.

Our global Chief Investment Office (CIO) draws on approximately 200 analysts, strategists, and investment professionals present in 10 key financial hubs globally and leverages access to buy-side partners and client networks. Seeking to add alpha to our clients’ portfolios, the CIO provides clear, independent investment views, 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 over generations. We apply it to our clients’ portfolios and asset allocations, and it underpins 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 tactically and ultimately improve the risk and return trade-off potential of their portfolios.

Our Investment Platforms and Solutions (IPS) unit provides clients with portfolio-based investment advice and solutions in line with their overall investment goals. Clients can choose to delegate their investment decisions to our team of investment experts through a discretionary mandate. Those who wish to be more actively involved in their investment activities can choose to receive recommendations on an advisory basis. IPS seeks to ensure 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 across asset classes to investment funds, structured products and alternative investments. Additionally, we offer our clients advice on structured lending and corporate finance.

We continue to develop innovative solutions to help our clients address the challenges of an increasingly complex financial world and to respond to their evolving needs. We have expanded our discretionary mandate solutions to meet specific client needs and preferences. We are also strongly committed to broadening our sustainable and impact investment offering. For example, in 2017, we offered our clients access to the Rise Fund, a private equity impact investment vehicle that aims to achieve measurable, positive social and environmental outcomes combined with competitive financial returns.

®   Refer to the “UBS and Society” section of this report for more information on sustainable investing products and services

Organizational structure

We are organized along regional lines, with our business areas being the Americas, including the US, Canada and Latin America; Europe, Middle East and Africa; Asia Pacific; Switzerland; and the business area for our global ultra high net worth clients.

We are governed by executive, risk and operating committees. In the US and Puerto Rico, we operate primarily through UBS Financial Services Inc. and UBS Financial Services Incorporated of Puerto Rico. Our banking services in the US include those conducted through UBS Bank USA, a Federal Deposit Insurance Corporation-insured depository institution subsidiary, and branches of UBS AG. Canadian wealth management and banking operations are conducted through UBS Bank (Canada). Outside North America and Puerto Rico, we mainly operate through UBS Switzerland AG and UBS AG branches. In Europe, we further operate through UBS Europe SE. We have a presence in more than 40 countries.

Competitors

Our main competitors include the private banking operations of BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Julius Baer, and the large US-based wirehouses Morgan Stanley, Bank of America Merrill Lynch and Wells Fargo, in addition to the banks and independent financial advisors in each market we operate.

 

  

35


Operating environment and strategy
Personal & Corporate Banking

Personal & Corporate Banking

Business

As the leading personal & 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 central to UBS’s universal bank delivery model in Switzerland. We work with the Group’s wealth management, investment bank and asset management businesses to help our clients receive the best products and solutions for their specific financial needs. We are also an important source of growth for these business divisions 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 digital banking offering, we continue to strengthen our position as the leading multi-channel bank in Switzerland.

Strategy and clients

Our strategy focuses on promoting profitable growth while continuously improving our banking services for clients within Switzerland. To achieve this, we have launched Client Experience 2020, our strategic digitalization program, which aims to strengthen our position as the leading universal bank in Switzerland and enhance our digital leadership position.

In the personal banking business, we aspire to be the bank of choice for private clients in Switzerland. Currently, we serve one in three Swiss households through our branch network, customer service centers and digital banking services. We continue to pursue our strategy of moderately and selectively growing our business in high-quality loans and endeavor to expand our multi-channel offering.

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, centered on cash flow-based lending and our strategic advisory and trading business. Additionally, we are selectively expanding our offering at our international hubs to serve Swiss-based corporate clients operating globally. We also assist our Swiss-based corporate clients with sustainability measures, such as the energy check-up offered by the Energy Agency of the Swiss Private Sector (EnAW), that contribute toward enhancing energy efficiency, thereby reducing operating costs.

Our clients value their relationship with us and our efforts to provide them with superior service. In 2017, for the sixth consecutive year, the international finance magazine Euromoney named UBS Best Bank in Switzerland, recognizing our experience, client centricity, focus on innovation, and the quality of our employees. Additionally, and for the seventh consecutive year, UBS was rated Best Domestic Cash Manager Switzerland based on a survey of cash managers and chief financial officers.

Continuous employee development, including client advisor certification, is a crucial element of our divisional strategy, as this is our key to providing superior client service.

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 respective 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

®   Refer to the “UBS and Society” section of this report for more information on sustainable investing products and services

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.

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.

 

36


 

In 2017, we implemented a number of product and service innovations:

   Remote Expert: a videoconferencing tool that allows clients to interact with our product specialists in areas such as trade finance or cash management.

   Improvements to the UBS account opening app: clients can now open an account via smartphone using video identification and use paperless signing with a qualified electronic signature for various services, including credit card applications.

   Liquidity Cockpit: a product that uses specific business software to help small businesses manage their liquidity.

��   KeyPort: a connectivity solution with multi-banking functionality for our midsize and larger corporate clients.

   UBS Atrium: a platform that intermediates between Swiss institutional investors looking to invest in mortgages and owners of investment properties seeking mortgage financing.

 

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


Organizational structure

Our divisional business is organized into Personal Banking and Corporate & Institutional Clients, and is the core of Region Switzerland, which in addition contains Wealth Management Switzerland, the Investment Bank Switzerland and Asset Management Switzerland. The Swiss network includes around 280 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 include 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.

 

  

37


Operating environment and strategy
Asset Management

Asset Management

Business

Asset Management is a large-scale and diversified asset manager, with an onshore presence in 23 countries. We offer investment capabilities and investment styles across all major traditional and alternative asset classes, as well as platform solutions and advisory support, to institutions, wholesale intermediaries and wealth management clients around the world.

Strategy and clients

We aim to drive profitable and sustainable growth in key markets in Europe, Switzerland, the Americas and Asia Pacific, including China, where we continue to expand our long-standing presence. In 2017, Asset Management was granted a Private Fund Management license in China, allowing us to develop and offer onshore investment products for Chinese institutional and high net worth investors, through our wholly foreign-owned enterprise UBS Asset Management (Shanghai) Limited.

To achieve our goals, we seek to strengthen our institutional business and to accelerate the growth of our wholesale business. Collaboration with UBS’s wealth management business to provide best-in-class products and services to meet private clients’ needs continues to be a core component of our strategy.

We have defined our strategic growth and efficiency priorities with an overarching goal to deliver holistic investment and platform solutions to our clients, by leveraging our global reach and investment expertise.

To enable us to better leverage our best investment processes, tools and systems to generate alpha and offer holistic solutions for clients, we brought together our Equities, Fixed Income, Solutions and single-manager hedge fund capabilities in 2017 to create an integrated business area named Investments. We also combined our Global Real Estate, Infrastructure and Private Equity businesses to form a new business area named Real Estate & Private Markets.

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 are committed to integrating sustainability into our active investment capabilities, as part of our ambition to become a leading provider of sustainable solutions for sophisticated clients. We continue to enhance our proprietary sustainability database and toolset and have built a dedicated sustainability research team to work with our investment teams across asset classes.


To capture opportunities presented by the evolving needs of wholesale clients, we are focused on building strategic partnerships and expanding our platforms and advisory support capabilities. With this in mind, in late 2017, we brought together our three Platform Services businesses – Fondcenter, Fund Management Services and UBS Partner – under unified leadership within Client Coverage to best capture the growth opportunities globally and to facilitate closer collaboration across these capabilities.

To support our efforts to increase our operational efficiency, we continue to invest in our operating platform and simplify our organization. Notable developments in this regard are the establishment of a dedicated middle-office services function and the sale of our fund administration servicing units in Luxembourg and Switzerland to Northern Trust in 2017.

We evaluate our performance against key performance indicators and our respective 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

®   Refer to the “UBS and Society” section of this report for more information on sustainable investing products and services

Products and services

We offer clients a wide range of investment products and services in different asset classes, which can be delivered,  directly or through third-party banks and distributors, in the form of segregated, pooled or advisory mandates as well as registered investment funds in various jurisdictions.

Our traditional and alternative capabilities include:

   Equities – global, regional and thematic strategies, as well as high alpha, growth and quantitative styles.

   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.

   O’Connor – a global, single-manager hedge fund platform, offering both multi-strategy and standalone capabilities.

   Real Estate & Private Markets – global and regional real estate equity and debt strategies; direct infrastructure investment in core infrastructure assets globally; and multi-manager real estate, infrastructure and private equity strategies in broadly diversified fund-of-funds portfolios.

   Passive and Alternative Beta – indexed, alternative beta and rules-based strategies across equities, fixed income, commodities, real estate and alternatives, with mainstream to highly customized benchmarks and various structures including ETFs, pooled funds, structured funds and mandates.

 

38


 

   Sustainable & Impact Investing – to meet investors’ financial and sustainability goals, we offer a wide range of sustainable and impact investing strategies across asset classes, from environmental, social and corporate governance integration to impact investing including investment themes such as renewable energy, environmental stewardship, social integration, health care, resource efficiency and demographics.

 

In addition, our Solutions business offers:

   Global and regional asset allocation and currency investment strategies across the risk / return spectrum, including balanced, growth, income, risk-managed, and unconstrained strategies.

   Customized multi-asset solutions, advisory and fiduciary services, including risk-managed and structured strategies, pension risk management and outsourced Chief Investment Office services.

   Multi-manager hedge fund solutions and advisory services, and manager selection for traditional asset classes.

 

Our Platform Services business offers:

   Fondcenter: our leading fund platform in Europe and Switzerland connecting distribution partners with fund providers.

   Fund Management Services: offering fund management company, white-labeling and representative services.

   UBS Partner: our innovative modular platform providing banks with powerful tools and analytics to support their advisory offering and enable them to significantly enhance their end clients’ experience.


Organizational structure

Our business is organized by the products and services we offer, our business areas being: Client Coverage, Investments, Real Estate & Private Markets, Products & Solutions and the Chief Operating Officer area. Our business is driven out of eight main hubs: Chicago, Hong Kong, London, New York, Singapore, Sydney, Tokyo and Zurich. We are governed by executive, risk and operating committees.

Competitors

Our main competitors include global firms with wide-ranging capabilities and distribution channels, such as Amundi, BlackRock, Deutsche Asset Management, Goldman Sachs Asset Management, Invesco, J.P. Morgan Asset Management, Morgan Stanley Investment Management and Schroders. Other competitors include firms with a specific market or asset class focus.

 

  

39


Operating environment and strategy
Investment Bank

Investment Bank

Business

The Investment Bank provides investment advice, financial solutions and capital markets access in over 35 countries, with principal offices in all major financial centers. We serve corporate, institutional and wealth management clients across the globe and partner 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, which 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 our 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 develop integrated solutions to support our clients as they adapt to evolving market structures, driven by changes to the regulatory, technological, economic and competitive landscape.

We continue to invest in talent and technology and to strengthen our operational risk framework. We continue to develop and foster a shared culture across the Investment Bank. In 2017, implementation of our technology plan remained critical in making our platform for clients more effective and simplifying our processes.


We operate a tightly controlled balance sheet, risk-weighted assets and leverage ratio denominator allocation process to support our goal of earning attractive returns on allocated capital. We evaluate our performance against key performance indicators and our respective 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 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. The 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 the resulting exposures.

   Financing Solutions provides customized solutions across asset classes via a wide range of financing capabilities, including structured, real estate and special situations financing.

   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 risks and liquidity. The businesses are:

 

40


 

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. The 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 precious metals.

   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 IB Research

In UBS IB Research, we offer clients key insights on securities in major financial markets around the globe. Together with UBS Evidence Lab, UBS research analysts refine investor questions into testable propositions and apply various primary research methods, such as quantitative market research, digital footprint analysis, geospatial analysis or data science. In 2017, UBS was named Institutional Investor magazine’s Top Global Equity Research Firm of the Year. The recognition of this award positions us well under the new Markets in Financial Instruments Directive II (MiFID II) environment, where we continue to focus on our clients’ needs with a differentiated approach to question-driven, evidence-based research.

Organizational structure

Our business is organized along the products and services described above 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 mainly 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

Our 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.

 

  

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Operating environment and strategy
Corporate Center

Corporate Center

Corporate Center provides services to the Group through the reporting units Corporate Center – Services and Group Asset and Liability Management (Group ALM). Corporate Center also includes the Non-core and Legacy Portfolio unit.

Priorities and initiatives

Our Corporate Center functions strive to provide best-in-class services to the Group based on commercially sound service management principles, including transparency on both qualitative and quantitative components of the services offered. Specifically in the areas of finance, risk management and control, and legal, we aim to provide high-quality advice and solutions, while optimizing resources and mitigating risk. In other areas such as compliance, human resources, information technology, operations and marketing and communications, we align services based on demand and delivery of defined strategies. 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.

All Corporate Center functions are represented in onshore, nearshore and offshore locations that allow us to tap into larger talent pools and realize efficiencies by reducing our footprint in high-cost real estate locations. As of 31 December 2017, 36% of Corporate Center employees and contractors were in offshore or nearshore locations compared with 18% as of 31 December 2013.

We seek to increase value by leveraging common capabilities and creating centralized functions. In 2017, we successfully completed the transfer of substantially all shared services functions to our separate Group service companies, which, in addition to meeting regulatory requirements, allows us to further strengthen our approach to service management while remaining efficient in the way we operate. In our technology landscape, we continue to upgrade our infrastructure, simplify our portfolio of applications and deliver digital innovation, such as artificial intelligence.

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

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


Corporate Center – Services

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

The functions within Corporate Center – Services partner with business divisions and other Corporate Center units through a service-based operating model, managing services from a quality, risk and cost perspective in order to achieve operational and financial efficiencies. Corporate Center – Services allocates the majority of its operating expenses to the business divisions and other Corporate Center units. As part of the annual business planning cycle, Corporate Center – Services agrees with the business divisions and other Corporate Center units on projected cost allocations for services provided, depending on expected capital and service consumption levels as well as the nature of the service performed. Since 2017, Corporate Center – Services allocates expenses based on actual costs incurred using service-based billing, providing cost transparency and enabling cost management. In 2015 and 2016, where costs incurred were different from those expected, Corporate Center – Services recognized over- and under-recoveries.

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

 

 

 

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Roles and responsibilities within Corporate Center – Services

Head of Group functions

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 Group’s 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 UBS’s regulatory capital ratios

     Ensures asset and liability management by balancing consumption of the Group’s financial resources through consolidation and management of the Group’s structural risks, enabling sustainable earnings generation

     Manages and controls the Group’s 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, together with the Group Chief Executive Officer (CEO)

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

     Supports the 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 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

     Efficiently supplies real estate infrastructure and general administrative services, directs and controls all supply and demand management activities, supports the Group with its third-party sourcing strategies and takes responsibility for the Group’s 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 Group’s operating platform

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

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

Group Chief Risk Officer

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

     Develops the Group’s risk appetite framework and its risk principles

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

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

(ii) developing and implementing the frameworks for risk measurement, aggregation, portfolio controls and 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

Group General Counsel

     Manages the Group’s legal affairs and is responsible for ensuring effective and timely assessment of legal matters impacting the Group or its business and for providing the legal advice required by the Group

     Manages and reports all litigation and other significant contentious matters, including all legal proceedings, that involve UBS

     Manages and supervises the legal function of the Group

Group Head Communications & Branding

     Manages UBS’s corporate and brand communication to its stakeholders in alignment with the Group’s overall strategy

     Develops UBS’s communications strategy, content and positioning with the primary purpose to build and protect the Group’s 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 & Governance

     Develops a coherent and effective 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 recovery and resolution planning and develops key resolvability improvement measures

     Designs the Group’s legal entity structure and further develops coherent corporate governance standards

     Governs the Group’s investigation portfolio and performs important investigations

Head UBS and Society

     Is UBS’s senior-level representative for sustainability issues

     Manages UBS and Society, which covers all of UBS’s activities related to sustainable investing, philanthropy, environmental and human rights policies governing client and supplier relationships, its environmental footprint, as well as community investment

     Develops the UBS and Society strategy and ensures its execution across divisions and regions through chairmanship of the UBS and Society Operating Committee

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

 

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Operating environment and strategy
Corporate Center

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 matching assets and liabilities within the context of the Group’s liquidity, funding and capital targets and constraints. 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 Global Wealth Management and Personal & Corporate Banking, high-quality liquid asset (HQLA) portfolios on behalf of specific business divisions as well as risk management of 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 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

Non-core and Legacy Portfolio manages legacy positions from businesses exited by the Investment Bank, 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 at the time of its formation.

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

  

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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.

Market conditions and fluctuations may have a detrimental effect on our profitability, capital strength, liquidity and funding position

Low and negative interest rates in Switzerland and the eurozone have negatively affected our net interest income: 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 Global Wealth Management businesses. Our performance is also affected by the cost of maintaining the high-quality liquid assets (HQLA) 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 Swiss pension plan net defined benefit assets and liabilities is sensitive to the discount rate applied. Any further reduction in interest rates may 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.


We are subject to risk from currency fluctuationsWe 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.

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.

®   Refer to the “Current market climate and industry trends” section of this report for more information

Substantial changes in the regulation of our businesses 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. Following the 2007–2009 financial crisis, regulators and legislators have adopted a wide range of changes to the laws, regulations and supervisory frameworks applicable to banks intended to address the perceived causes of the crisis and to limit the systemic risks posed by major financial institutions. These changes have caused us to make significant changes in our businesses and strategy and to move significant operations into subsidiaries to improve our resolvability or meet regulatory requirements, resulting in substantial implementation costs, increased our capital and funding costs and reduced operational flexibility. Although many of the regulatory changes have been completed, a number of these changes are being phased in over time or require further rulemaking or guidance for implementation. Certain changes are still under consideration. There remains significant uncertainty regarding a number of the measures referred to above.

 

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Operating environment and strategy
Risk factors

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 often 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.

Higher capital and total loss-absorbing capacity requirements increase our costs: 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, we are required to maintain minimum levels of TLAC measured based on both our RWA and the leverage ratio denominator.

We expect increases in our RWA from changes in methodology, add-ons in the calculation of RWA and other changes in 2018 and 2019. Changes to international capital standards for banks recently adopted by the Basel Committee on Banking Supervision are expected to further increase our RWA when the standards are scheduled to become effective in 2022. We also expect that we will incur significant costs to implement the proposed changes.

Liquidity and funding: The requirements to maintain an LCR of HQLA to estimated stressed short-term net cash outflows, the proposed requirement to maintain a net stable funding ratio (NSFR), and other similar liquidity and funding requirements we are subject to, oblige us to maintain high levels of overall liquidity, 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 market- and firm-specific stress situations. 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.

Banking structure and activity limitations: We have made significant changes in our legal and operational structure to meet legal and regulatory requirements and expectations. For example, we have transferred all of our US subsidiaries under a US intermediate holding company to meet US regulatory requirements and substantially all the operations of Personal & Corporate Banking and Wealth Management booked in Switzerland to UBS Switzerland AG to improve our resolvability. These changes, particularly the transfer of operations to subsidiaries, such as our US intermediate holding company and UBS Switzerland AG, 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. Our operations in subsidiaries are subject to local capital, liquidity, stable funding, capital planning and stress testing requirements. These requirements have resulted in increased capital and liquidity requirements in affected subsidiaries, which limit our operational flexibility and negatively affect our ability to benefit from synergies between business units and to distribute earnings to the Group.

In the US, we have incurred substantial costs for implementing our 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 the Volcker Rule’s 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.

 

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Resolvability and resolution and recovery planning: Under the Swiss too big to fail (TBTF) framework, we are required to put in place viable emergency plans to preserve the operation of systemically important functions in the event of a failure. Moreover, under the Swiss TBTF framework and similar regulations in the US, the UK, the EU and other jurisdictions in which we operate, we are required to prepare credible recovery and resolution plans detailing the measures that would be taken to recover in the event of a significant adverse event or to wind down the Group or the operations in a host country through resolution or insolvency proceedings. We have made changes to the legal structure of the Group to improve the viability of our recovery and resolution plans and may be required in the future to make further changes to our legal structure, operations, or liquidity and funding plans to enable our recovery and resolution plans to meet regulatory expectations. 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.

Substantial changes in market regulation have affected and will continue to affect how we conduct our business: The revised Markets in Financial Instruments Directive and the associated Regulation (MiFID II / MiFIR) took effect on 3 January 2018. MiFID II, among other things, introduces substantial new regulation of exchanges and trading venues, including new pre-trade and post-trade transparency requirements, a ban on the practice of using commissions on transactions to compensate for research services and substantial new conduct requirements for financial services firms when dealing with clients. Implementation by the G20 countries of the commitment to require all standardized over-the-counter (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 and the changes introduced by MiFID II may result in a reduction in commission rates and trading margins. 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 have required significant changes to collateral agreements with counterparties and our clients’ operational processes. In some jurisdictions implementation of these changes is ongoing, while rulemaking 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, record-keeping, 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.

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

 

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Operating environment and strategy
Risk factors

If we are unable to maintain our capital strength, this may adversely affect our ability to execute our strategy, our client franchise and our 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 reassures 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, by 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 and other methodology changes, as well as the implementation of the recently adopted changes to international capital standards for banks, 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.


The leverage ratio is a balance sheet-driven 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 LRD 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

Over the last six years, we have transformed our business to focus on our wealth management businesses and our universal bank in Switzerland, complemented by Asset Management and a significantly smaller Investment Bank; substantially reduced the RWA and LRD usage in our Corporate Center – Non-core and Legacy Portfolio; and made significant cost reductions. We have recently provided an update on the execution of our strategy and updated our performance targets and provided guidance on capital and resources. Risk remains that we may not succeed in executing our strategy or achieve our performance targets, or may be delayed in doing so. Market events or other factors may adversely affect our ability to achieve our objectives. Macroeconomic conditions, geopolitical uncertainty, changes to regulatory requirements and the continuing costs of meeting these requirements have prompted us to adapt our targets in the past and we may need to do so again in the future.

As part of our strategic plans, we expect to continue to make significant expenditures on technology and infrastructure to improve our client experience, improve and further enable digital offerings and increase efficiency. There is a risk that our investments in new technology will not fully achieve our objectives or improve our ability to attract and retain customers.  In addition, we may face competition in providing digitally enabled offerings from both existing competitors and new financial service providers in various portions of the value chain. Our ability to develop and implement competitive digitally enabled offerings and processes will be an important factor in our ability to compete.

Moreover, the continued illiquidity and complexity of many of our legacy risk positions remaining in Corporate Center – Non-core and Legacy Portfolio could make it difficult to sell or otherwise exit these positions and there remains a risk that we could incur significant losses in doing so.

 

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As part of our strategy, we also have programs under way that seek to improve our operating efficiency, in part by controlling our costs. A number of factors could negatively affect our plans. We may not be able to identify feasible cost reduction opportunities that are also consistent with our business goals, and cost reductions may be realized later or may be less than we anticipate. Higher temporary and permanent regulatory costs and higher business demand than we had originally anticipated have partly offset our cost reductions and delayed the achievement of our cost reduction targets in the past, and we could continue to be challenged in the execution of our ongoing plans.

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.

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

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 them. 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 connection with investigations related to LIBOR and other benchmark rates and to foreign exchange and precious metals, 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.

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 resulted in continued scrutiny. We are also subject to significant new regulatory requirements, including recovery and resolution planning, US enhanced prudential standards and Comprehensive Capital Analysis and Review (CCAR). Our implementation of additional regulatory requirements and changes in supervisory standards will likely receive heightened scrutiny from supervisors. If we do not meet supervisory expectations in relation to these or other matters, or have additional supervisory or regulatory issues, we would likely be subject to continued regulatory scrutiny as well as measures that might further constrain our strategic flexibility. We are in active dialog with our regulators concerning the actions that we are taking to improve our operational risk management, control, anti-money laundering, data management and other frameworks and otherwise seek to meet supervisory expectations, 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

 

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Operating environment and strategy
Risk factors

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. Any 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, inadequate or ineffective access controls 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, including through the introduction of viruses or malware, social engineering, distributed denial of service attacks and other means. These attempts may occur directly, or using equipment or security passwords of our employees, third party service providers or other users. We may not be able to anticipate, detect or recognize threats to our systems or data or that our preventative measures may not be effective to prevent an attack or a security breach. In the event a security breach occurs notwithstanding our preventative measures, we may not immediately detect a particular breach or attack. Once a particular attack is detected time may be required to investigate and assess the nature and extent of the attack. 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 have 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.

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 reputation has been adversely affected by our losses during the financial crisis, investigations into our cross-border private banking services, criminal resolutions of LIBOR-related and foreign exchange matters, as well as other matters. We believe that reputational damage as a result of these events 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 the past. Any further reputational damage could have a material adverse effect on our operational results and financial condition and on our ability to achieve our strategic goals and financial targets.

 

 

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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. 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. Over time, our strategic plans have become more heavily dependent 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 “Risk measurement” in the “Risk management and control” 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 limits trading opportunities and impedes our ability to manage risks, impacting trading income, and may reduce institutional client activity and therefore transaction 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 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. Refer to “Our financial results may be negatively affected by changes to assumptions and valuations, as well as changes to accounting standards” and “The effect of taxes on our financial results is significantly influenced by tax law changes and reassessments of our deferred tax assets” below.

®   Refer to the “Current market climate and industry trends” section of this report for more information

UK withdrawal from the EU

In December 2017, the UK and the remaining EU member states reached an agreement on the separation issues under Phase I of the negotiations for the UK’s withdrawal from the EU. As a result, the European Council agreed that “sufficient progress” had been made to allow the negotiations to move to Phase II on transitional arrangements and the future EU-UK relationship. The UK is still expected to leave the EU in March 2019, subject to a possible transition period.

 

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Operating environment and strategy
Risk factors

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 the EU, and to our legal structure. In the absence of adequate transition relief being agreed and passed into law by the United Kingdom and the European Union, we currently expect to merge UBS Limited into UBS Europe SE, our German headquartered European bank, prior to the United Kingdom leaving the European Union on 29 March 2019. Clients and other counterparties of UBS Limited would become counterparties of UBS Europe SE through the planned merger of the two entities. However, we anticipate that clients of UBS Limited who can be serviced by UBS AG, London Branch would generally be migrated to UBS AG, London Branch prior to this merger. We further anticipate that some staff would be relocated as a result; the exact number of staff and roles would be determined in due course. The timing and extent of the actions we take may vary considerably depending on regulatory requirements and the nature of any transition or successor agreements with the EU.

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 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 requires 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 when they become fully effective. In addition, MiFID II imposes new requirements on us when providing advisory services to clients in the EU, including new requirements for agreements with clients.

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.

As the discussion above indicates, 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. Initiatives that we may implement to overcome the effects of changes in the business environment on our profitability, balance sheet and capital positions may not succeed in counteracting 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. 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 clawback provisions for certain awards linked to business performance.

 

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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.

Swiss law requires that shareholders approve the compensation of the Board of Directors (BoD) and the Group Executive Board (GEB) each year. If our shareholders fail to approve the compensation for the GEB or the BoD, this could have an adverse effect on our ability to retain experienced directors and our senior management.

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 are 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.

 

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Operating environment and strategy
Risk factors

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.

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 our derivatives businesses. Our credit ratings, together with our capital strength and reputation, also contribute to maintaining client and counterparty confidence and it is possible that 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. For example, we adopted IFRS 9 effective on 1 January 2018, which required us to change the accounting treatment of certain instruments, requires us to record loans at inception net of expected credit 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. In addition, the expected credit loss (ECL) provisions of IFRS 9 may result in greater volatility in credit loss expense as ECL changes in response to developments in the credit cycle and composition of our loan portfolio. The effect may be more pronounced in a deteriorating economic environment. 

®   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 tax law changes and reassessments of our deferred tax assets

Our effective tax rate is highly sensitive to our performance, our expectation of future profitability and statutory tax rates. 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, 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. 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, the reduction in the US federal corporate tax rate to 21% from 35% introduced by the US Tax Cuts and Jobs Act (TCJA) resulted in a CHF 2.9 billion net write-down in the Group’s DTAs in the fourth quarter of 2017. Changes in tax law may materially affect our effective tax rate and in some cases may substantially affect the profitability of certain activities. For example, the TCJA introduced a new minimum tax regime referred to as the base erosion and anti-abuse tax (BEAT) that potentially subjects otherwise deductible payments made from our US businesses to non-US affiliated parties to a minimum tax. We currently expect that BEAT could increase our current tax expense by up to CHF 60 million in 2018. The actual effects could be materially higher as the amount of payments subject to BEAT will increase with higher interest rates and business activity and as a result of interpretative uncertainty relating to BEAT. It may also be lower if we are able to successfully mitigate our payments subject to BEAT.

 

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We generally revalue our DTAs in the second half of the financial year based on a reassessment of future profitability taking into account updated business plan forecasts. We consider the performance of our businesses and the accuracy of historical forecasts tax rates and other factors in evaluating the recoverability of our DTAs, including the remaining tax loss carry-forward period and our assessment of expected future taxable profits in the forecast period used for recognizing DTAs. Estimating future profitability is inherently subjective and is particularly sensitive to future economic, market and other conditions, which are difficult to predict. Our results in recent periods have demonstrated that changes in the recognition of DTAs can have a very significant effect on our reported results. The enactment of the TCJA, and the narrowing of the window between the end of the forecast period and the expiry of our US net operating losses, may also lead us to review our approach to periodically remeasuring our US DTAs and the timing for recognizing deferred tax in our income statement. Any change in the manner in which we remeasure DTAs could impact the effective tax rate, particularly in the year in which the change is made.

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.

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.

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

We plan to operate with a fully applied CET1 capital ratio of around 13% and a fully applied CET1 leverage ratio of around 3.7%. Our ability to maintain these ratios is subject to numerous risks, including the financial results of our businesses, the effect of changes to capital standards, 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. These risks could prevent or delay our ability to achieve our capital returns policy of a progressive cash dividend coupled with a share repurchase program.


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, or 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. For example, the US CCAR process requires that our US intermediate holding company demonstrate that it can continue to meet minimum capital standards over a nine-quarter hypothetical severely adverse economic scenario. If it fails to meet the quantitative capital requirements, or the Federal Reserve Board’s qualitative assessment of the capital planning process is adverse, our US intermediate holding company will be prohibited from paying dividends or making distributions. Restrictions and regulatory actions of this kind could impede access to funds that UBS Group AG may need to meet its obligations or to pay dividends to shareholders. 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.

 

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Operating environment and strategy
Risk factors

If we experience financial difficulties, FINMA has the power to open restructuring 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 overindebted, has serious liquidity problems or, after the expiration of any relevant deadline, no longer fulfills 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 restructuring proceedings. 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.

 

  

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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:

   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

   Consolidation of structured entities

 


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 2017 and the results of our operations and cash flows for the year ended on 31 December 2017 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


 

Group performance

Income statement

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.17

31.12.16

31.12.15

 

31.12.16

Net interest income

 

 6,528 

 6,413 

 6,732 

 

 2 

Credit loss (expense) / recovery

 

 (128) 

 (37) 

 (117) 

 

 246 

Net interest income after credit loss expense

 

 6,400 

 6,376 

 6,615 

 

 0 

Net fee and commission income

 

 17,186 

 16,397 

 17,140 

 

 5 

Net trading income

 

 4,972 

 4,948 

 5,742 

 

 0 

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

 

 

 

 553 

 

 

Other income

 

 509 

 599 

 1,107 

 

 (15) 

Total operating income

 

 29,067 

 28,320 

 30,605 

 

 3 

of which: net interest and trading income

 

 11,499 

 11,361 

 12,474 

 

 1 

Personnel expenses

 

 15,889 

 15,720 

 15,981 

 

 1 

General and administrative expenses

 

 6,808 

 7,434 

 8,107 

 

 (8) 

Depreciation and impairment of property, equipment and software

 

 1,033 

 985 

 920 

 

 5 

Amortization and impairment of intangible assets

 

 70 

 91 

 107 

 

 (23) 

Total operating expenses

 

 23,800 

 24,230 

 25,116 

 

 (2) 

Operating profit / (loss) before tax

 

 5,268 

 4,090 

 5,489 

 

 29 

Tax expense / (benefit)

 

 4,139 

 805 

 (898) 

 

 414 

Net profit / (loss)

 

 1,128 

 3,286 

 6,386 

 

 (66) 

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

 

 76 

 82 

 183 

 

 (7) 

Net profit / (loss) attributable to shareholders

 

 1,053 

 3,204 

 6,203 

 

 (67) 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

Total comprehensive income

 

 218 

 2,170 

 5,781 

 

 (90) 

Total comprehensive income attributable to non-controlling interests

 

 428 

 352 

 83 

 

 22 

Total comprehensive income attributable to shareholders

 

 (210) 

 1,817 

 5,698 

 

 

 

59


Financial and operating performance
Group performance

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

 

 

 

For the year ended 31.12.17

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

 

 7,625 

 8,349 

 3,850 

 2,044 

 7,651 

 (153) 

 (276) 

 (22) 

 29,067 

of which: gains on sale of subsidiaries and businesses

 

 

 

 

 153 

 

 

 

 

 153 

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

 

 

 

 

 

 136 

 

 

 

 136 

of which: net foreign currency translation losses5

 

 

 

 

 

 

 

 (22) 

 

 (22) 

Operating income (adjusted)

 

 7,625 

 8,349 

 3,850 

 1,891 

 7,515 

 (153) 

 (254) 

 (22) 

 28,800 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as reported

 

 5,330 

 7,141 

 2,272 

 1,466 

 6,402 

 762 

 47 

 381 

 23,800 

of which: personnel-related restructuring expenses6

 

 38 

 1 

 7 

 16 

 38 

 433 

 1 

 0 

 534 

of which: non-personnel-related restructuring expenses6

 

 73 

 0 

 0 

 22 

 18 

 522 

 0 

 0 

 634 

of which: restructuring expenses allocated from CC ­ Services6

 

 353 

 113 

 96 

 62 

 303 

 (935) 

 3 

 6 

 0 

of which: expenses from modification of terms for certain DCCP awards7

 

 

 

 

 

 25 

 

 

 

 25 

Operating expenses (adjusted)

 

 4,867 

 7,028 

 2,169 

 1,366 

 6,018 

 743 

 43 

 375 

 22,607 

of which: net expenses for provisions for litigation, regulatory and similar matters8

 

 26 

 144 

 2 

 (3) 

 (41) 

 242 

 0 

 51 

 420 

 

 

 

 

 

 

 

 

 

 

 

Operating profit / (loss) before tax as reported

 

 2,295 

 1,208 

 1,578 

 578 

 1,249 

 (914) 

 (322) 

 (403) 

 5,268 

Operating profit / (loss) before tax (adjusted)

 

 2,758 

 1,321 

 1,681 

 525 

 1,497 

 (895) 

 (296) 

 (397) 

 6,194 

 

 

 

 

 

 

 

 

 

 

 

 

 

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: net expenses for provisions for litigation, regulatory and similar matters8

 

 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 

 

60


 

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

 

 

 

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 value

 

 

 

 

 

 

 

 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: net expenses for provisions for litigation, regulatory and similar matters8

 

 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 

1 Adjusted results are non-GAAP financial measures as defined by SEC regulations.    2 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period.    3 Corporate Center ­ Services operating expenses presented in this table are after service allocations to business divisions and other Corporate Center units.    4 Includes a gain on the sale of our investment in London Clearing House in the Investment Bank in 2017, gains on sales of our investment in IHS Markit in 2017, 2016 and 2015 in the Investment Bank and a gain on the sale of our investment in Visa Europe in 2016 in Wealth Management and Personal & Corporate Banking.    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 Relates to the removal of the service period requirement for DCCP awards granted for the performance years 2012 and 2013.    8 Includes recoveries from third parties of CHF 53 million, CHF 13 million and CHF 10 million for the years ended 31 December 2017, 31 December 2016 and 31 December 2015, respectively.

 

61


Financial and operating performance
Group performance

2017 compared with 2016 

Results

We recorded net profit attributable to shareholders of CHF 1,053 million in 2017, which included a net tax expense of CHF 4,139 million, mainly driven by a CHF 2,865 million net write-down of deferred tax assets (DTAs) following a reduction in the US federal corporate tax rate after the enactment of the Tax Cuts and Jobs Act (TCJA) in the US during the fourth quarter of 2017. In 2016, net profit attributable to shareholders was CHF 3,204 million, which included a net tax expense of CHF 805 million. Excluding the aforementioned net write-down of DTAs, net profit attributable to shareholders would have increased 22%.

Profit before tax increased by CHF 1,178 million or 29% to CHF 5,268 million, reflecting higher operating income and a reduction in operating expenses. Operating income increased by CHF 747 million or 3%, mainly due to CHF 789 million higher net fee and commission income, primarily in our wealth management businesses. Operating expenses decreased by CHF 430 million or 2%, mainly due to CHF 626 million lower general and administrative expenses, mainly reflecting CHF 375 million lower net expenses for provisions for litigation, regulatory and similar matters.

In addition to reporting our results in accordance with International Financial Reporting Standards (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 2017, we excluded gains of CHF 153 million on sale of subsidiaries and businesses related to the disposal of Asset Management’s fund administration servicing units in Luxembourg and Switzerland, gains of CHF 136 million on sale of financial assets available for sale, net foreign currency translation losses of CHF 22 million, expenses of CHF 25 million related to the modification of terms for Deferred Contingent Capital Plan (DCCP) awards granted for the performance years 2012 and 2013 and net restructuring expenses of CHF 1,168 million. For 2016, we excluded gains of CHF 211 million on sale of financial assets available for sale, gains of CHF 120 million on sales of real estate, gains of CHF 21 million related to investments in associates, net foreign currency translation losses of CHF 122 million, losses of CHF 23 million on sales of subsidiaries and businesses and net restructuring expenses of CHF 1,458 million.

On this adjusted basis, profit before tax increased by CHF 853 million or 16% to CHF 6,194 million, reflecting CHF 687 million higher adjusted operating income and CHF 165 million lower adjusted operating expenses.

Operating income

Total operating income was CHF 29,067 million compared with CHF 28,320 million. On an adjusted basis, total operating income increased by CHF 687 million or 2% to CHF 28,800 million, mainly reflecting an increase of CHF 789 million in net fee and commission income.

 

Net interest and trading income

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.17

31.12.16

31.12.15

 

31.12.16

 

 

 

 

 

 

 

Net interest and trading income

 

 

 

 

 

 

Net interest income

 

 6,528 

 6,413 

 6,732 

 

 2 

of which: Wealth Management

 

 2,344 

 2,331 

 2,326 

 

 1 

of which: Wealth Management Americas

 

 1,679 

 1,467 

 1,174 

 

 14 

of which: Personal & Corporate Banking

 

 2,086 

 2,199 

 2,270 

 

 (5) 

of which: Asset Management

 

 (14) 

 (24) 

 (17) 

 

 (42) 

Net trading income

 

 4,972 

 4,948 

 5,742 

 

 0 

of which: Wealth Management

 

 694 

 667 

 708 

 

 4 

of which: Wealth Management Americas

 

 332 

 372 

 362 

 

 (11) 

of which: Personal & Corporate Banking

 

 376 

 333 

 343 

 

 13 

of which: Asset Management

 

 (10) 

 (5) 

 12 

 

 100 

Total net interest and trading income

 

 11,499 

 11,361 

 12,474 

 

 1 

of which: Investment Bank

 

 4,282 

 4,277 

 5,186 

 

 0 

of which: Corporate Client Solutions

 

 1,065 

 822 

 1,001 

 

 30 

of which: Investor Client Services

 

 3,217 

 3,455 

 4,185 

 

 (7) 

of which: Corporate Center

 

 (270) 

 (256) 

 110 

 

 5 

of which: Services

 

 (42) 

 (89) 

 (3) 

 

 (53) 

of which: Group ALM

 

 (157) 

 (104) 

 426 

 

 51 

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

 

 

 

 553 

 

 

of which: Non-core and Legacy Portfolio

 

 (71) 

 (62) 

 (313) 

 

 15 

 

 

62


 

Net interest and trading income

Total combined net interest and trading income increased by CHF 138 million to CHF 11,499 million.

Wealth Management net interest income increased by CHF 13 million to CHF 2,344 million, mainly due to an increase in deposit revenues, mostly reflecting higher short-term US dollar interest rates, and higher lending revenues. This was largely offset by lower allocated treasury-related income from Corporate Center – Group Asset and Liability Management (Group ALM), reflecting lower banking book interest income and higher funding costs for long-term debt that contributes to total loss-absorbing capacity (TLAC). Net trading income increased by CHF 27 million to CHF 694 million, mainly due to increased client activity, most notably in Asia Pacific and Switzerland.

In Wealth Management Americas, net interest income increased by CHF 212 million to CHF 1,679 million, primarily due to an increase in net interest margin on higher short-term US dollar interest rates as well as higher lending balances. This was partly offset by a CHF 40 million decrease in net trading income, mainly due to lower client activity.

Personal & Corporate Banking net interest income decreased by CHF 113 million to CHF 2,086 million, mainly due to lower allocated treasury-related income from Corporate Center – Group ALM, reflecting higher funding costs for long-term debt that contributes to TLAC and lower banking book interest income. This was partly offset by higher deposit revenues. Net trading income increased by CHF 43 million to CHF 376 million, mainly due to higher revenues from foreign exchange transactions.

In the Investment Bank, net interest and trading income was broadly stable at CHF 4,282 million, due to a CHF 243 million increase in Corporate Client Solutions, mainly in Equity Capital Markets and Risk Management, which was almost entirely offset by a CHF 238 million decrease in Investor Client Services, reflecting lower revenues in Foreign Exchange, Rates and Credit, partly offset by higher revenues in Equities.

In Corporate Center, net interest and trading income decreased by CHF 14 million to negative CHF 270 million, mainly due to a CHF 53 million decrease in Corporate Center – Group ALM, primarily reflecting negative income related to accounting asymmetries. This was largely offset by an increase of CHF 47 million in Corporate Center – Services, mainly reflecting higher allocated treasury-related income from Corporate Center – Group ALM, primarily resulting from a change made in the first quarter of 2017 to the methodology used to allocate certain Corporate Center – Group ALM revenues.

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

Credit loss expense / recovery

The net credit loss expense was CHF 128 million compared with CHF 37 million, mainly reflecting CHF 79 million higher expenses in the Investment Bank, primarily related to a margin loan to a single client following a significant decrease in the value of the collateral.

®   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

 

31.12.17

31.12.16

31.12.15

 

31.12.16

Wealth Management

 

 (4) 

 (5) 

 0 

 

 (20) 

Wealth Management Americas

 

 (4) 

 (3) 

 (4) 

 

 33 

Personal & Corporate Banking

 

 (19) 

 (6) 

 (37) 

 

 217 

Investment Bank

 

 (90) 

 (11) 

 (68) 

 

 718 

Corporate Center

 

 (11) 

 (13) 

 (8) 

 

 (15) 

of which: Non-core and Legacy Portfolio

 

 (11) 

 (13) 

 (8) 

 

 (15) 

Total

 

 (128) 

 (37) 

 (117) 

 

 246 

 

63


Financial and operating performance
Group performance

Net fee and commission income

Net fee and commission income increased by CHF 789 million to CHF 17,186 million.

Portfolio management and advisory fees increased by CHF 507 million to CHF 8,542 million, primarily driven by our wealth management businesses, mainly due to higher invested assets.

Underwriting fees increased by CHF 349 million to CHF 1,295 million, largely due to higher equity underwriting revenues, mainly in the Investment Bank.

®   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 509 million compared with CHF 599 million. Excluding the aforementioned adjusting items, which consist of gains on sales of subsidiaries and businesses, gains on sales of financial assets available for sale and real estate, gains related to investments in associates and net foreign currency translation losses, adjusted other income decreased by CHF 150 million. This decrease was mainly due to lower gains on sale of financial assets available for sale and a decrease in other sundry income.

®   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 430 million or 2% to CHF 23,800 million. Excluding net restructuring expenses of CHF 1,168 million compared with CHF 1,458 million in 2016 and expenses of CHF 25 million in 2017 in the Investment Bank related to the modification of terms in DCCP awards granted for the performance years 2012 and 2013, adjusted total operating expenses decreased by CHF 165 million or 1% to CHF 22,607 million. This decrease was mainly due to CHF 375 million lower net expenses for provisions for litigation, regulatory and similar matters, partly offset by a CHF 289 million increase in financial advisor compensation in Wealth Management Americas.

®   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 increased by CHF 169 million to CHF 15,889 million and included net restructuring expenses of CHF 534 million in 2017, mainly related to our transitioning activities to nearshore and offshore locations, compared with CHF 751 million in 2016. In addition, 2017 included expenses of CHF 25 million in the Investment Bank related to the modification of terms in DCCP awards granted for the performance years 2012 and 2013. On an adjusted basis, personnel expenses increased by CHF 361 million to CHF 15,330 million.

Adjusted expenses for salaries decreased by CHF 104 million to CHF 5,691 million, mainly reflecting our nearshoring and offshoring initiatives and cost reduction programs.

Adjusted expenses for total variable compensation increased by CHF 103 million, reflecting an increase of CHF 241 million in expenses for current-year awards, partly offset by CHF 140 million lower expenses for awards related to prior years.

Adjusted other personnel expenses increased by CHF 75 million, largely due to CHF 49 million higher social security expenses.

Financial advisor compensation in Wealth Management Americas increased by CHF 289 million to CHF 3,986 million, mainly due to higher compensable revenues and changes we announced in 2016 to our financial advisor compensation model.

®   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 Employee benefits: variable compensation” in the “Consolidated financial statements” section of this report for more information

General and administrative expenses

General and administrative expenses decreased by CHF 626 million to CHF 6,808 million. Excluding net restructuring expenses of CHF 627 million compared with CHF 695 million, adjusted general and administrative expenses decreased by CHF 558 million, primarily reflecting CHF 375 million lower net expenses for provisions for litigation, regulatory and similar matters, a decrease in expenses for marketing and public relations and lower professional fees. In addition, the net expense for the UK bank levy was CHF 17 million in 2017 compared with CHF 123 million, primarily as 2017 included a CHF 82 million credit related to prior years.

 

64


 

Operating expenses

 

 

 

 

 

 

 

 

For the year ended

 

% change from

CHF million

 

31.12.17

31.12.16

31.12.15

 

31.12.16

 

 

 

 

 

 

 

Operating expenses as reported

 

 

 

 

 

 

Personnel expenses

 

 15,889 

 15,720 

 15,981 

 

 1 

General and administrative expenses

 

 6,808 

 7,434 

 8,107 

 

 (8) 

Depreciation and impairment of property, equipment and software

 

 1,033 

 985 

 920 

 

 5 

Amortization and impairment of intangible assets

 

 70 

 91 

 107 

 

 (23) 

Total operating expenses as reported

 

 23,800 

 24,230 

 25,116 

 

 (2) 

 

 

 

 

 

 

 

Adjusting items

 

 

 

 

 

 

Personnel expenses

 

 559 

 751 

 439 

 

 

of which: restructuring expenses1

 

 534 

 751 

 460 

 

 

of which: expenses from modification of terms for certain DCCP awards2

 

 25 

 

 

 

 

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

 

 

 

 (21) 

 

 

General and administrative expenses3

 

 627 

 695 

 761 

 

 

Depreciation and impairment of property, equipment and software3

 

 7 

 11 

 12 

 

 

Amortization and impairment of intangible assets

 

 0 

 0 

 13 

 

 

of which: restructuring expenses1

 

 0 

 0 

 2 

 

 

of which: impairment of an intangible asset

 

 

 

 11 

 

 

Total adjusting items

 

 1,193 

 1,458 

 1,225 

 

 

 

 

 

 

 

 

 

Operating expenses (adjusted)4

 

 

 

 

 

 

Personnel expenses

 

 15,330 

 14,969 

 15,542 

 

 2 

of which: salaries

 

 5,691 

 5,795 

 5,970 

 

 (2) 

of which: total variable compensation

 

 3,182 

 3,079 

 3,410 

 

 3 

of which: relating to current year5

 

 2,490 

 2,249 

 2,610 

 

 11 

of which: relating to prior years6

 

 692 

 832 

 799 

 

 (17) 

of which: Wealth Management Americas ­ Financial advisor compensation7

 

 3,986 

 3,697 

 3,552 

 

 8 

of which: other personnel expenses8

 

 2,471 

 2,396 

 2,613 

 

 3 

General and administrative expenses

 

 6,181 

 6,739 

 7,346 

 

 (8) 

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

 

 420 

 795 

 1,087 

 

 (47) 

of which: other general and administrative expenses

 

 5,761 

 5,944 

 6,259 

 

 (3) 

Depreciation and impairment of property, equipment and software

 

 1,026 

 974 

 908 

 

 5 

Amortization and impairment of intangible assets

 

 70 

 91 

 94 

 

 (23) 

Total operating expenses (adjusted)

 

 22,607 

 22,772 

 23,891 

 

 (1) 

1 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information.    2 Relates to the removal of the service period requirement for DCCP awards granted for the performance years 2012 and 2013.    3 Consists of restructuring expenses.    4 Adjusted results are non-GAAP financial measures as defined by SEC regulations.    5 Includes expenses relating to performance awards and other variable compensation for the respective performance year.    6 Consists of amortization of prior years’ awards relating to performance awards and other variable compensation.    7 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.    8 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 48 million to CHF 1,033 million, largely driven by higher expenses related to internally generated capitalized software.

Amortization and impairment of intangible assets was CHF 70 million compared with CHF 91 million.

®   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

65


Financial and operating performance
Group performance

Tax

We recognized an income tax expense of CHF 4,139 million for 2017, which included a net Swiss tax expense of CHF 485 million and a net non-Swiss tax expense of CHF 3,654 million.

The Swiss tax expense included a current tax expense of CHF 448 million related to taxable profits earned by Swiss subsidiaries, against which no losses were available to offset. In addition, it included a deferred tax expense of CHF 37 million, which reflected a net decrease in deferred tax assets (DTAs) previously recognized in relation to tax losses carried forward and temporary differences.

The non-Swiss tax expense included a current tax expense of CHF 427 million related to taxable profits earned by non-Swiss subsidiaries and branches, against which no losses were available to offset. In addition, it included a deferred tax expense of CHF 3,227 million, which reflected a net decrease in DTAs previously recognized in relation to tax losses carried forward and temporary differences and mainly related to the write-down of US DTAs resulting from the reduction in the federal corporate tax rate to 21% from 35% after the enactment of the TCJA during the fourth quarter of 2017.

The tax expense of CHF 4,139 million for 2017 was higher than the tax expense of CHF 805 million in 2016, mainly as 2017 included a net write-down of DTAs of CHF 2,865 million resulting from the aforementioned reduction in the US federal corporate tax rate.

The TCJA also introduced a new minimum tax regime, referred to as the base erosion and anti-abuse tax (BEAT), which targets US businesses benefiting from deductible payments made to non-US related parties.

For 2018, we currently forecast a full-year tax rate of approximately 25%, including the effects of BEAT, and excluding the effects from any periodic remeasurement of DTAs and any change in the manner in which we remeasure DTAs.

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

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

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


Total comprehensive income attributable to shareholders

In 2017, total comprehensive income attributable to shareholders was negative CHF 210 million, reflecting net profit of CHF 1,053 million, more than offset by negative other comprehensive income (OCI) of CHF 1,263 million.

OCI related to cash flow hedges was negative CHF 621 million, primarily reflecting a decrease in unrealized gains on hedging derivatives that resulted from increases in long-term interest rates. In 2016, OCI related to cash flow hedges was negative CHF 666 million.

Foreign currency translation OCI was negative CHF 530 million, mainly resulting from the weakening of the US dollar against the Swiss franc, partly offset by the strengthening of the euro against the Swiss franc. In 2016, foreign currency translation OCI was positive CHF 292 million.

OCI related to own credit on financial liabilities designated at fair value was negative CHF 313 million compared with negative CHF 115 million and mainly reflected a tightening of credit spreads in 2017.

OCI associated with financial assets available for sale was negative CHF 86 million compared with negative CHF 73 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.

Defined benefit plan OCI was positive CHF 288 million compared with negative CHF 824 million. Total pre-tax OCI related to UK defined benefit plans was positive CHF 296 million, reflecting OCI gains of CHF 213 million from the return on plan assets and an OCI gain of CHF 83 million due to a net decrease in the defined benefit obligation (DBO). The OCI gain of CHF 83 million from the net DBO decrease reflected gains of CHF 80 million due to changes in life expectancy assumptions, a gain of CHF 60 million due to a decline in the rate of pension increase and an OCI experience gain of CHF 49 million, reflecting the effects of differences between the previous actuarial assumptions and what actually occurred, partly offset by a loss of CHF 105 million from a decrease in the applicable discount rate.

Total pre-tax OCI related to the Swiss defined benefit plan was negative CHF 78 million. This reflected an OCI gain of CHF 1,619 million from the return on plan assets, which was more than offset by an OCI loss of CHF 1,394 million representing an increase in the excess of the pension surplus over the estimated future economic benefit and an OCI loss of CHF 303 million due to the DBO remeasurement. The OCI loss of CHF 303 million related to the DBO remeasurement mainly reflected a loss of CHF 170 million from a decrease in the applicable discount rate and an OCI experience loss of CHF 152 million, reflecting the effects of differences between the previous actuarial assumptions and what actually occurred.

®   Refer to “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

 

66


 

Sensitivity to interest rate movements

As of 31 December 2017, 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.

The immediate effect on shareholders’ equity of such a shift in yield curves would be a decrease of approximately CHF 1.5 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 effect on shareholders’ equity is related to cash flow hedge OCI, which is not recognized for the purposes of calculating regulatory capital, the immediate effect on regulatory capital would be an increase of approximately CHF 0.1 billion, primarily related to the estimated effect related to pension fund assets and liabilities.

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 financial assets available for sale. These estimates further assume no change to balance sheet size and structure, constant foreign exchange rates and no specific management action.

Net profit attributable to non-controlling interests

Net profit attributable to non-controlling interests was CHF 76 million in 2017 compared with CHF 82 million in the prior year.

From 2018, we currently expect net profit attributable to non-controlling interests to be less than CHF 10 million per year following the redemption of a EUR 600 million non-Basel III-compliant hybrid tier 1 capital instrument in the fourth quarter of 2017.

Key figures

Return on tangible equity

The return on tangible equity (RoTE) was 2.4% compared with 6.9%. On an adjusted basis, the RoTE was 4.0% compared with 9.0% and was below our 2017 target of more than 15%. This was mainly due to a CHF 2,865 million net write-down of DTAs in 2017 following a reduction in the US federal corporate tax rate after the enactment of the TCJA during the fourth quarter of 2017.


Cost / income ratio

The cost / income ratio was 81.5% compared with 85.4%. On an adjusted basis, the cost / income ratio was 78.1% compared with 80.9% and was above our 2017 target range of 60–70%.

Common equity tier 1 capital ratio / risk-weighted assets

Our fully applied common equity tier 1 (CET1) capital ratio remained stable at 13.8% as of 31 December 2017, exceeding our 2017 target ratio of 13.0% and reflecting a CHF 2 billion increase in CET1 capital and a CHF 15 billion increase in risk-weighted assets (RWA).

Our fully applied RWA increased by CHF 15 billion to CHF 237 billion as of 31 December 2017, primarily due to a CHF 17 billion increase in methodology, policy changes and model updates.

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

Common equity tier 1 leverage ratio / leverage ratio denominator

Our fully applied CET1 leverage ratio increased 0.2 percentage points to 3.7% as of 31 December 2017, reflecting the aforementioned increase in CET1 capital, partly offset by a CHF 16 billion increase in the leverage ratio denominator (LRD).

Our fully applied LRD increased by CHF 16 billion to CHF 886 billion as of 31 December 2017, primarily due to asset size and other increases of CHF 20 billion, partly offset by CHF 3 billion incremental netting and collateral mitigation as well as currency effects of CHF 1 billion.

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

Going concern leverage ratio

Our fully applied going concern leverage ratio increased 0.1 percentage points to 4.7% as of 31 December 2017, reflecting a CHF 2 billion increase in going concern capital, partly offset by the aforementioned increase in LRD.

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

 

67


Financial and operating performance
Group performance

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.

Disposals in 2018

Hana Financial Group, our partner in South Korea, exercised a 10-year buyout option to acquire Asset Management’s 51% stake in UBS Hana Asset Management in the third quarter of 2017. This transaction is pending and still subject to regulatory approval.


Seasonal characteristics

Our revenues may show seasonal patterns, notably in the Investment Bank and our wealth management businesses, which typically show the highest client activity levels in the first quarter, with lower levels throughout the rest of the year, especially during the summer months and end-of-year holiday season. Other seasonal factors that may affect our businesses include annual 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

 

31.12.17

31.12.16

31.12.15

 

 

 

 

 

Net profit

 

 

 

 

Net profit attributable to shareholders

 

 1,053 

 3,204 

 6,203 

Amortization and impairment of intangible assets

 

 70 

 91 

 107 

Pre-tax adjusting items1,2

 

 926 

 1,251 

 135 

Tax effect on adjusting items3

 

 (204) 

 (275) 

 (140) 

Adjusted net profit attributable to shareholders

 

 1,845 

 4,271 

 6,305 

of which: deferred tax (expense) / benefit4

 

 (3,264) 

 7 

 1,613 

Adjusted net profit attributable to shareholders excluding deferred tax expense / benefit

 

 5,109 

 4,264 

 4,692 

 

 

 

 

 

Equity

 

 

 

 

Equity attributable to shareholders

 

 51,214 

 53,621 

 55,313 

Less: goodwill and intangible assets

 

 6,398 

 6,556 

 6,568 

Tangible equity attributable to shareholders

 

 44,816 

 47,065 

 48,745 

of which: DTAs not eligible as CET1 capital5

 

 6,654 

 10,238 

 10,066 

Tangible equity attributable to shareholders excluding DTAs

 

 38,162 

 36,827 

 38,679 

 

 

 

 

 

Return on equity

 

 

 

 

Return on equity (%)

 

 2.0 

 5.9 

 11.8 

Return on tangible equity (%)

 

 2.4 

 6.9 

 13.7 

Adjusted return on tangible equity (%)1

 

 4.0 

 9.0 

 13.7 

Adjusted return on tangible equity excluding deferred tax expense / benefit and DTAs (%)1,6

 

 13.8 

 11.3 

 12.4 

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 included own credit on financial liabilities designated at fair value as an adjusting item with an indicative tax rate of 2%.    4 Deferred tax expense / benefit in respect to taxable profits and any remeasurements of DTAs, such as the net write-down due to the Tax Cuts and Jobs Act enacted in the fourth quarter of 2017.    5 DTAs that do not qualify as CET1 capital, reflecting DTAs recognized for tax loss carry-forwards of CHF 5,797 million as 31 December 2017 (31 December 2016: CHF 8,403 million; 31 December 2015: CHF 7,468 million) as well as DTAs on temporary differences, excess over threshold of CHF 857 million as of 31 December 2017 (31 December 2016: CHF 1,835 million; 31 December 2015: CHF 2,598 million), in accordance with fully applied Swiss SRB rules. Refer to the “Capital management” section of this report for more information.    6 Calculated as adjusted net profit / loss attributable to shareholders excluding deferred tax expense / benefit, such as the net write-down due to the Tax Cuts and Jobs Act enacted in the fourth quarter of 2017, divided by average tangible equity attributable to shareholders excluding any DTAs that do not qualify as fully applied CET1 capital.

 

 

68


 

Net new money1

 

 

 

 

 

 

For the year ended

CHF billion

 

31.12.17

31.12.16

31.12.15

Wealth Management

 

 51.1 

 26.8 

 12.9 

Wealth Management (adjusted)2

 

 51.1 

 26.8 

 22.8 

Wealth Management Americas

 

 (6.8) 

 15.4 

 21.3 

Asset Management

 

 58.7 

 (15.5) 

 (5.4) 

of which: excluding money market flows

 

 48.1 

 (22.5) 

 (0.7) 

of which: money market flows

 

 10.6 

 7.0 

 (4.7) 

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

 

31.12.17

31.12.16

31.12.15

 

31.12.16

Wealth Management

 

 1,148 

 977 

 947 

 

 18 

Wealth Management Americas1

 

 1,195 

 1,119 

 1,024 

 

 7 

Asset Management

 

 776 

 656 

 650 

 

 18 

of which: excluding money market funds

 

 701 

 591 

 592 

 

 19 

of which: money market funds

 

 76 

 66 

 58 

 

 15 

1 Certain account types were corrected during 2017. As a result, invested assets as of 31 December 2016 and 31 December 2015 were corrected by CHF 12 billion and CHF 11 billion, respectively.

 

69


Financial and operating performance
Group performance

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 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.

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.

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.

 

70


 

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.

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.

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.


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.

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.

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.

 

71


Financial and operating performance
Group performance

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.

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 the return on 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 from the return on 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.

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.

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.

  

72


 

Wealth Management

Wealth Management1

 

 

 

 

 

 

 

 

As of or for the year ended

 

% change from

CHF million, except where indicated

 

31.12.17

31.12.16

31.12.15

 

31.12.16

 

 

 

 

 

 

 

Results

 

 

 

 

 

 

Net interest income

 

 2,344 

 2,331 

 2,326 

 

 1 

Recurring net fee income2

 

 3,634 

 3,548 

 3,820 

 

 2 

Transaction-based income3

 

 1,611 

 1,397 

 1,778 

 

 15 

Other income

 

 39 

 20 

 231 

 

 95 

Income

 

 7,629 

 7,296 

 8,155 

 

 5 

Credit loss (expense) / recovery

 

 (4) 

 (5) 

 0 

 

 (20) 

Total operating income

 

 7,625 

 7,291 

 8,155 

 

 5 

Personnel expenses

 

 2,354 

 2,349 

 2,532 

 

 0 

General and administrative expenses

 

 594 

 640 

 637 

 

 (7) 

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

 

 2,372 

 2,348 

 2,289 

 

 1 

of which: services from CC – Services

 

 2,294 

 2,256 

 2,209 

 

 2 

Depreciation and impairment of property, equipment and software

 

 3 

 2 

 5 

 

 50 

Amortization and impairment of intangible assets

 

 7 

 4 

 3 

 

 75 

Total operating expenses

 

 5,330 

 5,343 

 5,465 

 

 0 

Business division operating profit / (loss) before tax

 

 2,295 

 1,948 

 2,689 

 

 18 

 

 

 

 

 

 

 

Adjusted results4

 

 

 

 

 

 

Total operating income as reported

 

 7,625 

 7,291 

 8,155 

 

 5 

of which: gain / (loss) on sales of subsidiaries and businesses

 

 

 (23) 

 169 

 

 

of which: gain related to investments in associates

 

 

 

 15 

 

 

of which: gain on sale of financial assets available for sale5

 

 

 21 

 

 

 

Total operating income (adjusted)

 

 7,625 

 7,293 

 7,971 

 

 5 

Total operating expenses as reported

 

 5,330 

 5,343 

 5,465 

 

 0 

of which: personnel-related restructuring expenses

 

 38 

 53 

 20 

 

 

of which: non-personnel-related restructuring expenses

 

 73 

 55 

 38 

 

 

of which: restructuring expenses allocated from CC – Services

 

 353 

 339 

 265 

 

 

Total operating expenses (adjusted)

 

 4,867 

 4,896 

 5,142 

 

 (1) 

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

 

 2,295 

 1,948 

 2,689 

 

 18 

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

 

 2,758 

 2,397 

 2,828 

 

 15 

 

 

 

 

 

 

 

Key performance indicators6

 

 

 

 

 

 

Pre-tax profit growth (%)

 

 17.8 

 (27.6) 

 15.6 

 

 

Cost / income ratio (%)

 

 69.9 

 73.2 

 67.0 

 

 

Net new money growth (%)

 

 5.2 

 2.8 

 1.3 

 

 

Gross margin on invested assets (bps)

 

 72 

 77 

 86 

 

 (6) 

Net margin on invested assets (bps)

 

 22 

 21 

 28 

 

 5 

 

 

 

 

 

 

 

Adjusted key performance indicators4,6

 

 

 

 

 

 

Pre-tax profit growth (%)

 

 15.1 

 (15.2) 

 12.6 

 

 

Cost / income ratio (%)

 

 63.8 

 67.1 

 64.5 

 

 

Net new money growth (%)

 

 5.2 

 2.8 

 2.3 

 

 

Gross margin on invested assets (bps)

 

 72 

 77 

 84 

 

 (6) 

Net margin on invested assets (bps)

 

 26 

 25 

 30 

 

 4 

 

73


Financial and operating performance
Wealth Management

Wealth Management (continued)1

 

 

 

 

 

 

 

 

As of or for the year ended

 

% change from

CHF million, except where indicated

 

31.12.17

31.12.16

31.12.15

 

31.12.16

 

 

 

 

 

 

 

Additional information

 

 

 

 

 

 

Recurring income7

 

 5,978 

 5,880 

 6,146 

 

 2 

Recurring income as a percentage of income (%)

 

 78.4 

 80.6 

 75.4 

 

 

Average attributed equity (CHF billion)8

 

 6.2 

 3.5 

 3.5 

 

 77 

Return on attributed equity (%)8

 

 37.1 

 56.1 

 77.4 

 

 

Return on attributed tangible equity (%)8

 

 47.7 

 

 

 

 

Risk-weighted assets (CHF billion)8

 

 30.2 

 25.8 

 25.3 

 

 17 

of which: held by Wealth Management (CHF billion)

 

 29.0 

 25.8 

 25.3 

 

 12 

of which: held by CC – Group ALM on behalf of Wealth Management (CHF billion)9

 

 1.2 

 

 

 

 

Leverage ratio denominator (CHF billion)8

 

 173.9 

 115.5 

 119.0 

 

 51 

of which: held by Wealth Management (CHF billion)

 

 128.0 

 115.5 

 119.0 

 

 11 

of which: held by CC – Group ALM on behalf of Wealth Management (CHF billion)9

 

 45.9 

 

 

 

 

Goodwill and intangible assets (CHF billion)

 

 1.4 

 1.3 

 1.3 

 

 8 

Net new money (CHF billion)

 

 51.1 

 26.8 

 12.9 

 

 

Invested assets (CHF billion)

 

 1,148 

 977 

 947 

 

 18 

Client assets (CHF billion)

 

 1,338 

 1,157 

 1,122 

 

 16 

Loans, gross (CHF billion)

 

 115.2 

 101.9 

 105.2 

 

 13 

Due to customers (CHF billion)

 

 195.3 

 192.3 

 172.3 

 

 2 

Personnel (full-time equivalents)

 

 9,665 

 9,721 

 10,239 

 

 (1) 

Client advisors (full-time equivalents)

 

 3,794 

 3,859 

 4,019 

 

 (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 Adjusted results are non-GAAP financial measures as defined by SEC regulations.    5 Reflects a gain on the sale of our investment in Visa Europe in 2016.    6 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators.    7 Recurring income consists of net interest income and recurring net fee income.    8 Refer to the “Capital management” section of this report for more information.    9 Represents risk-weighted assets and leverage ratio denominator held by Corporate Center – Group ALM that are directly associated with activity managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of attributing equity under the revised framework effective as of 1 January 2017, these resources are allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet the Group’s minimum liquidity coverage ratio requirement of 110%. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information.

 

 

Regional breakdown of key figures1

 

 

 

 

 

 

As of or for the year ended 31.12.17

Europe

Asia Pacific

Switzerland

Emerging markets

Total of regions2

of which: ultra high net worth

of which: Global Family Office3

Net new money (CHF billion)

 17.4 

 28.3 

 5.7 

 0.8 

 52.2 

 45.2 

 6.3 

Net new money growth (%)

 4.9 

 9.7 

 3.2 

 0.5 

 5.3 

 8.2 

 6.7 

Invested assets (CHF billion)

 402 

 373 

 204 

 166 

 1,145 

 678 

 120 

Client advisors (full-time equivalents)

 1,265 

 1,037 

 743 

 651 

 3,696 

 8104

 

1 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators.    2 Excluding minor functions with 98 client advisors, CHF 3 billion of invested assets, and CHF 1.1 billion of net new money outflows in 2017.    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 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.

 

 

74


 

2017 compared with 2016 

Results

Profit before tax increased by CHF 347 million or 18% to CHF 2,295 million and adjusted profit before tax increased by CHF 361 million or 15% to CHF 2,758 million, mainly reflecting higher operating income.

Operating income

Total operating income increased by CHF 334 million or 5% to CHF 7,625 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. Excluding these items, adjusted operating income increased by CHF 332 million or 5% to CHF 7,625 million, driven by increases across all income lines.

Net interest income increased by CHF 13 million to CHF 2,344 million, primarily due to higher deposit revenues, mostly reflecting higher short-term US dollar interest rates, as well as an increase in lending revenues. This was partly offset by lower allocated treasury-related income from Corporate Center – Group Asset and Liability Management (Group ALM), reflecting lower banking book interest income and higher funding costs for long-term debt that contributes to total loss-absorbing capacity.

Recurring net fee income increased by CHF 86 million to CHF 3,634 million, predominantly driven by higher average invested assets, increases in discretionary and advisory mandate penetration and pricing measures. These factors were partly offset by the effects of cross-border outflows and shifts into retrocession-free products.

Transaction-based income increased by CHF 214 million to CHF 1,611 million across all regions and most products, mainly due to increased client activity, most notably in Asia Pacific and Switzerland.

Other income increased by CHF 19 million to CHF 39 million, reflecting net gains on sales of subsidiaries and businesses.

Operating expenses

Total operating expenses decreased by CHF 13 million to CHF 5,330 million and adjusted operating expenses decreased by CHF 29 million or 1% to CHF 4,867 million.

Personnel expenses increased by CHF 5 million to CHF 2,354 million and increased by CHF 20 million to CHF 2,316 million on an adjusted basis, mainly due to higher variable compensation.


General and administrative expenses decreased by CHF 46 million to CHF 594 million and decreased by CHF 64 million to CHF 521 million on an adjusted basis, predominantly driven by lower net expenses for provisions for litigation, regulatory and similar matters.

Net expenses for services from Corporate Center and other business divisions increased by CHF 24 million to CHF 2,372 million and increased by CHF 10 million to CHF 2,019 million on an adjusted basis, mainly reflecting higher costs related to strategic and regulatory initiatives and higher net expenses from control functions, partly offset by lower net expenses from Group Technology.

Cost / income ratio

The cost / income ratio decreased to 69.9% from 73.2%. On an adjusted basis, the ratio decreased to 63.8% from 67.1% and was within our 2017 target range of 55% to 65%.

Net new money

Net new money was CHF 51.1 billion compared with CHF 26.8 billion, resulting in an annual growth rate of 5.2% compared with 2.8%, which was above our 2017 target range of 3% to 5%. Net new money was positive in all regions, predominantly driven by inflows in Asia Pacific and Europe. Cross-border-related net outflows were CHF 12 billion compared with CHF 14 billion, mainly driven by outflows in emerging markets. In addition, we incurred net outflows of CHF 8 billion related to the introduction of fees on euro deposit concentrations in Europe, emerging markets and Switzerland. Net new money from ultra high net worth clients was CHF 45.2 billion compared with CHF 27.3 billion.

Invested assets

Invested assets increased by CHF 171 billion to CHF 1,148 billion, primarily reflecting positive market performance of CHF 114 billion, net new money of CHF 51 billion, positive foreign currency translation effects of CHF 4 billion and an increase of CHF 4 billion due to the positive net effect of acquisitions and divestments of subsidiaries and businesses. Discretionary and advisory mandate penetration increased to 28.9% from 26.9%.

Personnel

Wealth Management employed 9,665 personnel compared with 9,721. The number of client advisors decreased by 65 to 3,794 and the number of non-client-facing staff remained stable at 5,871.

 

 

75


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 effects 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.

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%.

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%.

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.

  

76


 

Wealth Management Americas

Wealth Management Americas – in US dollars1

 

 

 

 

 

 

 

 

As of or for the year ended

 

% change from

USD million, except where indicated

 

31.12.17

31.12.16

31.12.15

 

31.12.16

 

 

 

 

 

 

 

Results

 

 

 

 

 

 

Net interest income

 

 1,712 

 1,484 

 1,215 

 

 15 

Recurring net fee income2

 

 5,263 

 4,880 

 4,795 

 

 8 

Transaction-based income3

 

 1,516 

 1,474 

 1,614 

 

 3 

Other income

 

 24 

 35 

 32 

 

 (31) 

Income

 

 8,516 

 7,873 

 7,657 

 

 8 

Credit loss (expense) / recovery

 

 (4) 

 (3) 

 (4) 

 

 33 

Total operating income

 

 8,512 

 7,871 

 7,653 

 

 8 

Personnel expenses

 

 5,274 

 4,874 

 4,746 

 

 8 

Financial advisor compensation4

 

 3,310 

 2,931 

 2,921 

 

 13 

Compensation commitments with recruited financial advisors5

 

 754 

 808 

 761 

 

 (7) 

Salaries and other personnel costs

 

 1,210 

 1,135 

 1,064 

 

 7 

General and administrative expenses

 

 657 

 576 

 845 

 

 14 

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

 

 1,307 

 1,250 

 1,252 

 

 5 

of which: services from CC – Services

 

 1,286 

 1,236 

 1,236 

 

 4 

Depreciation and impairment of property, equipment and software

 

 2 

 2 

 3 

 

 0 

Amortization and impairment of intangible assets

 

 42 

 50 

 53 

 

 (16) 

Total operating expenses

 

 7,282 

 6,752 

 6,899 

 

 8 

Business division operating profit / (loss) before tax

 

 1,230 

 1,118 

 754 

 

 10 

 

 

 

 

 

 

 

Adjusted results6

 

 

 

 

 

 

Total operating income as reported

 

 8,512 

 7,871 

 7,653 

 

 8 

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

 

 

 10 

 

 

 

Total operating income (adjusted)

 

 8,512 

 7,861 

 7,653 

 

 8 

Total operating expenses as reported

 

 7,282 

 6,752 

 6,899 

 

 8 

of which: personnel-related restructuring expenses

 

 1 

 7 

 0 

 

 

of which: non-personnel-related restructuring expenses

 

 0 

 0 

 0 

 

 

of which: restructuring expenses allocated from CC – Services

 

 115 

 134 

 141 

 

 

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

 

 

 

 (21) 

 

 

Total operating expenses (adjusted)

 

 7,167 

 6,610 

 6,779 

 

 8 

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

 

 1,230 

 1,118 

 754 

 

 10 

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

 

 1,345 

 1,250 

 874 

 

 8 

 

 

 

 

 

 

 

Key performance indicators7

 

 

 

 

 

 

Pre-tax profit growth (%)

 

 10.0 

 48.3 

 (23.1) 

 

 

Cost / income ratio (%)

 

 85.5 

 85.8 

 90.1 

 

 

Net new money growth (%)

 

 (0.7) 

 1.5 

 2.1 

 

 

Gross margin on invested assets (bps)

 

 73 

 74 

 75 

 

 (1) 

Net margin on invested assets (bps)

 

 11 

 10 

 7 

 

 10 

 

 

 

 

 

 

 

Adjusted key performance indicators6,7

 

 

 

 

 

 

Pre-tax profit growth (%)

 

 7.6 

 43.0 

 (15.1) 

 

 

Cost / income ratio (%)

 

 84.2 

 84.1 

 88.5 

 

 

Net new money growth (%)

 

 (0.7) 

 1.5 

 2.1 

 

 

Gross margin on invested assets (bps)

 

 73 

 74 

 75 

 

 (1) 

Net margin on invested assets (bps)

 

 12 

 12 

 9 

 

 0 

 

77


Financial and operating performance
Wealth Management Americas

Wealth Management Americas – in US dollars (continued)1

 

 

 

 

 

 

 

 

As of or for the year ended

 

% change from

USD million, except where indicated

 

31.12.17

31.12.16

31.12.15

 

31.12.16

 

 

 

 

 

 

 

Additional information

 

 

 

 

 

 

Recurring income8

 

 6,975 

 6,364 

 6,010 

 

 10 

Recurring income as a percentage of income (%)

 

 81.9 

 80.8 

 78.5 

 

 

Average attributed equity (USD billion)9

 

 6.7 

 2.6 

 2.6 

 

 158 

Return on attributed equity (%)9

 

 18.3 

 43.0 

 29.3 

 

 

Return on attributed tangible equity (%)9

 

 41.6 

 

 

 

 

Risk-weighted assets (USD billion)9

 

 27.2 

 23.4 

 21.9 

 

 16 

of which: held by Wealth Management Americas (USD billion)

 

 26.2 

 23.4 

 21.9 

 

 12 

of which: held by CC – Group ALM on behalf of Wealth Management Americas (USD billion)10

 

 1.0 

 

 

 

 

Leverage ratio denominator (USD billion)9

 

 90.2 

 66.9 

 62.8 

 

 35 

of which: held by Wealth Management Americas (USD billion)

 

 73.7 

 66.9 

 62.8 

 

 10 

of which: held by CC – Group ALM on behalf of Wealth Management Americas (USD billion)10

 

 16.6 

 

 

 

 

Goodwill and intangible assets (USD billion)

 

 3.6 

 3.7 

 3.7 

 

 (3) 

Net new money (USD billion)

 

 (7.2) 

 15.4 

 21.4 

 

 

Net new money including interest and dividend income (USD billion)11

 

 21.7 

 40.8 

 47.8 

 

 

Invested assets (USD billion)12

 

 1,225 

 1,100 

 1,022 

 

 11 

Client assets (USD billion)

 

 1,288 

 1,160 

 1,084 

 

 11 

Loans, gross (USD billion)

 

 54.4 

 51.6 

 48.7 

 

 5 

Due to customers (USD billion)

 

 77.6 

 89.2 

 83.1 

 

 (13) 

Recruitment loans to financial advisors

 

 2,619 

 3,033 

 3,179 

 

 (14) 

Other loans to financial advisors

 

 580 

 462 

 418 

 

 26 

Personnel (full-time equivalents)

 

 13,512 

 13,526 

 13,611 

 

 0 

Financial advisors (full-time equivalents)

 

 6,822 

 7,025 

 7,140 

 

 (3) 

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 represent expenses related to compensation commitments granted to financial advisors at the time of recruitment that are subject to vesting requirements.    6 Adjusted results are non-GAAP financial measures as defined by SEC regulations.    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 Represents risk-weighted assets and leverage ratio denominator held by Corporate Center – Group ALM that are directly associated with activity managed centrally on behalf of the business divisions and other Corporate Center units. For the purpose of attributing equity under the revised framework effective as of 1 January 2017, these resources are allocated to the business divisions and other Corporate Center units, primarily based on the level of high-quality liquid assets needed to meet the Group’s minimum liquidity coverage ratio requirement of 110%. Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information.    11 Presented in line with historical reporting practice in the US market.    12 Certain account types were corrected during 2017. As a result, invested assets as of 31 December 2016 and 31 December 2015 were corrected by USD 11 billion. The effect on net new money in all periods was immaterial.

 

78


 

2017 compared with 2016 

Results

Profit before tax increased by USD 112 million or 10% to USD 1,230 million, and adjusted profit before tax increased by USD 95 million or 8% to USD 1,345 million driven by higher operating income, partly offset by higher operating expenses.

Operating income

Total operating income increased by USD 641 million or 8% and adjusted operating income increased by USD 651 million or 8% to USD 8,512 million, mainly due to higher net interest income and recurring net fee income.

Net interest income increased by USD 228 million to USD 1,712 million, primarily due to an increase in net interest margin on higher short-term US dollar interest rates as well as higher lending balances. The average mortgage portfolio balance increased 18% and the average securities-backed lending portfolio balance increased 2%.

Recurring net fee income increased by USD 383 million to USD 5,263 million, mainly due to increased invested assets in managed accounts.

Transaction-based income increased by USD 42 million to USD 1,516 million, primarily due to higher client activity.

Operating expenses

Total operating expenses increased by USD 530 million or 8% to USD 7,282 million and adjusted operating expenses increased by USD 557 million or 8% to USD 7,167 million.

Personnel expenses increased by USD 400 million to USD 5,274 million and adjusted personnel expenses increased by USD 406 million to USD 5,273 million, mainly due to USD 379 million higher financial advisor compensation and an increase in salaries and other personnel costs. The higher financial advisor compensation reflects higher compensable revenues as well as changes we announced in 2016 to our financial advisor compensation model. The increase in salaries and other personnel costs is due to an increase in support staff. These increases were partly offset by lower expenses for compensation commitments with recruited financial advisors.


General and administrative expenses increased by USD 81 million to USD 657 million, largely due to a USD 51 million net expense for provisions for litigation, regulatory and similar matters. Furthermore, other provisions increased by USD 22 million, mainly as 2016 included a release of USD 18 million

Net expenses for services from Corporate Center and other business divisions increased by USD 57 million to USD 1,307 million and increased by USD 76 million to USD 1,192 million on an adjusted basis, mainly reflecting higher costs related to Group Technology and strategic and regulatory initiatives.

Cost / income ratio

The cost / income ratio decreased to 85.5% from 85.8%. On an adjusted basis, the cost / income ratio was 84.2% compared with 84.1% and was within our 2017 target range of 75% to 85%.

Net new money

Net new money outflows were USD 7.2 billion compared with net inflows of USD 15.4 billion, reflecting outflows from net recruiting partly offset by inflows from financial advisors employed with UBS for more than one year. The net new money growth rate was negative 0.7% compared with positive 1.5%, and was below our 2017 target range of 2% to 4%.

Invested assets

Invested assets increased by USD 125 billion to USD 1,225 billion, reflecting positive market performance of USD 135 billion, partly offset by net new money outflows of USD 7 billion. Discretionary and advisory mandate penetration increased to 36.8% from 35.1%.

Personnel

As of 31 December 2017, Wealth Management Americas employed 13,512 personnel, a decrease of 14 from 31 December 2016. Financial advisor headcount decreased by 203 to 6,822, due to attrition. Non-financial advisor headcount increased by 189 to 6,690 due to an increase in s