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AMNA Ubs

Filed: 3 Mar 20, 4:17pm

 

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, 2019

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 2019:

 

UBS Group AG

Ordinary shares, par value CHF 0.10 per share:

3,859,055,395 ordinary shares

(including 243,021,296treasury 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 405 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

Trading symbol(s)

Name of each exchange on

which registered

Ordinary Shares (par value of CHF 0.10 each)

UBS

New York Stock Exchange

UBS AG

Title of each class

Trading symbol(s)

Name of each exchange on

which registered

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

FBGX

NYSE Arca

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

FIEE

NYSE Arca

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

FIHD

NYSE Arca

E-TRACS Linked to the UBS Bloomberg CMCI Food Total Return due April 5, 2038

FUD

NYSE Arca

E-TRACS Linked to the UBS Bloomberg CMCI Agriculture Total Return due April 5, 2038

UAG

NYSE Arca

E-TRACS Linked to the UBS Bloomberg CMCI Total Return due April 5, 2038

UCI

NYSE Arca

E-TRACS Linked to the UBS Bloomberg CMCI Total Return Series B due April 5, 2038

UCIB

NYSE Arca

E-TRACS Linked to the UBS Bloomberg CMCI Gold Total Return due April 5, 2038

UBG

NYSE Arca

E-TRACS Linked to the UBS Bloomberg CMCI Silver Total Return due April 5, 2038

USV

NYSE Arca

E-TRACS Linked to the Bloomberg Commodity Index Total ReturnSM due October 31, 2039

DJCI

NYSE Arca

E-TRACS Linked to the Bloomberg Commodity Index Total ReturnSM Series B due October 31, 2039

DJCB

NYSE Arca

E-TRACS Linked to the Alerian MLP Infrastructure Index due April 2, 2040

MLPI

NYSE Arca

E-TRACS Linked to the Alerian MLP Infrastructure Index Series B due April 2, 2040

MLPB

NYSE Arca

E-TRACS Linked to the Alerian Natural Gas MLP Index due July 9,  2040

MLPG

NYSE Arca

E-TRACS Linked to the Wells Fargo® Business Development Company Index due April 26, 2041

BDCS

NYSE Arca

E-TRACS Linked to the Wells Fargo® Business Development Company Index Series B due April 26, 2041

BDCZ

NYSE Arca

2×Leveraged Long E-TRACS Linked to the Wells Fargo® Business Development Company Index due May 24, 2041

BDCL

NYSE Arca

2×Leveraged E-TRACS Linked to the Wells Fargo® Diversified Business Development Company Index Series B due October 21, 2049

BDCY

NYSE Arca

ETRACS Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN due May 22, 2042

DVYL

NYSE Arca

    

 

4 


 

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

MLPQ

NYSE Arca

ETRACS Monthly Pay 2xLeveraged S&P Dividend ETN due May 22, 2042

SDYL

NYSE Arca

ETRACS Alerian MLP Index ETN due July 18, 2042

AMU

NYSE Arca

ETRACS Alerian MLP Index ETN Series B due July 18, 2042

AMUB

NYSE Arca

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

MORL

NYSE Arca

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

MRRL

NYSE Arca

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

DVHL

NYSE Arca

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

CEFZ

NYSE Arca

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

CEFL

NYSE Arca

ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN Series B due May 24, 2041

LBDC

NYSE Arca

ETRACS Monthly Pay 2xLeveragedWells FargoMLP Ex-Energy ETN Series B due October 21, 2049

LMLB

NYSE Arca

ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN due June 24, 2044

LMLP

NYSE Arca

ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN due September 30, 2044

HDLV

NYSE Arca

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

SMHD

NYSE Arca

ETRACS 2xMonthly Pay Leveraged US Small Cap High Dividend ETN Series B due November 10, 2048

SMHB

NYSE Arca

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

HOML

NYSE Arca

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

LRET

NYSE Arca

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

MLPZ

NYSE Arca

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

OILX

NYSE Arca

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

WTIU

NYSE Arca

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

WTID

NYSE Arca

ETRACS 2xMonthly Pay Leveraged Preferred Stock Index ETN due September 25, 2048

PFFL

NYSE Arca

ETRACS NYSE® Pickens CoreMidstream™ Index ETN due August 20, 2048

PYPE

NYSE Arca

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

EVIX

Cboe

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

EXIV

Cboe

ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN Series B due October 21, 2049

HDLB

NYSE Arca

 

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

None

 

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

None

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) and leverage ratio denominator (LRD), including to counteract regulatory-driven increases, 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) the continuing low or negative interest rate environment in Switzerland and other jurisdictions, 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, and changes to national trade policies 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, including Interest Rate Benchmark Reform, and regulation in Switzerland, the US, the UK, the European Union 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, net stable funding ratio, liquidity and funding requirements, heightened operational resilience 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 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, 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) UBS’s ability to maintain and improve its systems and controls for the detection and prevention of money laundering and compliance with sanctions to meet evolving regulatory requirements and expectations, in particular in the US; (vii) the uncertainty arising from the UK’s exit from the EU; (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 regulations 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, potentially large fines or monetary penalties, or the 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 as well as the amount of capital available for return to shareholders; (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; (xiii) changes in accounting or tax standards or policies, and determinations or interpretations affecting the recognition of gain or loss, the valuation of goodwill, the recognition of deferred tax assets and other matters; (xiv) 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 or other cybersecurity disruptions, 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, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2019. 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 2019 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 (682-685 and 705-708), Statement of changes in equity (304-307 and 490-493) and UBS shares (197). 

B – Capitalization and Indebtedness.

Not applicable.

C – Reasons for the Offer and Use of Proceeds.

Not applicable.

D – Risk Factors.

Annual Report, Risk factors (60-70). 

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 (14-15); Our strategy (18); Our businesses (20-30); Note 32 to each set of Financial Statements (Changes in organization and acquisitions and disposals of subsidiaries and businesses) (464-465 and 651-652)

5: Refer to our management discussion and analysis for a description of material acquisitions and divestitures in Annual Report, Our businesses (20-30), as applicable, Note 15 to each set of Financial Statements (Property, equipment and software) (372 and 558) and Note 32 to each set of Financial Statements (Changes in organization and acquisitions and disposals of subsidiaries and businesses) (464-465 and 651-652).

6-7: Nothing to disclose.

8: Annual Report, Information sources (732).

B – Business Overview.

1, 2 and 5: Annual Report, Our strategy, business model and environment (18-70), Note 2a to each set of Financial Statements (Segment reporting) (347-350 and 534-537) and Note 2b to each set of Financial Statements (Segment reporting by geographic location) (351 and 538). See also Supplement (13).

3: Seasonal characteristics (83). 

4: Not applicable.

6: None.

7: Information as to the basis for these statements normally accompanies the statements, except where marked in the report as a statement based upon publicly available information or internal estimates, as applicable.

8: Regulation and supervision (49-53) and Regulatory and legal developments (54-59).

Supplement (14).

 

7 


 

C – Organizational Structure.

 

Annual Report, Our evolution (14-15) and Note 31 to each set of Financial Statements (Interests in subsidiaries and other entities) (458-463 and 645-650).

D – Property, Plant and Equipment.

 

Annual Report, Property, plant and equipment (686 and 709), Note 15 to each set of Financial Statements (Property, equipment and software) (372 and 558), Note 33 to each set of Financial Statements (Finance lease receivables(466 and 653)

Information required by Industry Guide 3

Annual Report, Information required by industry guide 3 (687-703 and 710-726) and Selected financial data (682-685 and 705-708)

Item 4A.  Unresolved Staff Comments.

None.

Item 5.  Operating and Financial Review and Prospects.

A – Operating Results.

Annual Report, Our key figures (8), UBS AG consolidated key figures (476), Performance targets and measurement (19), Group performance (75-84), financial and operating performance by business division and Corporate Center (85-102), Note 2a to each set of Financial Statements (Segment reporting) (347-350 and 534-537), Currency management (173), Capital management (175-199), Risk factors (60-70), Our environment (31-34), Note 28 to each set of Financial Statements (Hedge Accounting) (430-435 and 617-622), Regulatory and legal developments (54-59), Significant accounting and financial reporting changes (73-74), Note 1 to each set of Financial Statements (Summary of significant accounting policies) (311-346 and 498-533) and Note 32 to each set of Financial Statements (Changes in organization and acquisitions and disposals of subsidiaries and businesses) (464-465 and 651-652).

B – Liquidity and Capital Resources.

Annual Report, Risk factors (60-70)Group performance (75-84), financial and operating performance by business division and Corporate Center (85-102), Seasonal characteristics (83), Interest rate risk in the banking book (143-146), Balance sheet, liquidity and funding management (156-169), Currency management (173), Cash flows (174), Capital management (175-199)Note 26a to each set of Financial Statements (Restricted financial assets) (426-427 and 612-613), Note 13 (Financial assets at fair value not held for trading) (371 and 557), Note 14 (Financial assets measured at fair value through other comprehensive income) (372 and 558), and Note 17a (Other financial assets measured at amortized cost) (376 and 562), Note 11 to each set of Financial Statements (Derivative instruments) (365-370 and 551-556), Note 19 to each set of Financial Statements (Debt issued designated at fair value) (377 and 563), Note 20 to each set of Financial Statements (Debt issued measured at amortized cost) (378-379 and 564-565), Short-term borrowings (694 and 717), Property, Plant and Equipment (686 and 709), Note 15 to each set of Financial Statements (Property, equipment and software) (372 and 558), Note 28 to each set of Financial Statements (Hedge Accounting) (430-435 and 617-622), Note 33 to each set of Financial Statements (Finance lease receivables(466 and 653).

 

Liquidity and capital management is undertaken at UBS as an integrated asset and liability management function.  While we believe our 'working capital' is sufficient for the company's present requirements, it is our opinion that, as a bank, our liquidity coverage ratio (LCR) is the more relevant measure.  For more information see, Annual Report, Risk, treasury and capital management, Liquidity coverage ratio (159).

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

Not applicable.

D—Trend Information.

Annual Report, Our businesses (20-30), Our environment (31-34), Regulatory and legal developments (54-59), Risk factors (60-70), Financial and operating performance (72-102) and Top and emerging risks (108). 

E—Off-Balance Sheet Arrangements.

Annual Report, Off-balance sheet (170-172)Note 31c) to each set of Financial Statements (Interests in unconsolidated structured entities) (461-463 and 648-650), Note 26 to each set of Financial Statements (Restricted and transferred financial assets) (426-428 and 614-616) and Note 33 to each set of Financial Statements (Finance lease receivables(466 and 653)

F—Tabular Disclosure of Contractual Obligations.

Annual Report, Contractual obligations (172). Finance lease obligations disclosed together with operating leases as "Lease obligations", as it is not material enough to breakout separately.

Item 6.  Directors, Senior Management and Employees.

A – Directors and Senior Management.

1, 2 and 3: Annual Report, Board of Directors (214-220) and Group Executive Board (230-236). 

4, 5: None.

 

8 


 

B – Compensation.

1: Annual Report, Compensation (242-287), Note 30 to each set of Financial Statements (Employee benefits: variable compensation) (450-457 and 638-644) and Note 35 to each set of Financial Statements (Related parties) (467-468 and 654-656).

2: Annual Report, Note 29 to each set of Financial Statements (Pension and other post-employment benefit plans) (436-449 and 623-637).

C – Board practices.

1: Annual Report, Board of Directors (213-228). 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 29 April 2020.

2: Annual Report, Compensation (242-288) and Note 35 to each set of Financial Statements (Related parties) (467-468 and 654-656).

3: Annual Report, Corporate Governance and Compensation (202-203), Audit committee (223) and Compensation Committee (224). 

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

D—Employees.

Annual Report, Employees (43-44). 

E—Share Ownership.

Annual Report, Compensation (242-288), Note 30 to each set of Financial Statements (Employee benefits: variable compensation) (450-457 and 638-644) and Note 35b to each set of Financial Statements (Equity holdings of key management personnel(467 and 654).

Item 7.  Major Shareholders and Related Party Transactions.

A—Major Shareholders. 

Annual Report, Group structure and shareholders (204-205), Share capital structure (206-210) and Voting rights, restrictions and representation (211). 

 

The number of shares of UBS Group AG held by the respective shareholders listed on page 205 of the Annual Report registered in the UBS share register with 3% or more of total share capital as of 31 December 2019 is as follows:

 

Shareholder

Number of shares held

Chase Nominees Ltd., London

422,341,278

DTC (Cede & Co.), New York

292,085,340

Nortrust Nominees Ltd., London

189,027,452

 

The number of shares of UBS AG held by UBS Group AG as of 31 December 2019 was 3,858,408,466 shares.

B—Related Party Transactions.

Annual Report, Loans granted to GEB members (286), Loans granted to BoD members (286) and Note 35 to each set of Financial Statements (Related parties(467-468 and 654-656).

 

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, 6: Please see Item 18 of this Form 20-F.

5: Not applicable.

7: Information on material legal and regulatory proceedings is in Note 21 to each set of Financial Statements (Provisions and contingent liabilities) (380-388 and 566-574). 

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 2019, filed on Forms 6-K dated April 25, 2019 (UBS Group AG) and April 30, 2019 (UBS AG), July 23, 2019 (UBS Group AG) and July 26, 2019 (UBS AG) and October 22, 2019 (UBS Group AG) and October 25, 2019 (UBS AG), respectively; as well as the Provisions and contingent liabilities section in the Fourth Quarter 2019 Report, filed on Form 6-K dated January 21, 2020. The disclosures in each such Quarterly Report speak only as of their respective dates.

8: Annual Report, Letter to Shareholders (2-5), Shareholder returns (42), Our strategy, Driving increasing returns, Priority VII (18), Dividend Distribution (173), Distributions to shareholders (209). 

B—Significant Changes.

Annual Report, Note 1 to each set of Financial Statements (Summary of significant accounting policies) (311-346 and 498-533)).

Item 9.  The Offer and Listing.

A – Offer and Listing Details.

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

4: Listing of UBS Group AG shares are listed on the New York Stock Exchange under the symbol UBS and on the Swiss SIX Exchange under the symbol UBSG, Group structure and shareholders (204-205) and Share capital structure (206-210).

B—Plan of Distribution.

Not applicable.

C—Markets.

Annual Report, Listing of UBS Group AG shares (199).

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 (221), Share capital structure (206-210), Organizational principles and structure (221), Shareholders' participation rights (211-212), Significant shareholders (204-205), Change of control and defense measures (237), Board of Directors (213-228), Compensation governance (265-266) and Board of Directors Compesnation (273-275).

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 4.19 to this Form 20-F. These notes are described under Capital and other instruments contributing to our total loss-absorbing capacity on page 177 of the Annual Report and Our deferred compensation planson page 259 of the Annual Report.

 

The settlement agreements and orders filed as exhibits 4.20 through 4.24 are described in item 5 (Foreign exchange, LIBOR and benchmark rates, and other trading practices) of Note 21 (Provisions and contingent liabilities) to each set of Financial Statements 380-388 and 566-574.

 

The Asset Transfer Agreement by which certain assets and liabilities of UBS AG were transferred to UBS Switzerland AG is filed as Exhibit 4.25, and is described under Joint liability of UBS Switzerland AG on page 662 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. 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 (138-147). 

(b) Qualitative Information About Market Risk.

Annual Report, Market risk (138-147). 

(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 (292 and 478).

(c) Attestation Report of the Registered Public Accounting Firm

Annual Report, Reports of Independent Registered Public Accounting Firm (293-294 and 479-480).

(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 (223) and Differences from corporate governance standards relevant to US-listed companies (220-221). 

 

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 Jeremy Anderson, qualifies as a financial expert.

Item 16B.  Code of Ethics.

Annual Report, Code of Conduct and Ethics (46). UBS's Code of Conduct and Ethics ("the Code") is published on our website under https://www.ubs.com/code

The Code is regularly reviewed to make sure it is consistent with the rest of UBS's policies, as well as the law. The current Code published in May 2019 reflects minor changes on pages 6, 7 and 15 compared to the previous version:

  • Strengthening of language around fair dealing and competition;
  • Clarification on tax matters and on the threshold of reporting violations to authorities;
  • Re-write of the whistleblowing section to reflect current process and language;
  • Change to "Questions about the Code" to reflect the role and responsibility of GCRG.

The UBS Code of Business Conduct does not include a waiver option , and no waiver from any provision of the Code was granted to any employee in 2019.

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 (198).

 

On 22 January 2018, UBS Group AG announced its intention to buy back its own registered shares over the following three years starting from March 2018, amounting to a maximum of CHF 2 billion.

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 (202-203).

Item 16H. Mine Safety Disclosure.

Not applicable.

Item 17.  Financial Statements.

Not applicable.

Item 18.  Financial Statements.

Annual Report, Consolidated financial statements (306-674), Significant regulated subsidiary and sub-group information (676-677) and Additional regulatory information (681-726).

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 Non-core and Legacy Portfolio within Corporate Center, are managed at a Group level. These revenues are included in the Global column.

 

 

USD billion

Business Division

FY

Americas

Asia Pacific

EMEA

Switzerland

Global

Total

Global Wealth Management

2019

9.1

2.2

3.4

1.6

0.1

16.4

20181

9.1

2.4

3.6

1.6

0.1

16.8

20171

8.7

2.3

3.5

1.6

0.0

16.1

Personal & Corporate Banking

2019

0.0

0.0

0.0

3.7

0.0

3.7

20181

0.0

0.0

0.0

4.2

0.0

4.2

20171

0.0

0.0

0.0

3.8

0.0

3.8

Asset Management

2019

0.5

0.4

0.4

0.6

(0.0)

1.9

20181

0.5

0.4

0.3

0.7

(0.1)

1.9

20171

0.5

0.4

0.5

0.8

(0.1)

2.1

Investment Bank

2019

2.5

2.1

2.0

0.8

(0.1)

7.3

20181

3.0

2.1

2.3

0.7

(0.1)

8.0

20171

2.8

2.1

2.1

0.7

(0.1)

7.7

Corporate Center

2019

0.0

0.0

0.0

0.0

(0.4)

(0.4)

20181

0.0

0.0

0.0

0.0

(0.6)

(0.6)

20171

0.0

0.0

0.0

0.0

(0.1)

(0.1)

Group

2019

12.0

4.7

5.8

6.7

(0.4)

28.9

20181

12.6

4.9

6.2

7.2

(0.7)

30.2

20171

12.0

4.8

6.1

6.9

(0.2)

29.6

 

1  Comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework. Refer to "Note 1b Changes in accounting policies, comparability and other adjustments" and "Note 2b Segment reporting by geographic location" in the "Consolidated financial statements" section of Annual Report 2019 for more information.

 

13 


 

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

 

Section 219 of the US Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) added Section 13(r) to the US 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 US or other law, even if conducted outside the US by non-US 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 US or Swiss law. The corrected gross revenues for this UN- related account in 2018 were approximately USD 44,757.50. In 2019, the gross revenues for this UN-related account were approximately USD 29,347.91. 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 2019, 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 US 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 2019 were USD 3,169.92. There have been no transactions involving this account other than in general account fees. The gross revenues to report for 2019 are USD 9.69.

 

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 US 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 GEB 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 BoD 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.

 

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 10 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 is entered into the commercial registers of Canton Zurich and Canton Basel-City 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 US federal income tax consequences of the ownership of UBS Group AG's ordinary shares (defined as "UBS ordinary shares " in this section) by a US holder (as defined below) who holds UBS ordinary shares as capital assets. This discussion addresses only US federal income taxation and Swiss income and capital taxation and does not discuss all of the tax consequences that may be relevant to holders in light of their individual circumstances, including other foreign tax consequences, state or local tax consequences, estate and gift tax consequences, and tax consequences arising under the Medicare contribution tax on net investment income or the alternative minimum tax.  It is designed to explain the major interactions between Swiss and US taxation for US 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 that actually or constructively own 10% or more of the total 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 US tax purposes is not the US 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 US 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 US 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 US 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 “US holder” is any beneficial owner of UBS ordinary shares that is for US 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 US 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 US persons have the authority to control all substantial decisions of the trust.

 

Holders of UBS ordinary shares are urged to consult their tax advisors regarding the US 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.

 

The Swiss Withholding Tax Act was amended. Since 1 January 2020 Swiss companies listed on a Swiss stock exchange such as UBS Group AG can repay reserves from capital contributions to their shareholders without deduction of Swiss withholding tax only if they distribute at least the same amount of taxable dividends. For this reason UBS Group AG pays half of the dividend from capital contribution reserves and half of the dividend from taxable dividends which is subject to 35% Swiss withholding tax.

 

A US 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 US 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 US holder upon the sale of UBS ordinary shares are not subject to Swiss income or gains taxes, unless such US 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 - US Federal Income Taxation  

 

The tax treatment of the UBS ordinary shares will depend in part on whether or not UBS Group AG is classified as a passive foreign investment company, or PFIC, for US federal income tax purposes. Except as discussed below under “—Passive Foreign Investment Company (PFIC) Rules”, this discussion assumes that UBS Group AG is not classified as a PFIC for United States federal income tax purposes.

 

Dividends and Distributions  

A US holder will include in gross income and treat as a dividend the gross amount of any distribution paid, before reduction for Swiss withholding taxes, by UBS Group AG out of its current or accumulated earnings and profits (as determined for US federal income tax purposes), other than certain pro-rata distributions of UBS ordinary shares,  when the distribution is actually or constructively received by the US holder. Distributions in excess of current and accumulated earnings and profits (as determined for US federal income tax purposes) will be treated as a return of capital to the extent of the US 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 US federal income tax principles. Accordingly, a US holder should expect to generally treat distributions we make on UBS ordinary shares as dividends.

 

Dividends paid to a noncorporate US holder that constitute qualified dividend income will be taxable to the holder at preferential rates, 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 provided that, in the year that the US holder receives the dividend, the UBS ordinary shares are readily tradable on an established securities market in the United States. The UBS ordinary shares are listed on the New York Stock Exchange, and UBS Group AG therefore expects that dividends will be qualified dividend income.

 

21 


 

For US 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. However, if (a) we are 50% or more owned, by vote or value, by US persons and (b) at least 10% of our earnings and profits are attributable to sources within the US, then for foreign tax credit purposes, a portion of our dividends would be treated as derived from sources within the US. With respect to any dividend paid for any taxable year, the US source ratio of our dividends for foreign tax credit purposes would be equal to the portion of our earnings and profits from sources within the United States for such taxable year, divided by the total amount of our earnings and profits for such taxable year. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to preferential rates. The dividend will not be eligible for the dividends-received deduction generally allowed to US corporations in respect of dividends received from other US corporations.

 

The amount of the dividend distribution included in income of a US holder will be the US dollar value of the Swiss franc payments made, determined at the spot Swiss franc/US dollar rate on the date such dividend distribution is includible in the income of the US holder, regardless of whether the payment is in fact converted into US 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 US 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 US foreign tax credit limitations, the nonrefundable Swiss tax withheld and paid over to Switzerland will be creditable or deductible against the US holder’s US federal income tax liability. To the extent a reduction or refund of the tax withheld is available to a US 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 US holder’s US 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  

A US holder that sells or otherwise disposes of UBS ordinary shares generally will recognize capital gain or loss for US federal income tax purposes equal to the difference between the US dollar value of the amount realized and its tax basis, determined in US dollars, in such UBS ordinary shares. Capital gain of a non-corporate US 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. A US holder will not be allowed a foreign tax credit in respect of any stamp duty or stock exchange levy that is imposed upon a transfer of UBS ordinary shares.

 

Passive Foreign Investment Company (PFIC) Rules  

UBS Group AG believes that UBS ordinary shares should not currently be treated as stock of a PFIC for US federal income tax purposes, and does not expect to become a PFIC in the foreseeable future.  However, this conclusion is a factual determination made annually and thus may be subject to change. It is therefore possible that UBS Group AG could become a PFIC in a future taxable year.  In general, UBS Group AG will be a PFIC with respect to a US holder if, for any taxable year in which the US 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 PFIC, gain realized on the sale or other disposition of UBS ordinary shares would in general not be treated as capital gain. Instead, unless a US 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 PFIC if UBS Group AG was a PFIC 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 PFIC 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 5 March 2019.

1.2

Articles of Association of UBS AG dated 26 April 2018.  

1.3

Organization Regulations of UBS Group AG dated 1 May 2019.

1.4

Organization Regulations of UBS AG dated 1 May 2019.

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.

2(d)

Description of securities registered under Section 12 or the Securities Exchange Act of 1934

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 12 February 2026, issued 13 February 2014. (Incorporated by reference to Exhibit 4.3 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2013)

4.3

Terms and Conditions of Tier 2 Subordinated Notes of UBS AG due 2024, issued 15 May 2014. (Incorporated by reference to Exhibit 4.3 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2014)

4.4

Terms and Conditions of USD 1.25 billion 7% Tier 1 Subordinated Notes issued by UBS Group AG on 19 February 2015. (Incorporated by reference to Exhibit 4.4 to UBS AG's Annual Report on Form 20-F for the fiscal year ended December 31, 2014)

4.5

Terms and Conditions of 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)

4.6

Terms and Conditions of additional Tier 1 capital instruments issued pursuant to the Deferred Contingent Capital Plan 2014/15. (Incorporated by reference to Exhibit 4.9 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2017)

4.7

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)

4.8

Terms and Conditions of additional Tier 1 capital instruments issued pursuant to the Deferred Contingent Capital Plan 2015/16. (Incorporated by reference to Exhibit 4.11 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2017)

4.9

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)

4.10

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)

4.11

Terms and Conditions of additional Tier 1 capital instruments issued pursuant to the Deferred Contingent Capital Plan 2016/17. (Incorporated by reference to Exhibit 4.14 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2017)

4.12

Terms and Conditions of additional Tier 1 capital instruments issued pursuant to the Deferred Contingent Capital Plan 2017/18. (Incorporated by reference to Exhibit 4.15 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2017)

 

23 


 

4.13

Terms and Conditions of USD 2 billion 5.0% Tier 1 Subordinated Notes issued on 31 January 2018 by UBS Group AG (originally issued by UBS Group Funding (Switzerland) AG and guaranteed by UBS Group AG, migrated to UBS Group AG as issuer on 11 October 2019). (Incorporated by reference to Exhibit 4.16 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2017)

4.14

Terms and Conditions of SGD 700 million 5.875% Tier 1 Subordinated Notes issued on 28 November 2018 by UBS Group AG (originally issued by UBS Group Funding (Switzerland) AG and guaranteed by UBS Group AG, migrated to UBS Group AG as issuer on 11 October 2019). (Incorporated by reference to Exhibit 4.17 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2018)

4.15

Terms and Conditions of USD 2.5 billion 7.00% Tier 1 Subordinated Notes issued on 31 January 2019 by UBS Group AG (originally issued by UBS Group Funding (Switzerland) AG and guaranteed by UBS Group AG, migrated to UBS Group AG as issuer on 11 October 2019). (Incorporated by reference to Exhibit 4.18 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2018)

4.16

Terms and Conditions of additional Tier 1 capital instruments issued pursuant to the Deferred Contingent Capital Plan 2018/19. (Incorporated by reference to Exhibit 4.19 to UBS's Annual Report on Form 20-F for the fiscal year ended December 31, 2018)

4.17

Terms and Conditions of AUD 700 million 4.375% Tier 1 Subordinated Notes issued on 27 August 2019 by UBS Group AG.

4.18

Terms and Conditions of SGD 750 million 4.85% Tier 1 Subordinated Notes issued on 04 September 2019 by UBS Group AG.

4.19

Terms and Conditions of CHF 275 million 3.00% Tier 1 Subordinated Notes issued on 13 November 2019 by UBS Group AG.

4.20

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)

4.21

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)

4.22

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)

4.23

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)

4.24

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)

4.25

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)

8

Significant Subsidiaries of UBS Group AG.

 

 

 

Please see Note 31 to each set of Financial Statements (Interests in subsidiaries and other entities), on pages 458-463 and 645-650 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

 

 

Date: March 3, 2020

 

  

25 


 

UBS Group AG and UBS AG

Annual Report 2019

 


 

Our external reporting approach

The scope and content of our external reports are determined by Swiss legal and regulatory requirements, accounting standards, relevant stock and debt listing rules, including regulations promulgated by FINMA, the SIX Swiss Exchange, the US Securities and Exchange Commission and other regulatory requirements, as well as by our financial reporting policies.


At the center of our external reporting approach is the annual report of UBS Group AG, which consists of disclosures for UBS Group AG and its consolidated subsidiaries. We also provide a combined annual report for UBS Group AG and UBS AG consolidated, which additionally includes the consolidated financial statements of UBS AG as well as supplemental disclosures required under SEC regulations and is the basis for our SEC Form 20-F filing.

 

Annual reporting

UBS Annual Reports

The 2019 Annual Reports (UBS Group AG Annual Report 2019 and the combined UBS Group AG and UBS AG Annual Report 2019) include the consolidated financial statements of UBS Group AG and UBS AG, respectively, and provide comprehensive information about our firm, including our strategy and businesses, financial and operating performance and other key information. The reports are presented in US dollars, our presentation currency. The UBS Group AG Annual Report 2019 is translated into German, with the German translation available as of 13 March 2020 under “Annual reporting” at www.ubs.com/investors. 

 

The consolidated financial statements of UBS Group AG and UBS AG have been prepared in accordance with International Financial Reporting Standards (IFRS). The risk, treasury and capital management sections include certain audited financial information, which forms part of the consolidated financial statements. The Annual Reports also include the statutory financial statements of UBS Group AG, which are the basis for our Swiss tax return, our appropriation of retained earnings and a potential distribution of dividends, subject to shareholder approval at the Annual General Meeting.

We provide our combined Annual Report, the Pillar 3 report, the standalone legal entity reports and the sustainability report as web disclosures at www.ubs.com/investors. 

 

 

 

Pillar 3 report

The Pillar 3 report provides detailed quantitative and qualitative information about risk, capital, leverage and liquidity for the UBS Group and prudential key figures and regulatory information for UBS AG standalone, UBS Switzerland AG standalone, UBS Europe SE consolidated and UBS Americas Holding LLC consolidated.

Standalone legal entity reports

We publish separate standalone legal entity reports for UBS AG and UBS Switzerland AG. Selected financial and regulatory key figures for these entities as well as for UBS Europe SE and UBS Americas Holding LLC are also included in our annual reports.

Sustainability report

The sustainability report (formerly called the GRI Document), which will be available from 5 March 2020, provides disclosures on environmental, social and governance factors for the UBS Group and includes the disclosures of non-financial information required by German law implementing EU Directive 2014/95 (CSR-Richtlinie-Umsetzungsgesetz, CSR-RUG).

    

 


 

 


 

 

 


 

 

 


 

 

 



Annual Report 2019
Letter to shareholders
 

Dear Shareholders,

Building on your positive feedback from the previous years, our shareholder letter for 2019 again answers a series of questions that we are regularly asked by different stakeholders of the bank.

 

What was the market context in 2019?

Even though equity markets reached all-time highs, sharp changes in macroeconomic and market conditions affected UBS and our clients. Interest rate headwinds intensified, with rate cuts in the US and further moves into negative territory in Europe. Contrary to more optimistic expectations at the start of the year, global GDP growth of just 3% was both substantially lower than had been forecast and the lowest since the 2007–2009 financial crisis. Faced with slowing global growth and persistent geopolitical concerns, many clients either de-risked, or simply stayed on the sidelines. Client activity was also negatively affected by historically low market volatility. Nevertheless, recession concerns abated in the US and investor sentiment improved in the final quarter.

 

How do you assess the financial performance of the Group in 2019?

In these mixed conditions we delivered a solid performance in 2019, closing the year with the best fourth quarter since 2010. Our net profit reached USD 4.3 billion and we delivered a 12.4% return on CET1 capital, competitive with American peers and well ahead of other large European banks. Clients continued to turn to us for high-quality advice and solutions to help them achieve their goals. We now manage over USD 3.6 trillion of their assets, up nearly a trillion in four years. Our capital position remains formidable, with a CET1 capital ratio of 13.7%. Our total loss-absorbing capacity increased to nearly USD 90 billion.

 

How much of your profits did you return to shareholders last year?

In 2019, we generated USD 5 billion of capital, bringing the total to USD 28 billion since 2011. Our proposed dividend of USD 0.73 per share for 2019 represents an increase of 6% compared with 2018 and is in addition to the USD 806 million of shares bought back under our repurchase program, helping increase our tangible book value per share by 6%. The sum of our 2019 proposed dividend and share repurchases is USD 3.4 billion, or 80% of our net profits, which is highly attractive compared to peers.


What actions are you taking in the French litigation case?

Management and the Board of Directors are completely focused on and committed to a resolution of the French cross-border matter. This is in the best interest of shareholders, and it will most likely take time to resolve the case. The trial at the Court of Appeal is scheduled for 2–29 June 2020, and a verdict is expected later in the year. We are preparing diligently for this trial. UBS denies any criminal wrongdoing in this case. Our provision for this matter remains at EUR 450 million (USD 505 million), unchanged from year-end 2018. We have published responses to questions frequently asked by shareholders, clients, employees and other stakeholders on this matter, which are available at www.ubs.com/investors.   

 

What are the key growth opportunities you see going forward?

We are ideally positioned to take advantage of global mega-trends. As the largest truly global wealth manager to high net worth and ultra-high net worth clients, we are well positioned to benefit from these trends. Our business is based on wealth creation and helping clients manage their wealth and fulfil their goals, as well as advising on how they want to pass it on. Our billionaires report revealed that approximately 723 billionaires will transfer USD 3.5 trillion to their heirs over the next two decades. We have a strong presence in the US and Asia – two leading growth markets – along with the right people, the right investments in technology, and the capital strength to lead the wealth management industry. We are also a leading universal bank in Switzerland and we are determined to extend our lead. All this is enhanced by an investment bank that is strong in the areas where we choose to compete, and a successful asset manager.

We are delivering attractive returns in a responsible and sustainable way, while strategically investing for growth. Joint ventures, cross-selling and white-labelling are other growth opportunities. Examples in 2019 include exciting strategic partnerships with leading market players – Banco do Brasil in Brazil and Sumitomo Mitsui Trust in Japan. These are just some of the opportunities across our businesses that we are focused on. There are many others that you can read about in the pages of our annual report.

 

2 


         

Sergio P.Ermotti Group Chief Executive Officer

Axel A.Weber Chairman of the Board of Directors

 

3 


Annual Report 2019
Letter to shareholders
 

What are your priorities for 2020–2022?

We aim to drive higher and superior returns by growing each of our businesses and leveraging our unique, integrated and complementary business portfolio and geographic footprint. We have defined a number of priorities to help us achieve this in 2020–2022.

In Global Wealth Management, we will execute on several initiatives designed to accelerate our growth and elevate the quality and value of the service we deliver to our clients.

Our Investment Bank is well positioned to respond to changing market conditions and client needs and to better leverage our capabilities, including the technology investments we have made over the years.

Our Asset Management business will continue to build on its differentiated client offering for further growth, performance and scale.

In our Personal & Corporate Banking business in Switzerland, we will drive profitable growth through digital initiatives, services and efficiency gains.

Our business divisions are competitive in those fields that matter most to our clients, but they would not be as successful on a stand-alone basis. Therefore, a key priority is further embedding our one-firm approach across the Group. While we have successfully delivered our integrated business model for the benefit of many clients and shareholders, we can do more. We also remain committed to improving efficiency and productivity in 2020, keeping operating costs flat, while growing revenues and funding USD 1 billion in investments to meet regulatory requirements and improve efficiency. Continued investments in technology, platforms and risk management systems are crucial for growing our franchise, generating attractive returns in the future and improving client experience.

 

What are you doing to make sure UBS remains the most relevant global wealth manager?

Client needs are constantly evolving, and the pace of change is faster than ever. What has not and will not change is clients’ need for high-quality advice. This is where UBS excels and what makes our value proposition durable. We provide customized, nuanced, and personalized advice that helps our clients meet their individual financial goals, while improving their lives and generating impact that matters. Clients are increasingly looking to partner with a firm that creates value for society as a whole and helps them invest in areas and ideas that matter most to them. Our millennial clients are a good example of this. Many are restructuring their portfolios and using our advisory and product capabilities to do well financially while also doing good for the world around us. Technology plays another key part in this endeavor, helping us to deliver even more for our clients, empower our client-facing staff, including advisors, and make our infrastructure more agile and versatile and, as a result, increase productivity and quality of service.

 

What is UBS doing to provide sustainable finance opportunities for clients?

Sustainable finance has long been a firm-wide priority. The Dow Jones Sustainability Index, the most widely recognized
sustainability ranking, recognized UBS as the industry leader for the fifth year running. This demonstrates our commitment to the growing demand for sustainable finance services and products across client segments. A key indicator is the development of our core sustainable investing assets, which have more than doubled in just two years, from 5.6% of total invested assets in 2017 to 13.5% in 2019. Our multi-asset sustainable investing solutions were our fastest-growing mandate offering, reaching over USD 9 billion in invested assets. We aim to create sustainable finance products and services firm wide that help clients channel capital to support the United Nations Sustainable Development Goals (the SDGs). We also offer advice from philanthropy experts to assist clients in making a meaningful and measurable difference for their chosen philanthropic causes.

 

How are you using technology to help drive value for clients and shareholders?

We invest in technology to improve our client service and client experience, as well as to improve the efficiency and scalability of our businesses. Technology affects every element of our value chain – from the way we communicate with, serve and advise our clients to how we manage risks and run our back office. This is why we invest over 10% of revenues per year in technology, which was around USD 3.5 billion in 2019. Last year we decommissioned over 400 legacy applications and deployed 1,100 robots across our organization. In our Swiss Personal & Corporate Banking business, for example, two-thirds of our clients interact with us through our digital banking facilities. In our corporate business, this number is even higher with almost 80% using our digital banking. These clients are more satisfied and, as a result, do more business with us. Data analytics allows client advisors to analyze data more efficiently and provide better, more timely advice. We are also using machine learning and artificial intelligence-powered engines to automate more complex tasks and allow for better and faster decision-making.

 

What kind of capital returns can we expect if you successfully execute on your strategy and priorities?

We continue to focus on sustainable performance. We hold ourselves accountable for delivering our targets by executing on our proven strategy in a disciplined manner, and avoiding opportunistic measures for the sake of short-term gain. We invest for the long term and aim to do the right thing for clients and the long-term health of the business. Over the next three years, our aim is to deliver at the upper end of our target range of between 12% and 15% reported return on CET1 capital, as announced in January 2020. Our goal is to balance revenue growth with both cost and capital efficiency.

Going forward, we intend to grow our dividend per share by USD 1 cent per year. This will give us greater capacity to return more capital through share repurchases. We expect to repurchase around USD 450 million worth of shares in the first half of 2020, completing our current CHF 2 billion repurchase program, and will assess our future repurchase plans in the second half of 2020.

 

4 


         

What is UBS doing to develop the talent and leaders of tomorrow?

Our success relies on our long-standing commitment to investing in our employees at every career stage. We are widely recognized as an employer of choice and a great place to build a career. We believe the right strategy and a culture of ethical behavior and accountability drive strong performance. The three keys to success – our Pillars, Principles and Behaviors – embody the foundation of our strategy and culture. They define what we stand for as a firm and as individuals, while also defining the way we think, work and act at UBS. Our in-house UBS University updated its curriculum to emphasize future-skills development and personal growth for all employees, with a new digital skills syllabus that builds knowledge about topics such as blockchain, cloud computing, robotics and artificial intelligence. Furthermore, we revamped our leadership development offering to ensure our leaders have the skills they need to develop their businesses and their people, and to lead effectively in the digital transformation age. Finally, we foster a diverse and inclusive culture across the firm to drive sustainable growth and innovation, deliver the best of UBS to clients, and build a better place to work.

 

What is UBS doing to benefit stakeholders and society at large?

We believe that by keeping a healthy balance between the expectations of our most important stakeholder groups – clients, employees and investors – we are also creating value for society. Delivering tailored advice, top quality solutions and disciplined execution, while also addressing strategic opportunities, further improving the working environment and facilitating economic development that is sustainable for the planet and humanity – these actions are at the heart of our strategy. In 2019, we demonstrated this commitment by becoming a founding signatory of the United Nations Principles for Responsible Banking, a comprehensive framework for the integration of sustainability into banks’ business strategies. Our annual report contains a dedicated section on how we create value for all our stakeholders.

 

What are you doing to support the transition to a low-carbon economy?

We have been executing on our comprehensive climate strategy for many years. In 2019, our total core sustainable investments increased significantly to USD 488 billion from USD 313 billion in 2018, while, as part of this, our climate-related sustainable investments increased to USD 108 billion. This includes our recently launched and award-winning Climate Aware strategy, which reached over USD 3 billion in invested assets. To protect our own and our clients’ assets from climate-related risks, our exposure to carbon-related assets on our balance sheet continues to be low, at 0.8% or USD 1.9 billion as at the end of 2019, down from 1.6% at the end of 2018 and 2.8% at the end of 2017. Our goal is to be the financial partner of choice for
clients who want to mobilize capital toward climate action and the Paris Agreement. For the World Economic Forum annual meeting in 2020, our white paper focused on climate action and the ways in which investors can mobilize private and institutional capital toward the orderly transition to a low-carbon economy.

 

How does UBS play a role and give back in the communities in which it operates?

We strive to use our skills to help communities grow and thrive. We recognize that our long-term success depends on the health and prosperity of the communities in which we operate. Our firm-wide UBS in society program covers all of the activities and capabilities related to sustainable finance, including sustainable investing, philanthropy, environmental, climate and human rights policies governing client and supplier relationships, our environmental footprint, human resources, and community investment. For example, we seek to tackle societal disadvantage through long-term investments in education and entrepreneurship, such as the Quality Education India Development Impact Bond. We provide strategic financial commitments and offer targeted employee volunteering to drive positive change. Directing these efforts toward skills-based volunteering, we aim to tackle local social issues in the most powerful and effective way. In 2019, 38% of our global workforce volunteered, with 48% of the hours being skills based.

 

You have announced that Ralph Hamers will be appointed Group Chief Executive Officer as of 1 November 2020. Can you explain your choice?

The Board made the decision to appoint Ralph Hamers as successor of Group CEO Sergio P. Ermotti following a thorough and rigorous selection process, reflecting the firm’s commitment to strong corporate governance. Ralph is a proven leader in banking and a strong cultural fit for UBS. Under his leadership, ING Group has implemented a fundamental shift in its operating model and is now considered one of the best examples of digital innovation in the banking sector. Ralph is a charismatic executive with the experience and personality to write UBS’s next chapter.

 

Thank you for your ongoing support. We look forward to your feedback and to welcoming you to this year’s Annual General Meeting on 29 April.

 

Yours sincerely,

 

 

   

Axel A. Weber                                Sergio P. Ermotti

Chairman of the                            Group Chief Executive Officer

Board of Directors

  

5 


 

 

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, telephone +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 in 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, telephone +41-44-234 11 11; and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, telephone +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 in 1862) and Swiss Bank Corporation (founded in 1872) merged to form UBS AG.

Contacts

Switchboards

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

Zurich +41-44-234 1111
London +44-207-567 8000
New York +1-212-821 3000
Hong Kong +852-2971 8888
Singapore +65-6495 8000

Investor Relations

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

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

www.ubs.com/investors

Zurich +41-44-234 4100
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 5858
mediarelations@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

+41-44-235 6652


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

US Transfer Agent

For global registered share-related
inquiries in the US.

Computershare Trust Company NA
P.O. Box 505000
Louisville, KY 40233-5000, 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 2020 report:       Tuesday, 28 April 2020

Annual General Meeting 2020:                        Wednesday, 29 April 2020

Publication of the second quarter 2020 report: Tuesday, 21 July 2020

Publication of the third quarter 2020 report:     Tuesday, 20 October 2020

 

Corporate calendar UBS AG

Publication of the first quarter 2020 report:       Monday, 4 May 2020

Publication of the second quarter 2020 report: Friday, 24 July 2020

Publication of the third quarter 2020 report:     Friday, 23 October 2020

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 2020. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

7 


Annual Report 2019 

Our key figures

 

 

As of or for the year ended

USD million, except where indicated

 

31.12.19

31.12.18

31.12.17

Group results

 

 

 

 

Operating income

 

 28,889 

 30,213 

 29,622 

Operating expenses

 

 23,312 

 24,222 

 24,272 

Operating profit / (loss) before tax

 

 5,577 

 5,991 

 5,351 

Net profit / (loss) attributable to shareholders

 

 4,304 

 4,516 

 969 

Diluted earnings per share (USD)1

 

 1.14 

 1.18 

 0.25 

Profitability and growth2

 

 

 

 

Return on equity (%)

 

 7.9 

 8.6 

 1.8 

Return on tangible equity (%)

 

 9.0 

 9.8 

 2.0 

Return on common equity tier 1 capital (%)

 

 12.4 

 13.1 

 3.0 

Return on risk-weighted assets, gross (%)

 

 11.0 

 11.8 

 12.6 

Return on leverage ratio denominator, gross (%)

 

 3.2 

 3.3 

 3.3 

Cost / income ratio (%)

 

 80.5 

 79.9 

 81.6 

Adjusted cost / income ratio (%)

 

 78.9 

 79.5 

 78.2 

Effective tax rate (%)

 

 22.7 

 24.5 

 80.5 

Net profit growth (%)

 

 (4.7) 

 366.0 

 (71.1) 

Resources

 

 

 

 

Total assets

 

 972,183 

 958,489 

 939,279 

Equity attributable to shareholders

 

 54,533 

 52,928 

 52,495 

Common equity tier 1 capital3

 

 35,582 

 34,119 

 33,516 

Risk-weighted assets3

 

 259,208 

 263,747 

 243,636 

Common equity tier 1 capital ratio (%)3

 

 13.7 

 12.9 

 13.8 

Going concern capital ratio (%)3

 

 20.0 

 17.5 

 17.6 

Total loss-absorbing capacity ratio (%)3

 

 34.6 

 31.7 

 33.0 

Leverage ratio denominator3

 

 911,325 

 904,598 

 909,032 

Common equity tier 1 leverage ratio (%)3

 

 3.90 

 3.77 

 3.69 

Going concern leverage ratio (%)3

 

 5.7 

 5.1 

 4.7 

Total loss-absorbing capacity leverage ratio (%)3

 

 9.8 

 9.3 

 8.8 

Liquidity coverage ratio (%)4

 

 134 

 136 

 143 

Other

 

 

 

 

Invested assets (USD billion)5

 

 3,607 

 3,101 

 3,262 

Personnel (full-time equivalents)6

 

 68,601 

 66,888 

 61,253 

Market capitalization7

 

 45,661 

 45,907 

 68,477 

Total book value per share (USD)7

 

 15.08 

 14.35 

 14.11 

Total book value per share (CHF)7

 

 14.60 

 14.11 

 13.75 

Tangible book value per share (USD)7

 

 13.29 

 12.55 

 12.34 

Tangible book value per share (CHF)7

 

 12.87 

 12.33 

 12.03 

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 “Performance targets and measurement” section of this report for more information about our performance targets.    3 Based on the Swiss systemically relevant bank framework as of 1 January 2020. Refer to the “Capital management” section of this report for more information.    4 Refer to the “Balance sheet, liquidity and funding management” section of this report for more information.    5 Includes invested assets for Global Wealth Management, Asset Management and Personal & Corporate Banking.    6 Personnel (full-time equivalents) as of 31 December 2019 has been amended compared with our fourth quarter 2019 report, resulting in a decrease of 61.    7 Refer to “UBS shares” in the “Capital management” section of this report for more information.

 

 

 

 

Alternative performance measures

An alternative performance measure (APM) is a financial measure of historical or future financial performance, financial position or cash flows other than a financial measure defined or specified in the applicable recognized accounting standards or in other applicable regulations. We report a number of APMs, including adjusted results, in the discussion of the financial and operating performance of the Group, our business divisions and our Corporate Center. We use APMs to provide a fuller picture of our operating performance and to reflect management’s view of the fundamental drivers of our business results. A definition of each APM, the method used to calculate it and the information content are presented in the appendix under “Alternative performance measures.” Our APMs may qualify as non-GAAP measures as defined by SEC regulations.

 

8 


 

1

2

 

4

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” and “UBS Switzerland AG standalone”

UBS Switzerland AG on a standalone basis

“UBS Europe SE consolidated”

UBS Europe SE and its consolidated subsidiaries

“UBS Americas Holding LLC” and

“UBS Americas Holding LLC consolidated”

UBS Americas Holding LLC and its consolidated subsidiaries

In this report, unless the context requires otherwise, references to any gender shall apply to all genders.

 

9 


 

Our Board of Directors

10 


 

 

 

The Board of Directors (BoD) of UBS Group AG, under the leadership of the Chairman, consists of between 6 to 12 members as per our Articles of Association. The BoD decides on the strategy of the Group upon recommendation by 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.

  

11 


 

Our Group Executive Board

 

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 is comprised of 13 members and has executive management responsibility for the steering of the Group and its business. It assumes overall responsibility for developing and implementing the strategies of the Group, business divisions and Group functions, as approved by the BoD.

®   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

 

12 


 

     

13 


 

Our evolution

Since our origins in the mid-19th century, many financial institutions have become part of the history of our firm and have helped to shape its development. 1998 was a major turning point for the firm, when two of the then three largest banks in Switzerland, Union Bank of Switzerland and Swiss Bank Corporation (SBC), merged to form today’s UBS. At the time of the merger, both banks were already well established and successful in their own right. Union Bank of Switzerland had grown organically to become the largest Swiss bank. In contrast, SBC had grown mainly through a combination of strategic partnerships and acquisitions, including S.G. Warburg in 1995.

In 2000, we acquired PaineWebber, a US brokerage and asset management firm whose roots went back to 1879, establishing us as a significant player in the US. Over the past half century, we have also built a strong presence in the Asia Pacific region, where we are the largest wealth manager (measured by invested assets), a top-tier investment bank and an established player in asset management.


During the financial crisis of 2008, we 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 requires less risk-taking and capital, and have successfully completed this transformation.

Today, we are a global financial services firm, consisting of the largest truly global wealth manager, a leading personal and corporate banking business in Switzerland, a global asset manager and a focused investment bank.

The chart on the next page provides an overview of our principal legal entities and reflects our legal entity structure.

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

 

 

 

 

 

 

 

 

 

 

14 


 

The legal structure of the UBS Group as of 28 February 2020

 

 

 

 

15 


 

 


 

Our strategy, business model and environment

Management report

 


Our strategy, business model and environment
Our strategy
 

Our strategy

We aim to drive higher and superior returns by growing and leveraging our unique, integrated and complementary business portfolio and geographic footprint.

UBS is the largest truly global wealth manager and a leading personal and corporate bank in Switzerland, with focused investment bank and asset management divisions. We concentrate on capital-efficient businesses in our targeted markets, where we have a strong competitive position and an attractive long-term growth or profitability outlook. We view capital strength as the foundation of our strategy.

In delivering all of UBS as one firm to our clients, we intend to: strengthen our leading client franchises and grow share; position UBS for growth by expanding our services and capabilities; drive greater efficiencies and scale; and further intensify collaboration for the benefit of our clients.

Driving increasing returns

We manage UBS for the long term, focusing on sustainable profit growth and responsible resource deployment. We aim to balance growth opportunities with cost and capital efficiency in order to drive attractive risk-adjusted returns and sustainable performance.

For the years 2020–2022, we have seven strategic priorities, which are outlined below.

Priority I We aim to increase profit before tax in our Global Wealth Management business by 10–15% and drive higher pre-tax margins by elevating our leading franchise. We are adjusting our coverage across the client spectrum to deliver more tailored services and solutions. We are reorganizing ourselves to be closer to clients, in order to increase time spent with them, empowering regions, improving our responsiveness and speed to market, as well as delivering on all of the firm’s capabilities through expanded strategic partnerships with the Investment Bank and Asset Management. Furthermore, we are expanding our product offering while becoming more efficient, leveraging scale through partnerships and optimizing processes to increase productivity.

Priority II In our Investment Bank, we intend to improve returns by driving profitable growth, by further optimizing resources and through collaboration. We will maintain our capital-light business model that is focused on advice and execution and leverages our digital capabilities. Together with our other business divisions and through external partnerships, we aim to deliver market-leading digital, research and banking capabilities to our clients, while consuming up to one-third of Group resources.

Priority III In Asset Management, we intend to capitalize on our differentiated client offering for further growth,
performance and scale. We plan to build on our strengths in fast-growing areas of the industry, such as sustainable investing, private markets and alternatives.

Priority IV Personal & Corporate Banking aims to deliver steady profit growth by enhancing its digital initiatives and services, while improving efficiency. By expanding our leading position in digital services in Switzerland, along with broadening our advisory solutions and product offering, we expect to increase profits despite the current negative interest rate environment.

Priority V We want to deliver more as one firm to our clients. The collaboration between our business divisions is critical to the success of our strategy and is a source of competitive advantage. This collaboration also provides further revenue growth potential and enables us to better meet client needs; for example, in the ultra high net worth and Global Family Office space.

Another area where collaboration between our business divisions can bring more value to clients is in sustainable finance. As the largest truly global wealth manager, we have a responsibility to take a leading role in shaping a positive future, and our goal is to be the financial provider of choice for clients who wish to mobilize capital toward the achievement of specific environmental or social outcomes. We are shaping the landscape of sustainable finance by using thought leadership, innovation and partnerships to support clients in their sustainability efforts.

®   Refer to “Society” and “Our focus on ESG” in the “How we create value for our stakeholders” section of this report for more information about our engagement and leadership in sustainability matters

 

Priority VI We aim to drive improvements in firm-wide efficiency to fund growth and enhance returns. We believe continued optimization of processes, platforms, our organization and capital resources will help us to achieve this.

We will continue to invest in technology with the goal of improving efficiency and effectiveness, driving growth and better serving our clients.

We also intend to realize the benefits of existing external partnerships and to explore selected new opportunities.

Priority VII We plan to maintain an attractive capital return profile through dividends and share repurchases. Our capital strength and capital-accretive business model allows us to grow our business while delivering attractive capital returns to our shareholders.

We aim to increase our ordinary dividend per share by USD 0.01 each year, and to return excess capital through share repurchases. We consider business conditions and any idiosyncratic developments when determining excess capital available for share repurchases.

  

18 


 

Performance targets and measurement

Targets and capital guidance

In January 2020, we updated and simplified our performance target framework. We reduced the number of targets to concentrate primarily on the Group rather than our business divisions, underlining our focus on cross-divisional collaboration. Our targets are underpinned by the latest three-year strategic plan, which reflects our strategic initiatives, management actions, as well as certain economic and market assumptions. The return and efficiency targets have been revised to reflect changes in the market outlook since the previously communicated targets were set in October 2018.


The table below shows the performance targets and capital guidance for the 2020–2022 period. Our updated performance targets are based on reported results. From the first quarter of 2020, we will no longer disclose adjusted results in our financial reports. We will continue to provide disclosure of restructuring and litigation expenses as well as other material profit or loss items that management believes are not representative of underlying business performance in our management’s discussion and analysis.

Performance against targets is taken into account when determining variable compensation.

®   Refer to “Performance and compensation at a glance” in the “Compensation” section of this report for more information about variable compensation

®   Refer to “Alternative performance measures” in the appendix to this report for definitions of and further information about our performance measures

 

 

 

Targets and capital guidance 2020–2022
(on a reported basis)

 

 

 

Group
returns

 

12–15% return on CET1 capital (RoCET1)

 

 

 

 

 

 

Cost

efficiency

 

Positive operating leverage and 75–78% cost / income ratio

 

 

 

 

 

 

Growth

 

10–15% profit before tax growth in Global Wealth Management

 

 

 

 

 

 

Capital
allocation

 

Up to 13 of Group RWA and LRD in the Investment Bank

 

 

 

 

 

 

Capital
guidance

 

~13% CET1 capital ratio
~3.7% CET1 leverage ratio

 

  

19 


Our strategy, business model and environment
Our businesses
 

Our businesses

Working in partnership

We operate through four business divisions – Global Wealth Management, Personal & Corporate Banking, Asset Management and the Investment Bank. Our global reach and the breadth of our expertise are major assets that set us apart from our competitors. We see partnership as key to our growth, both within and between business divisions. We are at our best when we combine our strengths to provide our clients with more
comprehensive and better solutions through, for example, the creation of a unified capital markets group across Global Wealth Management and the Investment Bank, and a Global Family Office joint venture.

Combining our strengths makes us a better firm. Initiatives such as the Group Franchise Awards encourage employees to look for ways to build bridges between areas and offer the whole firm to our clients.

 

 

 

  

20 


 

Global Wealth Management

We are the largest truly global wealth manager, with USD 2.6 trillion in invested assets. Our goal is to provide tailored advice and solutions to private clients and family offices.

Since the combination of Wealth Management and Wealth Management Americas in 2018, we have continued to deliver comprehensive services to clients, capture operational efficiencies, and invest in our business. More than 22,000 Global Wealth Management employees assist our clients with achieving their goals. Our presence in the ultra high net worth segment is particularly strong, and we have access to the majority of the world’s billionaires.

In Japan, we have entered into a comprehensive strategic wealth management partnership with Sumitomo Mitsui Trust Holdings, Inc. (SuMi Trust Holdings). The new joint venture will combine UBS’s wealth management capabilities with SuMi Trust Holdings’ stature as Japan’s largest independent trust bank. SuMi Trust Holdings offers a range of services, including banking, real estate, asset and wealth advisory services, and has strong client access and brand name awareness in Japan.

Global Wealth Management organizational changes

In January 2020, we announced several initiatives designed to achieve Global Wealth Management’s growth ambitions and to elevate the quality and value of the service we deliver to our clients. First, we have reframed our offering around each client’s needs to deliver more tailored services and solutions. Second, we have made it easier for advisors to spend more time with clients and to better understand their needs and preferences, and we have taken measures to improve our responsiveness and speed to market. We created three distinct business units in EMEA – Europe; Central and Eastern Europe; and the Middle East and Africa – to better capture the diverse opportunities in these markets. Finally, we intend to deliver all of the firm’s capabilities through strategic partnerships with the Investment Bank and Asset Management.

Our focus

We serve high net worth and ultra high net worth individuals, families and family offices around the world, as well as affluent clients in selected markets. Through our organizational changes, we are making our Global Family Office capabilities, which are provided to ultra high net worth individuals, available to more clients, targeting coverage of around 1,500 in total.

While we are already a market leader in the ultra high net worth segment outside the US,1 we believe that we can also become the firm of choice for the wealthiest clients in the US,
many of whom already have a relationship with UBS. Our globally diversified footprint allows us to capture growth both in the largest (the US) and the fastest-growing (Asia Pacific) wealth markets.

We are focusing on increasing mandate and lending penetration, delivering innovative solutions for our clients (e.g., structured solutions, private markets, sustainability and thematic investing), as well as enhancing our advisors’ productivity by making operational processes more efficient. Additionally, we aim to maintain low attrition and to increase our share of clients’ business.

We are investing in our operating platforms and tools to support our clients and client advisors, in order to better serve our clients’ needs and improve our efficiency. As of 31 December 2019, approximately 80% of invested assets booked outside the Americas were on the Wealth Management Platform as we continue to consolidate our operating platforms there. In the US, and in collaboration with our third-party software provider Broadridge, we are building the Wealth Management Americas Platformwhich we expect to become operational in 2021. The development of our platforms is happening alongside enhancements to our digital capabilities for the benefit of our clients and advisors.

®   Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization

How we operate

We have a global footprint, with a presence in the world’s largest and fastest-growing markets and are well positioned to serve clients with global interests and demands. The US is our largest market, accounting for more than 50% of our invested assets. We are the largest wealth manager in Asia Pacific and the second largest in Latin America in terms of invested assets.1

In Switzerland, we hold a leading market position1 and can deploy the full range of the Group’s products and services across Personal & Corporate Banking, Asset Management and the Investment Bank.

Our broad domestic footprint in Europe enables us to provide locally adapted offerings, and our local offices across Central Europe, the Middle East and Africa keep us close to our clients.

Through strategic partnerships with the Investment Bank and Asset Management, we provide clients with broad access to financing, global capital markets and portfolio solutions.

®   Refer to “Working in partnership” in this section for examples of collaboration between the business divisions

 

 

 

1 Statements of market position for Global Wealth Management are UBS’s estimates based on published invested assets and internal estimates.

 

21 


Our strategy, business model and environment
Our businesses
 

 

 

As part of our organizational changes, ultra high net worth client relationships and advisors were integrated into regional business units to increase speed and proximity to clients. In our newly established Global Capital Markets team, we combined our Investment Product Services (IPS) unit and Investment Bank teams and their respective expertise. The Global Capital Markets team provides clients with an enhanced offering, faster execution, and more competitive conditions.

Our main competitors are either large US players that have a smaller presence outside the US (including Bank of America, JPMorgan Chase, Morgan Stanley and Wells Fargo) or geographically diverse firms with a smaller presence in the US (including BNP Paribas, Credit Suisse, HSBC and Julius Baer). Our size, geographic presence and diversified client portfolio are exceptional and would be difficult for other wealth managers to replicate organically.


What we offer

Our distinctive approach to wealth management is designed to strengthen engagement with our clients and to help them pursue what matters most to them.

By operating as a unified business, we aim to offer our clients the best wealth management solutions, services and expertise globally. Our experts provide our clients with thought leadership, investment analysis and formulated investment strategies, as well as develop and source solutions for them. The Chief Investment Office (CIO) provides the concise, comprehensive UBS House View, which identifies and communicates investment opportunities designed to protect and increase our clients’ wealth over generations. Regional client strategy teams deepen our understanding of clients’ needs, behaviors and preferences, enabling us to tailor our offerings to serve them better. Our product specialists deliver investment solutions, including our flagship investment mandates, innovative long-term themes and sustainable investment offerings.

®   Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization

 

22 


 

Clients benefit from our comprehensive set of capabilities and expertise, including wealth planning, investing, philanthropy, corporate and banking services, as well as family advisory services. We also offer considerable expertise across structured, mortgage and securities-based lending.

We work to improve our offerings and respond to changing client needs. In 2019, we launched a new line of UBS Manage offerings in Switzerland. In addition, to meet growing demand, we expanded the number of exclusive private markets opportunities for clients. Our sustainable investing solutions continue to be well received. Currently, invested assets in 100% sustainable investing solutions and bespoke sustainable investing solutions have grown to over USD 9 billion. We also broadened our sustainable investing offering, teaming up with external partners such as BMO Global Asset Management, Generation Investment Management and KKR & Co. Inc. to offer clients innovative sustainable development-related investment opportunities.


How we serve our clients

We serve our clients through local offices, dedicated advisors and experienced specialists. We use a mix of digital and non-digital channels (including marketing campaigns, events, advertising, publications and digital-only solutionsto help drive greater awareness of UBS among prospects and reinforce trust-based relationships between advisors and clients.

How we are organized

Our business division is organized into regional business units: the US and Canada; Latin America; Europe; Central and Eastern Europe; the Middle East and Africa; Asia Pacific; and Switzerland. We also have a business unit for our Global Family Office clients. Central functions for global capabilities supporting these business units are the CIO, Global Banking, Global Capital Markets and the Chief Operating Office. We are governed by the executive, risk, operating, and asset and liability committees.

  

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Our strategy, business model and environment
Our businesses
 

Personal & Corporate Banking

As a leading personal and corporate bank in Switzerland, we provide comprehensive financial products and services to private, corporate and institutional clients. We are among the country’s foremost players in the private and corporate loan market, with a substantial lending portfolio. Personal & Corporate Banking is at the core of our universal bank delivery model in Switzerland.

Our focus

We are a leading personal and corporate bank in Switzerland, providing a superior client experience and combining technology with a personal touch.

We have established a strong pipeline of growth initiatives across our business areas. Effective 1 November 2019, we have set up a new business area, Digital Platforms & Marketplaces, to rapidly extend our platform offering for mortgages.

We also aim to improve efficiency by streamlining processes and introducing new digital self-service tools. For example, we have rolled out an integrated mortgage workflow for extensions, which significantly reduces the time it takes to set up a contract. In addition, we have further optimized our contact center setup, increased automation of repetitive processes, and launched a pilot for a digital mailroom that reduces processing time by digitizing incoming physical mail and documents. Technology plays a key role in our client-centered operating model and we aim to expand our digital leadership. Our multi-year digitalization program enables us to further enhance the client experience. Thanks to technological solutions, we are able to offer clients new products and identify new cross-selling opportunities in a more targeted way.

®   Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization

 

Operationally, we strive for excellence in execution, focusing on efficiency while improving our service quality and overall agility. To scale our digital transformation efforts, in 2019 we opened our second digital factory in Switzerland, which is larger than our first one. These digital factories are now home to approximately 1,100 employees across various functions. Moreover, we introduced an agile academy and quick-launch formats to drive innovation and attract key talent.

How we operate

While we operate primarily in our home market of Switzerland, we also provide capabilities to support the growth of the international business activities of our Swiss corporate and institutional clients through our local hubs in Frankfurt, New York, Hong Kong and Singapore. We are the only Swiss bank providing local banking capabilities abroad to its corporate clients.


In the Corporate & Institutional Clients business, our main competitors are Credit Suisse, the cantonal banks and globally active foreign banks. We compete in areas covering basic banking services, cash management, trade and export finance, asset servicing, investment advice for institutional clients, corporate finance and lending, and cash and securities transactions for banks.

In the Swiss Personal Banking business, our competitors are Credit Suisse, PostFinance, Raiffeisen, the cantonal banks and other regional and local Swiss banks. In addition to those traditional players, we also face competition from international players entering the Swiss market and neobanks. We compete in areas such as basic banking, mortgages and foreign exchange, as well as investment mandates and funds.

What we offer

Our personal banking clients have access to a comprehensive, life cycle-based offering and convenient digital banking. We deliver a broad range of basic banking products, from payments to deposits, cards, online and mobile banking, as well as lending (predominantly mortgages), investments and retirement services. The overall service range is complemented by our UBS KeyClub reward program, which provides clients residing in Switzerland with exclusive and attractive offers, including those from third-party partners. In close collaboration with Global Wealth Management, we offer leading private banking and wealth management services.

Our corporate and institutional clients benefit from our financing and investment solutions, particularly 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, as well as global custody solutions for institutional clients.

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. In cooperation with Asset Management, we also provide fund and portfolio management solutions.

®   Refer to “Working in partnership” in this section for examples of collaboration between the business divisions

How we serve our clients

We are the recognized digital leader, with the highest online and mobile banking penetration in Switzerland, and continue to invest in a multi-channel distribution model to further enhance our leading position.

 

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We are adapting existing branch formats to suit evolving client needs by converting some locations to smaller, more agile branches that serve as digital support hubs and are intended to ensure a strong local presence along with advice on basic client needs. We aim to further reshape our physical footprint in an innovative and client-centric way, particularly by defining future branch formats with different purposes.

In addition, we continue to provide our expertise to our clients through our contact center and our digital channels, offering basic banking services and transactions. Dedicated client advisors serve personal banking clients who need tailored solutions.

As part of our sustainability road map, we are substantially expanding our offerings. Our personal banking and institutional clients have access to a number of sustainable investment solutions, and we promote innovative approaches for corporate banking clients. For example, we issued the first green bond for a listed company in Switzerland.

For marketing campaigns, we use online media (including social media and search engine advertising), out-of-home media (posters and digital billboards) and, very selectively, print, TV, radio and cinema advertising. In line with our position as a digital leader in Swiss banking, and because of the channel’s cost-effectiveness, we follow a digital-first media strategy. More than 50% of our media spending goes into online channels.

How we are organized

Our business division is organized into Personal Banking, Corporate & Institutional Clients, and Digital Platforms & Marketplaces. Geographically, our business, with its 267 branches, is organized into 10 regions, covering distinct Swiss economic areas. We are governed by the executive, risk and operating committees, and operate mainly through UBS Switzerland AG.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 The size of the circles on the map reflects the number of branches in each location.

  

25 


Our strategy, business model and environment
Our businesses
 

Asset Management

UBS Asset Management is a large-scale and diversified global asset manager, with USD 903 billion in invested assets. We offer investment capabilities and styles across all major traditional and alternative asset classes, as well as advisory support to institutions, wholesale intermediaries and Global Wealth Management clients around the world.

Our focus

Our strategy is focused on capitalizing on the areas where we have a leading position to drive further profitable growth and scale.

Sustainable and Impact Investing remains a key area, as clients increasingly seek solutions that combine their investment goals with sustainability objectives. We continue the expansion of our world-class capabilities in areas such as climate-aware solutions. We do this through: product and service innovation; dedicated research; integration of environmental, social and governance factors into our investment processes, leveraging our proprietary analytics; and active corporate engagement.

In response to the increasing importance of private markets and alternative investments, we are building on our existing expertise in these areas, including our hedge fund and real estate businesses, as well as our capabilities across infrastructure, private equity and private debt.

We continue to develop our award-winning1 Indexed and Alternative Beta business, including exchange-traded funds (ETFs) in Asia Pacific, Europe and Switzerland. We provide customization while leveraging our highly scalable platform, with a particular focus on key areas such as sustainability and fixed income products. Since 2016, the Alternative Beta business has seen growth in invested assets of approximately 85%.

Geographically, we are investing in our leading presence and products in China, both onshore and offshore, one of the fastest-growing asset management markets in the world, building on our extensive and long-standing presence in the Asia Pacific region.

In the rapidly evolving and attractive wholesale segment, we aim to significantly expand our market share through a combination of continued client penetration, expansion of our strategic partnerships with distributors and the build-out of our client service offerings.

®   Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization

 

To drive further growth in our Investment Solutions business, which provides access to and combines the breadth and depth of our capabilities across public and private markets, we are
focused on delivering superior multi-asset strategies and white-label solutions to meet the needs of clients around the world.

We also continue to intensify our cross-divisional collaboration, in particular with Global Wealth Management, to enable our teams to draw on the best ideas, solutions and capabilities from across the firm to deliver superior investment performance and experiences for our clients.

®   Refer to “Working in partnership” in this section for examples of collaboration between the business divisions

 

To support our growth, we are focused on disciplined execution of our operational excellence initiatives. This includes further automation, simplification, process optimization and offshoring / nearshoring of selected activities, complemented by a continued modernization of our platform and development of our analytics and data capabilities.

In January 2020, we announced a number of changes to the operational setup of our Platforms businesses intended to deliver greater scale and breadth of offering for our clients and ensure the ongoing development of these world-class businesses in a highly competitive marketplace. The changes include the proposed sale of a majority stake (51.2%) in UBS Fondcenter to Clearstream, Deutsche Börse Group’s post-trade services provider. The sale is expected to close in the second half of 2020, subject to customary closing conditions. In addition, in order to fully leverage the expertise and resources within the wider Group to accelerate the growth of the business, we have decided to transfer UBS Partner, our highly innovative white-label technology solution, to the Corporate & Institutional Clients International business within the Personal & Corporate Banking business division. UBS Partner will be part of UBS’s “The Bank for Banks” client offering, and this is an exciting step in our collaboration efforts across the firm to bring the best of UBS to our clients.

With these changes, we are making a step change in the proposition for our clients, who will have seamless access to expanded platform capabilities, while at the same time enabling us to sharpen our focus on the execution of our strategic priorities.

How we operate

We cover the main asset management markets globally, and have a local presence in four regions: the Americas; Europe, the Middle East and Africa; Switzerland; and Asia Pacific.

Our main competitors are global firms with wide-ranging capabilities and distribution channels, such as Amundi, BlackRock, DWS, Goldman Sachs Asset Management, Invesco, JPMorgan Asset Management, Morgan Stanley Investment Management and Schroders, as well as firms with a specific market or asset class focus.

 

1 Second largest Europe-based indexed player based on peers’ public reporting (UBS calculation, 3Q19) and ranked fourth largest ETF provider in Europe as of December 2019 (source: ETFGI).

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What we offer

We offer clients a wide range of investment products and services in different asset classes 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, fixed income, hedge funds, real estate and private markets, and indexed and alternative beta strategies (including ETFs), as well as sustainable and impact investing products and solutions.

Our Investment Solutions business draws on the breadth of our capabilities to offer: asset allocation and currency investment strategies across the risk / return spectrum; customized multi-asset solutions, advisory and fiduciary services; and multi-manager hedge fund solutions and advisory services.

How we serve our clients

We deliver our investment products and services directly to institutional clients. High net worth and retail clients are served through Global Wealth Management, third-party banks and distributors.


Our teams are based in the key financial markets, bringing our unique perspectives and global expertise to our clients around the world. This, in combination with our presence on the ground, enables our teams to develop long-term relationships with our clients and a deep understanding of their specific needs.

How we are organized

Our business division is organized along five areas: Client Coverage, Investments, Real Estate & Private Markets, Products and the COO Area. We are based worldwide across four regions, with nine main hubs: Chicago, Hong Kong, London, New York, Shanghai, Singapore, Sydney, Tokyo and Zurich.

We are governed by executive, risk and operating committees, supplemented by business unit-specific committees.

 

 

 

  

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Our strategy, business model and environment
Our businesses
 

Investment Bank

The Investment Bank provides a range of services to institutional, corporate and wealth management clients to help them raise capital, grow their businesses, invest for growth and manage risks. We are focused on our traditional strengths in equities, foreign exchange, research, advisory services and capital markets, complemented by a targeted rates and credit platform. We use our powerful research and technology capabilities to support our clients as they adapt to the evolving market structures and changes in the regulatory, technological, economic and competitive landscapes.

We aspire to deliver market-leading solutions to clients, using our intellectual capital and electronic platforms. We also provide services to Global Wealth Management, Personal & Corporate Banking and Asset Management, while managing our balance sheet, costs, risk-weighted assets and leverage ratio denominator with discipline.

Our capital-light business model allows the Investment Bank to deliver digital, research and banking capabilities, consuming up to one-third of Group resources.

Structural changes in the Investment Bank

In January 2020, we realigned our Investment Bank to meet the evolving needs of our clients and to further focus resources on opportunities for profitable growth and digital transformation. Corporate Client Solutions and Investor Client Services were renamed Global Banking and Global Markets, respectively. Global Banking moves to two product verticals (Capital Markets and Advisory), adopting a global coverage model. Global Markets combines Equities and Foreign Exchange, Rates and Credit, and introduces three product verticals (Execution & Platform, Derivatives & Solutions, and Financing) and three horizontal functions (Risk & Trading, Distribution and Digital Transformation). The new Global Markets structure is designed to facilitate the alignment of business processes and operations and to reduce inefficiencies and duplication. It further permits a more holistic understanding of our clients’ cross-product needs and is designed to foster tighter coordination of client coverage and distribution. This will allow for improved oversight of key risks and the allocation of resources. Investment Bank Research and UBS Evidence Lab Innovations continue to be a critical part of our advisory and content offering.

The changes are effective 1 January and we will provide restated prior-period information in advance of our first quarter 2020 results.

Our focus

Our key priority is disciplined growth in the capital-light advisory and execution businesses, while accelerating our digital transformation. Global Banking has a global coverage model and will utilize its deep global industry expertise to meet the emerging needs of its clients. In Global Markets, we are focused on clients’ expectation of excellence in execution, financing and structured solutions.

Our digital strategy is led by our businesses, which harness technology to deliver superior and differentiated client service and content. We established the UBS Investment Bank Innovation Lab to speed up innovation by facilitating proofs of concept. In Global Markets, the new Digital Transformation horizontal function facilitates adoption of best-in-class practices around trade idea generation, liquidity management, pricing tools and risk management. In Investment Bank Research, we continue to build UBS Evidence Lab Innovations to concentrate on data-driven outcomes.

Our balanced global reach gives us attractive options for growth across various regions. In the Americas, the largest investment banking fee pool globally, we are focusing on increasing our market share in our core Global Banking and Global Markets businesses.

In Asia Pacific, we see opportunities primarily from expected market internationalization and growth in China. We are planning to grow by further strengthening Global Banking, both onshore and offshore. Partnerships between the Investment Bank’s businesses and the Group, including the creation of a unified capital markets group, and, externally, joint ventures such as that with Banco do Brasil, are a key strategic focus. These initiatives should lead to growth by delivering global products to each region, leveraging our global connectivity across borders and sharing and strengthening our best client relationships.

®   Refer to “Working in partnership” in this section for examples of collaboration between the business divisions

How we operate

Our geographically balanced business has a global reach, with a presence in more than 30 countries and principal offices in the major financial hubs.

Competing firms are active in many of our markets, but our strategy differentiates us, with its focus on leadership in the selected areas where we have chosen to compete, and a business model that leverages talent and technology rather than balance sheet.

Our main competitors are the major global investment banks, including Morgan Stanley, Credit Suisse and Goldman Sachs, as well as corporate investment banks, including Bank of America, Barclays, Citigroup, BNP Paribas, Deutsche Bank and JPMorgan Chase. We also compete with boutique investment banks and fintech firms in certain regions and with regard to certain products.

 

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Through strategic partnerships with Global Wealth Management and Asset Management, we provide clients with broad access to financing, global capital markets and portfolio solutions.

®   Refer to “Working in partnership” in this section for examples of collaboration between the business divisions

What we offer

Through our Global Banking business, we advise our clients on strategic business opportunities and help them raise capital to fund their activities.

Our Global Markets business enables our clients to buy, sell and finance securities on capital markets across the globe and to manage their risks and liquidity. Furthermore, in Investment Bank Research, we offer clients key insights on major financial markets and securities around the globe. Separately, our team of experts in UBS Evidence Lab Innovations specializes in creating insightful data sets on diverse topics for companies of all sizes, spanning more than 30 countries and 50 sectors. We seek to develop new products and solutions that are consistent with our capital-efficient business model. These are typically related to new technologies or changing market standards.

®   Refer to “Clients” in the “How we create value for our stakeholders” section of this report for more information about innovation and digitalization


Since 2005, we have addressed increasing client demand for sustainable investing by providing thematic and sector research. We also provide investment solutions through socially responsible and impact exchange-traded funds and index-linked notes. In addition, we offer capital-raising and strategic advisory services globally to companies that make a positive contribution to climate change mitigation and adaptation.

How we serve our clients

We interact with our clients digitally and in person. In Global Banking, we leverage our intellectual capital and relationships to deliver high-quality solutions for our clients. In Global Markets, we use our execution capabilities, differentiated research content, bespoke solutions, client franchise model, and our global platform to expand coverage across a broad set of institutional and corporate clients. In Investment Bank Research, we deliver high-quality differentiated research to our institutional clients using a wide range of methods, including UBS Neoour multi-channel platform.

How we are organized

Our business division is organized into the following three units: Global Banking, Global Markets, and Investment Bank Research and UBS Evidence Lab Innovations. We are governed by the executive, operating, risk, and asset and liability committees. Each business unit is organized globally by product.

 

  

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Our strategy, business model and environment
Our businesses
 

Corporate Center

Our Corporate Center provides services to the Group, with a focus on effectiveness, risk mitigation and efficiency. Corporate Center also includes the Non-core and Legacy Portfolio unit.

How we are organized

Corporate Center

The major areas within Corporate Center are Group Chief Operating Officer (Group Technology, Group Corporate Services, Group Human Resources and Group Operations), Group Treasury, Group Finance, Group Legal, Group Risk Control, Group Communications & Branding, Group Compliance, Regulatory & Governance, UBS in society, and Non-core and Legacy Portfolio.

Over recent years, we have progressively aligned our support functions with our business divisions. We operate the Group with the vast majority of these functions either fully aligned or shared among business divisions, where they have full management responsibility. By keeping the activities of the businesses and support functions close together, we increase efficiency and create a working environment built on a culture of accountability and collaboration

The Non-core and Legacy Portfolio, a small residual set of activities in Group Treasury and certain other function costs mainly related to deferred tax assets and costs relating to our legal entity transformation program are retained centrally.

 


Since our first quarter 2019 report and in compliance with IFRS 8, Operating Segments, we provide results for total Corporate Center only and do not separately report Corporate Center – Services, Group Asset and Liability Management (Group ALM) and Non-core and Legacy Portfolio. Furthermore, we have combined Group Treasury operationally with Group ALM and call this combined function Group Treasury.

®   Refer to the “Significant accounting and financial reporting changes” section and “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about the changes in the structure of Corporate Center

 

Group Treasury

Group Treasury manages the structural risk of our balance sheet, including interest rate risk, structural foreign exchange risk and collateral risk, as well as the risks associated with our liquidity and funding portfolios. Group Treasury serves all business divisions and its risk management is fully integrated into the Group’s risk governance framework.

Non-core and Legacy Portfolio

Non-core and Legacy Portfolio manages legacy positions from businesses exited by the Investment Bank, following a largely passive wind-down strategy. It is overseen by a committee chaired by the Group Chief Risk Officer. The 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 21 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information about litigation, regulatory and similar matters

  

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Our environment

Current market climate

Global economic developments in 2019

In a year characterized by strong equity markets, ultra-low volatility and an inflection in interest rates, the pace of the global economy slowed on a broad basis in 2019. World GDP grew by 3.1%, which was substantially lower than the 3.7% growth achieved in 2018 and represents the weakest growth rate since the financial crisis.

US GDP increased 2.3%, compared with 2.9% in 2018, as trade tensions between the US and China hindered business investment and the boost from tax cuts introduced in December 2017 ebbed.

Trade tensions represented an even more serious drag on growth in the eurozone, which relies more than the US on global trade, manufacturing output, and business investment. Growth in the eurozone decreased to 1.2% in 2019, compared with 1.9% in 2018. Germany’s economy expanded by only 0.6%, after a 1.5% increase in the previous year. Outside the Eurozone, Swiss growth decreased as well, to 0.8%, compared with 2.8% in 2018.

China’s government attempted to partially offset the effects of increasing tariffs on its exports to the US by reducing bank reserve requirements and providing extra fiscal leeway to local governments. However, this stimulus was limited by concerns over high leverage in the economy. GDP growth decreased to around 6.1%, compared with 6.7% in 2018.

In other leading emerging economies, growth slowed or stabilized at low levels. The economy of India, which until recently had been one of the world’s fastest-growing major nations, expanded by 5%, compared with 6.1% in 2018. Momentum was weakened by the problems of the shadow-banking sector, which has been reducing the availability of credit to consumers. The Mexican economy, meanwhile, was roughly flat after expanding 2% in 2018, and Brazil’s growth rate decreased to 1.1% from 1.3%.

Major central banks were able to keep their accommodating monetary policies in place in 2019, given that low inflation rates persisted. Eurozone inflation stayed below the European Central Bank’s (the ECB) target (of at or below 2%), at around 1.2% for
the year. The ECB cut its deposit rate from negative 0.4% to negative 0.5%. US inflation was close to the target at 1.8%, permitting three quarter-point rate cuts over the course of the year to between 1.5% and 1.75%.

Equity markets rallied, with all major indices advancing. The MSCI All Country World Index gave a total return of 27% in US dollars. The S&P 500 index in the US returned 31%, while the technology-heavy Nasdaq Composite gained 37%. China’s CSI 300 was up 41% in local currency terms. Less well-performing markets included the UK’s FTSE 100 and Hong Kong’s Hang Seng, which both returned 17% in local currency terms.

It was also a favorable year for investors holding government bonds. The yield on 10-year US Treasury bonds fell around 80 basis points to 1.9%. The yield on the German Bund of the same tenor fell 40 basis points to negative 0.2%.

Economic and market outlook for 2020

We expect continued sub-trend growth in the coming year, and the global economy to continue expanding at about the same pace as in 2019. Consumer spending has remained robust in much of the world, especially in the US, where it is supported by a vibrant job market. The year ended with news of a “Phase 1” trade deal between the US and China, along with indications that tensions between the two powers may lessen. Not only did the agreement withdraw planned tariff increases and reverse some existing tariffs, it also moved negotiations forward in other areas of contention, such as intellectual property protection and US access to China’s financial services market. While this truce could be fragile and the US–China rivalry is not about to end anytime soon, the deal appears to reduce the risks to the global economy and business investment.

The UK left the European Union on 31 January 2020 and has entered a transition period in which the UK now faces a race to conclude talks on a trade deal with the EU ahead of the end of its transition period on 31 December 2020.

The next major political focus for markets will be the US election in November, which could generate higher volatility and affect key US sectors, such as technology, energy, finance and health care.

 

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Our strategy, business model and environment
Our environment
 

Against a backdrop of sluggish growth and continued political risk, we believe central banks will be in no rush to raise rates. We do not expect the US Federal Reserve to increase rates in the coming year, barring an unexpected shift in the trajectory of the economic data. Rates are unlikely to rise again until 2021. We expect the ECB to cut rates to negative 0.6%, with the Swiss National Bank maintaining rates at a negative 0.75%.

The outbreak of novel Coronavirus or Covid-19 in China and its subsequent spread to other countries is likely to increase investor uncertainty. Although our base economic forecast is that the outbreak of Covid-19 will be contained and the effect on full-year economic growth will be relatively limited, the virus and containment measures are likely to have at least a short-term adverse effect on economic activity in China and other affected countries, with a collateral impact on the global economy. A significant rise in the number of Covid-19 infections, infections in a wide range of countries and regions, or a prolongation of the outbreak, could increase the adverse economic effects.

In terms of investing, stocks in most major markets are trading above historical averages on a price-to-earnings basis. As a result, we believe equity market returns are more likely to be driven by earnings growth than by a further expansion of multiples. Markets should also be supported by continuing economic growth in 2020. The risk of a recession remains relatively low. Uncertainty over the effects of the Covid-19 outbreak has substantially increased the macroeconomic risk to growth and this increased risk has at least partially been reflected in recent declines in equity markets.

  

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Industry trends

While our industry was heavily affected by regulatory developments over the past decade, technology has clearly emerged as the main driver of change today and is expected to further affect the competitive landscape as well as our products and operations going forward. In parallel, our industry is materially driven by market and macroeconomic conditions.

®   Refer to “Current market climate” in this section for information about global economic growth

Digitalization

Technology is changing the way banks operate and we expect this to continue, in step with exponential advances in computing capability, evolving customer needs and digital trends. Investment in technology is no longer solely considered a means of making banks more efficient. Today, such investment is the key to keeping banks flexible and competitive in a digitalized world, and it creates the opportunity to develop new business models.

By connecting across the financial industry ecosystem through our innovation labs, digital factories, Future of Finance initiatives, and project collaborations, we aim to remain at the forefront of the digital movement to drive client experience as well as operational excellence. At the heart of our digital journey is the focus on our clients and their evolving needs. The speed, scale, security, transparency and precision that new technologies can offer enable us to create new services and experiences for our clients.

We also aim to improve operational efficiency by increasing the range of modernized and modularized applications and infrastructure in our IT portfolio, as well as by leveraging cloud technology and a growing number of front-to-back automated systems and processes. Effective data management and protection are crucial to us. The generated and curated data from our applications is protected under our data management framework, and supports the development of responsible artificial intelligence for better tailoring our client and employee experience.

Consolidation

In the financial services industry, many regions and businesses are still highly fragmented. We expect further consolidation, with ongoing margin pressure, the search for cost efficiencies and increasing scale advantages resulting from the fixed costs of technology and regulation being the key drivers. Many banks also seek increasing exposure and access to regions with attractive growth profiles, such as Asia and emerging markets, through local acquisitions or partnerships. Lastly, the increased focus on core capabilities or geographical footprints and the ongoing simplification of business models to reduce operational and compliance risks will result in further disposals of non-core businesses and assets.


New competitors

Our competitive environment is also evolving. In addition to our traditional competitors in the asset-gathering businesses, new entrants are targeting selected components of the value chain. However, we have not yet seen a fundamental unbundling of the value chain and client relationships, which might ultimately result in the disintermediation of banks by new competitors. Over the longer term, we believe the entry into the financial services industry of large platform companies could pose a significant competitive threat, given their strong client franchises and access to client data. Fintech firms are gaining momentum; however, they have not materially disrupted our asset-gathering businesses to date. We see a trend in forging partnerships between new entrants and incumbent banks, with the latter acquiring technology from fintech firms, thus gaining an edge over competitors in terms of technology, cost efficiency, and service quality.

Regulation

The post-2008 regulatory reform agenda has largely been completed. While some areas, such as funding in resolution, must still be fully addressed, and the implementation of certain standards, such as the finalized Basel III capital standard, is continuing on a national level, the focus is shifting from regulation to supervision. In parallel, some regulators are reviewing the efficiency of the new frameworks.

In general, regulatory-driven change continues to consume substantial resources. In 2020, we expect further consideration of adjustments to the Swiss too-big-to-fail framework, in particular focused on additional liquidity requirements for systemically important banks, and the national implementation of final Basel III rules. We expect continued work on resolution-related reforms, including stress testing, and a sustained focus on conduct and anti-money laundering. Furthermore, we are experiencing a surge in sustainability-related policy proposals targeted at various aspects of financial services across the globe. We also expect regulatory initiatives to address some of the more recent challenges that could affect financial stability, such as shadow banking and digital currencies.

Many of these developments are happening in the context of increased protectionism, posing challenges to the provision of cross-border financial services. Further restrictions with regard to market access into the EU in particular would have a significant effect on Switzerland as a financial center, affecting also UBS. Variations in how different countries implement rules, and an increasing national focus, bring a risk of additional regulatory fragmentation, which in turn may lead to higher costs for us and new financial stability risks.

 

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Our strategy, business model and environment
Our environment
 

However, we believe the adaptations made to our business model and our proactive management of regulatory change put us in a strong position to absorb upcoming changes to the regulatory environment.

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

Wealth creation

In 2018, global wealth overall grew marginally, given a steep decline in equity market performance in the fourth quarter. This trend was partially reversed in 2019, as equity markets rallied. Today, half of global wealth is concentrated in the Americas, followed by Asia Pacific (with approximately 30%) and the remainder in Europe, the Middle East and Africa.1 By segment,2 approximately half of global wealth is with high net worth individuals, ultra high net worth individuals hold approximately 30% of global wealth, and the remaining approximately 20% is within the affluent segment. Over the next four years, global wealth is expected to grow by 5–10% annually.1 Regionally, wealth creation will likely be driven by Asia Pacific and North America. The share of the Americas is expected to remain stable over the next four years at approximately 50% of global wealth, while the share of Europe, the Middle East and Africa is expected to further reduce as Asia Pacific grows. In particular, China’s share of global wealth is expected to grow to around 15% by 2023.

Wealth transfer

Demographic and socioeconomic developments continue to generate shifts in wealth. By 2030 for example, USD 15.4 trillion of global wealth is expected to be transferred by individuals with a net worth of USD 5 million or more, according to a 2019 report by Wealth-X.3 In addition, women now control more wealth than ever before: UBS’s 2019 report titled “The billionaire effect – Billionaires insights 2019” found that the number of female billionaires had grown by 46% in five years, outpacing the growth of male billionaires. We are responding to the evolving wealth landscape with a framework that addresses all aspects of our clients’ financial lives, called UBS Wealth Way. UBS Wealth Way begins with discovery questions and a conversation with clients about what is most important to them. We help clients organize their financial life along three key strategies: Liquidity to help provide cash flow for short-term expenses; Longevity for long-term needs; and Legacy for needs that go beyond their own and help improve the lives of others, a key part of wealth transfer planning.

Shift into passive strategies

We note a continuing trend of separation between low-cost, passive strategies and high-alpha active and alternative strategies. Passive management is beneficial in an environment with rising stock markets, such as the equity bull markets of the last decade. At the same time, central banks’ monetary policies have kept interest rates at historically low levels, which has had an effect on bond yields and other asset classes. Investors searching for longer-term higher alpha than passive strategies can provide have been diversifying their portfolios into real assets and alternatives and we expect this trend to continue. We believe the breadth of UBS Asset Management’s investment expertise allows us to meet client demands across asset classes and strategies.

Retirement funding

Over recent years, the pension industry has faced two key challenges: fundamental demographic shifts, such as aging populations, and lower expected returns due to all-time low interest rates.

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.

 

 

 

 

 

 

 

 

 

��

 

1 Based on BCG Global Wealth Report 2019.

2 The BCG Global Wealth Report 2019 defines wealth segmentation as follows: wealth of greater than USD 20 million to be classified as ultra high net worth individuals; USD 1–20 million for high net worth individuals; USD 0.25–1 million for affluent individuals.

3 A Generational Shift: Family Wealth Transfer Report, issued by Wealth-X in 2019.

  

34 


 

How we create value for our stakeholders

Stakeholder group

Stakeholder needs:

what do our stakeholders expect from us?

Value proposition:

how we create value for our stakeholders

Key topics discussed:

what was important to our stakeholders in 2019

Stakeholder engagement:

how did we engage with our stakeholders?

Clients

Advice on a broad range of products and services from trusted experts

 

The option of personal interaction with our advisors in combination with digital service anywhere, anytime (convenient digital banking)

 

Top quality solutions and the highest standards in terms of asset safety, data and information security, confidentiality and privacy

 

A combination of global reach and local service resulting in positive investment outcomes

 

Competitively priced products and services

Delivering tailored advice and customized solutions, using our intellectual capital and digital capabilities

 

Building long-term personalized relationships with our clients

 

Developing new products and services in response to clients’ evolving needs in the digital age

 

Providing access to the world’s capital markets and bespoke financing

 

Meeting increasing demand from clients for sustainable investments

Investment performance in light of current interest rate situation

 

Holistic goals-based financial planning

 

Sustainable finance and investing possibilities

 

Data privacy and security

 

Offerings for small enterprises in Personal & Corporate Banking

Individualized client meetings

 

Requests for regular client feedback, feedback monitoring and complaints handling

 

Specialized client events and conferences including information on key developments and opportunities

 

Client satisfaction surveys

Investors

Disciplined execution of our strategy leading to attractive capital returns through dividends and share repurchases

 

Comprehensive and clear disclosures on quantitative and qualitative data necessary to make an informed investment decision

 

Recognize and proactively address strategic opportunities and challenges

Executing our strategy with discipline and agility as the external environment evolves, while aiming to deliver cost- and capital-efficient growth

 

Providing transparent, timely and reliable public disclosures

Structural growth and return potential in our businesses

 

Cost efficiency and ability to generate positive operating leverage

 

Ability to protect or even grow revenues in a low-for-longer interest rate environment

Financial reports, investor and analyst conference calls, and/or webcasts, as well as media updates on our performance or other disclosures

 

General shareholder meetings

 

Investor and analyst meetings

Employees

A world-class employer providing an engaging and supportive workplace culture

 

Skill and career development opportunities and rewards for performance

 

An environment that provides a sense of belonging and of adding value to clients and to society

Attracting and developing great talent

 

Fostering a workplace culture that supports and engages our employees, enabling them to develop their careers and unlock their full potential

The three keys to a strong corporate culture

 

Our approach to hiring great people and supporting their growth

 

The importance of diversity and inclusion

Regular employee surveys

 

Group Franchise Awards program

 

Regular “Ask the CEO” events, along with senior leadership, regional and functional employee sessions

Society

Facilitation of economic development that is sustainable for the planet and humanity

 

Maximization of our positive effect and minimization of any negative effects on society and the environment

 

Proactive management of the environmental and societal impacts of our business

Promoting significant and lasting improvements in the well-being of communities in which we operate

 

Taking an active role in the transition of our economy toward environmentally and socially sustainable solutions

Sustainable finance

 

Our climate strategy

 

Our client and corporate philanthropy efforts

Dialogs with regulators and governments

 

Partnerships with social institutions

 

Community investments

 

Interaction with NGOs

 

Participation in forums and round tables, as well as industry-, sector- and topic-specific debates

35 


Our strategy, business model and environment
How we create value for our stakeholders
 

Clients

Our clients are the heart of our business. We are committed to building and sustaining long-term relationships based on mutual respect, trust and integrity. Understanding our clients’ needs and expectations enables us to best serve their interests and to create value for them.

Our clients and what matters most to them

There is no archetypal UBS client. Our clients have varying needs, but each of them expects outstanding advice and service, a wide range of choices, and an excellent client experience.

Global Wealth Management is focused on serving the unique and sophisticated needs of high net worth and ultra high net worth individuals, families, and family offices around the world, as well as affluent clients in selected markets. We provide these clients with access to outstanding advice, service, and investment opportunities from around the globe, delivered by experts they can trust. Using a holistic, goals-based approach to financial planning, we deliver a personalized wealth management experience and work side-by-side with clients to help them realize their ambitions

Our client-facing advisors and the global teams that support them are focused on developing long-term client relationships, which often span generations. Global Wealth Management clients look to us for our expertise in helping them to plan for, protect and grow their wealth, as well as helping them make some of the most important decisions in their lives. From significant liquidity events to professional milestones and personal turning points, we aim to give our clients the confidence to move forward and achieve their goals. Through extensive research into our clients’ preferences and goals, as well as broader analysis of investor sentiment globally, we are constantly evolving our offerings to meet the shifting priorities of today’s wealthy clients. This includes investing in digital capabilities and developing products that help clients fund their lifestyles and manage their cash flow, as well as offering guidance on how clients can create a lasting and positive impact for their communities and the causes about which they care the most. We have been recognized as the leading global wealth manager for clients interested in sustainable investing,1 with a commitment to developing solutions that allow clients to align their financial goals and their personal values.

®   Refer to “Our focus on ESG” in this section for examples of how sustainable finance solutions are used across our business divisions and for the benefit of our clients

 

Personal & Corporate Banking serves a total of approximately 2.6 million individuals and 128,000 firms. We provide services to companies ranging from start-ups to large multi-nationals, including specialized entities, such as pension funds and insurers, real estate companies, commodity traders, and
banks. Personal & Corporate Banking clients look for financial advice based on their needs at each stage of their individual or corporate journey. We aim to deliver outstanding advice to them via our client advisors and also through digital banking. Our clients demand convenience, 24/7 availability, security and value for money. We provide
clients with access to a broad range of services and products offered in all relevant areas: basic banking, investing, financing (including mortgages), retirement planning, cash management, trade and export finance, global custody, and company succession, among others.

In Asset Management, we deliver investment products and services directly to approximately 3,000 clients around the world – including sovereign institutions, central banks, supranational corporations, pension funds, insurers and charities – as well as to Global Wealth Management and its clients, wholesale intermediaries and financial institutions. Our clients seek global insights and a holistic approach to tailoring solutions. By building long-term, personalized relationships with our clients and partners, we aim to achieve a deep understanding of their needs and to earn their trust. We draw on the breadth and depth of our global investment capabilities – across traditional and alternative, active and passive categories – and provide seamless access to world-class platform services to deliver the solutions they need. We integrate sustainability into our financial analysis enabling us to help clients meet their sustainability objectives and their fiduciary duties.

The Investment Bank provides corporate, institutional and wealth management clients with expert advice, financial solutions, execution, and access to the world’s capital markets. Our business model is specifically built around our clients and their needs. Corporate clients can access advisory services, debt and equity capital market solutions, and bespoke financing through our newly reshaped Global Banking business. Meanwhile, our Global Markets business is focused on helping institutional clients engage with local markets around the world, offering equities and equity-linked products, foreign exchange, rates and credit.

®   Refer to “Investment Bank” in the “Our businesses” section of this report for more information about the structural changes in the Investment Bank

 

Our advisory and content offering is underpinned by the research we provide. The differentiated nature of this research, combined with UBS Evidence Lab Innovations, which offers access to insight-ready data sets for thousands of companies, aims to give clients an informational edge when it comes to understanding markets. As a new offering for 2019, we have established the UBS Research Academy, where our fundamental analytics team provides training for institutional investors on all aspects of fundamental investing, leveraging the best of the UBS Research and UBS Evidence Lab Innovations platforms.

 

1 Euromoney Private Banking and Wealth Management Survey 2019: Global Results.

36 


 

Our clients place the highest priority on the confidentiality and security of their data. The protection of our clients’ data is of the utmost importance to us and we have comprehensive measures in place designed to ensure that data confidentiality and integrity are maintained. We are investing in our IT platform to preserve and improve our IT security standards, while enabling our clients to have secure access to their data via our digital channels. The volume, level of sophistication and impact of cyberattacks constantly increase, and we aim to maintain a robust and agile cybersecurity and information security program to manage cyber risk.

Enhancing the client experience through innovation and digitalization

We strive to streamline and simplify interactions with our clients through front-to-back digitalization and innovations.

In Global Wealth Management, we develop and deploy digital tools that preserve and enhance the value of human relationships. Clients expect the convenience and speed that technology offers but, simultaneously, consider personal communication with our advisors to be more important than ever. Modern technology that our advisors use enables them to spend more time with clients. And our clients appreciate digital tools that improve their experience, such as easy ways to view their portfolios, access to research that is tailored to their needs, and multiple ways to communicate with their advisors. In 2019, we introduced a number of new tools to help deliver on those expectations. For example, our Asset Wizard platform provides ultra high net worth clients in the US with consolidated and sophisticated performance and risk analytics for their assets held at UBS and across multiple banks, portfolios, managers, and locations. Also, in Asia, we launched the UBS Advisor Messaging for WhatsApp, allowing for real-time conversations between clients and advisors, to create a better client experience. And we continue to make progress by executing our multi-year strategy to serve clients globally from two platforms: the Wealth Management Americas Platform in the US and the Wealth Management Platform outside the US. Our core investment solutions consist of: UBS Managea discretionary mandate solution where we use our expertise to invest clients’ assets according to a predefined investment strategy; UBS Advice, which adds portfolio monitoring and investment recommendations based on an agreed investment strategy to self-directed accounts; and UBS Transact, a self-directed account providing clients access to UBS execution capabilities and the UBS House View. All our solutions draw on our broad range of investment instruments across stocks, bonds, currencies, structured products, investment funds and alternative investments.


Personal & Corporate Banking launched several initiatives in 2019. Effective 1 November 2019, we have established a new business area, Digital Platforms & Marketplaces, which reflects our commitment to engage in new digital business models. In addition to the mortgage platform UBS Atrium, which we launched in 2017 and is directed at corporate and institutional clients, UBS is set to introduce a mortgage platform for private clients in the first half of 2020. We launched new tools for our client advisors aimed at improving the in-branch advisory experience for clients, so that we are able to suggest the right products that match the clients‘ needs. Thanks to our new mortgage workflow, we have been able to reduce contracting time substantially, from 10–15 days for extensions to 24 hours. We also further simplified our digital banking platform (for both mobile and desktop) and added new services, in addition to expanding the number of possible payment transaction currencies to more than 120. Our clients can now pay in stores directly with their smartphones and a wide array of wearables via Mobile Pay and Swatch Pay. Furthermore, we have introduced the ability to pay parking fees via Twint, which has more than 1.5 million users in Switzerland. As of October 2019, our clients can access we.trade, a blockchain-based trade finance platform, which was the first such platform to be launched by a Swiss bank. Recognizing changing client needs and growing demand from start-up companies for a broader offering, we have launched UBS Start Business, which includes digital accounting, mentoring for business planning, and many other services in addition to the banking services UBS offers. The attractive offering aims to assist young entrepreneurs in every stage of their business’s journey. Similarly, we bundle our digital offering for small companies in UBS Digital Business, which provides the convenience and leading digital solutions that small companies look for. We have also introduced our vendor leasing solution, an online tool that allows vendors to provide leasing proposals directly to their clients (based on online credit decisions) and to generate contracts. For corporate clients, we have made available the new UBS Payment Tracking service (SWIFT global payments innovation).

In Asset Management, we are investing in new tools and technologies, as well as our alternative data capabilities, to support our teams’ investment decision-making processes and enhance client service. In addition, our operational excellence programs are focused on building a scalable and globally integrated operating platform to better enable our teams to deliver the full breadth of our capabilities to clients around the world.

 

 

37 


Our strategy, business model and environment
How we create value for our stakeholders
 

The Investment Bank strives to be the digital investment bank of the future, with innovation-led businesses that drive efficiencies and solutions. We set up the UBS Investment Bank Innovation Lab to help connect business teams in order to leverage best practice, build and test proofs of concept safely and quickly, and inspire a culture of innovation. We see increasing interest from clients in financial and alternative data sets that they can incorporate into their models. In response, we set up UBS Data Solutions to meet those needs through a centralized robust data processing and distribution platform.

We strive to develop new products and solutions that are consistent with our capital-efficient business model. These are typically related to new technologies or changing market standards. Examples include FX spot & STIR tree E-pricing, which provides client-tailored pricing streams and hedging optimization, and Technology Enabled Sales, which enables faster delivery and distribution of tailored content matched to our clients’ interests. During 2019, we also launched the client portal of UBS Evidence Lab Innovations as part of the firm’s strategy to expand our value proposition in the alternative data space, which relates to innovative ways to capture data critical for investment decisions. We also set up UBS Neo, our multi-channel platform, and the One Client service model, which aims to drive superior client outcomes via collaboration, technology and data-driven client intelligence.

Engaging with our clients

Communication with our clients enables us to understand their needs and what matters most to them. We use a variety of channels to engage with clients, including regular client relationship / service meetings where we monitor feedback and satisfaction, as well as various corporate roadshows and dedicated events. We also engage with our clients while supporting cultural and sports events across Switzerland.

We conduct client events on a regular basis and on a wide array of topics. For example, in Personal & Corporate Banking, we have financing and retirement planning events, and a dedicated event for the CFO community. In the Investment Bank, we host around 350 conferences and educational seminars globally throughout the year, covering a broad range of macro, sector, regional and regulatory topics. More than 50,000 clients attended such events in 2019, providing insight and access to our own opinion leaders, policy makers and leading industry experts. In Global Wealth Management, we engage with clients in a range of ways, from personalized private briefings with subject matter experts, to segment-specific events, to large-scale gatherings such as UBS Wealth Insights, our flagship Pan-Asian investment forum series, which attracts more than 3,000 clients every year. In Asset Management, a consistent program of engagement takes place throughout the year. Thematic events, such as the UBS Reserve Management Seminar and the Sovereign Investment Circle, bring together institutional investors to debate relevant topics and share best practices. Our experts also produce insightful thought leadership on markets and assets that is regularly shared with clients, as well as frequently meeting investors to answer questions, clarify the investment strategy or discuss issues that can affect markets.

How we measure client satisfaction

We utilize different measures to regularly assess our achievements and the satisfaction of our clients.

Global Wealth Management is increasingly leveraging technology and analytics software to collect client feedback. In 2019, we began introducing a digital feedback tool to supplement more traditional survey methods. The tool allows Global Wealth Management to survey clients about their satisfaction with their advisors and UBS, as well as to identify additional financial needs. Advisors are provided with real-time access to client feedback, enabling them to address concerns and to follow up on new topics of interest. The tool was piloted in selected markets in 2019 and is expected to be rolled out more broadly throughout 2020.

We conduct an annual client survey in Personal & Corporate Banking. We have been conducting client surveys in Switzerland since 2011, consistently covering all private and corporate client segments annually since 2015. Clients assess their satisfaction with regard to various topics (e.g., UBS overall, branches, client advisors, products, services) and indicate further product or advisory needs. Survey responses are distributed to client advisors, who subsequently follow up with each respondent individually. In 2019, we introduced a new machine learning model which enables us to identify the importance of internal factors (e.g., advisors, products, prices) and external factors (e.g., media impact, market development) with regard to overall satisfaction scores.

In Asset Management, we conduct regular surveys, inviting institutional and wholesale clients across all our markets to participate. They are asked about their satisfaction with client service, products and solutions, as well as other factors relevant to their investments. The results are analyzed to identify focus areas to improve client satisfaction.

For the Investment Bank, client satisfaction is closely monitored by individual product coverage points. Relationship managers then collate and review feedback holistically, conducting regular internal review sessions to address specific areas of feedback. The Investment Bank also closely monitors external surveys, such as the Global Institutional Investor Survey, which provides feedback across a range of investment banking services.

We thoroughly evaluate the feedback we receive, including complaints from clients, and take measures to address key themes identified. In 2019, clients specifically raised sustainable finance as a key priority, which provided confirmation that we are aligned with our clients’ preferences in expanding our sustainable finance offering.

  

38 


 

Our focus on ESG

Our firm is in a powerful position to contribute toward achieving the 17 United Nations (UN) Sustainable Development Goals (the SDGs) by integrating sustainability in our mainstream offerings, through new and innovative financial products with a positive effect on the environment and society, and by advising our clients on their philanthropic works. Our goal is to be the financial provider of choice for clients who wish to mobilize capital toward the achievement of the SDGs and the orderly transition to a low-carbon economy. We are shaping the landscape of sustainable finance by using thought leadership, innovation and partnerships to support clients in their sustainability efforts.

Our clients are increasingly interested in sustainable finance, including sustainable investing (SI), which is especially attractive if it can reduce risk or improve returns. More than 80% of wealthy individuals are interested in sustainable investing and 45% already hold sustainable investments.1 With regard to asset owners across the globe, 78% are integrating environmental, social and governance (ESG) factors into their investment process.2 Switzerland, for example, saw an 87% asset growth in institutional sustainable investments in 2018 (compared with 2017),3 and the early indicators are that this growth continued throughout 2019.

Our key public commitments to sustainable finance

In 2019, we became a founding signatory of the UN Principles for Responsible Banking (the Principles). The Principles constitute a comprehensive framework for the integration of sustainability across banks. They define accountabilities and require each bank to set, publish and work toward ambitious targets.

Before signing up to the Principles, UBS had already been strongly committed both to maximizing positive effects through our sustainable business activities and to minimizing negative impacts. While our firm’s growing range of sustainable finance products and services supports the former, our environmental and social risk framework helps us to better understand and respond to potential risks to the environment and human rights.

Our Asset Management business division is among the signatories of the PRI (the Principles for Responsible Investment). The PRI organization supports the signatories in incorporating ESG factors into their investment and ownership decisions. In 2019, UBS also became one of the inaugural members of the CEO Alliance on Global Investors for Sustainable Development, which is committed to scaling up and speeding up efforts to align business with the SDGs. The Alliance is aimed at harnessing the insights of private sector leaders on ways to remove impediments and
introduce solutions for scaling long-term investment for sustainable development in line with the SDGs.

Since 2017, we have presented white papers to the World Economic Forum (the WEF) putting forward recommendations for ways in which private capital can achieve the SDGs, while also outlining our own actions and pledges in that regard. For the WEF annual meeting in 2020, our white paper focused on climate action and the ways in which investors can mobilize private and institutional capital toward the orderly transition to a low-carbon economy. In response, UBS has developed a Climate Aware framework.

We actively support the development of industry standards. In 2019, we contributed to the writing of and signed the International Finance Corporation’s Operating Principles for Impact Management. These Impact Principles provide a standard for impact investing, in which investors seek to generate positive impact for society alongside financial returns. We also contributed to a report by the Sustainable Finance Working Group of the Institute of International Finance on sustainable investment terminology.

®   Refer to the Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investors, for our key documents, frameworks and external commitments, and for our climate disclosure following the recommendations of the Task Force on Climate-related Financial Disclosures

What is our governance on ESG?

Our governance framework on sustainability supports the creation of long-term value. Our firm’s sustainability activities, including sustainable finance, are overseen at the highest level of our firm and are founded in our Code of Conduct and Ethics.

®   Refer to the Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investorsfor the sustainability governance chart

 

We regularly review whether our governance framework continues to reflect our ambitions with regard to sustainability. In 2019, we therefore decided to further sharpen our focus on sustainable finance and we are now establishing a Sustainable Finance Steering Committee. It will be comprised of senior business leaders engaged in our firm’s sustainable finance efforts, who will work together to ensure that we continue to drive innovation and develop expertise and thought leadership regarding sustainable finance. The Chair of the Sustainable Finance Steering Committee is a member of the UBS in society Steering Committee.

 

 

1  UBS Investor Watch on the Year Ahead, November 2019.

2  UBS Asset Management and Responsible Investor magazine, ESG: Do You or Don’t You?, June 2019.

3 Swiss Sustainable Investment Market Study 2019, June 2019.

 

39 


Our strategy, business model and environment
How we create value for our stakeholders
 

How do we define sustainable finance?

Sustainable finance refers to any form of financial service that integrates ESG criteria into business or investment decisions. We provide sustainable finance solutions across all our business divisions and to all our client groups (as shown in the “Key achievements in 2019” chart on the next page), with a particular focus on sustainable investing.

Sustainable investing is an approach that seeks to incorporate ESG considerations into investment decisions. SI strategies seek to achieve a positive environmental or social impact and/or align investments with an investor’s values regarding ESG topics, while aiming to improve portfolio risk and return characteristics. In the main, we identify three approaches of sustainable investing: exclusion (individual companies or entire industries are excluded from portfolios if their areas of activity conflict with an investor’s values); ESG integration (which combines ESG factors with traditional financial considerations); and impact investing (which is designed specifically to help generate a positive social or environmental impact alongside financial returns).

We were among the early movers in developing terminology to describe our sustainable investing activities and to consistently report on them. We are, however, conscious of the need to simplify and standardize the terminology for sustainable finance, which will help to develop and expand that market. We are therefore actively involved in the relevant discussions and are committed to reflecting pertinent changes to terminology in our reporting.

 

 

Core sustainable investments1

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended

 

% change from

USD billion, except where indicated

 

GRI2

 

31.12.19

31.12.18

31.12.17

 

31.12.18

Core SI products and mandates

 

 

 

 

 

 

 

 

Integration – sustainability focus3

 

FS11

 

46.4

20.0

12.8

 

132.4

Integration – ESG integration4

 

FS11

 

372.3

224.5

63.2

 

65.9

Impact investing5

 

FS11

 

9.1

4.7

2.8

 

92.1

Exclusions6

 

FS11

 

52.2

50.3

93.0

 

3.7

Third-party7

 

FS11

 

8.5

13.4

9.8

 

(37.0)

Total core sustainable investments

 

FS11

 

488.5

312.9

181.7

 

56.1

UBS total invested assets

 

 

 

3,607.0

3,101.0

3,262.0

 

16.3

Core SI proportion of total invested assets (%)

 

FS11

 

13.5

10.1

5.6

 

 

1 All figures are based on information available in January 2020.    2 FS stands for the performance indicators defined in the Financial Services Sector Supplement of the Global Reporting Initiative reporting framework.    3 Strategies where sustainability is an explicit part of the investment guidelines, universe, selection, and/or investment process.    4 Strategies that integrate environmental, social, and governance (ESG) factors into fundamental financial analysis to improve risk / return.    5 Strategies where the intention is to generate measurable environmental and social impact alongside financial return.    6 Strategies that exclude companies from portfolios where they are not aligned to an investor’s values. Includes customized screening services (single or multiple exclusion criteria).    7 SI products from third-party providers applying a strict and diligent asset selection process; the selection criteria have been reviewed for the end of 2019 reporting cycle, following a stricter approach from the provider of sustainability ratings. Excludes third-party products that went through a systematic GWM onboarding process, now counted under “Integration – sustainability focus.”

 

 

What do we offer?

We support clients’ sustainability efforts through thought leadership, innovation and partnerships, and we strive to incorporate ESG factors into the products and services we provide. We support corporate and institutional clients who want to generate positive environmental and societal impact using our corporate advisory expertise or by directing capital through our lending or investment capacity. We assist private and institutional clients with their desire to invest in accordance with their own social and environmental objectives, and we are proactive in discussing these issues with them.

Through our Philanthropy Services platform, we are partnering with clients to manage their philanthropy and maximize their impact, by offering expert advice, carefully selected programs from UBS Optimus Foundation, and innovative social financing mechanisms, such as development impact bonds.


In 2019, we noted strong momentum in our sustainable finance activities. A key indicator is the development of our core SI assets, where we managed to more than double penetration, from 5.6% of total invested assets in 2017 to 13.5% (USD 488 billion) in 2019 (2018: 10.1% or USD 313 billion). Core sustainable investments are SI products that involve a strict and diligent asset selection process through either exclusions (of companies / sectors from portfolios where the companies / sectors are not aligned to an investor’s values) or positive selections (such as best-in-class, thematic or ESG integration and impact investing).

Norms-based screening assets, i.e., assets that fall under the application of a UBS policy1 and do not otherwise qualify as a core sustainable investment, amounted to USD 818 billion as of 31 December 2019 (up from USD 797 billion in 2018). Total sustainable investments, including norms-based screening assets, accounted for USD 1,306 billion (2018: USD 1,110 billion), or 36.2% (2018: 35.8%), of our total invested assets.

 

 

1 The assets in discretionary mandates, in UBS’s actively managed retail and institutional funds, as well as in our firm’s proprietary trading book, are subject to our firm’s policy on the prohibition of investment in and indirect financing of companies involved in the development, production or purchase of anti-personnel mines and cluster munitions.

 

40 


 

  

41 


Our strategy, business model and environment
How we create value for our stakeholders
 

Investors

We generate long-term value for our investors by executing our strategy with discipline, striving for cost- and capital-efficient growth, long-term sustainable value creation, and attractive shareholder returns.

Investor base

Our investor base is well diversified. A substantial proportion of our institutional shareholders are based in the US, the UK and Switzerland.

®   Refer to the “Corporate governance” section of this report for more information about disclosed shareholdings

Cost- and capital-efficient revenue growth

We aim to drive higher and superior returns by growing and leveraging our unique, integrated and complementary business portfolio and geographic footprint. Our Global Wealth Management business is well positioned to take advantage of two secular trends: wealth transfer and wealth creation, partly driven by continued economic growth, particularly in Asia, where China is opening its financial markets. Each of our businesses has initiatives to achieve revenue growth and improve operating efficiency.

®   Refer to “Industry trends” in the “Our environment” section of this report for more information about wealth creation and wealth transfer

 

We aim to balance growth opportunities with cost and capital efficiency in order to drive attractive risk-adjusted returns and sustainable performance.

Our primary measurement of performance for the Group is return on common equity tier 1 capital (CET1), as regulatory capital is our binding constraint and drives our ability to return capital to shareholders.

®   Refer to the “Performance targets and measurement” section of this report for more information


Shareholder returns

We aim to increase our ordinary dividend per share by USD 0.01 each year, and to return excess capital through share repurchases. We consider business conditions and any idiosyncratic developments when determining excess capital available for share repurchases.

Alignment of interests

We aim to align the interests of our employees with those of our equity and debt investors. This is reflected in our compensation philosophy and practices.

®   Refer to “Our compensation philosophy” in the “Compensation” section of this report for more information

Communications

Our Investor Relations function serves as the primary point of contact between UBS and all shareholders. Our senior management and the Investor Relations team regularly interact with the institutional investors community, financial analysts and other market participants, such as credit rating agencies. Clear, transparent and relevant disclosures, together with regular and direct interactions with existing and prospective shareholders, form the basis for our communications. The Investor Relations team also relays the views of and feedback from institutional investors and other market participants on UBS to our senior management.

Investor Relations and Corporate Responsibility work together and interact with those investors focusing on sustainability topics relevant to UBS and society at large.

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

®   Refer to “Society” in this section for more information about our sustainability efforts

  

42 


 

Employees

Our employees drive our success. Our employees work in 50 countries, are citizens of 136 nations and speak more than 150 languages. Their skills, experience and commitment enable us to deliver innovative solutions for our clients, foster sustainable business success, protect our reputation and drive the firm forward. As an employer, we attract, develop and retain a diverse range of talent and aim to ensure there is a workplace culture that supports and engages our employees, enabling them to build their careers and unlock their full potential.


The keys to a strong corporate culture

Our three keys to success remain the foundation of our strategy and culture. Together, they define what we stand for as a firm and as individuals, and they drive our business strategy. We set out on our cultural transformation in 2011, defining and then embedding our Pillars, Principles and Behaviors into our core people management processes. We conduct regular employee surveys to obtain feedback and ensure continuous improvement, discussing the findings and further actions with our employees. In 2019, responses indicated that employee engagement, appreciation for our talent management practices, and pride in working at UBS were all above the norm for financial services organizations.

®   Refer to the foldout pages of this report for more information about our Pillars, Principles and Behaviors

 

Engaging and enabling employees, instilling a strong risk culture and promoting sustainability were culture-building priorities in 2019. In this respect, our Group Franchise Awards program provided foundational support. This Group-wide initiative rewards employees for cross-divisional collaboration and operational effectiveness improvements.

We are convinced that leadership drives culture, and culture drives performance. Great leaders are the key to developing our people, client relationships and results. For many years, our House View on Leadership has outlined what effective leadership is at UBS, as well as what employees can expect. To help leaders better adapt to continuous change and digitalization, we updated our House View in 2019 and integrated its precepts into all of our core HR processes, including recruitment, performance evaluations, training, succession planning and promotions. Characteristics such as innovation, curiosity and agility complement our long-standing emphasis on inclusivity, sustainable profits, accountability, cross-firm partnership and putting clients first. It is an evolution of how we view leadership that creates an extraordinary experience for our clients and our people.

 

43 


Our strategy, business model and environment
How we create value for our stakeholders
 

Hiring, developing and retaining talent

We are widely recognized as an employer of choice and a great place to build a career. Key to our success is our long-standing commitment to investing in our employees at every career stage. It starts with recruitment, where our philosophy is to hire for potential, considering the individual’s experience and competencies, learning capabilities and agility, as well as digital and data savviness. We hired a total of 10,080 external candidates in 2019. Our junior talent programs hired more than 1,700 graduate and other trainees, interns and apprentices. We also continued our insourcing and hiring activities in our Business Solutions Centers in China, India, Poland, Switzerland and the US as part of our integrated workforce strategy.

Our in-house UBS University further updated its curriculum in 2019 to emphasize future-skills development and personal growth for all employees, with a new digital skills curriculum that builds knowledge about topics such as blockchain, cloud computing, robotics and artificial intelligence. We also launched a mobile learning app to enable employees to learn whenever and wherever they want. We revamped our leadership development offering in 2019 to ensure that our leaders have the skills they need to develop their businesses and their people, and to lead effectively in the digital transformation age. In 2019, our permanent employees completed more than 1,100,000 learning activities, including mandatory training on compliance, business and other topics. This averaged to more than two training days per employee.

Along with line manager effectiveness, having a wide range of learning and career development opportunities, as well as tools to facilitate professional growth, are key drivers of employee engagement. In this respect, our new Career Navigator tool, which was launched in June 2019, has been a game-changer. This online platform enables employees to explore career paths and search for open roles that match their interests while allowing our recruiters to find internal talent more easily. It also identifies skill gaps with regard to new roles and interests and directly links to learning opportunities to help fill these gaps.

We are committed to ensuring a workplace where employees are fairly treated, with equal opportunities for all. We do not tolerate harassment of any kind. Our global measures include employee and line manager training, specialist expertise in handling concerns raised, and a global employee hotline. A Harassment Guardian provides an independent view of the firm’s setup, procedures and behaviors to prevent harassment and sexual misconduct.

We pay for performance, and a strong commitment to pay equity is embedded into our compensation policies. We conduct regular internal, as well as independent external, reviews, with the aim of ensuring that all employees are paid fairly, and we seek to address any unexplained gaps.

®   Refer to www.ubs.com/employerawards, www.ubs.com/careers and the “Compensation�� section of this report for more information

 

 

Personnel by region

 

 

 

 

 

 

 

 

As of

 

% change from

Full-time equivalents

 

31.12.19

31.12.18

31.12.17

 

31.12.18

Americas

 

21,036

21,309

20,770

 

(1)

of which: USA

 

20,232

20,495

19,944

 

(1)

Asia Pacific

 

13,956

12,119

8,959

 

15

Europe, Middle East and Africa (excluding Switzerland)

 

12,918

12,620

11,097

 

2

of which: UK

 

5,704

5,782

5,274

 

(1)

of which: rest of Europe (excluding Switzerland)

 

7,048

6,670

5,662

 

6

of which: Middle East and Africa

 

166

168

161

 

(1)

Switzerland

 

20,691

20,840

20,427

 

(1)

Total1

 

68,601

66,888

61,253

 

3

1 The increase in workforce in 2019 and 2018 was mainly due to insourcing initiatives and was more than offset by a decrease in external staff.

 

 

 

44 


 

The importance of diversity and inclusion

A widely diverse workforce that reflects the experience of our global clients is important for our long-term success. We therefore strive to shape a diverse and inclusive culture across the firm to drive sustainable growth and innovation, deliver the best of UBS to our clients, and build a better place to work for all employees.

Our broad view of diversity encompasses a range of aspects, including gender, ethnicity, LGBTQ, disability, mental health and inclusive leadership. We remain committed to narrowing our gender representation gap, especially at the management level, through a global gender diversity strategy and a wide range of supporting initiatives to hire, promote and retain more women at all levels of the organization. We continue to make progress toward our stated aspiration of increasing the representation of women in management roles to one-third. In 2019, 25.2% of all employees in roles at Director level and above were women, up from 24.7% in 2018.

Our UBS Career Comeback program, which was launched in 2016, continues to help us increase our pipeline of female senior leaders. Professionals looking to return to corporate jobs after a career break are hired for permanent roles and supported with specialized onboarding, coaching and mentoring. In 2019, Career Comeback expanded beyond its four established hubs in the US, UK, Switzerland and India to become a global, year-round program. To date, Career Comeback has helped 142 women and 8 men relaunch their careers.

®  Refer to www.ubs.com/diversity for additional information about our priorities and commitments, and the Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investors for our management practices and detailed employee data, including gender- and region-specific data


  

45 


Our strategy, business model and environment
How we create value for our stakeholders
 

Society

As expressed in the 17 United Nations Sustainable Development Goals (the SDGs), the world faces enormous societal and environmental challenges. We recognize that it is important to understand these challenges, as well as the opportunities arising from them, to consider their relevance to UBS and to identify potential actions our firm may need to take.

As the world’s largest truly global wealth manager, we have a responsibility to take a leading role in shaping a positive future, for everyone, including the generations to come.

Code of Conduct and Ethics

In our Code of Conduct and Ethics (the Code), the Board of Directors and the Group Executive Board set out the principles and practices that define our ethical standards and the way we do business. These principles apply to all aspects of our business.

All employees must confirm annually that they have read and will adhere to the Code and other key policies, supporting a culture where ethical and responsible behavior is part of our everyday operations.

In the Code, we make a commitment to integrating financial and societal performance for the mutual benefit of our clients and our firm – and that we are constantly looking for better ways to do business in an environmentally sound and socially responsible manner.

®   Refer to the Code of Conduct and Ethics of UBS, available at www.ubs.com/code, for more information

Engaging with society

We engage with representatives of wider society on a regular basis and on a wide range of topics. This engagement yields important information about society’s expectations and concerns and makes a critical contribution to our understanding and management of issues with potential (positive and negative) relevance to our firm – and to society. By actively fostering such interactions, we are in a position to address expectations and concerns in an informed and effective manner.

UBS in society

UBS in society is dedicated organization within the firm, focused on maximizing our positive effect and minimizing any negative effects UBS has on society and the environment. It covers all of the activities and capabilities related to sustainable finance (including sustainable investing), philanthropy, environmental, climate and human rights policies governing client and supplier relationships, our environmental footprint, human resources, and community investment. It is through this cross-divisional organization that we leverage our expertise across all of these areas to drive sustainable performance. UBS in society is committed to making UBS a force for driving positive change in society and the environment.

The activities driven by UBS in society are overseen, at the highest level of our firm, by our Board of Directors’ Corporate Culture and Responsibility Committee (the CCRC). The Group CEO supervises the execution of the UBS in society strategy and annual objectives and informs the Group Executive Board and CCRC about UBS in society updates as appropriate. Reporting to the Group CEO, the Head UBS in society is UBS’s senior-level representative for sustainability issues and, on behalf of the Group CEO, proposes the UBS in society strategy and annual objectives to the CCRC for approval.

®   Refer to “Board of Directors” in the “Corporate governance” section of this report for more information about the CCRC 

Driving change in finance

As a major financial institution, we are conscious that the activities and decisions of our clients can have a substantial impact on society. It is for that reason that we strive to incorporate environmental, social and governance (ESG) impacts into the products and services we provide to clients and partner with them to help mobilize capital toward the achievement of the SDGs and the orderly transition to a low-carbon economy.

We know that ESG topics are increasingly important to our clients. That is why we have dedicated a separate section in this report to highlight our commitment to serving the growing sustainable finance needs and expectations of our clients, and to the key activities associated with our commitment.

®      Refer to “Our focus on ESG” in this section for more information

Driving change in philanthropy

We believe our clients can make a meaningful, and measurable, difference for their chosen causes with advice from our philanthropy experts and the more than 200 global programs that have been carefully selected through our UBS Optimus Foundation. We increase social impact by combining our expertise with capital and networks. Through our Philanthropy Services platform, we offer clients unique access to social and financial innovation and philanthropic advice, as well as tailored program design, co-funding and co-development opportunities.

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

 

 

46 


 

Driving change in communities

We recognize that our firm’s long-term success depends on the health and prosperity of the communities of which we are a part. We seek to redress disadvantages through long-term investments in education and entrepreneurship. We provide strategic financial commitments and targeted employee volunteering to drive impact across a number of the SDGs.

®   Refer to the Driving change in communities” section in the Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investors for more information 

Driving change in business

We view the proper, firm-wide management of our firm’s own environmental footprint and our supply chain as important proof of how we do business in a sustainable manner for the benefit of society.

This is equally true of our comprehensive environmental and social risk management and framework that governs client and vendor relationships and is applied firm-wide to all activities. We have set environmental and social risk standards pertaining to environmental and human rights topics in product development, investments, financing and supply chain management. We have identified certain controversial activities that we will not engage in at all, or only under stringent criteria. As part of this process, we engage with clients and vendors to better understand their processes and policies, and to explore how any environmental and social risks may be mitigated.

We have set ambitious targets relating to our use of energy, water and paper, as well as to our travel and the amount of waste we produce, and we aim to increase the awareness of environmental and social matters among our employees and foster a long-term sustainable mindset in all our activities. In 2019, the year in which we celebrated 20 years since becoming the first bank to gain global environmental management system certification (ISO 14001), we ran major campaigns on key environmental themes.

Our campaigns demonstrate our strong commitment to reducing UBS’s environmental footprint and further raising our employees’ awareness of key environmental challenges. The “Go drastic. Cut the plastic.” global campaign, which was launched in July 2019, aims at encouraging behavioral change to help tackle, reduce and phase out single-use plastic items across our firm. In October, we held our first Zero Waste Day at 22 sites across the globe, which featured numerous sustainability-themed activities. Additionally, at five major offices across the globe, we hosted events featuring subject matter experts talking about their life’s work and passion, including speakers from innovative companies.

®   Refer to the Sustainability Report 2019, available from 5 March 2020 under “Annual reporting” at www.ubs.com/investors, for full descriptions of our environmental management, our responsible supply chain management and our environmental and social risk management and framework


Reporting to our stakeholders on our sustainability strategy and activities

Information about all our sustainability efforts and commitments is provided in the UBS Sustainability Report,1 available under “Annual reporting” at www.ubs.com/investorsThe content of the Sustainability Report has been prepared in accordance with the Global Reporting Initiative (GRI) Standards (“comprehensive” option) and with the German rules implementing the EU directive on disclosure of non-financial and diversity information (2014/95/EU). Our reporting on sustainability has been reviewed on a limited assurance basis by Ernst & Young Ltd against the GRI Standards. Our Sustainability Report 2019 also includes our full climate disclosure, which we have been aligning with the recommendations provided by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures since their introduction in 2017.

 

 

 

1 The UBS Sustainability Report is available from 5 March 2020, and is not deemed incorporated by reference into the SEC Form 20-F filing.

 

47 


Our strategy, business model and environment
How we create value for our stakeholders
 

Aims and progress

We work with a long-term focus on providing appropriate returns to all of our stakeholders in a responsible manner. To underline our commitment, we provide transparent goals and report on progress made against them wherever possible. In 2019, we made good progress in delivering against the Group’s aims.

 

We aim to be / Our key goals1

Our progress

A leader in sustainable finance across all client segments

2017–2020

     Double the penetration of core SI assets from 5.6% (USD 182 billion) of total invested assets2

 

     Achieved our goal one year early, reaching USD 488.5 billion in core SI assets representing 13.5% of total invested assets2,3

2016–2021

     Direct at least USD 5 billion of client assets into SDG-related impact investments

 

     USD 3.9 billion of client assets directed into SDG-related impact investments4

A recognized innovator and thought leader in philanthropy

2017–2020

     Achieve 40% of employees volunteering with 40% of volunteer hours being skills based

     Increase donations to UBS Optimus Foundation to
CHF
 100 million in 2020

 

     38% of global workforce volunteered and 48% of volunteer hours
 were skills based
5

     UBS Optimus Foundation: USD 89.5 million (CHF 86.9 million) in donations raised; USD 109.5 million (CHF 106.3 million) in grants approved

2020–2025

     Support 1 million young people and adults (beneficiaries) to learn and develop skills for employment, decent jobs and entrepreneurship through our community investment activities

     Improve the lives of 5 million children globally by engaging at least 1,000 clients in UBS Optimus Foundations collective giving platforms

 

     Progress against these goals will be reported for the financial year 2020 onward

An industry leader in sustainable business practices

     Retain favorable positions in key ESG ratings

     Maintained leadership position (Dow Jones Sustainability Indices / DJSI)

     AA rating maintained (MSCI ESG Research)

     Industry leader rank maintained (Sustainalytics)

     A– rating and included in Leadership band (CDP)

2017–2022

     Implement the recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD)

 

     First TCFD reporting introduced for the financial year 2017, continuous improvements ever since

2019–2024

     Implement the requirements of the
Principles for Responsible Banking (PRB)

 

     Among the founding signatories of the PRB (September 2019)

An employer of choice

     Being recognized as one of the worlds most attractive employers in key ratings and rankings

     Included in Global Universum ranking of Top 50 Worlds Most Attractive Employers

     Peer-leading position in human resources elements of DJSI

     Score above financial services norm in employee engagement and work environment (based on employee survey results)

     Recognized by Bloomberg Gender-Equality Index

1 Refer to the UBS in society constitutional document (in the Sustainability Report 2019) for more information about all aims. Goals are to be achieved by the end of the target year.    Core SI are SI products that involve a strict and diligent asset selection process through either exclusions (of companies / sectors from the portfolio where the companies are not aligned to an investor’s values) or positive selections (such as best-in-class, thematic or ESG integration and impact investing). Refer to the “Core sustainable investments” table in “Our focus on ESG” in this section.    The increase in core SI assets was mainly driven by the ESG integration strategy of Asset Management. Refer to the “Core sustainable investments” table in “Our focus on ESG” in this section.    Strategies where the investment has the intention of generating measurable environmental and social impact alongside a financial return.    5 Refer to the “Driving change in communities” section in the Sustainability Report 2019.

 

  

48 


 

Regulation and supervision

As a financial services provider based in Switzerland, UBS is subject to the consolidated supervision of the Swiss Financial Market Supervisory Authority (FINMA). Our entities are also regulated and supervised by the authorities in each of the countries where they conduct business. Through UBS AG and UBS Switzerland AG, which are licensed as banks in Switzerland, the Group 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 a global systemically important bank (G-SIB), as designated by the Financial Stability Board, and a systemically relevant bank (SRB) in Switzerland, we are subject to stricter regulatory requirements and supervision than most other Swiss banks. The significant changes to financial regulation after the financial crisis in 2008 have had a material effect on how we conduct our business and have required significant investment.

®   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 (the Swiss Banking Act) and related ordinances, which impose, among other requirements, minimum standards for capital, liquidity, risk concentration and internal organization. FINMA fulfills its statutory supervisory responsibilities through licensing, regulation, supervision and enforcement. It is responsible for prudential supervision and mandates audit firms to perform regulatory audits and other supervisory tasks on its behalf.

Capital adequacy and liquidity regulation

As an internationally active Swiss SRB, we are subject to capital and total loss-absorbing capacity requirements that are based on both risk-weighted assets and leverage ratio denominator and are among the most stringent in the world. Furthermore, we are subject to short-term liquidity coverage ratio rules, and after the net stable funding ratio will have been brought into force in
Switzerland, which the Swiss Federal Council currently intends will be by mid-2021, we will be subject to long-term minimum funding requirements.

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

®   Refer to “Assets and liquidity management” in the “Treasury management” section of this report for more information about liquidity coverage ratio requirements

®   Refer to the “Regulatory and legal developments” section of this report for more information about the introduction of the net stable funding ratio

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 (the Federal Reserve Board) under a number of laws. UBS Group AG and UBS AG are both subject to the Bank Holding Company Act, under which the Federal Reserve Board has supervisory authority over the US operations of both UBS Group AG and UBS AG. UBS’s US operations are also subject to oversight by the Federal Reserve Board’s Large Institution Supervision Coordinating Committee.

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 registered as a swap dealer with the Commodity Futures Trading Commission (the CFTC) and we expect that UBS AG will be required to register as a security-based swap dealer with the Securities and Exchange Commission (the SEC) by the registration date of 6 October 2021.

UBS Americas Holding LLC – the intermediate holding company for our non-UBS AG 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 stress testing and capital planning process, and resolution planning and governance.

 

49 


Our strategy, business model and environment
Regulation and supervision
 

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

UBS Financial Services Inc., UBS Securities LLC and several other US subsidiaries are subject to regulation by a number of different government agencies and self-regulatory organizations, including the SEC, the Financial Industry Regulatory Authority, the CFTC, the Municipal Securities Rulemaking Board and 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 (the PRA), which is part of the Bank of England, and the Financial Conduct Authority (the FCA). We are also subject to the rules of the London Stock Exchange and other securities and commodities exchanges of which UBS AG is a member.

UBS AG and UBS Europe SE have UK-registered branches in London. UBS AG, London Branch 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.

Regulation and supervision in Germany

Certain parts of the businesses of UBS Limited have been transferred via cross-border merger to UBS Europe SE, a Frankfurt-based subsidiary of UBS AG. The remainder of the businesses not merged into UBS Europe SE were transferred to UBS AG, London Branch. As a result of the cross-border merger, UBS Europe SE has become a significant entity and is subject to the direct supervision of the European Central Bank, in addition to the continued conduct, consumer protection and anti-money laundering-related supervision by the German BaFin and the supervisory support by the German Bundesbank. The entity is subject to EU and German laws and regulations. UBS Europe SE maintains branches in Austria, Denmark, France, Italy, Luxembourg, the Netherlands, Poland, Spain, Sweden, Switzerland and the UK, and is subject to conduct supervision by authorities in all those countries.

Regulation and supervision in Singapore and Hong Kong

In Asia Pacific (APAC), we operate from 13 locations and are therefore subject to the regulation and supervision by local financial regulators. The APAC regional hubs are Singapore and Hong Kong.

UBS AG, Singapore Branch and UBS Securities Pte. Ltd. are primarily supervised by the Monetary Authority of Singapore and the Singapore Exchange.

UBS AG, Hong Kong Branch is primarily supervised by the Hong Kong Monetary Authority. UBS Securities Hong Kong Limited, UBS Securities Asia Limited and UBS Asset Management (Hong Kong) Limited are primarily supervised by the Hong Kong Securities and Futures Commission. In addition, UBS Securities Hong Kong Limited is supervised by the Hong Kong Stock Exchange and the Hong Kong Futures Exchange.

Financial crime prevention

Combating money laundering and terrorist financing has been a major focus of government policies relating to financial institutions in recent years. The US Bank Secrecy Act and other laws and regulations 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.

In addition, 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 those regulations.

Data protection

We are subject to regulations concerning the use and protection of customer, employee, and other personal and confidential information. This includes provisions under Swiss law, the EU General Data Protection Regulation (the GDPR) and laws of other jurisdictions.

If implemented as proposed, we will become subject to a revised Swiss data protection law, which seeks to improve data protection for individuals by enhancing the transparency and accountability rules for companies processing data, among other measures. This is intended to ensure the equivalence necessary for the continued cross-border transmission of data. We expect the Swiss parliament to pass the revised law in 2020 and expect it to take effect on 1 January 2021.

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

  

50 


 

Recovery and resolution 

Too-big-to-fail legislation in Switzerland requires each Swiss systemically relevant bank (SRB) to establish an emergency plan to avoid impending insolvency while maintaining systemic functions. In response to these requirements in Switzerland, and to similar requirements in other jurisdictions, UBS has developed recovery plans and resolution strategies, as well as plans for restructuring or winding down businesses if the firm could not be stabilized by other measures.  

In 2013, FINMA stated its preference for a single point of entry (SPE) strategy for globally active SRBs, such as UBS, with a bail-in at the group holding company level. UBS has since made structural, financial and operational changes to facilitate an SPE strategy and is confident that a resolution of the bank is operationally executable and legally enforceable. In February 2020, FINMA published its assessment of the recovery and resolution plans and emergency plans for Swiss SRBs. FINMA confirmed that our Swiss emergency plan is effective, subject to a further reduction of its joint and several liabilities. In addition, FINMA confirmed that UBS has completed important measures and made considerable progress with respect to its global resolvability.

UBS’s crisis management framework

There are three key governance bodies within the UBS Group crisis management framework (see the chart below), which take responsibility and action depending on the nature of the stress incident and the scale of the response needed.

   For incident, risk and crisis management, the Group Crisis Management Committee works with incident management teams who provide monitoring and early warning indicators to management at a local or regional level, without the need to activate protocols at the Group level. In the event that any local response is insufficient, global task forces and crisis management teams provide decision-making guidance and coordination, including crisis management plans, protocols and playbooks, as well as contingency funding plans.

   The Group Executive Board (the GEB) and the Board of Directors (the BoD) of the Group would evaluate and decide upon the need to activate the Global Recovery Plan (the GRP) were a stress event to reach a severity that required such decision making, according to the risk indicators identified in the GRP.

   FINMA has the authority to determine whether the point of impending insolvency as defined by Swiss law has been reached and, in such instances, as part of the resolution strategy, has the power to order the bail-in of creditors to recapitalize and stabilize the Group, limit payments of dividends and interest, alter our legal structure, take actions to reduce business risk, as well as to order a restructuring of the bank.

 

 

51 


Our strategy, business model and environment
Regulation and supervision
 

Global Recovery Plan

The Global Recovery Plan (the GRP) provides UBS’s senior management with a tool to respond to early warning indicators and identifies measures to restore financial strength should UBS come under severe capital and/or liquidity stress.

Defined quantitative and qualitative triggers are monitored daily and are subject to predefined governance and escalation processes. Fully actionable recovery options are available and provide a firm basis for the GEB Recovery Task Force for decision making in recovery. Recovery options have defined execution owners and playbooks with the following objectives:

   capital preservation, such as reduction of future dividends, incentive compensation reductions;

   capital raising, such as issuance of mandatory convertible instruments; and

   raising funding, disposal or wind-down of businesses.

 

 

 

Global Resolution Strategy

The Global Resolution Strategy (the GRS) sets out measures that can be taken by FINMA to resolve UBS in an orderly manner, in the event that the recovery process is not successful and the Group enters into resolution. UBS submits the GRS to FINMA, which has the ultimate authority and responsibility to execute the resolution, in cooperation with the Swiss National Bank, the Federal Department of Finance and other key authorities through a Crisis Management Group. The SPE bail-in strategy would involve the write-down of remaining equity, additional tier 1 and tier 2 instruments of the Group, as well as the bail-in of total loss‑absorbing (TLAC)-eligible senior unsecured bonds at the UBS Group AG level. At the same time, an internal recapitalization of the affected subsidiaries would be executed, allowing the subsidiaries to transmit incurred losses to the parent bank, UBS AG, and ultimately to UBS Group AG. Post-resolution restructuring measures could include the potential wind-down of businesses and assets, as well as business disposals. Preparatory work is ongoing. Overall, FINMA confirmed that UBS has already taken important preparatory steps and has thus made considerable progress with respect to its global resolvability.


 

 

 

52 


 

Local plans

The UBS US resolution plan sets out the steps which could be taken to resolve the UBS Americas Holding LLC group in the event that the US sub-group suffered material financial distress and the Group was either unable or unwilling to provide financial support. As required by the US resolution planning regulations, our US plan contemplates that UBS Americas Holding LLC will commence a bankruptcy proceeding in the US. Prior to commencement of the proceeding, the plan contemplates that UBS Americas Holding LLC would downstream financial resources to its subsidiaries to facilitate the orderly wind-down or disposal of businesses.

Subsequent to the cross-border merger of UBS Limited into UBS Europe SE, the enlarged European operating subsidiary is in the process of developing resolution planning according to Single Resolution Board requirements. In view of the relatively small size of UBS Europe SE compared with the overall Group, emphasis is placed on the GRP and GRS to provide the tools necessary to recapitalize and restructure the company in the event of material financial distress.

The Swiss emergency plan demonstrates how UBS’s systemically important functions and critical operations can continue in the event that a successful restructuring of the Group is deemed not to be successful. This is achieved mainly by maintaining UBS Switzerland AG as a separate legal entity. FINMA has confirmed that the Swiss emergency plan is effective, subject to a further reduction of its joint and several liabilities.

Other local recovery and resolution plans exist for various Group entities and jurisdictions. They illustrate how local operations benefit from the GRP and the GRS, and also support the global plans. UBS’s operational continuity planning is intended to ensure the uninterrupted provision of critical services even if certain Group entities are discontinued in a crisis.

  

53 


Our strategy, business model and environment
Regulatory and legal developments
 

Regulatory and legal developments

Switzerland

Swiss Federal Council adopts new rules on gone concern capital for G-SIBs

In November 2019, the Swiss Federal Council adopted amendments to the Capital Adequacy Ordinance, which became effective 1 January 2020. The revisions introduce gone concern capital requirements for Switzerland-based intermediate parent banks of global systemically important banks (G-SIBs) on a standalone basis. As a consequence, UBS AG will be subject to: (i) a gone concern capital requirement on its third-party exposure on a standalone basis; (ii) an additional gone concern capital buffer requirement equal to 30% of the Group’s gone concern capital requirement on UBS AG’s consolidated exposure; and (iii) a gone concern capital requirement equal to the nominal value of the gone concern instruments issued by UBS entities and held by the parent bank. A transitional period until 2024 will be granted for the buffer requirement.

Based on current estimates, and once the new requirements have been fully phased in, we expect the UBS Group to be required to maintain a gone concern leverage ratio of around 75–100 basis points higher than what would be required to meet the Group requirements alone. The actual total loss‑absorbing capital Group requirement at the end of the transition phase will depend on a number of components, including the subsidiaries’ loss-absorbing capacity at the time.

The revisions also reduced the gone concern requirement of UBS Switzerland AG to 62% of the Group’s gone concern requirement (before rebate) and increased the minimum gone concern requirement for the Group (after rebate) from 3% to 3.75% (based on leverage ratio denominator), effective 1 January 2022.

Finally, instruments available to meet gone concern requirements remain eligible until one year before maturity; however, the current haircut of 50% in the last year of eligibility is no longer applied under the revised rules.

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

Swiss corporate tax reform

In May 2019, the Swiss electorate approved corporate tax reform measures that abolish preferential corporate tax regimes and introduce a series of tax measures aligned with Organisation for Economic Co-operation and Development (OECD) standards, while seeking to maintain Switzerland’s competitiveness as a business location. The federal changes resulting from this tax reform do not have a significant effect on the tax expenses for the Group, as increases resulting from the reform are largely offset by tax rate reductions and other changes at the cantonal level. The federal reform became effective on 1 January 2020.

The reform measures also provide that for Switzerland-domiciled companies with shares listed on a stock exchange no more than 50% of dividends may be, and at least 50% of share repurchases for redemption must be, paid out of capital contribution reserves, with the remainder required to be paid from retained earnings. As a result, at least 50% of all dividends paid after 1 January 2020, including dividends in respect of the financial year 2019, will be paid from retained earnings, and will be subject to a 35% Swiss withholding tax. As of 31 December 2019, UBS held CHF 13 billion in approved capital contribution reserves for potential future distributions to shareholders, either in the form of dividends or share repurchases.

Separately, following a change in Swiss tax law as of 1 January 2019 that applies to holding companies of systemically relevant banks issuing loss-absorbing additional tier 1 or total loss-absorbing capacity (TLAC)-eligible senior unsecured debt instruments, UBS will no longer issue such instruments out of UBS Group Funding (Switzerland) AG and existing instruments were migrated to UBS Group AG in October 2019.

EU equivalence for Swiss trading venues

In June 2019, the European Commission decided not to extend its equivalence decision for Swiss trading venues beyond the end of June 2019, citing a perceived lack of progress toward the conclusion of an institutional framework agreement between Switzerland and the EU as the reason for this decision.

In reaction, the Swiss Federal Council activated a contingency measure to protect the Swiss stock exchange infrastructure, effective as of 1 July 2019. The Swiss measure introduced a recognition requirement for foreign trading venues that admit shares issued by Swiss incorporated companies to trading, with EU trading venues having their recognition revoked due to the lack of reciprocity. To comply with this measure, trading in Swiss shares on EU trading venues ceased and was redirected to Swiss trading venues as of 1 July 2019, as permitted under EU law in the absence of eligible EU trading venues.

We prepared for this scenario and, as of 1 July 2019, routed relevant trade flows in Swiss shares from EU to Swiss trading venues, with limited adjustment costs for UBS.

 

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Swiss National Bank adjustment to the zero interest rate exemption threshold

In September 2019, the Swiss National Bank (the SNB) announced adjustments to the calculation of the amount of sight deposits at the SNB that are exempt from negative interest rates. The exemption threshold has been increased from 20 to 25 times each bank’s minimum requirement. In addition, the threshold will be updated on a monthly basis. These changes came into effect on 1 November 2019. The SNB communicated that this decision was taken based on the assumption that the low interest rate environment around the world will persist for some time. In its December 2019 monetary policy assessment, the SNB left its previously announced policy measures unchanged. UBS maintains significant sight deposits at the SNB. The adjustments to the exemption threshold calculation benefit our net interest income.

Swiss Federal Council communicated its intention to bring the NSFR into force by mid-2021

Having delayed the introduction of net stable funding ratio (NSFR) requirements in Switzerland over the previous two years to align with developments in the EU and the US, the Swiss Federal Council communicated its intention in November 2019 to adopt the associated ordinance amendments in early summer 2020, and bring them into force by mid-2021. The Federal Department of Finance was mandated to finalize the regulatory texts jointly with relevant stakeholders, including affected banks, in the coming months. If implemented as originally proposed in the 2017 consultation, the introduction of the NSFR could result in a significant increase in long-term funding requirements on a legal entity level.

Automatic exchange of information

In September 2019, as a consequence of the automatic exchange of information (AEI) introduced in Switzerland as of 1 January 2017, the Swiss Federal Tax Administration exchanged information on financial accounts with 75 countries. With 63 of these countries, the exchange was reciprocal. In the case of 12 countries, Switzerland received information, but did not provide any, either because those countries do not yet meet the international requirements on confidentiality and data security (Belize, Bulgaria, Costa Rica, Curaçao, Cyprus, Montserrat, Romania and Saint Vincent and the Grenadines) or because they chose not to receive data (Bermuda, the British Virgin Islands, the Cayman Islands, and the Turks and Caicos Islands). The Federal Tax Administration sent information on around 3.1 million financial accounts to the partner states and received information on around 2.4 million from them. Subject to the exchange are identification, account and financial information, including name, address, state of residence and tax identification number, as well as information concerning the reporting financial institution, account balance, income payments and gross proceeds. UBS is committed to full compliance with its AEI obligations.


Tightened self-regulation for income-producing real estate

In August 2019, FINMA approved the Swiss Bankers Association’s revised self-regulation on mortgage lending for income-producing real estate. The revisions increase the minimum equity required for new and increased mortgages on these properties, from 10% to 25% of the market value at origination, and require mortgages to amortize to two-thirds of the market value at origination within 10 years (previously 15 years). UBS Switzerland AG is subject to the revised self-regulation that came into effect on 1 January 2020. We expect the overall effect on UBS to be limited.

Europe

Update on the UK’s withdrawal from the EU

Based on recent developments, the UK and EU are expected to negotiate the terms of their future relationship during a transition period intended to end 31 December 2020, including the granting of equivalence determinations for the UK under existing EU financial services legislation.

UBS implemented contingency plans through the combined UK business transfer and cross-border merger of UBS Limited into UBS Europe SE (UBS ESE) in March 2019.

The European Commission has confirmed an extension of the temporary equivalence for UK central counterparties (CCPs) until 31 January 2021. Should the UK exit the transition period without the necessary equivalence determination in place, UBS ESE’s exposures to UK CCPs would need to be migrated to an EU CCP ahead of the 31 January 2021 deadline. In the absence of an agreement on the future EU–UK relationship or equivalence determinations covering relevant financial services, however, the industry would face a number of market structure issues that await resolution between the UK and EU in 2020, such as the operation of the derivatives and share trading obligations under the EU’s Markets in Financial Instruments Directive II (MiFID II).

UK operational resilience requirements

In December 2019, the UK regulators (the Bank of England, the Prudential Regulation Authority (the PRA) and the Financial Conduct Authority) issued a consultation on their operational resilience expectations for banks and financial market infrastructures (FMIs). To complement this, the PRA is also consulting on outsourcing and third-party risk management requirements.

The proposals will require firms and FMIs to identify their key business services and set impact tolerances (i.e., the maximum level of disruption that would be tolerated) for each one. Firms will also be required to test their ability to deliver important business services within impact tolerances in severe but plausible scenarios.

UBS is in the process of adapting its existing operational resilience framework to the new methodology set out in the consultations. Impact tolerances will be clearly defined and scenarios will be designed and implemented to test our controls and maintain operations within those impact tolerances.

 

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Our strategy, business model and environment
Regulatory and legal developments
 

International

Developments on anti-money laundering

There has been increasing focus on anti-money laundering (AML), including on international collaboration, supervisory information sharing, and on divergences in the criteria and methodologies of the Financial Action Task Force (FATF). Authorities also recognized the increased role played by technology in facilitating AML compliance, but also in opening new doors for malicious activities. In this context, the FATF consulted on “Draft Guidance on Digital Identity”, which aims to clarify how digital identity systems can be used for customer due diligence. The FATF also updated its standards that require crypto-exchanges to identify their customers and make that information available to law enforcement authorities. Separately, the Basel Committee on Banking Supervision (BCBS) consulted on the introduction of guidelines on interaction and cooperation between prudential and AML and counter-terrorist financing supervision. In the EU, there has been focus on strengthening the implementation of the EU AML rules, including via a strengthened role of the European Banking Authority (EBA) in rulemaking and supervision, and discussions are ongoing on a possible creation of an EU AML Agency.

In Switzerland, the Federal Council adopted a dispatch on amending the Anti-Money Laundering Act (the AMLA) on 26 June 2019. According to the proposal, advisors, such as lawyers and other professionals, will be subject to the AMLA. Additionally, using a risk-based approach, financial intermediaries will be required to verify certain information regarding beneficial ownership and will also be required to periodically review client profiles to assess whether they are up-to-date. In the US, various amendments and guidance regarding US AML laws were introduced, including on issues such as beneficial ownership, information sharing, privacy protections, risk management, and examination priorities. In APAC, the FATF and the Asia/Pacific Group on Money Laundering (the APG) carried out an evaluation of Japan and adopted six mutual evaluation reports which will drive AML policy development in the region for the years to come.

Developments on data protection

There has been an increased focus on data protection regulation and in particular on how technology is changing the context and international coordination of data policies, in the absence of a single global data protection regulatory body. This included considerations for clarity regarding the ability of banks to use big data analytics, addressing privacy and security concerns aimed at giving individuals more control over how their data is collected and used, and smooth transfers of data across borders. In the EU, the focus was on ongoing implementation of the General Data Protection Regulation (the GDPR) and addressing the inconsistencies between the GDPR and other EU legislation. Additionally, the EBA outlined key challenges in the roll out of big data and advanced analytics. EU–UK data transfers require use of EU-approved standard contractual clauses in the absence of UK and EU adequacy decisions. UBS completed a review in 2019 intended to ensure that EU-approved standard contractual clauses are included in all relevant contracts. In Switzerland, parliamentary debate on the fundamental revision and modernization of the Federal Data Protection Act took place throughout 2019 and will continue in 2020. Linked to the revision is the Swiss Federal Council’s adoption of a dispatch to approve the Council of Europe data protection convention. The European Commission is expected to publish an adequacy decision on the level of Swiss data protection compared to the EU GDPR in the first quarter of 2020. In the US, California has become the first state to adopt its own comprehensive regulatory framework, the California Consumer Privacy Act.

Regulatory approaches to stablecoins

Stablecoins in general and the Libra project specifically continue to receive significant regulatory attention.

At the international level, a G7 report identified stablecoins as one of nine significant risks, giving rise to money laundering and tax compliance risks. The Financial Stability Board (the FSB) announced a review of the existing supervisory and regulatory approaches in addressing financial stability and systemic risks of stablecoins, and is expected to issue a consultation in April 2020. The International Organization of Securities Commissions examined how securities legislation may apply to global stablecoins and recommended a case-by-case approach.

In the EU, the European Commission and the Council of the EU stated that no global stablecoin initiative should operate in the EU until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.

In the US, Congress introduced a bill to classify stablecoins as securities and to regulate stablecoins under the Securities Act of 1933.

In Switzerland, FINMA outlined its treatment of stablecoins under Swiss supervisory law, stating that it would consider “substance over form” and apply a principle-based and technology-neutral approach. In addition, FINMA responded to a request from the Libra Association, providing an initial indication of the application of Swiss regulation, and highlighting the need for international regulatory coordination.

In the UK, the Bank of England recommended the UK Treasury consider adjusting the UK regulatory framework for payments to take into account innovations, such as stablecoins, by applying a risk-based approach and standards equivalent to those applied to traditional payment chains.

 

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FSB efforts on new and emerging vulnerabilities in the financial system and resolvability of systemically important financial institutions (banks and CCPs)

As part of its priorities for 2020, the FSB communicated that it will reinforce its forward-looking monitoring of developments to identify, assess and address new and emerging vulnerabilities in the financial system. Focus topics include developments and financial stability considerations around fintech, regulatory issues from global stablecoins, cross-border payment systems, interest rate benchmark reforms, implications of the extended low interest environment, leveraged loans and collateralized loan obligations, as well as financial stability implications of climate change. The FSB also pointed to remaining gaps in making resolution strategies and plans operational with respect to banks and central counterparties (CCPs). Regarding banks, the FSB plans to address challenges related to finding the appropriate balance between group-internal distribution of total loss-absorbing capacity (TLAC) and non-pre-positioned resources and ensuring access to temporary liquidity as needed by firms going through resolution. Concerning CCPs, the FSB seeks to further strengthen their resilience and resolvability by continuing its work on financial resources and tools to support orderly resolution, with a related consultation expected for the second quarter of 2020.

Basel III implementation across jurisdictions

In Switzerland, the technical work on implementation of the Basel III rules finalized in 2017 started in the second half of 2019, led by the Swiss Federal Department of Finance and FINMA. However, none of the proposals have been made public so far.

The European Commission (the EC) consulted on the EU’s approach to the implementation of the remaining elements of Basel III (including the market risk framework, the standardized approach to credit risk, operational risk and the output floor). The EC is expected to publish legislative proposals by June 2020. UBS’s EU entities, principally UBS Europe SE, will be in scope of the EU requirements. US regulators have not yet proposed rules regarding the implementation of the remaining elements of Basel III.

 Regulators in jurisdictions relevant to UBS are committed to meeting the BCBS implementation timeline for final Basel III rules as of 1 January 2022. However, we expect the effective dates to be later due to transition periods.

Regulatory developments related to sustainable finance

In the EU, political agreement has been reached on key elements of the EC’s Sustainable Finance Action Plan issued in March 2018, including: (i) a sustainable finance taxonomy determining whether an economic activity contributes to certain environmental objectives and does no harm to others; (ii) disclosure requirements for banks that offer portfolio management services to provide transparency on the promotion of environmental or social characteristics and of sustainable investments in periodic reports; and (iii) two types of benchmarks aiming to reduce the carbon footprint of a standard investment portfolio or specifically contribute to attaining the two degrees Celsius reduction target set out in the Paris Agreement of 2015.

The EC also published draft rules that amend delegated acts under MiFID II and the Insurance Distribution Directive aiming at obliging investment firms and insurance distributors to include environmental, social and governance (ESG) factors and preferences in the advice that investment firms offer to their clients.

In Switzerland, the Federal Council created a working group headed by the State Secretariat for International Finance (the SIF) tasked with reviewing regulatory developments in the area of sustainable finance, such as the impact of the EC action plan on Switzerland. A report is expected for spring 2020 containing the results of this review and proposals for Switzerland’s regulatory approach to sustainable finance. The effect on UBS will depend on the recommendations made in this report.

Separately, 2019 saw a number of developments related to management of financial risks. In April 2019, the UK Prudential Regulation Authority (the PRA) published a supervisory statement on enhancing banks’ and insurers’ approaches to managing the financial risk from climate change.

The Bank of England (the BoE) has published a discussion paper setting out its proposed framework for the 2021 biennial exploratory scenario (BES) exercise. The objective of the BES is to test the resilience of the largest banks and insurers to the physical and transition risks associated with different possible climate scenarios, and the financial system’s exposure more broadly to climate-related risk. The BES is the part of the BoE’s stress testing framework used to explore less well-understood risks that are not neatly linked to the financial cycle.

In Switzerland, parliament adopted a new draft for the revision of the CO2 Act to implement the reduction goals of the Paris Agreement until 2030. The draft contains a new provision mandating the SNB and FINMA to assess climate-related financial risks in the financial sector.

In Hong Kong, the Hong Kong Monetary Authority has developed the Common Assessment Framework on Green and Sustainable Banking for authorized institutions to conduct self-assessments of their readiness and preparedness in managing climate- and environment-related risks.

 

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Our strategy, business model and environment
Regulatory and legal developments
 

Developments related to the transition away from IBORs

Liquidity and activity in alternative reference rates (ARRs) continue to develop in markets around the world, with work progressing to resolve certain issues associated with transitioning away from interbank offered rates (IBORs). Regulatory authorities continue to focus on transitioning to ARRs by the end of 2021.

In June 2019, the SNB introduced the SNB policy rate, which replaces the previously used target range for the three-month CHF LIBOR. The SNB policy rate signals the interest rate level for secured short-term money market rates, with a focus on the Swiss Average Rate Overnight (SARON). The introduction of the SNB policy rate is also intended to foster an early transition to SARON.

The Financial Conduct Authority and Bank of England encourage switches from LIBOR to the Sterling Overnight Index Average (SONIA) for sterling interest rate swaps from the first quarter of 2020. In addition, banks need to target a stopping point with regard to the issuance of cash products linked to sterling LIBOR by the end of the third quarter of 2020 and a significant reduction of the number of existing contracts in circulation that reference the rate.

The European Central Bank published the euro short-term rate (€STR), the ARR for EUR markets, for the first time in October 2019.

Liquidity in the US Secured Overnight Financing Rate (SOFR) is still developing and is concentrated among a few issuers, primarily government-sponsored enterprises. SOFR averages are expected to be published beginning in the first half of 2020. The US Commodity Futures Trading Commission (CFTC) has issued no-action letters that provide relief and ensure that market participants are not penalized as they transition from LIBOR to ARRs.

We have a substantial number of contracts linked to IBORs. ARRs do not currently provide a term structure, which will require a change in the contractual terms of products currently indexed on terms other than overnight. We have established a cross-divisional, cross-regional governance structure and change program to address the scale and complexity of the transition.

USA

Tailoring of regulation for foreign banks in the US

On 10 October 2019, the Federal Reserve Board adopted two proposals that tailor how certain capital and liquidity requirements and enhanced prudential standards apply to foreign banking organizations (FBOs) with significant US operations. Under the final rules, FBOs and their US intermediate holding companies (IHCs) will be assigned to categories based on their size measured in total assets as well as on scores relating to four other risk-based indicators: non-bank assets, a weighted measure of short-term wholesale funding, off-balance sheet exposure and cross-jurisdictional activity.

Each of UBS Americas Holdings LLC (our IHC) and our combined US operations, which include our IHC and US branches of UBS AG, are “Category III” firms under the final rule. In this category, among other things, UBS Americas Holding LLC will continue to be: (i) required to submit its capital plan annually; (ii) subject to limitations on distributions through the Comprehensive Capital Analysis and Review (CCAR) process; (iii) subject to annual supervisory stress testing; and (iv) subject to the supplementary leverage ratio. It will also become subject to the newly applicable liquidity coverage ratio requirements and the proposed net stable funding ratio requirements. “Category III firms” are now required to conduct company-run stress tests once every two years, rather than annually, and to submit US resolution plans once every three years.

On 9 July 2019, US regulators adopted rules intended to simplify compliance with certain capital requirements for certain categories of organizations, including Category III organizations such as UBS Americas Holding LLC.

Volcker Rule revisions

US regulators have adopted amendments (2019 Final Rule) to their regulations implementing the Volcker Rule prohibitions on proprietary trading and limitations on covered fund activities. The amendments became effective 1 January 2020, with compliance voluntary from that date and mandatory from 1 January 2021.

Among other changes, the 2019 Final Rule tailors compliance program obligations for trading activities in tiers based on the level of US trading assets and liabilities and relaxes certain conditions for exemptions to the Volcker Rule restrictions to apply to activities engaged in by foreign banking entities outside the United States. We expect UBS will fall within the “Significant” category, which will require UBS to maintain its compliance program but should eliminate certain reporting requirements.

On 30 January 2020, US regulators proposed further amendments to their Volcker Rule regulations. The proposed amendments would permit banking entities to engage in additional activities with covered funds compared with the existing regulations.

Final BEAT tax regulations issued

In December 2019, the US Treasury Department and the Internal Revenue Service issued final regulations regarding the base erosion and anti-abuse tax (BEAT). BEAT was introduced as part of the Tax Cuts and Jobs Act of 2017 with the intended purpose of preventing US corporations from unduly reducing their US taxable income through payments to related foreign parties. While generally retaining most features of the proposed regulations issued in December 2018, including those that were considered helpful to foreign banks operating through branches and subsidiaries in the US (such as UBS), the final regulations contain a number of meaningful clarifications and changes. We continue to expect to have nil to limited exposure to BEAT for the foreseeable future, primarily because payments that our US branches and subsidiaries make to related parties outside the US are expected to remain below the applicable BEAT thresholds.

 

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US Regulation Best Interest

The SEC has adopted rules and interpretations intended to enhance customer protection of retail investors. The effective date of these new provisions will be 30 June 2020. The new rules are intended to align the legal requirements and mandated disclosures for broker-dealers and investment advisers with reasonable investor expectations, while preserving access, in terms of choice and cost, to a variety of investment services and products.

Regulation Best Interest elevates the standard of care for broker-dealers from the current “suitability” requirement to a newly defined “best interest” standard, which applies to any securities transaction or investment strategy involving securities offered to a retail customer and makes clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations. The regulation also creates new disclosure requirements and additional compliance program requirements. Implementation of these changes will require operational and supervisory changes for UBS’s US broker-dealers.

US Securities and Exchange Commission adopts US security-based swaps regulations

In 2019, the SEC adopted a number of rules and rule amendments for security-based swap dealers (SBSDs), including: (i) capital, margin and segregation requirements; (ii) record-keeping, reporting and notification requirements; and (iii) the application of risk mitigation techniques to uncleared portfolios of security-based swaps. In December 2019, the SEC also adopted rules and interpretations (effective 6 April 2020) intended to expand and improve the framework for regulating cross-border security-based swaps. The December 2019 rules address registration requirements for foreign SBSDs, including guidance on the process for obtaining substituted compliance for non-US SBSDs. We expect that UBS AG will be required to register as an SBSD. The date for security-based swap entities to register with the SEC, and to comply with other securities-based swaps regulations (including margin, capital, segregation, record-keeping and reporting, and business conduct requirements), is 6 October 2021.

APAC

China further opening up its financial sector

In July 2019, China’s Office of the Financial Stability and Development Committee and the State Administration of Foreign Exchange announced measures designed to accelerate the opening up of the financial sector to foreign financial institutions and investors. Measures include: the removal of foreign ownership limits on securities, fund management and futures companies one year earlier, in 2020; encouraging overseas financial institutions to establish and invest in asset and wealth management entities and currency brokers, and participate in the bond market; and eliminating requirements and quotas for qualified foreign investors to invest in China.

The accelerated removal of the ownership caps for securities companies means that UBS AG is expected to be permitted to increase its stake in UBS Securities China from the current level of 51% to 100% from 1 December 2020. UBS Asset Management will be permitted to apply for a fully owned securities investment fund management company from 1 April 2020.

  

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Our strategy, business model and environment
Risk factors
 

Risk factors

Certain risks, including those described below, may affect our ability to execute our strategy or our business activities, financial condition, results of operations and prospects. We are inherently exposed to multiple risks, many of which may become apparent only with the benefit of hindsight. As a result, risks that we do not consider to be material or of which we are not currently aware could also adversely affect us. Within each category, the risks that we consider to be most material are presented first.

Market and macroeconomic risks

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

Our businesses are materially affected by market and macroeconomic 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, global trade disruption, changes in monetary or fiscal policy, changes in trade policies, natural disasters, pandemics, civil unrest, acts of violence, war or terrorism. Such developments can have unpredictable and destabilizing effects and, because financial markets are global and highly interconnected, even local and regional events can have widespread effects well beyond the countries in which they occur. For example, the outbreak of the Covid-19 virus in China, its spread to other nations as well as quarantine and other efforts to contain the outbreak appear to have had an adverse economic effect on economic activity in China as well as on industries such as travel and tourism. The future effects of the outbreak of Covid-19 are unclear at this time. A significant rise in the number of Covid-19 infections, infections in a wide range of countries and regions, or a prolongation of the outbreak could significantly adversely affect economic growth, affect specific industries or countries or affect our employees and business operations in affected countries. Any of these developments may adversely affect our business or financial results.

If individual countries impose restrictions on cross-border payments, trade, 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, or be unable to effectively manage our risks.

Should the market experience significant volatility, a decrease in business and client activity and market volumes could result, which would adversely affect our ability to generate transaction fees, commissions and margins, particularly in Global Wealth Management and the Investment Bank, as we experienced in
the fourth quarter of 2018. A market downturn would likely reduce the volume and valuation of assets that we manage on behalf of clients, which would reduce recurring fee income that is charged based on invested assets in Global Wealth Management and Asset Management and performance-based fees in Asset Management. Such a downturn could also cause a decline in the value of assets that we own and account for as investments or trading positions. In addition, reduced market liquidity or volatility may limit trading opportunities and may therefore reduce transaction-based income and may also impede our ability to manage risks.

We could be materially affected if a crisis develops, regionally or globally, as a result of disruptions in markets due to macroeconomic or 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.

Global Wealth Management derives revenues from all the principal regions, but has a greater concentration in Asia than many peers and a substantial presence in the US, unlike many European peers. The Investment Bank’s business is more heavily weighted to Europe and Asia than our peers, while its derivatives business is more heavily weighted to structured products for wealth management clients, in particular with European and Asian underlyings. Our performance may therefore be more affected by political, economic and market developments in these regions and businesses, including the effects of the Covid-19 outbreak, than some other financial service providers.

Low and negative interest rates in Switzerland and the eurozone could continue to negatively affect our net interest income

The continuing low or negative interest rate environment may further erode interest margins and adversely affect the net interest income generated by the Personal & Corporate Banking and Global Wealth Management businesses. The Swiss National Bank permits Swiss banks to make deposits up to a threshold at zero interest and has recently increased this threshold. Any reduction in or limitation on the use of this exemption from the otherwise applicable negative interest rates could exacerbate the effect of negative interest rates in Switzerland on our business.

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 funding for us), net new money outflows and a declining market share in our Swiss lending business.

 

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Our shareholders’ equity and capital are also affected by changes in interest rates. In particular, the calculation of our Swiss pension plan’s net defined benefit assets and liabilities is sensitive to the applied discount rate and to fluctuations in the value of pension plan assets. Any further reduction in interest rates may lower the discount rates and result in pension plan deficits as a result of the long duration of corresponding liabilities. This could lead to a corresponding reduction in our equity and common equity tier 1 (CET1) capital.

Our credit risk exposure to clients, trading counterparties and other financial institutions would increase under adverse economic conditions

Credit risk is an integral part of many of our activities, including lending, underwriting and derivatives activities. Adverse economic or market conditions may lead to impairments and defaults on these credit exposures. Losses may be exacerbated by declines in the value of collateral securing loans and other exposures. In our prime brokerage, securities finance and Lombard lending businesses, we extend substantial amounts of credit against securities collateral, the value or liquidity of which may decline rapidly. Our Swiss mortgage and corporate lending portfolios are a large part of our overall lending. We are therefore exposed to the risk of adverse economic developments in Switzerland, including the strength of the Swiss franc and its effect on Swiss exports, prevailing negative interest rates by the Swiss National Bank, economic conditions within the eurozone or the EU, and the evolution of agreements between Switzerland and the EU or European Economic Area, which represent Switzerland’s largest export market. In addition, under the IFRS 9 expected credit loss (ECL) regime, credit loss expenses may increase rapidly at the onset of an economic downturn as a result of higher levels of credit impairments (stage 3), as well as higher ECL from stages 1 and 2, only gradually diminishing once the economic outlook improves. Substantial increases in ECL could exceed expected loss for regulatory capital purposes and adversely affect our CET1 capital and regulatory capital ratios.

Our plans to ensure uninterrupted business dealings as the UK withdraws from the EU may not be effective

Our plans to ensure uninterrupted business dealings as the UK withdraws from the EU may not be effective if the UK and the EU do not reach a deal by the end of the transition period, scheduled to end on 31 December, 2020, resulting in disruptions across the financial sector.

To prepare our business for the UK withdrawal from the EU, we completed a merger of UBS Limited, our UK-based subsidiary, into UBS Europe SE, our Germany-headquartered European subsidiary, which is under the direct supervision of the European Central Bank. All clients and counterparties of UBS Limited who would not be able to be serviced by UBS AG, London Branch following the exit of the UK from the EU have been transferred to UBS Europe SE.

Regulators in both the UK and Europe have taken measures to minimize business disruption in the financial sector in the event of a no-deal scenario, including the UK implementation of a temporary permissions regime so that firms currently using an
EU passport for business into the UK can continue operating within the scope of their existing permissions, as well as the recognition by EU authorities of three UK-authorized central counterparties. Nevertheless, significant risk of a disorderly exit of the UK from the EU remains and, should this risk materialize, it could cause significant disruption across the financial industry and, under extreme conditions, contribute to a weakening of the global economy.

Currency fluctuation 

We are subject to currency fluctuation risks. Although our change from the Swiss franc to the US dollar as our functional and presentation currency in 2018 reduces our exposure to currency fluctuation risks with respect to the Swiss franc, a substantial portion of our assets and liabilities are denominated in currencies other than the US dollar. Additionally, in order to hedge our CET1 capital ratio, our CET1 capital must have foreign currency exposure, which leads to currency sensitivity. As a consequence, it is not possible to simultaneously fully hedge both the amount of capital and the capital ratio. Accordingly, changes in foreign exchange rates may continue to adversely affect our profits, balance sheet and capital leverage and liquidity coverage ratios.

Regulatory and legal risks

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, including extensive regulatory oversight, and are 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.

We may be subject to adverse preliminary determinations or court decisions that may negatively affect public perception and our reputation, result in prudential actions from regulators, and cause us to record additional provisions for the matter even when we believe we have substantial defenses and expect to ultimately achieve a more favorable outcome. This risk is illustrated by the award of aggregate penalties and damages of EUR 4.5 billion by the court of first instance in France, which we have appealed and will be retried in the Court of Appeal in June 2020.

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 adverse consequences for us.

 

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Our settlements with governmental authorities in connection with foreign exchange, London Interbank Offered Rates (LIBOR) and other 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 anti-trust 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 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, as well as on 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, as well as the extensive efforts required to implement new regulatory expectations, have resulted in continued scrutiny.

We are in active dialog with regulators concerning the actions we are taking to improve our operational risk management, risk 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.

Substantial changes in regulation may adversely affect our businesses and our ability to execute our strategic plans

We are subject to significant new regulatory requirements, including recovery and resolution planning, changes in capital and prudential standards, as well as new and revised market standards and fiduciary duties. Notwithstanding attempts by regulators to align their efforts, the measures adopted or proposed for banking regulation differ significantly across the major jurisdictions, making it increasingly difficult to manage a global institution. In addition, Swiss regulatory changes with regard to such matters as capital and liquidity have often proceeded more quickly than those in other major jurisdictions, and Switzerland’s requirements for major international banks are among the strictest of the major financial centers. This could put Swiss banks, such as UBS, at a disadvantage when competing with peer financial institutions subject to more lenient regulation or with unregulated non-bank competitors.

Our implementation of additional regulatory requirements and changes in supervisory standards, as well as our compliance with existing laws and regulations, continue to receive heightened scrutiny from supervisors. If we do not meet supervisory expectations in relation to these or other matters, or if additional supervisory or regulatory issues arise, we would
likely be subject to further regulatory scrutiny as well as measures that might further constrain our strategic flexibility.

Resolvability and resolution and recovery planning: We have moved significant operations into subsidiaries to improve resolvability and meet other regulatory requirements, and this has resulted in substantial implementation costs, increased our capital and funding costs and reduced operational flexibility. For example, we have transferred all of our US subsidiaries under a US intermediate holding company to meet US regulatory requirements, and have transferred substantially all the operations of Personal & Corporate Banking and Global Wealth Management booked in Switzerland to UBS Switzerland AG to improve resolvability.

These changes, particularly the transfer of operations to subsidiaries, require significant time and resources to implement, and create operational, capital, liquidity, funding and tax inefficiencies. In addition, they may increase our aggregate credit exposure to counterparties as they transact with multiple entities within the Group. Furthermore, 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.

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 this 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 a significant adverse event or in the event of winding down the Group or the operations in a host country through resolution or insolvency proceedings. If a recovery or resolution plan that we produce 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, or 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. FINMA is expected to make a formal determination of whether the emergency plans of Swiss systemically relevant banks are “credible” in early 2020. As a result of this review, FINMA may require us to amend the plan or put other measures in place.

Capital and prudential standards: As an internationally active Swiss systemically relevant bank (an SRB), we are subject to capital and total loss-absorbing capacity (TLAC) requirements that are among the most stringent in the world. 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 these subsidiaries. These funds are available to meet funding and collateral needs in the relevant entities, but are generally not readily available for use by the Group as a whole.

 

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We expect our risk-weighted assets (RWA) to further increase as the effective date for capital standards promulgated by the Basel Committee on Banking Supervision (the BCBS) draws nearer, although the effective date of the proposals is likely to be later than 2022 contemplated by the BCBS standard. In addition, the Board of Governors of the Federal Reserve System adopted two proposals last year regarding certain capital and liquidity requirements and enhanced prudential standards applicable to foreign banking organizations (FBOs) with significant US operations. Under the proposal, it is expected that UBS Americas Holding LLC would continue to be subject to annual assessments of its capital plan through the Comprehensive Capital Analysis and Review (CCAR) process, a supplementary leverage ratio, newly applicable liquidity coverage ratio requirements and new net stable funding ratio requirements.

These additional increases in capital and liquidity standards could significantly curtail our ability to pursue strategic opportunities and to distribute risk.

Market regulation and fiduciary standards: 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 SEC has adopted a new Regulation Best Interest that is intended to enhance and clarify the duties of brokers and investment advisers to retail customers. Regulation Best Interest will apply to a large portion of Global Wealth Management’s business in the US, and 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.

Previously, we have incurred substantial costs in implementing a compliance and monitoring framework in connection the with the Volcker Rule under the Dodd–Frank Act and have modified our business activities both inside and outside the US to conform to the Volcker Rule’s activity limitations. In 2019, US regulators have adopted amendments (the 2019 Final Ruleto their regulations implementing the Volcker Rule prohibitions on proprietary trading and limitations on covered fund activities. The amendments were effective as of 1 January 2020 and compliance is mandatory from 1 January 2021. We may incur additional costs in the short term to implement the changes to the operation of our Volcker compliance program, required by the 2019 Final Rule. However, these changes may reduce the long-term burden on our operations. We may also become subject to other similar regulations substantively limiting the types of activities in which we may engage or the way we conduct our operations.

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 US Securities and Exchange Commission (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 duplicate or may 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 with respect to Swiss equivalence could limit our access to the market in those jurisdictions and may negatively influence our ability to act as a global firm. For example, the EU declined to extend the equivalence determination for Swiss exchanges, which lapsed as of 30 June 2019. Reciprocally, the regulations that Switzerland adopted to prohibit trading of shares issued by Swiss incorporated companies on EU venues came into effect on 1 July 2019. 

UBS 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 UBS has 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 could result in additional cross-border outflows.

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 CET1 capital ratio of around 13% and a 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 interpretations that may adversely affect the calculation of our CET1 ratios, the imposition of risk add-ons or capital buffers, and the application of additional capital, liquidity and similar requirements to subsidiaries. The results of our businesses may be adversely affected by events arising from other factors described herein. In some cases, such as litigation and regulatory risk and operational risk events, losses may be sudden and large. These risks could reduce the amount of capital available for return to shareholders and hinder our ability to achieve our capital returns target of a progressive cash dividend coupled with a share repurchase program.

Capital strength is a key component of our business model. Capital strength enables us to grow our businesses, and absorb

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increases in regulatory and capital requirements. It reassures our clients and stakeholders, forms the basis for our capital return policy and contributes to our credit ratings. Our capital ratios are driven primarily by RWA, the leverage ratio denominator and eligible capital, 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 acquisitions which change the level of goodwill, changes in temporary differences related to deferred tax assets included in capital, 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, adverse currency movements, increased counterparty risk, deterioration in the economic environment or increased operational risk could result in an increase 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, the imposition of additional supplemental RWA charges or multipliers applied to certain exposures and other methodology changes, as well as the implementation of the capital standards promulgated by the Basel Committee on Banking Supervision, which will take effect in 2022, could substantially increase our RWA.

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 even if we satisfy other risk-based capital requirements. Our leverage ratio denominator is driven by, among other things, the level of client activity, including deposits and loans, foreign exchange rates, interest rates and other market factors. Many of these factors are wholly or partly outside of our control.

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 in excess of anticipated amortization. This would have the effect of increasing our effective tax rate in the year in which any write-downs are taken. Conversely, if we expect the performance of entities in which we have unrecognized tax losses to improve, particularly in the US or the UK, we could potentially recognize additional DTAs. The effect of doing so would be to 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, 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 USD 2.9 billion net write-down in the Group’s DTAs in the fourth quarter of 2017.

We generally revalue our DTAs in the fourth quarter of the financial year based on a reassessment of future profitability taking into account our updated business plans. 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 over the life of 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 past years have demonstrated that changes in the recognition of DTAs can have a very significant effect on our reported results. Any future change in the manner in which UBS remeasures DTAs could affect UBS’s effective tax rate, particularly in the year in which the change is made.

Our full-year effective tax rate could change if aggregate tax expenses in respect of profits from branches and subsidiaries without loss coverage differ from what is expected, or if branches and subsidiaries generate tax losses that we cannot benefit from through the income statement. In particular, losses at entities or branches that cannot offset for tax purposes taxable profits in other group entities, and which do not result in additional DTA recognition, may increase our effective tax rate. In addition, 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 may be required to be written down through the income statement.

 

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Changes in tax law may materially affect our effective tax rate, and, in some cases, may substantially affect the profitability of certain activities. In addition, statutory and regulatory changes, as well as changes to the way in which courts and tax authorities interpret tax laws, including assertions that we are required to pay taxes in a jurisdiction as a result of activities connected to that jurisdiction constituting a permanent establishment or similar theory, and changes in our assessment of uncertain tax positions, could cause the amount of taxes we ultimately pay to materially differ from the amount accrued.

Discontinuance of, or changes to, benchmark rates may require adjustments to our agreements with clients and other market participants, as well as to our systems and processes

Since April 2013, the UK Financial Conduct Authority (the FCA) has regulated LIBOR, and regulators in other jurisdictions have increased oversight of other interbank offered rates (IBORs) and similar benchmark rates. Efforts to transition from IBORs to alternative benchmark rates are underway in several jurisdictions. The FCA announced in July 2017 that it will not continue beyond 2021 to regulate LIBOR or take other actions to sustain LIBOR, and urged users to plan the transition to alternative reference rates. As a result, there can be no guarantee that LIBOR will be determined after 2021 on the same basis as at present, if at all.

Liquidity and activity in alternative reference rates (ARRscontinue to develop in markets globally, with work progressing to resolve certain issues associated with transitioning away from IBORs. Regulatory authorities continue to focus on transitioning to ARRs by the end of 2021. The Alternative Reference Rates Committee is considering potential legislative solutions that would mitigate legal risks related to legacy contracts in the event of IBOR discontinuation. In addition, in October 2019, the US Treasury Department and Internal Revenue Service published proposed regulations providing tax relief related to issues that may arise as a result of the modification of debt, derivative, and other financial contracts from LIBOR-based language to ARRs. The European Central Bank published the euro short-term rate, the risk-free rate for euro markets, for the first time on 2 October 2019, reflecting trading activity on 1 October 2019. The Bank of England Working Group on Sterling Risk-Free Reference Rates continues to be supportive of the development of a term (Sterling Overnight Index Average) reference rate.

We have a substantial number of contracts linked to IBORs. ARRs do not currently provide a term structure, which will require a change in the contractual terms of products currently indexed on terms other than overnight. In some cases, contracts may contain provisions intended to provide a fallback interest rate in the event of a brief unavailability of the relevant IBOR. These provisions may not be effective or may produce arbitrary results in the event of a permanent cessation of the relevant IBOR. In addition, numerous of our internal systems, limits and processes make use of IBORs as reference rates. Transition to replacement reference rates will require significant investment and effort.

If UBS experiences 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 UBS’s 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 Group AG, UBS AG and UBS Switzerland AG, if there is justified concern that the entity is over-indebted, has serious liquidity problems or, after the expiration of any relevant deadline, no longer 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 shareholders and creditors or may prevent UBS Group AG, UBS AG or UBS Switzerland AG from paying dividends or making payments on debt obligations.

UBS would have limited ability to challenge any such protective measures, and creditors and shareholders 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 (a) the termination of, or the exercise of rights to terminate, netting rights, (b) rights to enforce or dispose of certain types of collateral or (c) 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.

 

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Upon full or partial write-down of the equity and 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 of the restructured entity in the event of a subsequent winding up, liquidation or dissolution of the restructured entity, which would increase the risk that investors would lose all or some of their investment.

FINMA has 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.

 

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 International Financial Reporting Standards (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, the assessment of the impairment of goodwill, expected credit losses and estimation of provisions for contingencies, including litigation, regulatory and similar matters. 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. Estimates of provisions for contingencies may be subject to a wide range of potential outcomes and significant uncertainty. For example, the broad range of potential outcomes in UBS AG’s proceeding in France increases the uncertainty associated with assessing the appropriate provision. If the estimates and assumptions in future periods deviate from the current outlook, UBS AG’s financial results may also be negatively affected.

Changes to IFRS or interpretations thereof may cause 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 1 January 2018, which required us to change the accounting treatment of financial instruments measured at amortized cost and certain other positions, to record loans from inception net of expected credit loss (ECL) allowances and provisions instead of recording credit losses on an incurred loss basis. This may result in a significant increase in recognized credit loss allowances in the future and greater volatility in the income statement 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.

Strategy, management and operations risks

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

We have transformed UBS to focus on our Global Wealth Management business and our universal bank in Switzerland, complemented by Asset Management and a significantly smaller and more capital-efficient Investment Bank; we have substantially reduced the risk-weighted assets and leverage ratio denominator usage in Corporate Center; and made significant cost reductions. Risk remains that going forward we may not succeed in executing our strategy or achieving our performance targets, or may be delayed in doing so. Macroeconomic conditions, geopolitical uncertainty, changes to regulatory requirements and the continuing costs of meeting these requirements have prompted us to adapt our targets and ambitions in the past and we may need to do so again in the future.

To achieve our strategic plans, we expect to continue to make significant expenditures on technology and infrastructure to improve client experience, improve and further enable digital offerings and increase efficiency. Our investments in new technology may not fully achieve our objectives or improve our ability to attract and retain customers. In addition, we will likely face competition in providing digitally enabled offerings from both existing competitors and new financial service providers in various portions of the value chain. For example, technological advances and the growth of e-commerce have made it possible for e-commerce firms and other companies to offer products and services that were traditionally offered only by banks. These advances have also allowed financial institutions and other companies to provide digitally based financial solutions, including electronic securities trading, payments processing and online automated algorithmic-based investment advice at a low cost to their customers. We may have to lower our prices, or risk losing customers as a result. Our ability to develop and implement competitive digitally enabled offerings and processes will be an important factor in our ability to compete.

 

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

Changes in our workforce as a result of outsourcing, nearshoring, offshoring, insourcing or staff reductions may introduce new operational risks that, if not effectively addressed, could affect our ability to achieve cost and other benefits from such changes, or could result in operational losses.

As we implement effectiveness and efficiency programs, we may also experience unintended consequences, such as the unintended 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.

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 substantial loss we incurred from the unauthorized trading incident announced in September 2011.

We use automation as part of our efforts to improve efficiency, reduce the risk of error and improve our client experience. We intend to expand the use of robotic processing, machine learning and artificial intelligence to further these goals. Use of these tools presents their own risks, including the need for effective design and testing; the quality of the data used for development and operation of machine learning and artificial intelligence tools may adversely affect their functioning and result in errors and other operational risks.

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. These attacks may be attempted through the introduction of viruses or malware, phishing and other forms of 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. In addition to external attacks, we have experienced loss of client data from failure by employees and others to follow internal policies and procedures and from misappropriation of our data by employees and others. We may not be able to anticipate, detect or recognize threats to our systems or data and our preventative measures may not be effective to prevent an attack or a security breach. In the event of a security breach, 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.

We are subject to complex and frequently changing laws and regulations governing the protection of client and personal data, such as the EU General Data Protection Regulation. Ensuring that we comply with applicable laws and regulations when we collect, use and transfer personal information requires substantial resources and may affect the ways in which we conduct our business. In the event that we fail to comply with applicable laws, we may be exposed to regulatory fines and penalties and other sanctions. We may also incur such penalties if our vendors or other service providers or clients or counterparties fail to comply with these laws or to maintain appropriate controls over protected data. In addition, any loss or exposure of client or other data may adversely damage our reputation and adversely affect our business.

 

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A major focus of US and other countries’ governmental policies relating to financial institutions in recent years has been on 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 under the laws of many of the countries in which we operate. 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. Notwithstanding this, US regulators have found deficiencies in the design and operation of anti-money laundering programs in our US operations. We have undertaken a significant program to address these regulatory findings with the objective of fully meeting regulatory expectations for our programs. 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. Frequent changes in sanctions imposed and increasingly complex sanctions imposed on countries, entities and individuals increase our cost of monitoring and complying with sanctions requirements and increase the risk that we will not identify in a timely manner previously permissible client activity that is subject to a sanction.

As a result of new and changed regulatory requirements and the changes we have made in our legal structure, the volume, frequency and complexity of our regulatory and other reporting has significantly increased. Regulators have also significantly increased expectations regarding our internal reporting and data aggregation, as well as management reporting. We have incurred and continue to incur significant costs to implement infrastructure to meet these requirements. Failure to meet external reporting requirements accurately and in a timely manner or failure to meet regulatory expectations of internal reporting, data aggregation and management 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 that 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 operate. This may include a disruption due to natural disasters, pandemics, civil unrest, war or terrorism and involve electrical, communications, transportation or other services that we use or that are used by third parties with whom we conduct business.


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

In recent years, inflows from lower-margin segments and markets have been replacing outflows from higher-margin segments and markets, in particular for 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 Global 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 Global Wealth Management, in particular. 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 such trends and developments by devising and implementing adequate business strategies, do not adequately develop or update our technology including our digital channels and tools, or are unable to attract or retain the qualified people needed.

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 other stakeholders, 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. We have also introduced individual caps on the proportion of fixed to variable pay for the Group Executive Board (GEB) members, as well as certain other employees.

 

68 


 

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 could seriously compromise our ability to execute our strategy and to successfully improve our operating and control environment, and could affect our business performance. Swiss law requires that shareholders approve the compensation of the Board of Directors (the BoD) and the 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 generated. Therefore we must 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 have not always been able to prevent serious losses arising from extreme or sudden market events that are not anticipated by our risk measures and systems. Our risk measures, concentration controls and the dimensions in which we aggregated risk to identify correlated exposures proved inadequate in a historically severe deterioration in financial markets. As a result, we recorded substantial losses on fixed income trading positions, particularly in 2008 and 2009. We have substantially revised and strengthened our risk management and control framework and increased the capital that we hold relative to the risks that we take. Nonetheless, 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 are severely affected by events and 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 default.

We have exposures related to real estate in various countries, including a substantial Swiss mortgage portfolio. Although we believe this portfolio is prudently managed, we could nevertheless be exposed to losses if a substantial deterioration in the Swiss real estate market were to occur. We also hold legacy risk positions, primarily in Corporate Center, that, in many cases, are illiquid and may again deteriorate in value.

We also manage risk on behalf of our clients. The performance of assets we hold for our clients may 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. Deteriorations in the fair value of these positions would have a negative effect on our earnings.

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 Americas Holding LLC and UBS Europe SE, 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 affect 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 Comprehensive Capital Analysis and Review process requires that our US intermediate holding company demonstrate that it can continue to meet minimum capital standards over a hypothetical nine-quarter 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 would 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.

 

69 


Our strategy, business model and environment
Risk factors
 

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.

Our reputation is critical to our success

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. New events that cause reputational damage could have a material adverse effect on our results of operation and financial condition, as well as our ability to achieve our strategic goals and financial targets.

Liquidity and funding risk

Liquidity and funding management are critical to UBS’s 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. Our funding sources have generally been stable, but could change in the future because of, 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.

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 UBS’s holding company and at subsidiaries, as well as the power of resolution authorities to bail in TLAC and other debt obligations, and uncertainty as to how such powers will be exercised, will increase our cost of funding and could potentially increase the total amount of funding required, in the absence of 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 could affect the availability of certain kinds of funding. In addition, as experienced in connection with Moody’s downgrade of UBS AG’s long-term debt rating in June 2012, rating downgrades can require us to post additional collateral or make additional cash payments under trading agreements. 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.

The requirement to maintain a liquidity coverage ratio of high-quality liquid assets to estimated stressed short-term net cash outflows, and other similar liquidity and funding requirements, oblige us to maintain high levels of overall liquidity, limit our ability to optimize interest income and expense, make certain lines of business less attractive and reduce our overall ability to generate profits. The liquidity coverage ratio and net stable funding ratio 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. The relevant calculations make assumptions about the relative likelihood and amount of outflows of funding and available sources of additional funding in market-wide 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.

 

  

70 


 

Financial and operating performance

Management report

 

 

 

 

 

 

Changes related to Item 303 of Regulation S-K

In our Annual Report 2019 and related 20-F filing, we exclude the discussion of the financial years 2018 compared with 2017 in our Management’s Discussion and Analysis section pursuant to changes related to Item 303 of Regulation S-K, as we have included such discussion already in a prior filing, which can be found under:

 

www.sec.gov/Archives/edgar/data/1114446/000161052019000031/ar1820f.htm

 

 


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 International 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 effect 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 financial statements include:

   fair value measurement

   expected credit loss measurement

   assessment of the business model and certain contractual features when classifying financial instruments

   pension and other post-employment benefit plans

   income taxes

   goodwill  

   provisions and contingent liabilities

   consolidation of structured entities

   determination of the functional currency and assessing the earliest date from which it is practical to perform a restatement following a change in presentation currency for the year ended 31 December 2018

 


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 2019 and the results of our operations and cash flows for 2019, including comparative information, 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

 

  

72 


 

Significant accounting and financial reporting changes

Significant accounting and financial reporting changes in 2019

IFRS 16, Leases 

We have adopted IFRS 16, Leases, effective 1 January 2019, fundamentally changing how we account for operating leases when acting as a lessee. Upon adoption, assets and liabilities increased by USD 3.5 billion, with a corresponding increase in risk-weighted assets (RWA) and leverage ratio denominator (LRD).

In the income statement, the adoption of the new standard has resulted in increases in Interest expense and Depreciation and impairment of property, equipment and softwarewhich have been partly offset by a decrease in General and administrative expenses. The full-year effect of the application of IFRS 16 was a net decrease in profit before tax of approximately USD 60 million, reflecting reductions of approximately USD 120 million and USD 60 million in operating income and expenses, respectively.

As permitted by IFRS 16, we have elected not to restate prior-period information.

®   Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about the adoption of IFRS 16

Presentation of dividend income and expense from financial instruments measured at fair value through profit or loss

Effective 1 January 2019, we refined the presentation of dividend income and expense, reclassifying dividends from financial instruments measured at fair value through profit or loss from Net interest income to Other net income from financial instruments measured at fair value through profit or loss (prior to 1 January 2019: Other net income from fair value changes on financial instruments), in order to align the presentation of dividends with other associated fair value changes. There is no effect on Total operating income or Net profit / (loss). The change reduces the significant volatility in Net interest income that previously arose.


Prior periods have been restated for this presentation change. For the financial year 2018, this resulted in a decrease of USD 976 million in Net interest income and a corresponding increase in Other net income from financial instruments measured at fair value through profit or loss

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

Changes in Corporate Center cost and resource allocation to business divisions

In order to further align Group and divisional performance, we have adjusted our methodology for the allocation of Corporate Center funding costs and expenses to the business divisions. At the same time, we updated our funds transfer pricing framework to better reflect the sources and usage of funding. All of these changes became effective as of 1 January 2019. Prior periods have been restated.

Together, for the full year 2018, these changes reduced the business divisions’ operating results and thereby increased their adjusted cost / income ratios approximately 1–2 percentage points, while Corporate Center’s 2018 operating loss before tax decreased by USD 0.7 billion.

In Corporate Center, we retain funding costs for deferred tax assets, costs relating to our legal entity transformation program and other costs not attributable to, or representative of the performance of, the business divisions.

Alongside the updates to cost allocations and to our funds transfer pricing framework, we increased the allocation of balance sheet resources from Corporate Center to the business divisions. For 2018, the restatement resulted in USD 26 billion of additional RWA and USD 93 billion of additional LRD allocated from Corporate Center to the business divisions.

The additional USD 3.5 billion RWA and LRD that resulted from the adoption of IFRS 16, Leases, have both been fully allocated to the business divisions.

®   Refer to “Note 2a Segment reporting” in the “Consolidated financial statements” section of this report for more information

 

73 


Financial and operating performance
Significant accounting and financial reporting changes
 

Changes in equity attribution

The aforementioned changes in resource allocation from Corporate Center to the business divisions are reflected in the equity attribution to the business divisions. Furthermore, we have updated our equity attribution framework, revising the capital ratio for RWA from 11% to 12.5% to better align with Group capital levels, and incrementally allocating to business divisions USD 2 billion of attributed equity that is related to certain common equity tier 1 (CET1) deduction items previously held centrally. In aggregate, we allocated USD 7 billion of additional attributed equity to the business divisions. The remaining attributed equity retained in Corporate Center primarily relates to deferred tax assets, dividend accruals and the Non-core and Legacy Portfolio.

Prior periods have been restated. For the full year 2018, the combined effect from the changes in equity attribution and the aforementioned changes in cost and resource allocation to the business divisions led to a 3–7 percentage point reduction in their respective return on attributed equity.

®   Refer to “Equity attribution and return on attributed equity” in the “Capital management” section of this report for more information about our equity attribution framework

Changes in Corporate Center segment reporting

Effective 1 January 2019, and in compliance with IFRS 8, Operating Segments, we provide results for total Corporate Center only and do not separately report Corporate Center – Services, Group Asset and Liability Management (Group ALM) and Non-core and Legacy Portfolio. Furthermore, we have operationally combined our Group Treasury activities with Group ALM and call this combined function Group Treasury. Prior-period information has been restated.

®   Refer to “Note 1 Summary of significant accounting policies” and “Note 2a Segment reporting” in the “Consolidated financial statements” section of this report for more information

Amendments to IAS 39, IFRS 9 and IFRS 7 (Interest Rate Benchmark Reform)

In September 2019, the IASB issued Interest Rate Benchmark Reform, Amendments to IFRS 9, IAS 39 and IFRS 7, enabling hedge accounting to continue during the period of uncertainty before existing interest rate benchmarks are replaced with alternative risk-free interest rates. As permitted by the transitional provisions, we early adopted the revisions in 2019.

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

Changes to Pillar 3 disclosure requirements

During 2019, we introduced several new tables and/or narratives in accordance with the FINMA Pillar 3 disclosure requirements (FINMA Circular 2016/1 “Disclosure – banks,” as last
revised on 31 October 2019), as well as amendments to existing disclosures in accordance with the Basel Committee on Banking Supervision “Technical Amendment – Pillar 3 disclosure requirements – regulatory treatment of accounting provisions” issued in August 2018.

®   Refer to the 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors, for more information about the changes to Pillar 3 disclosure requirements

Significant accounting and financial reporting changes in 2020

Adoption of hedge accounting requirements of IFRS 9, Financial instruments

Effective 1 January 2020, we have adopted the hedge accounting requirements of IFRS 9, Financial instruments, for most of our existing hedge accounting programs, including fair value hedges for interest rate risk related to debt instruments, cash flow hedges of forecast transactions and hedges of net investments in foreign operations. As permitted by IFRS 9, we continue to account for our fair value hedges of portfolio interest rate risk related to loans under IAS 39, Financial Instruments: Recognition and Measurement.

The adoption of these requirements will have no consequential financial effect on our financial statements. However, the adoption will allow us to designate more effective hedge accounting relationships going forward, including fair value hedges of foreign currency risk using cross-currency swaps, and to reduce income statement volatility caused by foreign currency basis spreads.

®   Refer to “Note 1c International Financial Reporting Standards and Interpretations to be adopted in 2020 and later and other changes” in the “Consolidated financial statements” section of this report for more information

Streamlining of business division expense reporting

Over recent years, we have been progressively aligning our support functions, such as Technology, Operations and Real Estate, with the business divisions. In order to reflect this alignment, we will streamline our reporting beginning with our first quarter 2020 report. We will no longer provide the individual operating expense lines but will disclose costs at a total operating expense level for our divisions. We will continue to disclose the full details on operating expenses at the Group level, and explain the drivers of changes in divisional operating expenses in our management’s discussion and analysis. Revenues and costs related to a small residual set of activities that are not directly attributable to or representative of the performance of the business divisions will be renamed as Group items. These changes will have no impact on Business Division or Group operating income, operating expenses and profit before tax.

  

74 


 

Group performance

Income statement

 

 

 

 

 

 

 

 

For the year ended

 

% change from

USD million

 

31.12.19

31.12.18

31.12.17

 

31.12.18

Net interest income

 

4,501

5,048

6,070

 

(11)

Other net income from financial instruments measured at fair value through profit or loss

 

6,842

6,960

5,637

 

(2)

Credit loss (expense) / recovery

 

(78)

(118)

(131)

 

(34)

Fee and commission income

 

19,110

19,598

19,362

 

(2)

Fee and commission expense

 

(1,696)

(1,703)

(1,840)

 

0

Net fee and commission income

 

17,413

17,895

17,522

 

(3)

Other income

 

212

428

524

 

(51)

Total operating income

 

28,889

30,213

29,622

 

(4)

of which: net interest income and other net income from financial instruments measured at fair value through profit or loss

 

11,343

12,008

11,707

 

(6)

Personnel expenses

 

16,084

16,132

16,199

 

0

General and administrative expenses

 

5,288

6,797

6,949

 

(22)

Depreciation and impairment of property, equipment and software

 

1,765

1,228

1,053

 

44

Amortization and impairment of goodwill and intangible assets

 

175

65

71

 

169

Total operating expenses

 

23,312

24,222

24,272

 

(4)

Operating profit / (loss) before tax

 

5,577

5,991

5,351

 

(7)

Tax expense / (benefit)

 

1,267

1,468

4,305

 

(14)

Net profit / (loss)

 

4,310

4,522

1,046

 

(5)

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

 

6

7

77

 

(13)

Net profit / (loss) attributable to shareholders

 

4,304

4,516

969

 

(5)

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

Total comprehensive income

 

5,091

4,231

2,113

 

20

Total comprehensive income attributable to non-controlling interests

 

2

5

326

 

(69)

Total comprehensive income attributable to shareholders

 

5,089

4,225

1,787

 

20

 

75 


Financial and operating performance
Group performance
 

Performance of our business divisions and Corporate Center – reported and adjusted1

 

 

For the year ended 31.12.19

USD million

 

Global Wealth Management

Personal &

Corporate

Banking

Asset

Manage-

ment

Investment Bank

Corporate Center2

UBS

Operating income as reported

 

16,353

3,715

1,938

7,269

(385)

28,889

of which: net foreign currency translations losses3

 

 

 

 

 

(35)

(35)

of which: net losses from properties held for sale

 

 

 

 

 

(29)

(29)

Operating income (adjusted)

 

16,353

3,715

1,938

7,269

(321)

28,953

 

 

 

 

 

 

 

 

Operating expenses as reported

 

12,955

2,274

1,406

6,485

192

23,312

of which: personnel-related restructuring expenses4

 

0

0

6

84

113

203

of which: non-personnel-related restructuring expenses4

 

0

0

7

7

68

81

of which: restructuring expenses allocated from Corporate Center4

 

69

17

20

77

(183)

0

of which: impairment of goodwill

 

 

 

 

110

 

110

Operating expenses (adjusted)

 

12,887

2,257

1,373

6,208

194

22,918

of which: net expenses for litigation, regulatory and similar matters5

 

135

0

0

53

(23)

165

 

 

 

 

 

 

 

 

Operating profit / (loss) before tax as reported

 

3,397

1,441

532

784

(577)

5,577

Operating profit / (loss) before tax (adjusted)

 

3,466

1,458

565

1,061

(515)

6,035

 

 

 

 

 

 

 

 

 

 

For the year ended 31.12.18

USD million

 

Global Wealth Management

Personal &

Corporate

Banking

Asset

Manage-

ment

Investment Bank

Corporate Center2

UBS

Operating income as reported

 

16,785

4,161

1,852

8,041

(626)

30,213

of which: gains related to investments in associates

 

101

359

 

 

 

460

of which: gains on sale of real estate

 

 

 

 

 

31

31

of which: gains on sale of subsidiaries and businesses

 

 

 

 

 

25

25

of which: remeasurement loss related to UBS Securities China

 

 

 

 

 

(270)

(270)

Operating income (adjusted)

 

16,684

3,802

1,852

8,041

(413)

29,966

 

 

 

 

 

 

 

 

Operating expenses as reported

 

13,531

2,365

1,426

6,554

346

24,222

of which: personnel-related restructuring expenses4

 

34

4

23

16

208

286

of which: non-personnel-related restructuring expenses4

 

16

0

10

11

238

275

of which: restructuring expenses allocated from Corporate Center4

 

209

43

33

166

(450)

0

of which: gain related to changes to the Swiss pension plan6

 

(66)

(38)

(10)

(5)

(122)

(241)

Operating expenses (adjusted)

 

13,338

2,355

1,370

6,367

472

23,903

of which: net expenses for litigation, regulatory and similar matters5

 

619

41

0

(64)

62

657

 

 

 

 

 

 

 

 

Operating profit / (loss) before tax as reported

 

3,254

1,796

426

1,486

(971)

5,991

Operating profit / (loss) before tax (adjusted)

 

3,346

1,447

482

1,674

(885)

6,063

 

76 


 

Performance of our business divisions and Corporate Center – reported and adjusted (continued)1

 

 

For the year ended 31.12.17

USD million

 

Global Wealth Management

Personal &

Corporate

Banking

Asset

Manage-

ment

Investment Bank

Corporate Center2

UBS

Operating income as reported

 

16,136

3,839

2,077

7,650

(80)

29,622

of which: gains on sale of subsidiaries and businesses

 

 

 

153

 

 

153

of which: gains on sale of financial assets at fair value through OCI7

 

 

 

 

137

 

137

of which: net foreign currency translation losses

 

 

 

 

 

(16)

(16)

Operating income (adjusted)

 

16,136

3,839

1,924

7,513

(63)

29,349

 

 

 

 

 

 

 

 

Operating expenses as reported

 

12,917

2,364

1,514

6,563

913

24,272

of which: personnel-related restructuring expenses4

 

39

7

17

39

443

545

of which: non-personnel-related restructuring expenses4

 

75

0

22

18

532

647

of which: restructuring expenses allocated from Corporate Center4

 

474

98

63

310

(945)

0

of which: expenses from modification of terms for certain DCCP awards8

 

 

 

 

26

 

26

Operating expenses (adjusted)

 

12,329

2,259

1,412

6,171

883

23,054

of which: net expenses for litigation, regulatory and similar matters5

 

174

2

(4)

(42)

304

434

 

 

 

 

 

 

 

 

Operating profit / (loss) before tax as reported

 

3,219

1,475

563

1,087

(993)

5,351

Operating profit / (loss) before tax (adjusted)

 

3,807

1,580

512

1,342

(946)

6,295

1 Prior-year comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework effective 1 January 2019. Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about the changes to the Corporate Center cost and resource allocation to business divisions and to the “Significant accounting and financial reporting changes” section of this report for more information about the changes in the equity attribution framework. Comparatives may additionally differ as a result of 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 Corporate Center operating expenses presented in this table are after service allocations to business divisions.    3 Related to the disposal or closure of foreign operations.    4 Reflects restructuring expenses related to legacy cost programs as well as expenses for new restructuring initiatives.    5 Reflects the net increase in / (release of) provisions for litigation, regulatory and similar matters recognized in the income statement. Refer to “Note 21 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information. Also includes recoveries from third parties of USD 11 million, USD 29 million and USD 55 million for the years ended 31 December 2019, 31 December 2018 and 31 December 2017, respectively.    6 Changes to the pension fund of UBS in Switzerland in 2018 resulted in a reduction in the pension obligation recognized by UBS. As a consequence, a pre-tax gain of USD 241 million was recognized in the income statement in 2018, with no overall effect on total equity. Refer to “Note 29 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information.    7 Includes gains on the sale of our investment in the London Clearing House and on the sale of our investment in IHS Markit in the Investment Bank in 2017.    8 Relates to the removal of the service period requirement for DCCP awards granted for the performance years 2012 and 2013.

 

77 


Financial and operating performance
Group performance
 

2019 compared with 2018 

Results

We recorded net profit attributable to shareholders of USD 4,304 million in 2019, which included a net tax expense of USD 1,267 million. In 2018, net profit attributable to shareholders was USD 4,516 million, which included a net tax expense of USD 1,468 million.

Profit before tax decreased by USD 414 million, or 7%, to USD 5,577 million, reflecting lower operating income, partly offset by a decrease in operating expenses. Operating income decreased by USD 1,324 million, or 4%, to USD 28,889 million, reflecting a USD 665 million decrease in net interest income and other net income from financial instruments measured at fair value through profit or loss, a USD 482 million decrease in net fee and commission income and USD 216 million lower other income. Operating expenses decreased by USD 910 million, or 4%, to USD 23,312 million. This was mainly driven by USD 1,509 million lower general and administrative expenses, largely reflecting USD 533 million lower occupancy expenses and a decrease of USD 492 million in expenses related to litigation, regulatory and similar matters. This was partly offset by USD 537 million higher depreciation and impairment of property, equipment and software, as well as USD 110 million higher amortization and impairment of goodwill and intangible assets.

In addition to reporting our results in accordance with International Financial Reporting Standards (IFRS), we report adjusted results, which 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 US Securities and Exchange Commission (SEC) regulations. These adjustments include restructuring expenses related to our CHF 2.1 billion cost reduction program completed at the end of 2017 (referred to as our “legacy cost programs” in this report), as well as expenses relating to new restructuring initiatives. For the full year 2019, we incurred a runoff of restructuring expenses associated with our legacy cost programs of USD 205 million, which are now expected to be nil for 2020 and future years. In addition, in connection with the planned structural changes in the Investment Bank, we incurred USD 79 million of restructuring expenses in the fourth quarter of 2019. We expect to incur restructuring expenses of approximately USD 200 million in 2020 related to additional cost actions across the Group, with the majority of this expense being incurred in the first half of the year.

In January 2020, we updated and simplified our performance target framework, with our updated performance targets based on reported results. From the first quarter of 2020, we will no longer disclose adjusted results; however, we will continue to provide disclosure of restructuring and litigation expenses as well as other material profit or loss items that management believes are not representative of underlying business performance.

For the purpose of determining adjusted results for 2019, we excluded net restructuring expenses of USD 284 million, a USD 110 million loss related to an impairment of goodwill, net foreign currency translation losses of USD 35 million and a loss of USD 29 million related to the remeasurement of properties that were reclassified as properties held for sale. For 2018, we excluded a gain of USD 460 million related to investments in associates, gains of USD 31 million on sale of real estate, gains of USD 25 million on sale of subsidiaries and businesses, a remeasurement loss of USD 270 million related to the increase of our shareholding in UBS Securities China, a gain of USD 241 million related to changes to the Swiss pension plan, and net restructuring expenses of USD 561 million.

On this adjusted basis, profit before tax decreased slightly to USD 6,035 million.  

 

Net interest income and other net income from financial instruments measured at fair value through profit or loss

 

 

For the year ended

 

% change from

USD million

 

31.12.19

31.12.18

31.12.17

 

31.12.18

Net interest income from financial instruments measured at amortized cost and fair value through other comprehensive income

 

 3,490 

 3,710 

 5,018 

 

 (6) 

Net interest income from financial instruments measured at fair value through profit or loss

 

 1,011 

 1,338 

 1,052 

 

 (24) 

Other net income from financial instruments measured at fair value through profit or loss

 

 6,842 

 6,960 

 5,637 

 

 (2) 

Total

 

 11,343 

 12,008 

 11,707 

 

 (6) 

Global Wealth Management

 

 4,913 

 5,049 

 4,941 

 

 (3) 

of which: net interest income

 

 3,947 

 4,101 

 3,880 

 

 (4) 

of which: transaction-based income from foreign exchange and other intermediary activity1

 

 966 

 948 

 1,062 

 

 2 

Personal & Corporate Banking

 

 2,436 

 2,451 

 2,420 

 

 (1) 

of which: net interest income

 

 1,992 

 2,049 

 2,044 

 

 (3) 

of which: transaction-based income from foreign exchange and other intermediary activity1

 

 443 

 402 

 376 

 

 10 

Asset Management

 

 (13) 

 (35) 

 (34) 

 

 (63) 

Investment Bank2

 

 4,189 

 4,756 

 4,272 

 

 (12) 

Corporate Client Solutions

 

 716 

 1,051 

 1,076 

 

 (32) 

Investor Client Services

 

 3,473 

 3,705 

 3,196 

 

 (6) 

Corporate Center

 

 (182) 

 (214) 

 107 

 

 (15) 

1 Mainly includes spread-related income in connection with client-driven transactions, foreign currency translation effects and income and expenses from precious metals, which are included in the income statement line Other net income from financial instruments measured at fair value through profit or loss. The amounts reported on this line are one component of Transaction-based income in the management discussion and analysis of Global Wealth Management and Personal & Corporate Banking in the “Global Wealth Management” and “Personal & Corporate Banking” sections of this report.    2 Investment Bank information is provided at the business line level rather than by financial statement reporting line in order to reflect the underlying business activities, which is consistent with the structure of the management discussion and analysis in the “Investment Bank” section of this report.

 

78 


 

Operating income

Total operating income decreased by USD 1,324 million, or 4%, to USD 28,889 million. On an adjusted basis, total operating income decreased by USD 1,013 million, or 3%, to USD 28,953 million.

Net interest income and other net income from financial instruments measured at fair value through profit or loss

Total combined net interest income and other net income from financial instruments measured at fair value through profit or loss decreased by USD 665 million to USD 11,343 million. This was mainly driven by lower net income in the Investment Bank and Global Wealth Management.

Global Wealth Management

In Global Wealth Management, net interest income decreased by USD 154 million to USD 3,947 million, mainly reflecting lower income from lending and deposits, due to margin compression and moves into lower-margin products. These effects were partly offset by higher investment-of-equity income.

Transaction-based income from foreign exchange and other intermediary activity increased by USD 18 million to USD 966 million, mainly due to higher revenues from foreign exchange transactions, driven by higher levels of client activity.

Personal & Corporate Banking

In Personal & Corporate Banking, net interest income decreased by USD 57 million to USD 1,992 million, mainly reflecting higher funding costs for long-term debt that contributes to total loss-absorbing capacity and lower banking book interest income. This was partly offset by higher deposit revenues.

Transaction-based income from foreign exchange and other intermediary activity increased by USD 41 million to USD 443 million, mainly due to higher net income from foreign exchange transactions.

Investment Bank

In the Investment Bank, net interest income and other net income from financial instruments measured at fair value through profit or loss decreased by USD 567 million to USD 4,189 million. This was driven by a USD 335 million decrease in Corporate Client Solutions, mainly reflecting a decrease in leveraged finance revenues and as 2018 included higher gains from transactions across our Equity Capital Markets and Risk Management portfolio. In addition, USD 198 million lower income in our Equities business was driven by lower prime brokerage client balances and margin compression, as well as lower client activity levels across all Equities product lines.

Corporate Center

In Corporate Center, net interest income and other net income from financial instruments measured at fair value through profit or loss increased by USD 32 million. This reflected USD 421 million higher net treasury income, driven by income from hedge accounting ineffectiveness, revenues from accounting asymmetries, as well as higher net interest income. This was partly offset by USD 252 million lower income in Retained Services, driven by USD 122 million of additional interest expense related to lease liabilities recognized as a result of the application of IFRS 16, Leases, which was adopted in the first quarter of 2019, and approximately USD 130 million higher asset funding costs, mainly driven by increased interest rates. In addition, income in Non-Core and Legacy Portfolio decreased by USD 137 million, mainly as 2018 included higher valuation gains on auction rate securities.

®   Refer to “Note 3 Net interest income and other net income from financial instruments measured at fair value through profit or loss” in the “Consolidated financial statements” section of this report for more information

Credit loss expense / recovery

Total net credit loss expenses were USD 78 million in 2019, compared with USD 118 million, reflecting net credit loss expenses of USD 100 million related to credit-impaired (stage 3) positions, mainly in Personal & Corporate Banking and to a lesser extent in the Investment Bank and Global Wealth Management. This was partly offset by USD 22 million of net releases in expected credit loss expense allowances from stage 1 and 2 positions.

®   Refer to “Note Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information about IFRS 9

®   Refer to “Note 10 Financial assets at amortized cost and other positions in scope of expected credit loss measurement” and “Note 23 Expected credit loss measurement” in the “Consolidated financial statements” section of this report for more information about credit loss expense / recovery

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

 

 

Credit loss (expense) / recovery

 

 

 

 

 

 

 

 

For the year ended

 

% change from

USD million

 

31.12.19

31.12.18

31.12.17

 

31.12.18

Global Wealth Management

 

(20)

(15)

(8)

 

32

Personal & Corporate Banking

 

(21)

(56)

(20)

 

(63)

Investment Bank

 

(30)

(38)

(92)

 

(22)

Corporate Center

 

(7)

(8)

(11)

 

(12)

Total

 

(78)

(118)

(131)

 

(34)

 

79 


Financial and operating performance
Group performance
 

Net fee and commission income

Net fee and commission income was USD 17,413 million compared with USD 17,895 million.

Net brokerage fees decreased by USD 267 million, mainly in the Investment Bank and in Global Wealth Management, largely due to lower levels of client activity across the first half of 2019.

Investment fund fees and fees for portfolio management and related services decreased by USD 196 million, driven by Global Wealth Management, largely reflecting lower average invested assets in the first quarter of 2019, as well as margin compression and shifts into lower-margin products. These effects were partly offset by an increase of USD 82 million in Asset Management, reflecting the effect of higher average invested assets, as well as an increase in performance fees, reflecting strong investment performance in a constructive market environment.

Underwriting fees decreased by USD 70 million, mainly in our Corporate Client Solutions business in the Investment Bank, driven by lower revenues from public offerings.

®   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 USD 212 million compared with USD 428 million on a reported basis. 2019 included net foreign currency translation losses of USD 35 million and a loss of USD 29 million related to the remeasurement of properties that were reclassified as properties held for sale. The previous year included a valuation gain of USD 460 million on our equity ownership in SIX related to the sale of SIX Payment Services to Worldline, a remeasurement loss of USD 270 million related to the increase of our shareholding in UBS Securities China, gains on sale of real estate of USD 31 million and gains on sale of subsidiaries of USD 25 million. Excluding these items, adjusted other income increased by USD 94 million, mainly driven by gains resulting from the settlement of a litigation claim, gains related to legacy securities positions, and income related to a claim on a defaulted counterparty position.

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

®   Refer to “Note 32 Changes in organization and acquisitions and disposals of subsidiaries and businesses” in the “Consolidated financial statements” section of this report for more information about the increase of stake in and consolidation of UBS Securities China


Operating expenses

Total operating expenses decreased by USD 910 million, or 4%, to USD 23,312 million. On an adjusted basis, total operating expenses decreased by USD 985 million, or 4%, to USD 22,918 million.

Personnel expenses

Personnel expenses decreased by USD 48 million to USD 16,084 million on a reported basis, primarily reflecting lower variable compensation, lower expenses for contractors, and lower other personnel expenses. This was largely offset by higher expenses for pension and other post-employment benefit plans, as 2018 included a gain of USD 241 million related to changes to the Swiss pension plan, and higher salary costs. On an adjusted basis, personnel expenses decreased by USD 206 million to USD 15,881 million, primarily driven by the aforementioned decrease in variable compensation.

Expenses for salaries increased by USD 70 million to USD 6,518 million, primarily driven by continued insourcing of certain activities from third-party vendors to our Business Solutions Centers, as well as increased staffing to address regulatory requirements. These increases were partly offset by lower salary expenses in Global Wealth Management. On an adjusted basis, expenses for salaries increased by USD 170 million to USD 6,443 million, mainly reflecting the aforementioned insourcing effects.

Expenses for total variable compensation decreased by USD 237 million, and adjusted expenses for total variable compensation decreased by USD 261 million, mainly reflecting a decrease in expenses for current year awards.

Financial advisor compensation was broadly stable at USD 4,043 million.

Other personnel expenses decreased by USD 99 million and adjusted other personnel expenses decreased by USD 103 million, primarily due to lower medical insurance and recruitment costs.

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

®   Refer to “Note 6 Personnel expenses,” “Note 29 Pension and other post-employment benefit plans” and “Note 30 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 USD 1,509 million to USD 5,288 million. This was driven by USD 492 million lower expenses related to litigation, regulatory and similar matters, as the prior year included an increase in provisions that largely related to our cross-border wealth management businesses, as well as USD 269 million lower expenses related to the outsourcing of IT and other services and USD 133 million lower professional fees.

80 


 

Operating expenses

 

 

 

 

 

 

 

 

For the year ended

 

% change from

USD million

 

31.12.19

31.12.18

31.12.17

 

31.12.18

 

 

 

 

 

 

 

Operating expenses as reported

 

 

 

 

 

 

Personnel expenses

 

16,084

16,132

16,199

 

0

General and administrative expenses

 

5,288

6,797

6,949

 

(22)

Depreciation and impairment of property, equipment and software

 

1,765

1,228

1,053

 

44

Amortization and impairment of goodwill and intangible assets

 

175

65

71

 

169

Total operating expenses as reported

 

23,312

24,222

24,272

 

(4)

 

 

 

 

 

 

 

Adjusting items

 

 

 

 

 

 

Personnel expenses

 

203

45

570

 

 

of which: restructuring expenses1

 

203

286

545

 

 

of which: gain related to changes to the Swiss pension plan2

 

 

(241)

 

 

 

of which: expenses from modification of terms for certain DCCP awards3

 

 

 

26

 

 

General and administrative expenses1

 

72

225

640

 

 

Depreciation and impairment of property, equipment and software1

 

10

50

7

 

 

Amortization and impairment of goodwill and intangible assets

 

110

0

0

 

 

of which: impairment of goodwill

 

110

0

0

 

 

Total adjusting items

 

394

319

1,217

 

 

 

 

 

 

 

 

 

Operating expenses (adjusted)

 

 

 

 

 

 

Personnel expenses

 

15,881

16,087

15,628

 

(1)

of which: salaries

 

6,443

6,273

5,801

 

3

of which: total variable compensation

 

2,906

3,167

3,242

 

(8)

of which: relating to current year4

 

2,288

2,576

2,538

 

(11)

of which: relating to prior years5

 

618

592

704

 

4

of which: financial advisor compensation6

 

4,043

4,054

4,064

 

0

of which: other personnel expenses7

 

2,490

2,593

2,521

 

(4)

General and administrative expenses

 

5,216

6,572

6,309

 

(21)

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

 

165

657

434

 

(75)

of which: other general and administrative expenses

 

5,051

5,916

5,875

 

(15)

Depreciation and impairment of property, equipment and software

 

1,755

1,178

1,046

 

49

Amortization and impairment of goodwill and intangible assets

 

65

65

71

 

0

Total operating expenses (adjusted)

 

22,918

23,903

23,054

 

(4)

1 Reflects restructuring expenses related to legacy cost programs as well as expenses for new restructuring initiatives.    2 Refer to “Note 29 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information.    3 Relates to the removal of the service period requirement for DCCP awards granted for the performance years 2012 and 2013.    4 Includes expenses relating to performance awards and other variable compensation for the respective performance year.    5 Consists of amortization of prior years’ awards relating to performance awards and other variable compensation.    6 Financial advisor compensation consists of formulaic compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, new assets and other variables. It also includes expenses related to compensation commitments with financial advisors entered into at the time of recruitment that are subject to vesting requirements.    7 Consists of expenses related to contractors, social security, pension and other post-employment benefit plans and other personnel expenses. Refer to “Note 6 Personnel expenses” in the “Consolidated financial statements” section of this report for more information.

 

Occupancy expenses decreased by USD 533 million, primarily following the adoption of IFRS 16, Leases, as of 1 January 2019. This decrease was more than offset by an increase of USD 484 million in depreciation expenses for leased properties and an increase of USD 122 million in interest expense relating to lease liabilities, both also as a direct result of the adoption of IFRS 16. The full year effect of the application of IFRS 16 in 2019 was a net decrease in profit before tax of approximately USD 60 million, reflecting reductions of approximately USD 120 million and USD 60 million in operating income and expenses, respectively.

Net expenses for the UK and German bank levies were USD 41 million in 2019 and included a USD 31 million credit related to prior years. In 2018, net expenses for the UK and German bank levies were USD 58 million and included a USD 45 million credit related to prior years.

On an adjusted basis, general and administrative expenses decreased by USD 1,356 million to USD 5,216 million, largely due to the aforementioned decreases in expenses related to litigation, regulatory and similar matters, costs for outsourcing of IT and other services and professional fees.


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 21 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information

Depreciation, amortization and impairment

Depreciation and impairment of property, equipment and software increased by USD 537 million to USD 1,765 million on a reported basis, and by USD 577 million to USD 1,755 million on an adjusted basis, mainly driven by the aforementioned USD 484 million higher depreciation expenses resulting from the application of IFRS 16.

 

81 


Financial and operating performance
Group performance
 

Amortization and impairment of goodwill and intangible assets increased by USD 110 million to USD 175 million on a reported basis, as a result of a USD 110 million impairment of goodwill in the Investment Bank in the fourth quarter of 2019. Excluding this item, these expenses were broadly unchanged.

®   Refer to “Note 15 Property, equipment and software” and “Note 16 Goodwill and intangible assets” in the “Consolidated financial statements” section of this report for more information

Tax

We recognized an income tax expense of USD 1,267 million in 2019, representing an effective tax rate of 22.7%, compared with USD 1,468 million for 2018.

This included net Swiss tax expenses of USD 630 million and net non-Swiss tax expenses of USD 637 million.

The Swiss tax expenses included current tax expenses of USD 365 million related to taxable profits earned by Swiss subsidiaries. In addition, they included deferred tax expenses of USD 265 million, which primarily reflect the amortization of deferred tax assets (DTAs) previously recognized in relation to deductible temporary differences.

The non-Swiss tax expenses included current tax expenses of USD 426 million related to taxable profits earned by non-Swiss subsidiaries and branches. In addition, they included deferred tax expenses of USD 211 million. These included expenses of USD 471 million that primarily reflected the amortization of DTAs previously recognized in relation to tax losses carried forward and deductible temporary differences, including the amortization of US tax loss DTAs at the level of UBS Americas Inc. These were partly offset by a benefit of USD 260 million in respect of additional DTA recognition that resulted from the contribution of real estate assets by UBS AG to UBS Americas Inc. in the year. The additional DTA recognition related to the elections that were made in the fourth quarter of 2018 to capitalize certain historic real estate costs.

For 2020, we expect a full-year tax rate of approximately 25%, excluding any potential effects from the reassessment of deferred tax assets.

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

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


Total comprehensive income attributable to shareholders

In 2019, total comprehensive income attributable to shareholders was USD 5,089 million, reflecting net profit of USD 4,304 million and other comprehensive income (OCI), net of tax, of USD 785 million.

OCI related to cash flow hedges was positive USD 1,143 million, mainly reflecting an increase in net unrealized gains on US dollar hedging derivatives resulting from decreases in the relevant long-term US dollar interest rates. In 2018, OCI related to cash flow hedges was negative USD 269 million.

OCI associated with financial assets measured at fair value through OCI was positive USD 117 million, compared with negative USD 45 million, primarily reflecting net unrealized gains following decreases in the relevant US dollar long-term interest rates in 2019.

Foreign currency translation OCI was positive USD 104 million in 2019. This was mainly due to the strengthening of the Swiss franc and the pound sterling against the US dollar as well as the reclassification of net losses totaling USD 38 million to the income statement. These effects were partly offset by the weakening of the euro. In 2018, OCI related to foreign currency translation was negative USD 541 million.

OCI related to own credit on financial liabilities designated at fair value was negative USD 392 million, compared with positive USD 509 million, primarily due to tightening credit spreads in 2019.

Defined benefit plan OCI, net of tax, was negative USD 186 million compared with positive USD 56 million. Total pre-tax OCI related to UK defined benefit plans was negative USD 78 million, reflecting OCI losses of USD 361 million from the remeasurement of the defined benefit obligation (DBO), mainly driven by a loss of USD 552 million due to a decrease in the applicable discount rate, partly offset by a gain of USD 132 million due to a decrease in the expected rate of pension increase. This was partly offset by an OCI gain of USD 284 million due to a positive return on plan assets.

Total pre-tax OCI related to the Swiss defined benefit plan was negative USD 22 million. This reflected losses of USD 1,728 million from the DBO remeasurement and of USD 353 million from an increase in the effect of the IFRS asset ceiling, almost entirely offset by a gain of USD 2,059 million due to a positive return on plan assets. The DBO remeasurement loss of USD 1,728 million was driven by a loss of USD 1,887 million due to a decrease in the applicable discount rate and an experience loss of USD 284 million, reflecting the effects of differences between the previous actuarial assumptions and what actually occurred. These losses were partly offset by gains of USD 243 million resulting from a decrease in the expected rate of interest credit on retirement savings and of USD 199 million due to other changes in actuarial assumptions.

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

®   Refer to “Note 29 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information about defined benefit plans including a description of an enhancement to the asset ceiling calculation methodology effective in the first quarter of 2020

 

82 


 

Sensitivity to interest rate movements

As of 31 December 2019, 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 USD 0.6 billion in Global Wealth Management and Personal & Corporate Banking. A parallel shift in yield curves by minus 100 basis points could lead to a combined reduction in annual net interest income of approximately USD 0.6 billion.

These estimates are based on a hypothetical scenario of an immediate change in interest rates, equal across all currencies and relative to implied forward rates applied to our banking book. These estimates further assume no change to balance sheet size and structure, constant foreign exchange rates and no specific management action.

Key figures

Below we provide an overview of selected key figures of the Group. For further information about key figures related to capital management, refer to the “Capital management” section of this report.

Adjusted cost / income ratio

The adjusted cost / income ratio was 78.9%, compared with 79.5%, reflecting a reduction in adjusted operating expenses, offset by a decrease in adjusted operating income.

Common equity tier 1 capital

Common equity tier 1 (CET1) capital increased by USD 1.5 billion to USD 35.6 billion, mainly driven by operating profit before tax of USD 5.6 billion, partly offset by accruals for capital returns to shareholders of USD 2.6 billion, a USD 0.8 billion effect from our share repurchase program and current tax expenses of USD 0.8 billion.

Return on CET1 capital

Our return on CET1 capital (RoCET1) was 12.4%, compared with 13.1%, driven by a USD 0.2 billion decrease in net profit attributable to shareholders and a USD 0.4 billion increase in the average CET1 capital.

Risk-weighted assets

Risk-weighted assets (RWA) decreased by USD 4.5 billion to USD 259.2 billion, reflecting decreases from asset size and other movements of USD 8.0 billion and regulatory add-ons of USD 0.7 billion, partly offset by methodology and policy change of USD 2.0 billion, model updates of USD 1.2 billion and currency effects of USD 0.9 billion.

Common equity tier 1 capital ratio

Our CET1 capital ratio increased 0.8 percentage points to 13.7%, reflecting the USD 1.5 billion increase in CET1 capital and a USD 4.5 billion decrease in RWA.

Leverage ratio denominator

The leverage ratio denominator (LRD) increased by USD 7 billion to USD 911 billion. The increase was driven by currency effects of USD 5 billion and policy changes of USD 4 billion, partly offset by a decrease in asset size and other movements of USD 2 billion.

Common equity tier 1 leverage ratio

Our CET1 leverage ratio increased from 3.77% to 3.90% as of 31 December 2019, reflecting the aforementioned increase in CET1 capital, partly offset by a USD 7 billion increase in the LRD.

Going concern leverage ratio

Our going concern leverage ratio increased from 5.1% to 5.7%, reflecting a USD 5.6 billion increase in our going concern capital, partly offset by the aforementioned increase in the LRD.

Personnel

We employed 68,601 personnel (full-time equivalents) as of 31 December 2019. The net increase of 1,713 compared with 31 December 2018 was largely driven by a 2,583 increase in Corporate Center, mainly as a result of the ongoing insourcing of certain activities from third-party vendors to our Business Solutions Centers, resulting in a decrease of approximately 2,200 outsourced staff. This was partly offset by a 944 decrease in Global Wealth Management, reflecting the effect of cost management initiatives and a review of advisor portfolios.

Net new money and invested assets

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

Seasonal characteristics

Our revenues may show seasonal patterns, notably in the Investment Bank and Global Wealth Management. These business divisions 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.

Net new money can be affected by annual tax payments, which are concentrated in the second quarter in the US.

 

 

83 


Financial and operating performance
Group performance
 

Return on equity

 

 

 

 

 

 

As of or for the year ended

USD million, except where indicated

 

31.12.19

31.12.18

31.12.17

 

 

 

 

 

Net profit

 

 

 

 

Net profit / (loss) attributable to shareholders

 

4,304

4,516

969

 

 

 

 

 

Equity

 

 

 

 

Equity attributable to shareholders

 

54,533

52,928

52,495

Less: goodwill and intangible assets

 

6,469

6,647

6,563

Tangible equity attributable to shareholders

 

48,064

46,281

45,932

Less: other CET1 deductions

 

12,482

12,162

12,416

Common equity tier 1 capital

 

 35,582 

34,119

33,516

 

 

 

 

 

Return on equity

 

 

 

 

Return on equity (%)

 

7.9

8.6

1.8

Return on tangible equity (%)

 

9.0

9.8

2.0

Return on common equity tier 1 capital (%)

 

12.4

13.1

3.0

 

 

Net new money1

 

 

 

 

 

 

For the year ended

USD billion

 

31.12.19

31.12.18

31.12.17

Global Wealth Management

 

31.6

24.7

44.8

Asset Management2

 

17.8

32.2

59.5

of which: excluding money market flows

 

12.6

24.7

48.3

of which: money market flows

 

5.2

7.5

11.2

1 Net new money excludes interest and dividend income.    2 Effective 1 January 2019, certain assets have been reclassified between asset classes to better reflect their underlying nature, with prior-period information restated. The adjustments have no effect on total net new money.

 

Invested assets

 

 

 

 

 

 

 

 

As of

 

% change from

USD billion

 

31.12.19

31.12.18

31.12.17

 

31.12.18

Global Wealth Management

 

2,635

2,260

2,403

 

17

Asset Management1

 

903

781

796

 

16

of which: excluding money market funds

 

801

686

708

 

17

of which: money market funds

 

102

95

88

 

6

1 Effective 1 January 2019, certain assets have been reclassified between asset classes to better reflect their underlying nature, with prior-period information restated. The adjustments have no effect on total invested assets.

 

 

  

84 


 

Global Wealth Management

Global Wealth Management1

 

 

 

 

 

As of or for the year ended

 

% change from

USD million, except where indicated

 

31.12.19

31.12.18

 

31.12.18

 

 

 

 

 

 

Results

 

 

 

 

 

Net interest income

 

3,947

4,101

 

(4)

Recurring net fee income2

 

9,258

9,577

 

(3)

Transaction-based income3

 

3,059

2,971

 

3

Other income

 

110

151

 

(27)

Income

 

16,373

16,800

 

(3)

Credit loss (expense) / recovery

 

(20)

(15)

 

32

Total operating income

 

16,353

16,785

 

(3)

Personnel expenses

 

7,621

7,683

 

(1)

Salaries and other personnel costs

 

3,578

3,628

 

(1)

Financial advisor variable compensation4,5

 

3,501

3,470

 

1

Compensation commitments with recruited financial advisors4,6

 

542

584

 

(7)

General and administrative expenses

 

1,217

1,724

 

(29)

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

 

4,056

4,070

 

0

of which: services from Corporate Center

 

3,922

3,936

 

0

Depreciation and impairment of property, equipment and software

 

5

4

 

22

Amortization and impairment of goodwill and intangible assets

 

56

50

 

13

Total operating expenses

 

12,955

13,531

 

(4)

Business division operating profit / (loss) before tax

 

3,397

3,254

 

4

 

 

 

 

 

 

Adjusted results

 

 

 

 

 

Total operating income as reported

 

16,353

16,785

 

(3)

of which: gain related to investments in associates

 

 

101

 

 

Total operating income (adjusted)

 

16,353

16,684

 

(2)

Total operating expenses as reported

 

12,955

13,531

 

(4)

of which: personnel-related restructuring expenses7

 

0

34

 

 

of which: non-personnel-related restructuring expenses7

 

0

16

 

 

of which: restructuring expenses allocated from Corporate Center7,8

 

69

209

 

 

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

 

 

(66)

 

 

Total operating expenses (adjusted)

 

12,887

13,338

 

(3)

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

 

3,397

3,254

 

4

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

 

3,466

3,346

 

4

 

 

 

 

 

 

Performance measures

 

 

 

 

 

Pre-tax profit growth (%)

 

4.4

1.1

 

 

Cost / income ratio (%)

 

79.1

80.5

 

 

Net new money growth (%)

 

1.4

1.0

 

 

 

 

 

 

 

 

Adjusted performance measures

 

 

 

 

 

Pre-tax profit growth (%)

 

3.6

(12.1)

 

 

Cost / income ratio (%)

 

78.7

79.9

 

 

 

85 


Financial and operating performance
Global Wealth Management
 

Global Wealth Management (continued)1

 

 

 

 

 

As of or for the year ended

 

% change from

USD million, except where indicated

 

31.12.19

31.12.18

 

31.12.18

 

 

 

 

 

 

Additional information

 

 

 

 

 

Recurring income9

 

13,205

13,678

 

(3)

Recurring income as a percentage of income (%)

 

80.6

81.4

 

 

Average attributed equity (USD billion)10

 

16.6

16.3

 

2

Return on attributed equity (%)10

 

20.5

20.0

 

 

Risk-weighted assets (USD billion)10

 

78.1

74.3

 

5

Leverage ratio denominator (USD billion)10

 

312.7

315.8

 

(1)

Goodwill and intangible assets (USD billion)

 

5.1

5.2

 

(1)

Net new money (USD billion)

 

31.6

24.7

 

 

Invested assets (USD billion)

 

2,635

2,260

 

17

Net margin on invested assets (bps)11

 

14

14

 

1

Gross margin on invested assets (bps)

 

66

70

 

(5)

Client assets (USD billion)

 

2,909

2,519

 

15

Loans, gross (USD billion)12

 

179.3

174.7

 

3

Customer deposits (USD billion)12,13

 

296.1

278.1

 

6

Recruitment loans to financial advisors4

 

2,053

2,296

 

(11)

Other loans to financial advisors4

 

824

994

 

(17)

Personnel (full-time equivalents)14

 

22,674

23,618

 

(4)

Advisors (full-time equivalents)

 

10,077

10,677

 

(6)

1 Prior-year comparative figures in this table have been restated for the changes in Corporate Center cost and resource allocation to the business divisions and the changes in the equity attribution framework effective 1 January 2019. Refer to “Note 1 Basis of accounting” in the “Consolidated financial statements” section of our first quarter 2019 report for more information about the changes to the Corporate Center cost and resource allocation to business divisions and to the “Recent developments” section of our first quarter 2019 report for more information about the changes in the equity attribution framework. Comparatives may additionally differ as a result of 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 composed of brokerage and transaction-based investment fund fees, as well as credit card fees and fees for payment transactions, together with Other net income from financial instruments measured at fair value through profit or loss.    4 Relates to licensed professionals with the ability to provide investment advice to clients in the Americas.    5 Financial advisor variable compensation consists of formulaic compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, new assets and other variables.    6 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.    7 Reflects restructuring expenses related to legacy cost programs as well as expenses for new restructuring initiatives.    8 Prior periods may include allocations (to) / from other business divisions.    9 Recurring income consists of net interest income and recurring net fee income.    10 Refer to the “Capital management” section of this report for more information.    11 Calculated as operating profit before tax (annualized as applicable) divided by average invested assets.    12 Loans and Customer deposits in this table include customer brokerage receivables and payables, respectively, which, with the adoption of IFRS 9, effective 1 January 2018, have been reclassified to a separate reporting line on the balance sheet.    13 Customer deposits in Global Wealth Management have been restated as of 31 December 2018 to reflect a reclassification of balances from Corporate Center, with no impact on customer deposits reported for the Group. This has resulted in an increase in customer deposits reported for Global Wealth Management of USD 6.3 billion as of 31 December 2018.    14 Personnel (full-time equivalents) as of 31 December 2019  has been amended compared with our fourth quarter 2019 report, resulting in a decrease of 6.

 

Regional breakdown of performance measures

 

 

 

 

 

 

As of or for the year ended 31.12.19

USD billion, except where indicated

Americas

EMEA (excluding Switzerland)

Asia Pacific

Switzerland

Total of regions1

of which: ultra high net worth (UHNW)

Net new money

 (17.4) 

 10.5 

 31.4 

 7.5 

 32.0 

 45.5 

Net new money growth (%)

 (1.4) 

 2.1 

 8.8 

 3.7 

 1.4 

 4.0 

Invested assets

 1,403 

 552 

 450 

 228 

 2,633 

 1,371 

Loans, gross

 62.52

 37.1 

 43.1 

 36.0 

 178.7 

 

Advisors (full-time equivalents)

 6,549 

 1,660 

 1,041 

 727 

 9,976 

 1,0423

1 Excluding minor functions with 101 advisors, USD 3 billion of invested assets, USD 0.6 billion of loans and USD 0.4 billion of net new money outflows in 2019.    2 Loans include customer brokerage receivables, which with the adoption of IFRS 9, effective 1 January 2018, have been reclassified to a separate reporting line on the balance sheet.    3 Represents advisors who exclusively serve ultra high net worth clients in a globally managed unit.

 

86 


 

2019 compared with 2018 

Results

Profit before tax increased by USD 143 million, or 4%, to USD 3,397 million. Excluding a USD 101 million valuation gain on our equity ownership in SIX related to the sale of SIX Payment Services to Worldline in 2018, a prior-year credit of USD 66 million related to our Swiss pension plan and restructuring expenses, adjusted profit before tax increased by USD 120 million, or 4%, to USD 3,466 million, reflecting lower operating expenses, partly offset by lower operating income.

Operating income included a USD 75 million fee received from Personal & Corporate Banking for the shift of USD 6 billion of business volume from Global Wealth Management to Personal & Corporate Banking, as a result of a detailed client segmentation review.

Operating income

Total operating income decreased by USD 432 million, or 3%, to USD 16,353 million. Excluding the aforementioned valuation gain on our equity ownership in SIX, adjusted total operating income decreased by USD 331 million, or 2%, mainly driven by lower recurring net fee income and net interest income, partly offset by higher transaction-based income and other income.

Net interest income decreased by USD 154 million to USD 3,947 million, mainly as a result of lower deposit and loan margins, partly offset by higher investment-of-equity income.

Recurring net fee income decreased by USD 319 million to USD 9,258 million, reflecting margin compression and moves into lower-margin products, partly offset by an increase in mandate penetration.

Transaction-based income increased by USD 88 million to USD 3,059 million, predominantly due to the aforementioned fee received from Personal & Corporate Banking.

®   Refer to the “Group performance” section of our third quarter 2019 report for more information about the realignment of our client coverage between Global Wealth Management and Personal & Corporate Banking

 

Other income decreased by USD 41 million to USD 110 million. Excluding the aforementioned valuation gain on our equity ownership in SIX, adjusted other income increased by USD 60 million, primarily due to a gain related to the repositioning of the liquidity portfolio in the Americas and gains related to legacy securities positions.

®  Refer to the “Recent developments” section of our fourth quarter 2018 report for more information about the Worldline acquisition of SIX Payment Services

Operating expenses

Total operating expenses decreased by USD 576 million, or 4%, to USD 12,955 million and adjusted operating expenses decreased by USD 451 million, or 3%, to USD 12,887 million.


Personnel expenses decreased by USD 62 million to USD 7,621 million. Excluding the aforementioned credit related to changes to our Swiss pension plan and restructuring expenses, adjusted personnel expenses decreased by USD 93 million, mainly due to lower variable compensation and lower staffing levels.

General and administrative expenses decreased by USD 507 million to USD 1,217 million. Excluding restructuring expenses, adjusted general and administrative expenses decreased by USD 492 million, predominantly driven by lower expenses for provisions for litigation, regulatory and similar matters.

Net expenses for services to/from Corporate Center and other business divisions decreased by USD 14 million to USD 4,056 mi