UBS Group AG
Annual Report 2016
Contents
Letter to shareholders
2
5 Key figures
8 Our Board of Directors
10 Our Group Executive Board
12 History
13 The legal structure of UBS Group
15 External reporting
3. Risk, treasury and
capital management
117 Risk management and control
168 Treasury management
184 Capital management
202 UBS shares
1. Operating environment
and strategy
4. Corporate governance, responsibility and
compensation
18 Current market climate and industry trends
21 Regulation and supervision
23 Regulatory and legal developments
27 Our strategy
29 Measurement of performance
31 Wealth Management
33 Wealth Management Americas
35 Personal & Corporate Banking
37 Asset Management
Investment Bank
39
41 Corporate Center
44 Risk factors
208 Corporate governance
239 UBS and Society
250 Our employees
256 Compensation
5. Financial
statements
301 Consolidated financial statements
461 Standalone financial statements
Appendix
2. Financial
and operating performance
481 Abbreviations frequently used in our financial reports
483
484 Cautionary statement
Information sources
58 Critical accounting estimates and judgments
59 Significant accounting and financial reporting changes
64 Group performance
78 Wealth Management
82 Wealth Management Americas
88 Personal & Corporate Banking
92 Asset Management
Investment Bank
97
103 Corporate Center
Annual Report 2016
Letter to shareholders
Dear shareholders,
Axel A. Weber Chairman of the Board of Directors
2016 was another challenging year for the industry and UBS,
marked by macroeconomic uncertainty, geopolitical tensions and
divisive politics, which adversely affected client sentiment. Com-
bined with the implementation of stricter prudential standards
and the unclear trajectory of the future regulatory landscape,
these factors contributed to headwinds for our businesses.
In particular, economic conditions in the world’s major economic
centers – the US, the eurozone and China – were mixed. The US
grew more slowly than expected, and although consumption
remained strong and unemployment fell, the Federal Reserve
Board delayed raising interest rates until the end of the year. In the
eurozone, exceptionally loose monetary policy, continuing nega-
tive interest rates, low oil prices and improving credit conditions
supported a modest recovery. Emerging market economies were
highly divergent, although the slowdown in China proved milder
than anticipated. While the Swiss economy rebounded following
the sharp appreciation of the Swiss franc in the prior year, negative
interest rates continued to provide challenging conditions with
unclear medium- to long-term consequences. The results of the US
election and the UK’s vote to leave the EU produced the year’s big-
gest political surprises, creating additional volatility and concerns.
Despite these many challenges, which had a particularly strong
impact on European banks, our results in 2016 were solid and
once again demonstrated the benefits of our balanced business
mix and geographic diversification. As the world’s largest and only
truly global wealth manager, we have a significant presence in
both mature and high-growth markets. We are the number one
bank in Switzerland and have competitive and specialized Invest-
ment Bank and Asset Management businesses. 2016 was another
example of the power of our business model, as strong results in
the US and Switzerland partly offset headwinds in Asia and the
rest of Europe.
For the year, Group net profit attributable to shareholders was
CHF 3.2 billion, with profit before tax of CHF 4.1 billion, and
adjusted1 profit before tax was CHF 5.3 billion, down 5% year on
year. Our return on equity was 5.9% and our adjusted1 return on
tangible equity was 9.0%. We generated CHF 42 billion of net
new money in our wealth management businesses, while absorb-
ing substantial cross-border outflows in Wealth Management.
2
Sergio P. Ermotti Group Chief Executive Officer
Wealth Management’s adjusted1 profit before tax was CHF 2.4
billion, down 15% on the prior year as cost reductions only partly
offset lower revenues caused by reduced client activity, the effects
of cross-border outflows and shifts into retrocession-free products,
and changes in clients’ asset allocation. Net new money was CHF
27 billion, despite cross-border outflows of CHF 14 billion.
Wealth Management Americas delivered a record adjusted1
profit before tax of USD 1.3 billion, a 43% increase year on year,
and net new money of USD 15 billion. Personal & Corporate
Banking’s adjusted1 profit before tax was CHF 1.8 billion, up 4%
year on year, and the best result since 2008. Asset Management
recorded an adjusted1 profit before tax of CHF 552 million, down
10% year on year. The Investment Bank maintained its disci-
plined resource utilization and delivered an adjusted1 profit before
tax of CHF 1.5 billion, down 34% compared with a strong prior
year. With an adjusted1 return on attributed equity of 19.6%, it
continued to more than cover its cost of capital and added sig-
nificant value to our wealth management, corporate and institu-
tional client bases.
We made good progress toward achieving our ambitious cost tar-
gets, increasing our net cost savings by CHF 0.5 billion to CHF 1.6
billion, measured based on our year-end exit rate, and on course
to achieve our CHF 2.1 billion net cost reduction target by the end
of 2017. We achieved these savings while maintaining our focus
on properly managing risk, serving our clients and selectively
investing in our businesses. We also continued to absorb costs
related to legacy issues and provisions for litigation, regulatory
and similar matters, amounting to CHF 0.8 billion, down from
CHF 1.1 billion in 2015.
Our capital position at the end of 2016 remains one of the stron-
gest among large global banks, with a fully applied common
equity tier 1 (CET1) capital ratio of 13.8%. We also reached the
2020 minimum CET1 leverage ratio of 3.5% in the fourth quarter
of 2016. During the year, we issued CHF 14 billion of loss-absorb-
ing debt, bringing our total loss-absorbing capacity to over CHF
73 billion, well ahead of Swiss and, in particular, international
regulatory requirements. Our strong capital position and success-
ful execution of our strategy resulted in rating upgrades from the
three leading credit rating agencies, placing us among the top-
rated global banks.
1 Refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results.
3
Annual Report 2016
Letter to shareholders
In addition to the progress made on building our capital, we suc-
cessfully executed a series of measures to improve the resolvability
of the Group in response to regulatory requirements in Switzer-
land and other countries. In 2016, we completed the establish-
ment of UBS Americas Holding LLC as our US intermediate hold-
ing company and implemented our Group service company. The
measures taken over the last few years have made our bank stron-
ger and more resolvable.
We continue to support effective and reasonable regulation.
However, we believe further regulatory tightening would create
additional costs for the financial system and the economy at large,
with unclear benefits and a negative impact on the international
competitive playing field.
Our solid results and leading capital position have allowed us
to maintain our ordinary dividend at 2015 levels and reconfirm
our dividend policy. We intend to propose a 2016 dividend of
CHF 0.60 per share for approval at our next Annual General
Meeting (AGM).
In 2016, we further strengthened our reputation for excellence.
This was demonstrated by numerous awards and accolades for
our businesses. In March, UBS was named the world’s number
one investment banking house by Global Finance in its annual
World’s Best Investment Banks Survey. UBS dominated the recently
announced 2017 Euromoney Private Banking Survey, taking the
top spot in over 180 categories, including Best Global Private
Bank and in the two “Innovative Technology” categories, Client
Experience and Back Office Systems. In October 2016, UBS was
named Best Global Private Bank and Best Private Bank in Asia at
the FT’s PWM / The Banker Awards. In July 2016, wealth manage-
ment researcher Scorpio Partnership confirmed UBS as the world’s
largest wealth manager.
UBS confirmed its reputation as a global sustainability leader
when it was named Diversified Financials Industry Group leader in
the Dow Jones Sustainability Indices for the second year running.
As of 31 December 2016, sustainable investments by our clients
totaled CHF 976 billion, representing over a third of total invested
assets. As one of the first signatories of the UN Global Compact
with one of the largest portfolios of sustainable investment prod-
ucts and services, UBS is actively engaged in supporting the UN
Sustainable Development Goals (SDGs). The UBS Grand Chal-
lenge mobilized over 1,200 employees to develop innovative solu-
tions for five of the SDGs. UBS also announced plans to direct at
least USD 5 billion of client assets to support the SDGs over the
next five years. UBS’s ongoing commitment to sustainable invest-
ing found expression in a number of groundbreaking initiatives,
most notably the closing of the USD 471 million UBS Oncology
Impact Fund. This is the largest amount ever raised for an impact
fund dedicated to a single cause.
In 2016, our Community Affairs program benefited over 117,000
young people and entrepreneurs across all of the regions in which
we operate. Our local volunteering programs saw over 30% of
UBS employees record a total of over 155,000 volunteer hours in
community engagement projects.
We would like to take this opportunity to thank both our clients
and our shareholders for their continued support and our employ-
ees for their dedication and commitment over the year. Our focus
remains on the disciplined execution of our strategy, staying close
to our clients and delivering sustainable performance, while
investing for growth. Our unique business model, successful track
record of execution and strategic clarity position us well to deliver
for our clients and generate shareholder value in a variety of
market conditions.
We look forward to seeing you at this year’s AGM.
10 March 2017
Yours sincerely,
UBS
Axel A. Weber
Chairman of the
Board of Directors
Sergio P. Ermotti
Group Chief Executive Officer
4
UBS Group key figures
CHF million, except where indicated
Group results
Operating income
Operating expenses
Operating profit / (loss) before tax
Net profit / (loss) attributable to shareholders
Diluted earnings per share (CHF)1
Key performance indicators2
Profitability
Return on tangible equity (%)
Return on assets, gross (%)
Cost / income ratio (%)
Growth
Net profit growth (%)
Net new money growth for combined wealth management businesses (%)3
Resources
Common equity tier 1 capital ratio (fully applied, %)4
Going concern leverage ratio (phase-in, %)5
As of or for the year ended
31.12.16
31.12.15
31.12.14
28,320
24,230
4,090
3,204
0.84
6.9
3.0
85.4
(48.3)
2.1
13.8
6.4
30,605
25,116
5,489
6,203
1.64
13.7
3.1
81.8
79.0
2.2
14.5
28,027
25,567
2,461
3,466
0.91
8.2
2.8
91.0
9.3
2.5
13.4
7.0
12.6
11.8
14.4
5.9
13.2
Additional information
Profitability
Return on equity (RoE) (%)
Return on risk-weighted assets, gross (%)6
Resources
Total assets
Equity attributable to shareholders
Common equity tier 1 capital (fully applied)4
Common equity tier 1 capital (phase-in)4
Risk-weighted assets (fully applied)4
Common equity tier 1 capital ratio (phase-in, %)4
Going concern capital ratio (fully applied, %)5
Going concern capital ratio (phase-in, %)5
Common equity tier 1 leverage ratio (fully applied, %)7
Going concern leverage ratio (fully applied, %)5
Leverage ratio denominator (fully applied)7
Liquidity coverage ratio (%)8
Other
Invested assets (CHF billion)9
Personnel (full-time equivalents)
Market capitalization10
Total book value per share (CHF)10
Tangible book value per share (CHF)10
1 Refer to “Note 9 Earnings per share (EPS) and shares outstanding” in the “Consolidated financial statements” section of this report for more information. 2 Refer to the “Measurement of performance” section of
this report for the definition of our key performance indicators. 3 Based on adjusted net new money, which excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital
optimization program. 4 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 5 Based on the
revised Swiss SRB framework that became effective on 1 July 2016. 6 Based on fully applied risk-weighted assets. 7 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this
report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance
with former Swiss SRB rules and are therefore not fully comparable. 8 Figures reported for 31 December 2016 and 31 December 2015 represent a 3-month average. Refer to the “Treasury management” section of this
report for more information. The figure reported for 31 December 2014 was calculated on a pro forma basis and represents a period-end number. 9 Includes invested assets for Personal & Corporate Banking. 10 Refer
to the “UBS shares” section of this report for more information.
935,016
53,621
30,693
37,788
222,677
16.8
17.9
24.7
3.5
4.6
870,470
132
1,062,478
50,608
28,941
42,863
216,462
19.4
942,819
55,313
30,044
40,378
207,530
19.0
2,821
59,387
61,420
14.44
12.68
2,734
60,155
63,526
13.94
12.14
2,689
60,099
75,147
14.75
13.00
897,607
124
997,822
123
2.9
3.3
The 2016 results and the balance sheet in this report differ from those presented in the unaudited fourth quarter 2016 report
published on 27 January 2017 as a result of an adjusting event after the reporting period. Provisions for litigation, regulatory and
similar matters increased reflecting an agreement in principle to resolve an RMBS matter related to the National Credit Union
Association. This adjustment reduced 2016 net profit attributable to shareholders by CHF 102 million, and basic and diluted
earnings per share by CHF 0.03 and CHF 0.02, respectively.
5
Connecting
value
Annual Review 2016
The Annual Review 2016 will be available
from mid-April 2017 as a tablet
publication in UBS Newsstand / Annual Review
(AppStore or Google Play Store).
Corporate information
UBS Group AG is incorporated and domiciled in Switzerland and operates
under the Swiss Code of Obligations as an Aktiengesellschaft, a corporation
limited by shares. Its registered office is at Bahnhofstrasse 45, CH-8001
Zurich, Switzerland, phone +41-44-234 11 11, and its corporate identification
number is CHE-395.345.924. UBS Group AG was incorporated on 10 June
2014 and was established in 2014 as the holding company of the UBS Group.
UBS Group AG shares are listed on the SIX Swiss Exchange and on the New
York Stock Exchange (ISIN: CH0244767585; CUSIP: H42097107).
Contacts
Switchboards
For all general inquiries.
www.ubs.com/contact
Zurich +41-44-234 1111
London +44-20-7568 0000
New York +1-212-821 3000
Hong Kong +852-2971 8888
Investor Relations
UBS’s Investor Relations team supports institu-
tional, professional and retail investors from our
offices in Zurich, London, New York and Hong
Kong.
UBS Group AG, Investor Relations
P.O. Box, CH-8098 Zurich, Switzerland
www.ubs.com/investors
Hotline Zurich +41-44-234 4100
Hotline New York +1-212-882 5734
Fax (Zurich) +41-44-234 3415
Media Relations
UBS’s Media Relations team supports
global media and journalists from
offices in Zurich, London, New York
and Hong Kong.
www.ubs.com/media
Zurich +41-44-234 8500
mediarelations@ubs.com
London +44-20-7567 4714
ubs-media-relations@ubs.com
New York +1-212-882 5857
mediarelations-ny@ubs.com
Hong Kong +852-2971 8200
sh-mediarelations-ap@ubs.com
Office of the Group Company Secretary
The Group Company Secretary receives
inquiries on compensation and related
issues addressed to members of the
Board of Directors.
UBS Group AG, Office of the
Group Company Secretary
P.O. Box, CH-8098 Zurich, Switzerland
sh-company-secretary@ubs.com
Hotline +41-44-235 6652
Fax +41-44-235 8220
Shareholder Services
UBS’s Shareholder Services team, a unit
of the Group Company Secretary office,
is responsible for the registration of
UBS Group AG registered shares.
UBS Group AG, Shareholder Services
P.O. Box, CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
Hotline +41-44-235 6652
Fax +41-44-235 8220
US Transfer Agent
For global registered share-related
inquiries in the US.
Computershare Trust Company NA
P.O. Box 30170
College Station
TX 77842-3170, USA
Shareholder online inquiries:
https://www-us.computershare.com/
investor/Contact
Shareholder website:
www.computershare.com/investor
Calls from the US +1-866-305-9566
Calls from outside
the US +1-781-575-2623
TDD for hearing impaired
+1-800-231-5469
TDD foreign shareholders
+1-201-680-6610
Corporate calendar UBS Group AG
Imprint
Publication of the first quarter 2017 report:
Friday, 28 April 2017
Publisher: UBS Group AG, Zurich, Switzerland | www.ubs.com
Annual General Meeting 2017:
Thursday, 4 May 2017
Language: English / German | SAP-No. 80531E
Publication of the second quarter 2017 report:
Friday, 28 July 2017
Publication of the third quarter 2017 report:
Friday, 27 October 2017
© UBS 2017. The key symbol and UBS are among the registered and
unregistered trademarks of UBS. All rights reserved.
Printed in Switzerland on chlorine-free paper with mineral oil-reduced inks.
Paper production from socially responsible and ecologically sound forestry
practices
7
Annual Report 2016
Our Board of Directors as of 31 December 2016
Axel A. Weber Chairman of the Board of Directors / Chairperson of the
Corporate Culture and Responsibility Committee / Chairperson of the Governance
and Nominating Committee
Beatrice Weder di Mauro Member of the Audit Committee / member
of the Risk Committee
David Sidwell Senior Independent Director / Chairperson of the
Risk Committee / member of the Governance and Nominating Committee
William G. Parrett Chairperson of the Audit Committee / member of
the Compensation Committee / member of the Corporate Culture and
Responsibility Committee
Isabelle Romy Member of the Audit Committee / member of the
Governance and Nominating Committee
Michel Demaré Independent Vice Chairman / member of the
Audit Committee / member of the Compensation Committee / member
of the Governance and Nominating Committee
8
Our Board of Directors as of 31 December 2016
Reto Francioni Member of the Compensation Committee / member
of the Corporate Culture and Responsibility Committee / member of the
Risk Committee
Ann F. Godbehere Chairperson of the Compensation Committee / member
of the Audit Committee
Joseph Yam Member of the Corporate Culture and Responsibility
Committee / member of the Risk Committee
Dieter Wemmer Member of the Risk Committee
Robert W. Scully Member of the Risk Committee
The Board of Directors (BoD) of UBS Group AG, under the leader-
ship of the Chairman, consists of six to twelve members as per our
Articles of Association. The BoD decides on the strategy of the
Group upon recommendation of the Group Chief Executive Officer
(Group CEO) and is responsible for the overall direction, supervision
and control of the Group and its management as well as for super-
vising compliance with applicable laws, rules and regulations. The
BoD exercises oversight over UBS Group AG and its subsidiaries and
is responsible for ensuring the establishment of a clear Group gov-
ernance framework to ensure effective steering and supervision of
the Group, taking into account the material risks to which UBS
Group AG and its subsidiaries are exposed. The BoD has ultimate
responsibility for the success of the Group and for delivering sus-
tainable shareholder value within a framework of prudent and
effective controls, approves all financial statements for issue and
appoints and removes all Group Executive Board (GEB) members.
9
Annual Report 2016
Our Group Executive Board as of 31 December 2016
Sergio P. Ermotti Group Chief Executive Officer
Martin Blessing President Personal & Corporate Banking and
President UBS Switzerland
Tom Naratil President Wealth Management Americas and President UBS Americas
Markus U. Diethelm Group General Counsel
Kathryn Shih President UBS Asia Pacific
Kirt Gardner Group Chief Financial Officer
10
Our Group Executive Board as of 31 December 2016
UBS Group AG operates under a strict dual board structure, as
mandated by Swiss banking law, and therefore the BoD delegates
the management of the business to the GEB. Under the leadership
of the Group CEO, the GEB has executive management responsibil-
ity for the steering of the Group and its business. It assumes overall
responsibility for developing the Group and business division strat-
egies and the implementation of approved strategies.
➔ Refer to “Board of Directors” and “Group Executive Board” in the
“Corporate governance” section of this report or to www.ubs.com/
bod and www.ubs.com/geb for the full biographies of our BoD
and GEB members
Jürg Zeltner President Wealth Management
Ulrich Körner President Asset Management and President UBS Europe,
Middle East and Africa
Sabine Keller-Busse Group Head Human Resources
Andrea Orcel President Investment Bank
Christian Bluhm Group Chief Risk Officer
Axel P. Lehmann Group Chief Operating Officer
11
Annual Report 2016
History
UBS has played a pivotal role in the development and growth of
Swiss banking. Since the firm’s origins in the mid-19th century,
UBS has evolved to become a global financial services firm that
houses the world’s largest wealth manager, the number one bank
in Switzerland, a specialized and successful investment bank and
one of the world’s largest asset managers.
The scope and international reach of what UBS is today was
largely shaped in the second half of the 20th century. In 1998,
two of Switzerland’s large banks, Union Bank of Switzerland and
Swiss Bank Corporation (SBC), merged to form UBS. At the time
of the merger, both banks were already well-established and suc-
cessful in their own right. Union Bank of Switzerland’s origins go
back to the Bank in Winterthur founded in 1862. SBC’s founding
forebear, the Basler Bankverein, was established in 1872.
In the early 1990s, SBC and Union Bank of Switzerland were
both commercial banks operating mainly out of Switzerland, and
both shared the vision of becoming a world leader in wealth man-
agement, a successful global investment bank and a top-tier
global asset manager, while remaining an important commercial
and retail bank in their home market of Switzerland.
Union Bank of Switzerland, the largest Swiss bank of its time,
pursued these goals primarily through organic growth. In con-
trast, SBC, then the third-largest Swiss bank, grew mainly through
a combination of strategic partnerships and acquisitions, includ-
ing O’Connor in 1992, Brinson Partners in 1994, and S.G.
Warburg, the historical pillar of UBS’s Investment Bank, in 1995.
In 2000, UBS acquired PaineWebber, whose roots went back
to 1879, establishing the firm as a significant player in the US.
Over the last half century, UBS has largely organically built a
strong presence in the Asia Pacific region, where it is the leading
wealth manager and a top-tier investment bank.
During the financial crisis from 2007 to 2009, UBS incurred
significant losses. In 2011, we initiated a strategic transformation
of our firm toward a business model that focused on our core
businesses of wealth management and personal and corporate
banking in Switzerland.
We sought to revert to our roots, emphasizing a client-centric
model that required less risk-taking and capital, and have success-
fully completed this transformation. The Pillars, Principles and
Behaviors, which we launched in 2014, have been a foundation
for our new corporate strategy, identity and culture.
We have also adapted our legal entity structure to improve our
resolvability and to respond to the new regulatory environment.
Today, we are among the world’s best-capitalized large global
banks with a balanced business mix and geographic diversifica-
tion. We remain committed to executing our strategy with
discipline and creating sustainable value for our clients and
shareholders.
➔ Refer to www.ubs.com/history for more information
➔ Refer to the “The legal structure of UBS Group” and “Our
strategy” sections of this report for more information
12
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(cid:70)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:78)(cid:91)(cid:2)(cid:68)(cid:91)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85)(cid:2)(cid:43)(cid:80)(cid:69)(cid:16)(cid:2)(cid:81)(cid:84)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:78)(cid:91)(cid:2)(cid:86)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:53)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:2)(cid:43)(cid:80)(cid:69)(cid:16)
The legal structure of UBS Group
Since 2014, we have undertaken a series of measures to improve
the resolvability of the Group in response to too big to fail (TBTF)
requirements in Switzerland and other countries in which the
Group operates.
In December 2014, UBS Group AG completed an exchange
offer for the shares of UBS AG and became the holding company
of the Group. During 2015, UBS Group AG completed a court
procedure under article 33 of the Swiss Stock Exchange Act
(SESTA procedure) resulting in the cancellation of the shares of the
remaining minority shareholders of UBS AG. As a result, UBS Group
AG owns 100% of the outstanding shares of UBS AG.
In June 2015, we transferred our Personal & Corporate Bank-
ing and Wealth Management businesses booked in Switzerland
from UBS AG to UBS Switzerland AG.
Also in 2015, we implemented a more self-sufficient business
and operating model for UBS Limited and established UBS Busi-
ness Solutions AG as a direct subsidiary of UBS Group AG to act
as the Group service company. The purpose of the service com-
pany structure is to improve the resolvability of the Group by
enabling us to maintain operational continuity of critical services
should a recovery or resolution event occur.
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13
Annual Report 2016
In the second half of 2015, we transferred the ownership of
the majority of our existing service subsidiaries outside the US to
UBS Business Solutions AG, and we expect to transfer shared ser-
vices functions in Switzerland and the UK from UBS AG to this
entity during 2017. As of 1 January 2017, we completed the
transfer of the shared service employees in the US to our US ser-
vice company, UBS Business Solutions US LLC.
As of 1 July 2016, UBS Americas Holding LLC was designated
as our intermediate holding company for our US subsidiaries as
required under the enhanced prudential standards regulations
pursuant to the Dodd-Frank Act. UBS Americas Holding LLC holds
all of our US subsidiaries and is subject to US capital requirements,
governance requirements and other prudential regulation.
In addition, we transferred the majority of the operating sub-
sidiaries of Asset Management to UBS Asset Management AG
during 2016. Furthermore, we merged our Wealth Management
subsidiaries in Italy, Luxembourg (including its branches in Austria,
Denmark and Sweden), the Netherlands and Spain into UBS
Deutschland AG, which was renamed to UBS Europe SE, to estab-
lish our new European legal entity which is headquartered in
Frankfurt, Germany.
We have established UBS Group Funding (Switzerland) AG, a
wholly owned direct subsidiary of UBS Group AG, to issue future
loss-absorbing additional tier 1 (AT1) capital instruments and total
loss-absorbing capacity- (TLAC-) eligible senior unsecured debt,
which will be guaranteed by UBS Group AG. We also intend to
substitute the issuer of outstanding TLAC-eligible senior unsecured
debt with UBS Group Funding (Switzerland) AG replacing UBS
Group Funding (Jersey) Limited as the issuer. Outstanding
loss-absorbing AT1 capital instruments issued by UBS Group AG
may in the future be transferred to UBS Group Funding (Switzer-
land) AG, subject to further regulatory review. The Swiss Federal
Council has requested the Swiss Federal Tax Administration to
propose amendments to the current Swiss tax law in order to
reduce the additional tax burden on debt issuances by bank top
holding companies. When such changes become effective, we
expect loss-absorbing AT1 capital instruments and TLAC-eligible
senior unsecured debt to be issued directly out of UBS Group AG.
At that point, we also expect to substitute UBS Group AG as
issuer of outstanding capital and debt instruments issued by UBS
Group Funding (Switzerland) AG. We expect the substitution of
UBS Group Funding (Switzerland) AG as issuer of outstanding
TLAC-eligible senior unsecured debt to be completed during the
second quarter of 2017. Upon completion of the issuer substitu-
tion, outstanding TLAC-eligible senior unsecured debt will con-
tinue to be guaranteed by UBS Group AG, and investors’ seniority
of claim against UBS Group AG will remain unchanged.
Our strategy, our business and the way we serve the vast
majority of our clients are not affected by these changes. These
plans do not create the need to raise additional common equity
capital and are not expected to materially affect the firm’s capital-
generating capability.
We continue to consider further changes to the Group’s legal
structure in response to regulatory requirements and other exter-
nal developments, including the anticipated exit of the UK from
the EU. Such changes may include the transfer of operating sub-
sidiaries of UBS AG to become direct subsidiaries of UBS Group
AG, further consolidation of operating subsidiaries in the EU and
adjustments to the booking entity or location of products and
services. These structural changes are being discussed on an
ongoing basis with FINMA and other regulatory authorities and
remain subject to a number of uncertainties that may affect their
feasibility, scope or timing.
➔ Refer to the “Regulatory and legal developments” section of this
report for more information
Terms used in this report, unless the context requires otherwise
“UBS,” “UBS Group,” “UBS Group AG consolidated,”
“Group,” “the Group,” “we,” “us” and “our”
UBS Group AG and its consolidated subsidiaries
“UBS AG consolidated”
UBS AG and its consolidated subsidiaries
“UBS Group AG” and “UBS Group AG standalone”
UBS Group AG on a standalone basis
“UBS AG” and “UBS AG standalone”
UBS AG on a standalone basis
“UBS Switzerland AG”
“UBS Limited”
UBS Switzerland AG on a standalone basis
UBS Limited on a standalone basis
“UBS Americas Holding LLC consolidated”
UBS Americas Holding LLC and its consolidated subsidiaries
14
External reporting
General requirements
Our external reporting requirements and the scope of our external
reports are defined by general accounting law and principles, rel-
evant stock and debt listing rules, specific legal and regulatory
requirements, as well as by our own financial reporting policies.
We have to prepare and publish consolidated financial state-
ments in accordance with International Financial Reporting Stan-
dards (IFRS) on a half-yearly basis, in line with the requirements of
SIX Swiss Exchange and New York Stock Exchange, where our
shares are listed. However, we also publish our results on a quarterly
basis in order to provide shareholders with more frequent disclo-
sures than required by law. Additionally, statutory financial state-
ments for UBS Group AG are prepared annually as the basis for our
Swiss tax return, the appropriation of retained earnings and a
potential distribution of dividends, subject to shareholder approval
at the Annual General Meeting. Management’s discussion and
analysis (MD&A) complements our annual financial statements.
In preparing these disclosures, we consistently apply our finan-
cial disclosure principles, such as transparency and relevance to
our stakeholders. We also continuously seek to improve our dis-
closures by benchmarking them against best practice examples,
including those recommended by the Enhanced Disclosure Task
Force (EDTF).
➔ Refer to “Information policy” in the “Corporate governance”
section of this report for more information
Our Annual Report 2016, Form 20-F and additional
year-end disclosures
UBS Group AG
The UBS Group AG Annual Report 2016 is available at www.ubs.
com/investors and includes:
– the aforementioned MD&A provided on a UBS Group AG con-
solidated basis, covering our strategy and the environment in
which we operate, the financial and operating performance of
our business divisions and Corporate Center, our risk, treasury
and capital management and our corporate governance,
corporate responsibility and compensation frameworks
– audited UBS Group AG consolidated financial statements in
accordance with IFRS
– audited UBS Group AG standalone financial statements in
accordance with the Swiss Code of Obligations
UBS Group AG and UBS AG
Also available at www.ubs.com/investors is the combined UBS
Group AG and UBS AG Annual Report 2016. As financial informa-
tion for UBS AG (consolidated) does not differ materially from
UBS Group AG (consolidated), the MD&A included in the com-
bined Annual Report 2016 is generally provided on a UBS Group
AG consolidated basis. In addition, it includes information for UBS
AG (consolidated) with respect to risk profile as well as capital and
leverage ratios in line with the requirements for Swiss systemically
relevant banks. UBS AG consolidated financial statements in
accordance with IFRS are also part of the combined UBS Group
AG and UBS AG Annual Report 2016.
This document, excluding the standalone financial statements
of UBS Group AG and including the supplemental disclosures
required under US Securities and Exchange Commission (SEC)
regulations for both UBS Group AG (consolidated) and UBS AG
(consolidated), forms the basis of our Form 20-F filing, which is
available under “SEC filings” at www.ubs.com/investors.
Basel III Pillar 3 disclosures for UBS Group AG
UBS Group AG (consolidated) disclosures required under Basel III
Pillar 3 regulations are published as a separate report under
“Pillar 3 disclosures” at www.ubs.com/investors.
Legal entity disclosures
In accordance with Swiss Financial Market Supervisory Authority
(FINMA) Circular 2016 / 01, Disclosure – banks, which requires
disclosures for significant Pillar 3 entities and sub-groups, stand-
alone legal entity financial and regulatory information for UBS
AG, UBS Switzerland AG and UBS Limited as well as consolidated
financial and regulatory information for UBS Americas Holding
LLC is provided under “Disclosure for legal entities” at www.ubs.
com/investors. The documents for UBS AG and UBS Switzerland
AG include audited standalone financial statements. In addition,
audited standalone financial statements for UBS Limited will be
made available in April 2017.
Furthermore, legal entity-specific disclosures in accordance
with Article 89 of the European Union Capital Requirements
Directive IV (CRD IV) are provided under “EU CRD IV disclosures”
at www.ubs.com/investors. Information as of 31 December 2016
will be published by the end of 2017.
15
Operating
environment
and strategy
Management report
Signposts
Throughout the Annual Report 2016, the Audited | signpost that is displayed at the beginning of a section, table or chart indicates that those items have
been audited. A triangle symbol – – indicates the end of the signpost.
Operating environment and strategy
Current market climate and industry trends
Current market climate and industry trends
Global economic developments in 2016
Global growth slowed modestly in 2016. Each of the world’s
major economic areas – the US, the eurozone and China – saw
slower growth, primarily due to lower investment spending. Brazil
and Russia experienced another year in recession, and Japan’s
growth remained muted. India delivered very strong growth.
At a global level, economic uncertainty meant investment
spending continued to fall short of pre-financial crisis levels,
despite record low interest rates across much of the world. In
2016, the trend of slower investment spending was exacerbated
by low energy prices, which led to further cutbacks in capital
investment, particularly in the US and Russia. Oil prices saw an
improvement toward the end of the year, primarily as a result of
an OPEC decision to reduce production, but geopolitical and
economic uncertainty poses a risk to a broad recovery in invest-
ment spending.
Despite these conditions, equity markets delivered generally
positive performance. After a challenging start to 2016 on con-
cerns about China and a decline in oil prices, global equity mar-
kets rallied to record highs, supported by the economic stimulus
in China, and the Bank of England’s monetary easing policy in
response to the rise in political uncertainty following the outcome
of the UK referendum on EU membership.
Fixed income markets performed well through much of the
year, although signs of rising US inflation and expectations of fis-
cal stimulus led to a sharp sell-off toward the year-end. Currency
markets saw a recovery in the Brazilian real and the South African
rand, while the British pound and Mexican peso declined sharply
following the outcomes of the UK referendum on EU membership
and the US presidential election, respectively.
US growth was lower than expected, primarily due to stagna-
tion in business investment in the energy sector. Private consump-
tion remained relatively robust, jobs growth was strong, unem-
ployment decreased, and improving wage growth and credit
availability proved supportive of consumer confidence. The US
Federal Reserve Board raised interest rates just once toward the
end of the year. Political and financial market uncertainty led the
Federal Reserve Board to proceed with caution in 2016.
In Japan, growth remained positive due to positive net exports,
but continued to show little response to the extensive monetary
and fiscal stimulus put in place in recent years. Weak wage growth,
uncertainty over social security, and a negative wealth effect result-
ing from an appreciating yen weighed on consumption.
The Bank of Japan introduced a new policy of yield curve con-
trol to cap longer-term interest rates, contributing to yen weak-
ness in the latter months of the year.
In Europe, growth slowed a little, but proved resilient following
the outcome of the UK referendum on EU membership. Excep-
tionally loose monetary policy, low oil prices and improving credit
conditions supported growth in the eurozone. Meanwhile, UK
growth was aided by the effects of stronger than expected house-
hold consumption following the referendum, as well as a weaker
British pound and lower interest rates.
The Swiss economy recovered from the sharp appreciation of
the Swiss franc in the prior year, with economic growth accelerat-
ing in 2016 to almost double the pace of 2015. Continued sound
growth in key eurozone trading partners benefited exports, after
a slowdown in 2015.
Growth in emerging markets was highly divergent. The slow-
down in China proved milder than anticipated, as a rebound in
real estate prices and construction stabilized the economy after an
uncertain start in 2016. India saw another year of strong growth,
driven largely by private consumption, although uncertainty
related to the government’s action to take high-value banknotes
out of circulation acted as a temporary brake on growth toward
the end of the year. Brazil saw a second year of deep recession,
with private consumption and investment continuing to suffer
from high rates of inflation, interest rate hikes, and persistent
political uncertainty. Russia’s economy contracted again, but less
severely than in 2015, as the economy showed signs of adjust-
ment to the drop in oil prices, with consumption recovering well
in the latter half of the year.
Economic and market outlook for 2017
We expect a modest acceleration in global growth in 2017, sup-
ported by accelerating growth in the US, a beginning of recover-
ing from the recessions in Brazil and Russia, and only modest
slowdowns in Europe and China. Central bank policy globally is
expected to remain broadly supportive, as the European Central
Bank is likely to continue with quantitative easing, even if at a
slower pace, even as the Federal Reserve Board continues to
increase rates.
US consumption continues to benefit from an improving labor
market, while a post-election rally in business sentiment bodes
well for investment spending and deregulation could provide
additional stimulus. Eurozone growth could slow modestly as
political uncertainty weighs on investment spending and the pos-
itive effects of monetary easing begin to wane. A recovery in the
euro and in oil prices might also slow exports and consumption,
respectively. Switzerland is expected to see a continuation of
steady growth, although uncertainty over corporate tax reform
and the continued Swiss franc strength present headwinds. China
is likely to see slower growth as the real estate and construction
boom slows, but quasi-fiscal and credit stimuli are likely to keep
growth steady. More stable commodity prices and currencies
should prove helpful for Brazil and Russia.
18
Major risks to growth and markets relate to uncertainty regard-
ing the effect of higher US interest rates, the possibility of greater
protectionism in response to changes in US trade policy, uncer-
tainty raised by the commencement of the UK’s negotiation of its
withdrawal agreement with the EU, and the potential for sur-
prises from election outcomes in the Netherlands, France and
Germany. China’s management of its rising debt levels and eco-
nomic transition remains an important medium-term factor, as
does the possibility of heightened geopolitical tensions in an
uncertain global environment.
Digitalization
Over the last few years, investments in financial technology have
increased sharply. The market expects continued digital disruption
in the financial industry, driven by consumer preferences and
expectations. We strongly believe that core technologies, such as
automated investment advice, mobile access to banking services
and distributed ledger technology, will become mainstream in the
financial services industry. Digital capabilities are likely to play a
significant role in transforming how banks interact with clients
and how they operate internally.
Industry trends
Wealth accumulation
The wealth management industry offers fundamentally attractive
economics with a forecast for robust wealth accumulation around
the world. According to the Boston Consulting Group Global
Wealth Report 2016, the ultra high net worth segment is expected
to expand by about 9.5% annually from 2015 to 2020, and the
high net worth segment by about 9.4% annually. Asia Pacific and
the emerging markets are expected to be the fastest-growing
regions, with an estimated annual market growth rate of 14.0%
and 10.4% for the high net worth, and 16.0% and 12.4% for the
ultra high net worth segments, respectively. Mature markets, such
as Western Europe and North America, are forecast to see wealth
accumulation grow within the high net worth and ultra high net
worth segments at an annual rate exceeding expected gross
domestic product growth. We believe that wealth management is
likely to remain a highly fragmented industry with high barriers to
entry due to the significant investments needed to meet current
and proposed regulatory requirements.
Demographics, wealth transfer and retirement funding
Demographic changes, particularly escalating costs associated
with the care of an aging population and the funding challenges
faced by public pension systems, will be a key long-term driver for
both wealth consumption and wealth transfer. Pressures on public
pension schemes will make reform a pressing matter in several
countries. Although change in public pension schemes will vary, a
general and gradual shift from public to privately funded pension
schemes seems inevitable.
These developments are expected to benefit our businesses, as
individuals and privately funded pension schemes seek invest-
ment advice and tailored service offerings with a relevant product
range. We believe that our strong capabilities in asset manage-
ment, as well as our ability to tailor our service offerings to our
clients’ financial needs and preferences, put us in a position of
strength to address these emerging needs.
Further adaptation of operating models
Increases in operational cost pressure, reflecting higher regulatory
costs and a subdued revenue environment, will drive financial ser-
vices firms to seek more efficient operating models. This push for
efficiency is forcing banks to reassess their front-to-back pro-
cesses, focus on identifying potential for standardization, and
reconsider the ownership of value chain components. Over the
past few years, a diverse network of suppliers and service provid-
ers for different parts of the banking industry value chain has
emerged, in particular by disrupting the traditional approach to
process ownership, service and supply chain.
Consolidation
Increasing investment requirements along with constrained sup-
ply, a stronger refocus on core businesses and a subdued macro
environment will continue to drive and accelerate efficiency
efforts that are likely to span all functions in the banking business.
A retrenchment of banks’ operations to their core markets is
expected to continue, with banks curtailing or even abandoning
completely some of their past international expansion efforts. This
is expected to foster concentration in certain markets, but also
increase competition in certain business lines in order to gain scale
and more efficiency.
Considering continuous cost pressures, the industry is likely to
seek opportunities to achieve further increased efficiency of non-
client-facing logistics and control functions, and the emergence
of more utility-like models, for example, centralized providers of
banking infrastructure or shared service companies, is increasingly
probable. Moreover, we will continue to see banks focusing on
their business portfolios, exiting their non-core products and
geographies, and further crystallizing and sharpening their core
value proposition in order to increase revenues, reduce costs and
improve their balance sheets. This could lead to added pressure
on profitability.
19
Operating environment and strategy Operating environment and strategy
Current market climate and industry trends
Banking intermediation developments
Against the backdrop of digitalization and new market partici-
pants, the banking sector’s role as a facilitator of economic policy
and an enabler of domestic growth may come under pressure, as
well as be subjected to renewed public discussion and regulatory
scrutiny. The combination of enhanced regulatory requirements,
reduced risk appetite and subdued macroeconomic prospects
continues to curb the lending appetite of banks. While banks are
currently still active in more specific or niche areas, such as long-
dated assets and high-risk lending, other financial industry players
are increasingly stepping into banking intermediation and risk-
taking areas. It is expected that this trend will continue with its
extent and pace depending on regulatory developments.
Despite these challenges, we believe banks still have the neces-
sary capital and the competitive ability to preserve their core role
in the economy and to have continued access to their traditional
sources of revenue.
Regulation
There has been continuous regulatory pressure on the financial
services industry to become simpler, more transparent and more
resilient, and we expect that regulation will remain a major driver
of change and costs for the industry.
We believe we have the right business model to comply with
new, more demanding regulations without the need to change
our strategy. We have one of the highest fully applied CET1 capi-
tal ratios among our peer group of large global banks and we
have made substantial progress in our efforts to improve resolv-
ability. We are well prepared to meet the requirements of the
revised Swiss too big to fail framework by the effective date in
2020, and we intend to use this period to fully implement the
new requirements.
➔ Refer to the “Regulatory and legal developments” and “Capital
management” sections of this report for more information
20
Regulation and supervision
The Swiss Financial Market Supervisory Authority (FINMA) is UBS’s
home country regulator and consolidated supervisor. As a finan-
cial services provider with a global footprint, we are also regulated
and supervised by the relevant authorities in each of the jurisdic-
tions in which we conduct business, including the US, the UK and
the rest of the EU. Through UBS AG and UBS Switzerland AG,
which are licensed as banks in Switzerland, we may engage in a
full range of financial services activities in Switzerland and abroad,
including personal banking, commercial banking, investment
banking and asset management.
As we are a designated global systemically important bank
(G-SIB) and considered systemically relevant in Switzerland, we are
subject to more rigorous regulatory requirements and supervision
than most other Swiss banks. Since the financial crisis of 2007–
2009, regulation of financial services firms has been undergoing
significant changes both in Switzerland and in the other countries
where we operate. These changes, which continue to require
significant resources to implement, have a material effect on how
we conduct our business and result in increased ongoing costs.
➔ Refer to the “The legal structure of UBS Group” section of this
tions on intra-group funding and certain guarantees) or to reduce
business risk in some manner. The Swiss Banking Act provides
FINMA with the ability to extinguish or convert to common equity
the liabilities of the Group in connection with its resolution.
Furthermore, Swiss too big to fail requirements require Swiss
systemically relevant banks, including UBS, to put in place viable
emergency plans to preserve the operation of systemically impor-
tant functions in case of a failure of the institution, to the extent
that such activities are not sufficiently separated in advance. In
response to these requirements in Switzerland, as well as to simi-
lar requirements in other jurisdictions, UBS has developed com-
prehensive recovery plans that provide the tools to manage a
severe loss event. UBS also provides relevant authorities with reso-
lution plans for restructuring or winding down certain businesses
in the event the firm could not be stabilized. Alongside these
measures, the bank has invested significantly in structural, finan-
cial and operational ring-fencing measures to improve the Group’s
resolvability.
➔ Refer to the “Capital management” section of this report for
more information on the Swiss SRB framework and the Swiss
report for more information
too big to fail requirements
➔ Refer to the “Regulatory and legal developments” and “Risk
factors” sections of this report for more information
➔ Refer to the “Treasury management” section of this report for
more information on liquidity coverage ratio requirements
Regulation and supervision in Switzerland
Regulation and supervision outside Switzerland
Supervision
UBS Group AG and its subsidiaries are subject to consolidated
supervision by FINMA under the Swiss Federal Law on Banks and
Savings Banks (Swiss Banking Act) and the related ordinances
that impose, among other requirements, minimum standards for
capital, liquidity, risk concentration and organizational structure.
FINMA fulfills its statutory supervisory responsibilities through
licensing, regulation, monitoring and enforcement. FINMA is
responsible for the prudential supervision and mandates audit
firms to perform on its behalf a regulatory audit and certain other
supervisory tasks.
Resolution planning and resolvability
The Swiss Banking Act and related ordinances provide FINMA
with additional powers to intervene in order to prevent a failure or
resolve a failing financial institution, including UBS Group AG,
UBS AG and UBS Switzerland AG. These measures may be trig-
gered when certain thresholds are breached and permit the exer-
cise of considerable discretion by FINMA in determining whether,
when or in what manner to exercise such powers. In case of a
possible insolvency, FINMA may impose more onerous require-
ments on us, including restrictions on the payment of dividends
and interest as well as measures to alter our legal structure (e.g.,
to separate lines of business into dedicated entities, with limita-
Regulation and supervision in the US
In the US, UBS is subject to overall regulation and supervision by
the Board of Governors of the Federal Reserve (Federal Reserve
Board) under a number of laws. Furthermore, our US operations
are subject to additional oversight by the Federal Reserve Board’s
Large Institution Supervision Coordinating Committee, which
coordinates supervision of large or complex financial institutions.
UBS AG is a financial holding company under the Bank Holding
Company Act and maintains several branches and representative
offices in the US, which are authorized and supervised by either
the Office of the Comptroller of the Currency or the state banking
authority of the state in which the branch is located. UBS AG is
currently registered as a swap dealer with the Commodity Futures
Trading Commission (CFTC), and we expect to register it as a
security-based swap dealer with the Securities and Exchange
Commission (SEC) when such registration is required.
UBS Americas Holding LLC, the holding company for our non-
branch operations in the US as required under the Dodd-Frank
Act, is subject to risk-based capital, liquidity, Comprehensive Cap-
ital Analysis and Review, stress test, capital plan and governance
requirements established by the Federal Reserve Board.
UBS Bank USA, a Federal Deposit Insurance Corporation-
insured depository institution subsidiary, is licensed and regulated
by state regulators in Utah.
21
Operating environment and strategy Operating environment and strategy
Regulation and supervision
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 organiza-
tions, 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 operations in the UK are mainly regulated and supervised by
the Prudential Regulation Authority (PRA), an affiliated authority
of the Bank of England, and the Financial Conduct Authority
(FCA). Some of our subsidiaries and affiliates are also regulated by
the London Stock Exchange and other UK securities and com-
modities exchanges of which they are a member.
UBS Limited is a private limited company incorporated in the
UK and is authorized by the PRA and regulated by the PRA and
the FCA to conduct a broad range of banking and investment
business.
UBS AG maintains a UK-registered branch in London that
serves as a global booking center for our Investment Bank.
Financial services regulation in the UK is currently conducted in
accordance with EU directives covering, among other topics, com-
pliance with certain capital and liquidity adequacy standards, cli-
ent protection requirements and business conduct principles. This
may be subject to change depending on how the relationship
between the UK and the EU evolves.
Regulation and supervision in Germany
UBS Europe SE, headquartered in Frankfurt, Germany, is super-
vised by the Bundesanstalt für Finanzdienstleistungsaufsicht
(BaFin) and subject to EU and German laws and regulations. UBS
Europe SE was established in the fourth quarter of 2016, follow-
ing the merger of UBS Deutschland AG and our Wealth Man-
agement subsidiaries in Germany, Italy, Luxembourg (including
its branches in Austria, Denmark and Sweden), the Netherlands
and Spain.
Anti-money laundering and anti-corruption
A major focus of government policy relating to financial institu-
tions in recent years has been combating money laundering and
terrorist financing. The US Bank Secrecy Act and other laws and
regulations applicable to UBS require the maintenance of effective
policies, procedures and controls to detect, prevent and report
money laundering and terrorist financing, and to verify the iden-
tity of our clients. Failure to maintain and implement adequate
programs to prevent money laundering and terrorist financing
could result in significant legal and reputational risk.
We are subject to laws and regulations in jurisdictions in which
we operate, including the US Foreign Corrupt Practices Act and
the UK Bribery Act, prohibiting corrupt or illegal payments to gov-
ernment officials and others. We maintain policies, procedures
and internal controls intended to comply with these laws and
regulations.
Data protection
We are subject to laws and regulations concerning the use and
protection of customer, employee, and other personal and confi-
dential information, including provisions under Swiss law, the EU
Data Protection Directive and laws of other jurisdictions.
➔ Refer to the “Risk factors” section of this report for more
information
22
Regulatory and legal developments
Key international developments
Revisions of BCBS capital framework and ongoing consultations
Proposed revisions to the Pillar 1 requirements
The Basel Committee on Banking Supervision (BCBS) is currently
finalizing a comprehensive reform package for the Basel III capital
framework, the elements of which have been proposed in a series
of separate consultation papers. High-level guidance on the revi-
sions issued by the BCBS in November 2016 included: (i) the
revised standardized approach to credit risk will be more risk-sen-
sitive and more consistent with banks’ internal model-based
approaches, which are subject to approval by the home country
regulator; (ii) a revised standardized approach for operational risk
will replace the existing approaches, including the advanced mea-
surement approach, which is based on banks’ internal models and
also subject to approval by the home country regulator; and (iii) a
leverage ratio surcharge for global systemically important banks
(G-SIBs) will be introduced. In addition, an aggregate output floor,
in relation to the level of capital required, is expected to be part of
the reform package. Final rules, which were expected to be issued
in January 2017, have been delayed. We expect that if the
proposals are adopted in their current form and implemented in
Switzerland, the proposed changes to the capital framework will
likely result in a significant increase in our overall RWA without
considering the effect of mitigating measures.
Revisions to the Pillar 2 requirements
In April 2016, the BCBS revised its 2004 principles for the manage-
ment and supervision of interest rate risk. The revised standards
include guidance on the development of interest rate shock scenar-
ios, enhanced quantitative disclosure requirements as well as an
updated standardized framework, which banks could be mandated
to follow. The impact of these revisions can only be determined once
its implementation in national prudential regulations becomes clearer.
Revisions to the Pillar 3 requirements
FINMA has revised its Pillar 3 disclosure requirements to reflect
changes to the BCBS Pillar 3 standards. Requirements relating to the
2015 BCBS revisions became effective for Swiss banking institutions
on 31 December 2016 with additional requirements to be imple-
mented during 2017. Further revisions to the Pillar 3 framework are
expected as part of the finalization of the Basel III capital framework.
➔ Refer to the “Significant accounting and financial reporting
changes” section of this report and the “Basel III Pillar 3
UBS Group AG 2016” report under “Pillar 3, SEC filings & other
disclosures” at www.ubs.com/investors for more information
Consultation on regulatory capital treatment of
accounting provisions
In October 2016, the BCBS issued a consultative document and a
discussion paper on the Basel III regulatory capital treatment of
accounting provisions following the publication of IFRS 9, Financial
Instruments, issued by the International Accounting Standards
Board, and the Current Expected Credit Loss (CECL) model, issued
by the US Financial Accounting Standards Board. The new rules
require the use of expected credit loss models as opposed to the
currently applied incurred credit loss impairment approach under
IFRS and US GAAP. UBS will adopt the IFRS 9 requirements on
1 January 2018. The BCBS consultative document proposes to
retain for an interim period the current regulatory treatment of
accounting provisions. This would result in the impact of IFRS 9 on
common equity tier 1 capital to be limited to the excess of expected
credit losses over the current regulatory expected losses for banks
applying the internal ratings-based (IRB) approach. The BCBS also
considers the adoption of transitional arrangements to phase in
this impact. The BCBS discussion paper sets out longer-term
options that include retaining the current regulatory treatment
and introducing an expected credit loss component to the stan-
dardized regulatory approach. The consultation period ended in
January 2017.
➔ Refer to the “Significant accounting and financial reporting
changes” section of this report for more information
Developments on TLAC and MREL requirements
Following the publication of the Financial Stability Board’s (FSB)
international total loss-absorbing capacity (TLAC) standard in
November 2015, a number of major jurisdictions issued TLAC
requirements during 2016.
Switzerland was the first jurisdiction to implement TLAC
requirements as part of the revision of the Swiss Capital Adequacy
Ordinance that became effective on 1 July 2016. Subject to a
limited reduction of the gone concern requirement based on
improvements to our resolvability, the TLAC requirements appli-
cable to UBS as of 1 January 2020 are 28.6% of RWA (excluding
countercyclical buffer requirements) and 10% of the leverage ratio
denominator. The revised Capital Adequacy Ordinance requires
that TLAC-eligible instruments be issued out of a holding com-
pany, which would increase the overall tax burden for the Group
under the current Swiss tax law. The Swiss Federal Council has
requested the Federal Tax Administration to propose amendments
to the Swiss tax law in order to address this issue.
In November 2016, the Bank of England published the final UK
Minimum Requirement for own Funds and Eligible Liabilities
(MREL) rules, including minimum standards for domestic systemi-
cally important banks (D-SIBs) in the UK, such as UBS Limited.
Starting as of 1 January 2020, D-SIBs will have to meet MREL
requirements amounting to the greater of (i) a multiple, initially
less than two and increasing to two as of 1 January 2022, of the
Pillar 1 requirement of 8% and an institution-specific add-on, or
(ii) if subject to a leverage ratio requirement, two times the appli-
cable requirement of currently 3%.
23
Operating environment and strategy Operating environment and strategy
Regulatory and legal developments
Also in November 2016, the European Commission (EC) pub-
lished a proposal to integrate the FSB TLAC standard into the EU
MREL regime. The EC proposes to apply MREL requirements to
global systemically important institutions (G-SIIs) calculated at
16% of RWA and 6% of the leverage exposure measure as of
1 January 2019, increasing to 18% and 6.75%, respectively, as of
1 January 2022. The proposal would also introduce internal MREL
requirements for material subsidiaries of non-EU G-SIIs.
In December 2016, the Federal Reserve Board issued a final
rule that will apply TLAC requirements, minimum long-term debt
requirements and clean holding company requirements to all US
G-SIBs and to foreign G-SIBs’ US intermediate holding companies
(covered IHCs), including UBS Americas Holding LLC. The final
rule will require covered IHCs to maintain debt to the parent G-SIB
qualifying as TLAC (internal TLAC) of at least the greatest of 16%
of RWA, 6% of leverage exposure or 9% of average total con-
solidated assets, plus a buffer, including eligible long-term debt of
at least the greatest of 6% of RWA, 2.5% of leverage exposure or
3.5% of average total consolidated assets. The final rule prohibits
covered IHCs from having liabilities to unrelated third parties that
exceed 5% of its total TLAC (clean holding company requirement)
unless all of its TLAC is contractually subordinated to third-party
liabilities. It further prohibits a covered IHC from incurring short-
term debt, entering into derivatives with unaffiliated parties and
issuing certain guarantees. The rule becomes effective as of 1 Jan-
uary 2019.
➔ Refer to the “Capital management” section of this report for
more information on the revised Swiss SRB framework
Implementation of margin requirements for
non-cleared OTC derivatives
The G20 commitments on derivatives call for adoption of manda-
tory exchange of initial and variation margin for uncleared over-
the-counter (OTC) derivative transactions (margin rules).
Margin rules for the largest counterparties (phase 1 counter-
parties) became effective in the US, Canada and Japan on 1 Sep-
tember 2016 and in the EU, Switzerland and major jurisdictions in
Asia in the first quarter of 2017. Margin requirements for the next
group of counterparties, including significant numbers of end
users, have generally become effective in these jurisdictions on
1 March 2017. In recognition of the low level of industry and end-
user readiness for these requirements, regulators in many of these
jurisdictions have issued supervisory guidance or other relief
intended to allow market participants to continue to transact
while proceeding as quickly as practicable to implement the
requirements. This relief is generally effective until September
2017. The non-cleared margin requirements will have a signifi-
cant operational and funding impact on the OTC derivatives activ-
ities of UBS and many of our clients. The delays in the completion
of rulemaking have affected our ability to complete the execution
of required documentation and operational processes with coun-
terparties ahead of relevant compliance dates, which may limit
our and other dealers’ ability to transact with clients until this is
remedied.
Key developments in Switzerland
Implementation of the mass immigration initiative
In December 2016, the Swiss Parliament passed changes to the
Foreign Nationals Act to implement the mass immigration initia-
tive of February 2014. The rules aim to make better use of the
domestic workforce by giving preferential treatment to the unem-
ployed who are resident in Switzerland. In professions, industries
or regions where unemployment is above average, employers will
be required to advertise vacant positions to employment agencies
and to select suitable agency-registered job seekers for interviews.
However, employers will not be required to justify decisions not to
hire such candidates. The Swiss Parliament deems the new rules
compatible with the Agreement on the Free Movement of Per-
sons between Switzerland and the EU.
The legislation is subject to an optional national referendum
vote, for which 50,000 signatures of Swiss citizens would have to
be collected by 7 April 2017. If there is no referendum vote, the
rules will take effect after this deadline.
Corporate Tax Reform III rejected in referendum vote
In June 2016, the Swiss Parliament approved legislation to reform
the Swiss corporate tax code. The reform aimed to align the indi-
vidual cantonal corporate tax regimes with international stan-
dards by eliminating reduced holding company tax rates and
other privileges and providing a set of both optional and manda-
tory measures for the cantons to mitigate the effect on the corpo-
rate tax burden.
The reform was rejected by popular referendum on 12 Febru-
ary 2017. The Federal Council announced that a new proposal
will be drafted.
Company law reform
In November 2016, the Swiss Federal Council submitted a draft
bill to Parliament proposing to reform Swiss company law. The
revision is aimed at transferring the provisions of the Ordinance
against Excessive Compensation in Listed Companies Limited by
Shares into the relevant federal law. Moreover, the Federal Coun-
cil included new proposals to balance gender representation at
senior executive and board level in listed companies and to intro-
duce transparency rules for payments to government authorities
by commodity firms.
Under the current proposal, we expect the impact on UBS to
concern mainly corporate governance and shareholder rights.
However, the exact impact can only be determined once the final
law has been passed.
Switzerland begins automatic exchange of information
Automatic exchange of information in tax matters (AEI) between
Switzerland and all EU member states and a number of other
countries took effect on 1 January 2017. The first exchange of
information between Switzerland and tax authorities in these
countries will begin in 2018 based on 2017 data. The Swiss
Federal Department of Finance has initiated consultations to extend
the standard to additional countries.
24
We have experienced outflows of cross-border client assets as
a result of changes in local tax regimes or their enforcement.
FINMA launches consultations on revision of
Swiss Banking Insolvency Ordinance
In September 2016, the Swiss Financial Market Supervisory
Authority (FINMA) conducted a consultation on revisions to the
Banking Insolvency Ordinance, which governs restructuring pro-
ceedings and bankruptcy proceedings for Swiss banking institu-
tions. The draft includes provisions on the requirement for banks
to include in financial contracts that are subject to foreign laws or
foreign places of jurisdiction contractual acknowledgment of
FINMA’s ability to temporarily postpone exercise of remedies
against banks. Such postponement is intended to ensure the con-
tinuation of key contractual relationships without interruption in
crisis situations. Regulatory authorities in the UK, France, Germany,
Japan, Switzerland and the US have adopted or proposed similar
requirements to increase legal certainty in cross-border bank
resolutions. Implementation of these requirements is likely to
require us to amend the terms of a significant number of trading
agreements.
FINMA issues final corporate governance guidelines for banks
In November 2016, FINMA issued a circular on corporate gover-
nance, risk management and internal controls at banks. The circu-
lar sets out the duties and responsibilities of boards of directors
and executive board members and defines requirements for the
design of the relevant group-wide risk management framework,
the internal control framework and the internal audit function. At
the same time, FINMA introduced new principles on IT and cyber
risks in the circular on operational risk. We do not expect the
aforementioned requirements to have a significant impact on us.
In addition, FINMA revised the circular on remuneration schemes.
The requirements will enter into force on 1 July 2017 and will also
apply to UBS.
Switzerland launches consultation on data protection
In an effort to improve data protection and to reflect the new
technological and social landscape in existing laws, the Swiss
Federal Council launched a consultation on the proposed revision
of the data protection law in December 2016. The Federal Council
intends to increase the transparency of data processing and
strengthen data privacy. To this end, individuals and institutions
with access to personal data should be subject to increased trans-
parency and information requirements. The revision would enable
Switzerland to meet the requirements of the EU directive on data
protection and to ratify the revised Council of Europe Convention
on the Protection of Individuals with regard to Automatic Process-
ing of Personal Data, both of which are key to ensuring that the
EU continues to recognize Switzerland as having an adequate
level of data protection and that cross-border data transmission
will remain possible in the future. Implementation of new data
protection requirements has required and will require significant
investment by the Group.
Parliamentary debate on FinSA and FinIA
The Financial Services Act (FinSA) and Financial Institutions Act
(FinIA), which were approved by the Swiss Federal Council in
November 2015, have entered parliamentary debate. The two
comprehensive acts will have far-reaching consequences for the
provision of financial services in Switzerland. The FinSA primarily
aims to improve client protection, while the FinIA will introduce a
prudential supervision of managers of individual client assets,
managers of the assets of occupational benefits schemes and
trustees. The upper house of the Swiss Parliament made a num-
ber of major adjustments to the proposal by the Federal Council,
e.g., by reducing the areas of expanded information, documenta-
tion and clarification duties. The lower house of Parliament starts
its debate in the first quarter of 2017.
Key developments in the EU
EC proposes implementation rules for Basel III reforms
In November 2016, alongside its proposals to implement the FSB
TLAC standard, the European Commission (EC) published propos-
als to implement the remaining elements of the Basel III reforms in
the EU. The proposals would require non-EU G-SIBs with two or
more EU entities to establish an EU-domiciled intermediate hold-
ing company. In addition, banks would be required to maintain a
tier 1 leverage ratio of 3%, with the possibility of a G-SII add-on,
and a minimum net stable funding ratio of 100%. The EC would
also create a new asset class of non-preferred senior debt, which
would rank below other senior debt in insolvency. The precise
impact on UBS will depend on the final rules and their implemen-
tation at a national level.
UK referendum on EU membership
Following the result of the June 2016 referendum on the UK’s
membership in the EU, the UK prime minister, Theresa May, has
confirmed the UK will invoke Article 50 of the Treaty on European
Union by no later than the end of March 2017 subject to passing
the necessary legislation required by the Supreme Court judg-
ment on 24 January 2017. This will trigger a two-year period,
subject to extension, during which the UK will negotiate its with-
drawal agreement with the EU. Barring any changes to this time
schedule, it is expected that the UK will formally leave the EU in
early 2019. The future of the UK’s relationship with the EU remains
unclear, although the UK government has stated that the UK will
leave the EU single market and will seek a phased period of imple-
mentation for the new relationship that could cover the legal and
regulatory framework for the financial services industry.
Any future limitations on providing financial services into the
EU from our UK operations could require us to make potentially
significant changes to our operations in the UK and our legal
structure. Potential effects of a UK exit from the EU and potential
mitigating actions may vary considerably depending on the timing
of withdrawal and the nature of any transition or successor
arrangements.
25
Operating environment and strategy Operating environment and strategy
Regulatory and legal developments
Application of MiFID II / MiFIR package postponed until
January 2018
The EU Markets in Financial Instruments Directive II and Regula-
tion package (MiFID II / MiFIR) came into force in July 2014. The
bulk of the requirements were intended to become applicable on
3 January 2017, with transitional provisions in several areas. How-
ever, taking into account the significant technical implementation
challenges faced by regulators and market participants, the appli-
cation date has been postponed to 3 January 2018. MiFID II / MiFIR
will affect many areas of our business in the Investment Bank,
Wealth Management, Asset Management and Personal & Corpo-
rate Banking. We have a Group-wide implementation program in
place for MiFID II / MiFIR.
EU Benchmarks Regulation entered into force
The EU Benchmarks Regulation (EBR), which aims to improve the
accuracy and integrity of benchmarks, entered into force on
30 June 2016 and the majority of requirements will take effect as
of 1 January 2018. New EU and third-country benchmarks may
not be used in the EU after 1 January 2018 unless they comply
with EBR. Existing benchmarks (financial indices used as a refer-
ence in financial instruments, contracts or investment funds on
1 January 2018) are subject to transitional provisions. The regula-
tion will have a cross-divisional and a cross-regional impact, as it
affects UBS at three levels: administrator of UBS benchmarks,
contributor to various benchmarks, and as a user of benchmarks.
The governance, control and transparency requirements for
administrators and contributors will have cost implications. The
application of EBR may have a significant effect across the indus-
try as it may result in a reduction in benchmarks available for use
in financial instruments and financial contracts or to measure the
performance of investment funds.
Key developments in the US
US Department of Labor finalizes fiduciary rule
In April 2016, the US Department of Labor (DOL) adopted a rule
that expands the definition of “fiduciary” under the Employee
Retirement Income Security Act of 1974 (ERISA). On 1 March
2017, the DOL proposed a 60 day extension of the current
10 April 2017 applicability date of the fiduciary rule and its
exemptions. The proposed delay is intended to give the DOL time
to commence an examination of the rule called for by a memo-
randum issued by President Donald Trump on 3 February 2017.
That memo directed the DOL to review the fiduciary rule to
“determine whether it may adversely affect the ability of
Americans to gain access to retirement information and financial
advice.” The rule would require all advisors, including broker-
dealers, to abide by an ERISA fiduciary standard in dealings with
qualified retirement plans and individual retirement accounts. It
would also prohibit various customary transactions and fee
arrangements in the financial services industry with respect to
retirement plan investors, unless certain exemption criteria are
fully met. Wealth Management Americas and Asset Management
would be required to materially change some of their business
processes in response to the rule.
26
Changes to rules regulating systemic risks
UBS Americas Holding LLC, the intermediate holding company for
our US subsidiaries, is subject to US capital requirements, gover-
nance requirements and other prudential regulation, including
the Comprehensive Capital Analysis and Review (CCAR) process
beginning in 2017. In January 2017, the Federal Reserve Board
adjusted its capital plan and stress testing rules. Among other
changes, the rules will decrease the amount of capital any firm
subject to the quantitative requirements of CCAR can distribute
to shareholders outside an approved capital plan without seeking
prior approval from the Federal Reserve Board from 1% to 0.25%.
This change will apply to UBS Americas Holding LLC for the 2017
CCAR cycle. As announced by Federal Reserve Board Governor
Daniel Tarullo in September 2016, the Federal Reserve Board may
further revise the CCAR process and make various changes to the
modeling assumptions used in the CCAR scenarios. The revised
CCAR process could, among other things, require firms to hold an
additional stress capital buffer determined every year.
Separately, in March 2016, the Federal Reserve Board proposed
a rule to impose new limits on significant single-counterparty
credit exposures of large banking organizations, including large
US bank holding companies and US operations of foreign banking
organizations. The proposal would apply single-counterparty
credit limits to US-domiciled bank holding companies with total
consolidated assets of USD 50 billion or more. The proposed limits
are designed to become more stringent as the systemic impor-
tance of a firm increases. Under the proposal, the exposure of
UBS’s US operations to another systemically important financial
firm would be limited to a maximum of 15% of our tier 1 capital,
and exposure to any other single counterparty would be restricted
to 25% of our tier 1 capital. In addition, the single-counterparty
credit limits would apply separately to UBS Americas Holding LLC,
based on its capital. If adopted as proposed, these limits may
affect how UBS conducts its operations in the US, including the
use of other financial firms for payments and securities clearing
services and as transactional counterparties.
US incentive compensation regulation
In May 2016, US federal financial regulators, including the Board
of Governors of the Federal Reserve (Federal Reserve Board),
jointly proposed regulations that would, among other things,
(i) prescribe mandatory deferral amounts and periods for incentive
compensation based on the size of the financial institution and
(ii) require downward adjustment, forfeiture and / or claw-back of
incentive compensation in certain circumstances. The proposal
would apply to incentive compensation plans of our principal
operating entities in the US and would prescribe specific deferral
and forfeiture requirements for executive officers, highly compen-
sated employees and significant risk takers as defined in the pro-
posal. If implemented as proposed, these regulations would
require changes to our incentive compensation programs.
➔ Refer to the “Risk factors” section of this report for more
information
Our strategy
Who we are
The world’s largest and only truly global wealth manager
Our strategy is centered on our leading wealth management busi-
nesses and our premier universal bank in Switzerland, which are
enhanced by Asset Management and the Investment Bank. We
focus on businesses that have a strong competitive position in
their targeted markets, are capital efficient, and have an attractive
long-term structural growth or profitability outlook. We are the
world’s largest and only truly global wealth manager, with a
strong presence in the largest and fastest growing markets. Our
wealth management businesses benefit from significant scale in
an industry with attractive growth prospects, increasingly high
barriers to entry, and their leading position across the attractive
high net worth and ultra high net worth client segments. We are
the preeminent universal bank in Switzerland, the only country
where we operate in all business divisions. Our leading position in
our home market is central to UBS’s global brand and profit stabil-
ity. The partnership between our wealth management businesses
and our other businesses is a key differentiating factor and a
source of competitive advantage.
Strong capital position and capital efficient business model
Capital strength is the foundation of our strategy and provides
another competitive advantage. Our fully applied common equity
tier 1 (CET1) capital ratio is one of the highest among large global
banks, and we are well-positioned to meet the revised fully
applied Swiss too big to fail provisions as of 1 January 2020. Our
capital-accretive and efficient business model helps us adapt to
changes in regulatory requirements, while pursuing growth
opportunities without the need for significant earnings retention.
We believe that our business model can generate an adjusted
return on tangible equity of more than 15% in a normalized mar-
ket environment.
We are committed to an attractive capital returns policy
Our earnings capacity and capital efficiency support our objective
to deliver sustainable and growing capital returns to our share-
holders. We are committed to a total capital return of at least
50% of net profit attributable to shareholders, provided that we
maintain a fully applied CET1 capital ratio of at least 13% and
consistent with our objective of maintaining a post-stress fully
applied CET1 capital ratio of at least 10%. Total capital returns
will consist of an ordinary dividend, which we intend to grow
steadily over time, and other forms of capital returns. For the
financial year 2016, our Board of Directors intends to propose a
dividend payment of CHF 0.60 per share, which is in line with the
ordinary dividend paid for 2015, and which represents a payout
ratio of 71%.
Our priorities
1. Continue to execute our strategy and deliver on
our performance targets
The strategic change we initiated in 2011 was driven by our deci-
sion to focus on our strengths and our anticipation of more
demanding regulation. Having successfully completed our strate-
gic transformation in 2014, we intend to continue building on our
successful track record and to focus on disciplined execution to
deliver on our performance targets.
2. Improve effectiveness and efficiency
Our effectiveness and efficiency programs focus on creating the
right infrastructure and cost framework for the future, including
optimizing our global workforce and footprint. Delivering on our
cost savings target is critical to offsetting the escalating costs
associated with regulatory change and to achieve our return
objectives.
3. Invest for growth
We continue to upgrade and enhance our capabilities in technol-
ogy and digitalization with a focus on innovation, better serving
our clients and further strengthening our competitive position.
We are also committed to investing in the development of our
employees and attracting the best available talent.
27
Operating environment and strategy Operating environment and strategy
Our strategy
Our performance targets, expectations and ambitions
The tables below show our performance targets, expectations
and ambitions for the Group and business divisions. They are cal-
culated on an annual basis, and represent our objectives for sus-
tainable business performance over the cycle. Our performance
targets, expectations and ambitions are based on adjusted results
and assume constant foreign currency translation rates.
➔ Refer to the “Group performance” section of this report for more
information on adjusted results and adjusting items
Group
Adjusted cost / income ratio
Adjusted return on tangible equity
60–70%
>15%
Common equity tier 1 capital ratio (fully applied)1
At least 13% 2
Risk-weighted assets (fully applied)
Expectation: around CHF 250 billion short / medium term 3
Leverage ratio denominator (fully applied)
Expectation: around CHF 950 billion short / medium term 3
Net cost reduction4
CHF 2.1 billion by end 2017
1 Based on the revised Swiss SRB capital framework that became effective on 1 July 2016. Refer to the “Capital management” section of this report for more information. 2 Our capital returns policy also includes our
objective of maintaining a post-stress fully applied common equity tier 1 (CET1) capital ratio of at least 10%. 3 Based on the currently applicable rules. Refer to the “Capital management” section of this report for
more information. Also reflects known FINMA multipliers and methodology changes for risk-weighted assets (RWA), and assumes normalized market conditions for both RWA and leverage ratio denominator
(LRD). 4 Year-end 2017 exit rate compared with full-year 2013 adjusted operating expenses for Corporate Center and compared with full-year 2015 adjusted operating expenses for business divisions. Cost reductions
exclude expenses for provisions for litigation, regulatory and similar matters, foreign currency movements and temporary regulatory program costs. Business division adjusted operating expenses are before allocations
and exclude items that are not representative of the underlying net cost reduction performance, mainly related to variable compensation expenses and compensation for financial advisors in Wealth Management
Americas.
Business divisions
Wealth Management
Wealth Management Americas1
Net new money growth rate
Adjusted cost / income ratio
Net new money growth rate
Adjusted cost / income ratio
3–5%
55–65%
2–4%
75–85%
Expectation: 10–15% annual adjusted
pre-tax profi t growth for combined
businesses over the cycle
Personal & Corporate Banking
Net new business volume growth rate
1–4% (personal banking)
Asset Management
Investment Bank
Net interest margin
Adjusted cost / income ratio
Net new money growth rate
Adjusted cost / income ratio
Adjusted annual pre-tax profit
Adjusted annual pre-tax RoAE
Adjusted cost / income ratio
Risk-weighted assets (fully applied)
Leverage ratio denominator (fully applied)
140–180 bps
50–60%
3–5% excluding money market flows
60–70%
Ambition: CHF 1 billion in the medium term
>15%2
70–80%
Expectation: around CHF 85 billion
short / medium term3
Expectation: around CHF 325 billion
short / medium term3
1 Based on US dollars. 2 Under the current capital regime. 3 Based on the currently applicable rules. Refer to the “Capital management” section of this report for more information. Also reflects known FINMA mul-
tipliers and methodology changes for RWA, and assumes normalized market conditions for both RWA and LRD. Including RWA and LRD directly associated with activity that Corporate Center – Group Asset and Liability
Management manages centrally on the Investment Bank’s behalf.
28
Measurement of performance
Performance measures
Key performance indicators
The Group and business divisions are managed on the basis of a
KPI framework, which identifies profit and growth financial mea-
sures, in the context of sound risk and capital management objec-
tives. When determining variable compensation, both Group and
business division KPIs are taken into account.
We review the KPI framework on a regular basis, considering
our strategy and the market environment in which we operate.
KPIs are disclosed in our quarterly and annual reporting to
allow comparison of our performance over the reporting periods.
For certain KPIs we have performance targets in place, which are
defined in order to measure our performance against our strategy.
Our KPIs are designed to be assessed on an over-the-cycle basis
and are subject to seasonal patterns.
➔ Refer to the “Our strategy” section of this report for more
information on performance targets
Changes to our key performance indicators in 2017
We have fully aligned our performance targets and our KPI frame-
work as of 1 January 2017, and as a result our “Cost reduction”
target will be classified as a KPI for the Group as of 2017. Further-
more, to simplify the KPI framework, “Average value-at-risk
(1-day, 95% confidence, 5 years of historical data)” for the Invest-
ment Bank will be reported as “Additional information” rather
than as a KPI, and “Return on assets, gross (%)” for the Group
and the Investment Bank will be removed from the KPI frame-
work, as these will no longer be used as strategic steering metrics.
In addition, the going concern leverage ratio will change from a
phase-in to a fully applied basis.
29
Operating environment and strategy Operating environment and strategy
Measurement of performance
2016 Group and business division key performance indicators
Key performance indicators
Definition
Net profit growth (%)
Pre-tax profit growth (%)
Cost / income ratio (%)
Return on tangible equity (RoTE) (%)
Return on attributed equity (RoAE) (%)
Return on assets, gross (%)1
Going concern leverage ratio
(phase-in, %)1
Common equity tier 1 capital ratio
(fully applied, %)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
Net new business volume growth for
personal banking (%)
Change in net profit attributable to shareholders from continuing
operations between current and comparison periods / net profit
attributable to shareholders from continuing operations of
comparison period
Change in business division operating profit before tax between
current and comparison periods / business division operating profit
before tax of comparison period
Operating expenses / operating income before credit loss
(expense) or recovery
Net profit attributable to shareholders before amortization and
impairment of goodwill and intangible assets (annualized as
applicable) / average equity attributable to shareholders less
average goodwill and intangible assets
Business division operating profit before tax (annualized as
applicable) / average attributed equity
Operating income before credit loss (expense) or recovery
(annualized as applicable) / average total assets
Total going concern capital / leverage ratio denominator
Common equity tier 1 capital / risk-weighted assets
Net new money for the period (annualized as
applicable) / invested assets at the beginning of the period. Group
net new money growth is reported as net new money growth for
combined wealth management businesses. Asset Management
net new money excludes money market flows
Operating income before credit loss (expense) or recovery
(annualized as applicable) / average invested assets
Business division operating profit before tax (annualized as
applicable) / average invested assets
Net new business volume (i.e., total net inflows and outflows of
client assets and loans) for the period (annualized as
applicable) / business volume (i.e., total of client assets and loans)
at the beginning of the period
Net interest margin (%)
Net interest income (annualized as applicable) / average loans
Average VaR (1-day, 95% confidence,
5 years of historical data)1
Value-at-risk (VaR) expresses maximum potential loss measured
to a 95% confidence level, over a 1-day time horizon and based
on five years of historical data
1 Removed from the key performance indicator framework in 2017.
New key performance indicators in 2017
Key performance indicators
Cost reduction
Going concern leverage ratio
(fully applied, %)
Definition
Net exit rate cost reduction1
Total going concern capital / leverage ratio denominator
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1 Exit rate compared with full-year 2013 adjusted operating expenses for Corporate Center and full-year 2015 adjusted operating expenses for business divisions. Cost reductions exclude expenses for provisions for
litigation, regulatory and similar matters, foreign currency movements and temporary regulatory program costs. Business division adjusted operating expenses are before allocations and exclude items that are not
representative of the underlying net cost reduction performance, mainly related to variable compensation expenses and compensation for financial advisors in Wealth Management Americas.
30
Wealth Management
Business
Wealth Management provides comprehensive advice and tailored
financial services to wealthy private clients around the world,
except those served by Wealth Management Americas. Our cli-
ents benefit from the full spectrum of resources that UBS as a
global firm can offer, including banking and lending solutions,
wealth planning, investment management solutions, and corpo-
rate finance advice. Our guided architecture model gives clients
access to a wide range of products from the world’s leading third-
party institutions that complement our own products.
Strategy and clients
We are the preeminent wealth manager for private clients outside
the US, particularly in the ultra high net worth, high net worth
and affluent segments. We generally define ultra high net worth
clients as those with investable assets of more than CHF 50 mil-
lion, and high net worth clients as those with investable assets of
between CHF 2 million and CHF 50 million. Affluent clients are
those with investable assets between CHF 250,000 and CHF 2
million.
We believe the wealth management business has attractive
long-term growth prospects and expect its growth to outpace
that of global gross domestic product. From a client segment per-
spective, we believe the global ultra high net worth market,
including family offices, has the highest growth potential, fol-
lowed by the high net worth and affluent markets. We seek to
capitalize on our market-leading position in the ultra high net
worth business and to increase our market share considerably in
this segment. We also invest significantly in growing our high net
worth and affluent businesses, especially by leveraging and fur-
ther strengthening our leading competence in investment man-
agement, as well as by investing in our digital capabilities.
Investment management and portfolio construction are at the
heart of our offering. We aspire to provide our clients a wider
selection of discretionary and advisory services, helping them to
more effectively achieve their goals. This in turn would further
increase our mandate penetration and contribute to higher recur-
ring revenues. Our integrated client service model allows us to
bundle capabilities across the Group to identify investment oppor-
tunities in varying market conditions and create solutions that suit
individual client needs. For example, ultra high net worth clients
benefit from tailored institutional coverage and global execution
provided by dedicated specialist teams from Wealth Management
and the Investment Bank through the Global Family Office Group.
Furthermore, we have enhanced our coverage and offering by
establishing a global distribution management function and a
dedicated global ultra high net worth organization.
We have unique scale, an industry-leading platform and are
active in the most diverse wealth management markets and seg-
ments. Our booking centers across the globe give us a strong local
presence that allows us to book client assets in multiple locations,
in response to client preferences.
In Asia Pacific, we have accelerated our growth and expanded
our onshore presence, with a particular focus on Hong Kong, Sin-
gapore and China, as well as on other major markets such as
Japan and Taiwan, to capture long-term growth opportunities. In
emerging markets, we continue to focus on markets such as
Mexico, Brazil, Turkey, Russia, Israel and Saudi Arabia. We regularly
assess our local presence to ensure proximity to our clients in key
markets, as well as to make sure client needs for global diversifica-
tion and local offerings are met.
In Europe, our long-established local presence in all major mar-
kets supports our growth ambition. We have combined our off-
shore and onshore businesses, creating economies of scale and
enabling us to deal efficiently with increased regulatory and fiscal
requirements. In December 2016, we established UBS Europe SE,
an important step in simplifying our governance structure and in
improving operational and capital efficiency across our European
operations. UBS Europe SE was formed through the merger of
UBS Deutschland AG and our Wealth Management subsidiaries in
Germany, Italy, Luxembourg (including branches in other coun-
tries), the Netherlands and Spain. Further countries may be
included in the future.
In Switzerland, Wealth Management collaborates closely with
our colleagues in the personal and corporate banking, asset man-
agement and investment banking businesses. This creates oppor-
tunities to expand our business through client referrals and gener-
ates efficiencies by enabling us to use UBS’s extensive branch
network, which includes around 100 Wealth Management
offices.
We offer extensive training to our client advisors, designed to
enable the delivery of superior advice and solutions. All of our cli-
ent advisors must obtain the Wealth Management Diploma, a
program accredited by the Swiss Accreditation Service of the
State Secretariat for Economic Affairs, which ensures a high level
of knowledge and expertise. For our most senior client advisors,
we offer extensive training through the Wealth Management
Master program.
31
Operating environment and strategy Operating environment and strategy
Wealth Management
We are investing in digitalization and innovation to meet the
evolving needs of our clients. The One Wealth Management Plat-
form program is our signature business transformation strategy,
through which we aim to deliver advisory, digital and back office
capabilities to our clients around the world. We intend to stan-
dardize our operating model and deliver operating efficiencies
across our global wealth management business. The program has
already been rolled out in Switzerland and Germany and is cur-
rently being implemented in Hong Kong and Singapore. In addi-
tion, we are developing new solutions to deliver our services
through digital channels. For example, in 2016, we launched UBS
SmartWealth in the UK, which combines digital wealth manage-
ment with UBS’s market-leading expert insight, offering clients
tailored investment advice based on their personal goals, and
online access to their investments at any time.
We evaluate our performance against key performance indica-
tors and our performance targets.
➔ Refer to the “Our strategy” section of this report for more
information on our performance targets
➔ Refer to the “Measurement of performance” section of this
report for information on our key performance indicators
Products and services
Our approach focuses on gaining an understanding of our clients’
financial objectives that enables us to provide proprietary and
third-party solutions tailored to their individual needs. Clients
benefit from a comprehensive set of capabilities and expertise,
including planning, investing, lending, protection, philanthropy,
corporate and banking services. Investment management capa-
bilities are a core component of this value proposition.
Our Global Chief Investment Office, which serves both Wealth
Management and Wealth Management Americas, synthesizes the
research and expertise of UBS’s global network of economists,
strategists, analysts and investment specialists across all business
divisions. These experts closely monitor and assess financial mar-
ket developments and form a clear, concise and consistent invest-
ment view, known as the UBS House View.
The UBS House View identifies and communicates investment
opportunities and market risks to help protect and grow our cli-
ents’ wealth, which we apply to our clients’ portfolios and asset
allocations, underpinning the investment strategies for our flag-
ship discretionary mandates. The strategic asset allocation is an
essential part of our disciplined style of managing our clients’
wealth and strives to ensure that our clients remain on course to
meet their financial goals over the long term. It is complemented
by our tactical asset allocation, which uses our global expertise to
help our clients navigate markets and ultimately improve the risk
and return trade-off potential of their portfolios.
Our Investment Products and Services unit ensures our solu-
tions are in step with market conditions by aligning our discretion-
ary and advisory offerings with the UBS House View. Clients can
invest in a full range of financial instruments, from single securi-
ties, such as equities and bonds, to various investment funds,
structured products and alternative investments. Additionally, we
offer our clients advice on structured lending and corporate
finance.
To help our clients address the challenges of an increasingly
complex financial world, we continue to develop innovative prod-
ucts. In 2016, we rolled out expanded investment mandate solu-
tions based on our Chief Investment Office’s new asset allocation
framework. These innovative investment solutions are designed
to meet specific client needs and preferences beyond those
addressed in our existing discretionary mandate offering. For
example, our UBS Manage Advanced Systematic Asset Allocation
mandate is a quantitatively driven investment concept that allows
investors to participate fully in upward-trending equity markets
and to reduce their exposure to equity risk in downward-trending
and volatile equity markets.
By aggregating demand for private investments, we are able to
offer our clients access to investment opportunities in the private
markets space that are traditionally only available to institutional
investors. In 2016, we expanded our private markets offering,
most notably through a joint venture with Hamilton Lane, one of
the largest independent alternative investment management
firms globally.
We have also continued to invest significantly into our discre-
tionary and advisory platform infrastructure, with a focus on cus-
tomizing these offerings on a large scale and processing them
more efficiently.
Organizational structure
We are primarily organized along regional lines, with our business
areas being Asia Pacific, Europe and Emerging Markets, Switzer-
land and Global Ultra High Net Worth.
We are governed by executive, risk and operating committees
and operate mainly through UBS Switzerland AG and UBS AG
branches. Headquartered in Switzerland, we have a presence in
more than 40 countries with approximately 190 offices, of which
around 100 are in Switzerland.
Competitors
Our main global competitors include the private banking opera-
tions of BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank,
HSBC, JPMorgan Chase and Julius Baer. In the European domestic
markets, we primarily compete with the local private banking
operations of large banks such as Deutsche Bank in Germany, RBS
in the UK and UniCredit in Italy. In Asia Pacific, the private banking
franchises of Citigroup, Credit Suisse and HSBC are our main
competitors.
32
Wealth Management Americas
Business
Wealth Management Americas provides advice-based solutions
through financial advisors who deliver a fully integrated set of
products and services specifically designed to address the needs
of our clients. Our business is primarily domestic US but includes
Canada and international business booked in the US. We believe
we have attractive growth opportunities and a clear strategy
focused on serving our target client segments, particularly the
high and ultra high net worth segments.
Strategy and clients
Wealth Management Americas is one of the leading wealth man-
agers in the Americas in terms of financial advisor productivity
and invested assets by financial advisor. We offer a fully integrated
set of products and services to meet the needs of our high net
worth and ultra high net worth client segments, while also serv-
ing the needs of core affluent clients. We define high net worth
clients as those with investable assets of between USD 1 million
and USD 10 million, and ultra high net worth clients as those with
investable assets of more than USD 10 million. Core affluent cli-
ents are defined as those with investable assets of between USD
250,000 and USD 1 million. The Global Family Office – Americas,
a joint venture between Wealth Management Americas and the
Investment Bank, provides integrated, comprehensive wealth
management and institutional-type services to select Family Office
clients. Our Wealth Advice Center serves emerging affluent clients
with investable assets of less than USD 250,000. We are commit-
ted to providing high-quality advice to our clients across all their
financial needs by employing the best professionals in the indus-
try, delivering the highest standard of execution and running a
streamlined and efficient business.
We evaluate our performance against key performance indica-
firm with all of the capabilities of a premier, truly global wealth
manager. To accomplish that, in 2016 we introduced a new
Wealth Management Americas operating model designed to
move decision-making closer to clients, better leverage the capa-
bilities that our unrivaled global footprint can offer, invest in next-
generation technology and achieve long-term sustainable organic
growth through an increased focus on retaining and developing
our financial advisors. We aim to differentiate ourselves from
competitors and be a trusted and leading provider of financial
advice and solutions to our clients by enabling our financial advi-
sors to leverage the full resources of UBS globally, including access
to wealth management research, our global Chief Investment
Office, and solutions from our other business divisions. These
resources are augmented by our commitment to an open archi-
tecture platform and supported by our partnerships with many of
the world’s leading third-party institutions. Moreover, our wealth
management offering includes banking, mortgage and financing
solutions that enable us to provide advice on both the asset and
liability sides of our clients’ balance sheets.
We believe the long-term growth prospects of the wealth
management business are attractive in the Americas, with high
net worth and ultra high net worth expected to be the fastest-
growing client segments in terms of invested assets in the region.
We plan to grow our business by enabling our financial advisors
to focus on delivering holistic advice across the full spectrum of
client needs through continued expansion of our cross-business
collaboration throughout the firm, and delivering banking and
lending services that complement our wealth management solu-
tions. We also plan to continue investing in platforms and tech-
nology, while remaining disciplined on cost. We expect these
efforts to enable us to achieve higher levels of client satisfaction,
strengthen our client relationships and lead to greater productivity
across our financial advisors.
tors and our performance targets.
Products and services
➔ Refer to the “Our strategy” section of this report for more
information on our performance targets
➔ Refer to the “Measurement of performance” section of this
report for information on our key performance indicators
We believe we are uniquely positioned to serve high net worth
and ultra high net worth investors in the world’s largest wealth
market. With a network of over 7,000 financial advisors and USD
1 trillion in invested assets, we have a distinctive opportunity to
“feel small and play big” by combining the agility of a boutique
We offer clients a full array of solutions that focus on meeting
their individual financial needs. Our financial advisors work
closely with internal specialists to support evolving goals and
expectations throughout the client life cycle, including compre-
hensive wealth planning and portfolio strategy and manage-
ment. Our offering is designed to meet a wide variety of invest-
ment objectives, including wealth accumulation and preservation,
income generation, portfolio diversification, legacy planning and
philanthropy.
33
Operating environment and strategy Operating environment and strategy
Wealth Management Americas
We offer products and solutions including equities, fixed
income, retirement services, annuities, alternative investments,
managed accounts and structured products. Wealth Manage-
ment Americas’ financial advisors are supported by a dedicated
capital markets team collaborating with the Investment Bank and
Asset Management in order to leverage the resources of the
entire firm, as well as with third-party investment banks and asset
management firms. To address the full range of our clients’ finan-
cial needs, the Wealth Management Americas Banking Group
offers competitive lending and cash management services, such
as securities-backed lending, resource management accounts,
Federal Deposit Insurance Corporation (FDIC)-insured deposits,
mortgages and credit cards. Wealth Management Americas cli-
ents also benefit from our commitment to close collaboration
with our Wealth Management business. Our integrated Wealth
Management Research Americas and Global Chief Investment
Office Wealth Management organizations together provide mar-
ket analysis, economic outlooks and research guidance through a
global lens and deliver them in our UBS House View to help sup-
port investment decisions.
For corporate and institutional clients, we offer a robust suite
of solutions, including equity compensation, administration,
investment consulting, defined benefit and contribution pension
programs, and cash management services. For example, our UBS
Equity Plan Advisory Services provides equity compensation plan
services and advice to more than 180 US corporations, represent-
ing one million participants worldwide.
Organizational structure
Our business is primarily domestic US but includes Canada and
international business booked in the US.
In the US and Puerto Rico, we operate primarily through UBS
Financial Services Inc. and UBS Financial Services Incorporated of
Puerto Rico through 208 branches. Our banking services in the US
include those conducted through UBS Bank USA, an FDIC-insured
depository institution subsidiary, and branches of UBS AG.
Canadian wealth management and banking operations are
conducted through UBS Bank (Canada). We are governed by
executive, risk and operating committees.
Competitors
We compete with national full-service brokerage firms, domestic
and global private banks, regional broker-dealers, independent
broker-dealers, registered investment advisors, trust companies
and other financial services firms offering wealth management
services to US and Canadian private clients, as well as foreign
non-resident clients seeking wealth management services within
the US. Our main competitors include the wealth management
businesses of Bank of America, Morgan Stanley and Wells Fargo.
34
Personal & Corporate Banking
Business
As the leading personal and corporate banking business in Swit-
zerland, we provide comprehensive financial products and ser-
vices to private, corporate and institutional clients in Switzerland.
We are among the leading players in the private and corporate
loan market in Switzerland, with a well-collateralized and conser-
vatively managed lending portfolio.
Our business is a central element of UBS’s universal bank deliv-
ery model in Switzerland. We work with the Group’s wealth man-
agement, investment bank and asset management businesses to
ensure that our clients receive the best products and solutions for
their specific financial needs. We are also an important source of
growth for our other business divisions in Switzerland through
client referrals. In addition, we manage a substantial part of UBS’s
Swiss infrastructure and banking products platform, both of
which are leveraged across the Group.
Our distribution model is based on a multi-channel strategy.
With a steadily rising number of users and client interactions for
our expanding electronic and mobile banking offering, we con-
tinue to strengthen our position as the leading multi-channel
bank in Switzerland.
Strategy and clients
Our strategy focuses on profitable and qualitative growth in Swit-
zerland. We aim to provide stable and substantial profits for the
Group and create revenue opportunities for other businesses
within the firm.
In the personal banking business, we aspire to be the bank of
choice for private clients in Switzerland. We continue to pursue
our strategy of moderately and selectively growing our business in
high-quality loans and to further leverage the potential of digitali-
zation. Currently, we serve one in three Swiss households through
our branch network, customer service centers and digital banking
services. We are continuously expanding our multi-channel offer-
ing and continue to build on UBS’s long tradition as a leader and
innovator in digital services to deliver a superior client experience,
capture market share and increase efficiency and customer loyalty.
In the corporate and institutional business, we want to be our
clients’ main bank. We aim to continuously improve our profit-
ability and capital efficiency, striving to expand our market share
in Switzerland with a focus on a qualitative growth strategy, cen-
tered on cash flow-based lending and our strategic advisory and
trading business. Additionally, we are selectively expanding our
international footprint to serve Swiss corporate clients abroad as
well as global corporate clients headquartered in Switzerland.
Our clients value their relationship with us and our efforts to
provide them with superior service. In 2016, for the sixth consecu-
tive year, the international finance magazine Euromoney named
UBS “Best Domestic Cash Manager Switzerland” based on a sur-
vey of cash managers and chief financial officers. Additionally,
UBS was rated best asset servicing provider for asset managers
and as the leading custodian bank in Switzerland and Europe,
according to The R & M Survey, one of the industry’s most impor-
tant client surveys.
Constant employee development is a crucial element of our
divisional strategy, as this is our key to ensuring superior client
service. UBS sets the pace in client advisor certification, specifically
with the implementation of its state-accredited ISO certification
program.
Moreover, we continuously strive to simplify structures and
processes in order to improve client experience without compro-
mising our risk standards.
We evaluate our performance against key performance indica-
tors and our performance targets.
➔ Refer to the “Our strategy” section of this report for information
on our performance targets
➔ Refer to the “Measurement of performance” section of this
report for information on our key performance indicators
Products and services
Our private clients have access to a comprehensive life cycle based
offering and convenient digital banking, targeting the specific
needs of day-to-day banking, retirement and investment goals,
and real estate transactions. In 2016, new services such as digital
account opening and UBS Safe, where clients can securely store
electronic files, were introduced.
Our corporate and institutional clients benefit from our financ-
ing and investment solutions, notably regarding access to equity
and debt capital markets, syndicated and structured credit, pri-
vate placements, leasing and traditional financing. Our transac-
tion banking offers solutions for payment and cash management
services, trade and export finance, receivable finance, as well as
global custody solutions to institutional clients.
35
Operating environment and strategy Operating environment and strategy
Personal & Corporate Banking
In 2016, we implemented a number of product and service
innovations, such as the launch of UBS Atrium, an innovative plat-
form in the real estate business, where UBS acts as an intermedi-
ary in the market, connecting clients and institutional investors.
UBS’s platform services focus on credit origination and servicing of
brokered mortgages, thereby providing an attractive investment
opportunity for institutional investors in a low-yield environment.
Additionally, we enhanced our digital Asset Wizard, which gives
clients comprehensive wealth oversight, including a new func-
tionality that allows clients to create a wide range of reports tai-
lored to their individual needs.
We collaborate closely with the Investment Bank to offer capi-
tal market and foreign exchange products, hedging strategies,
trading capabilities, as well as corporate finance advice. Working
with Asset Management, we also provide state-of-the-art fund
and portfolio management solutions.
Organizational structure
Our business is organized into Personal Banking, Wealth Manage-
ment Switzerland and Corporate & Institutional Clients. The Swiss
network includes over 300 branches, covering 10 geographical
regions.
We are governed by executive, risk and operating committees
and operate mainly through UBS Switzerland AG.
Competitors
In the Swiss retail business, our competitors are Credit Suisse,
PostFinance, Raiffeisen, the cantonal banks and other regional
and local Swiss banks.
In the Swiss corporate and institutional business, our main
competitors are Credit Suisse, the cantonal banks and globally
active foreign banks in Switzerland.
36
Asset Management
Business
Asset Management provides investment management products
and services, platform solutions and advisory support to institu-
tions, wholesale intermediaries and wealth management clients
around the world, with an onshore presence in 22 countries. We
are a leading fund house in Europe, the largest mutual fund man-
ager in Switzerland and one of the largest fund of hedge funds
and real estate investment managers in the world. Our global
investment capabilities include all major traditional and alterna-
tive asset classes.
We continue to develop our well-established passive capabili-
ties, including indexed strategies and exchange-traded funds
(ETFs), where we are building on our strong position in Asia
Pacific, Europe and Switzerland. We also continue to expand our
world-class fund-of-hedge-fund business.
We evaluate our performance against key performance indica-
tors and our performance targets.
➔ Refer to the “Our strategy” section of this report for more
information on our performance targets
➔ Refer to the “Measurement of performance” section of this
report for information on our key performance indicators
Strategy and clients
Products and services
While market conditions and the low-yield environment in 2016
proved to be challenging for the industry, our global, diversified
asset management business model continues to provide a solid
foundation to capture growth opportunities in the shifting market
dynamics.
The long-term outlook for the asset management industry
remains positive, with three main drivers: (i) aging populations will
lead to higher savings requirements; (ii) tighter government
spending budgets will lead to increased private pension funding;
and (iii) emerging regulation is creating opportunities for asset
managers that have the necessary scale and expertise.
We have defined our current strategy with an overarching goal
to deliver holistic investment and platform solutions to our clients,
by leveraging our global reach and investment expertise.
Moreover, we are strengthening our institutional business and
seeking to accelerate the growth of our wholesale business by
building strategic partnerships, platforms and advisory support.
This is a key area in which we intend to pursue growth in the com-
ing years. Asset Management also continues to collaborate with
the wealth management businesses to provide best-in-class prod-
ucts and services to meet private clients’ needs.
We offer clients a wide range of investment products and services
in different asset classes, which can be delivered through segre-
gated, pooled or advisory mandates as well as registered invest-
ment funds in various jurisdictions. Our active traditional and
alternative capabilities are:
– Equities – investment strategies with varying risk and return
objectives, including global, regional and thematic strategies,
as well as a high alpha and growth and quantitative styles.
– Multi Asset – global and regional asset allocation and currency
investment strategies across the risk / return spectrum.
– O’Connor – a global, relative value-focused, single-manager
hedge fund platform providing investors with absolute and
risk-adjusted returns.
– Fixed Income – global, regional and local market-based single-
sector, multi-sector and extended-sector strategies, such as
high-yield and emerging market debt, as well as unconstrained
and currency strategies.
– Global Real Estate – global and regional strategies across the
major real estate sectors, mainly focused on core and value
added strategies and also including other strategies across the
risk / return spectrum.
We aim to drive profitable and sustainable growth in key mar-
kets in Europe, Switzerland, the Americas and Asia Pacific, includ-
ing China, where we also continue to expand our long-standing
onshore presence.
– Infrastructure and Private Equity – direct infrastructure invest-
ment in core infrastructure assets globally, and multi-manager
infrastructure and private equity strategies in broadly diversi-
fied fund-of-funds portfolios.
To support our efforts to achieve growth and increase our oper-
ational efficiency, we continue to invest in our operating platform
and have made significant progress transforming our organization
to create a less complex and unified global platform. We com-
pleted the sale of our Alternative Fund Services business in 2015,
and announced an agreement in 2017 to sell our fund administra-
tion servicing units in Luxembourg and Switzerland to Northern
Trust. The transaction is expected to close in the second half of the
year, subject to relevant approvals and other customary conditions.
Our Solutions business offers:
– Multi-manager hedge fund solutions and advisory services,
providing exposure to hedge fund investments with tailored
risk and return profiles.
– Customized multi-asset solutions and advisory services, includ-
ing risk-managed and structured strategies, manager selec-
tion, pension risk management, risk advisory and global tacti-
cal asset allocation.
37
Operating environment and strategy Operating environment and strategy
Asset Management
Our passive capabilities include indexed, alternative beta and
rules-based strategies across equities, fixed income, commodities,
real estate and alternatives with benchmarks ranging from main-
stream to highly customized indices and rules-driven solutions.
We offer our products in various structures, including ETFs, pooled
funds, structured funds and mandates.
In 2017, we aligned our businesses to enable us to better
leverage our best investment processes, tools and systems to
generate high alpha, systematic products and solutions for cli-
ents. Our Equities, Fixed Income and Solutions capabilities and
hedge funds business were integrated within a new area named
Investments.
Organizational structure
Our business is organized by the products and services we offer,
with principal offices located in Chicago, Frankfurt, Hartford, Hong
Kong, London, New York, Singapore, Sydney, Tokyo and Zurich.
We are governed by executive, risk and operating committees.
As part of UBS’s efforts to improve the resolvability of the
Group, we have established UBS Asset Management AG, a sub-
sidiary of UBS AG, to which we transferred the majority of Asset
Management’s operating subsidiaries during 2016, excluding
subsidiaries domiciled in the US, which were transferred to UBS
Americas Holdings LLC.
➔ Refer to the “The legal structure of UBS Group” section of this
report for more information
In addition, our Global Real Estate and Infrastructure and Pri-
vate Equity businesses were also combined to form a new area
named Real Estate & Private Markets. We will continue to grow
this business by developing integrated and innovative solutions,
as well as expanding in key markets, such as Brazil, Canada and
Japan.
Competitors
Our main competitors include global firms with wide-ranging
capabilities and distribution channels, such as AllianceBernstein
Investments, Amundi, BlackRock, Deutsche Bank Asset Manage-
ment, Goldman Sachs Asset Management, Invesco, JPMorgan
Chase Asset Management, Morgan Stanley Investment Manage-
ment and Schroders.
38
Investment Bank
Business
The Investment Bank is present in over 35 countries, with principal
offices in all major financial centers, providing investment advice,
financial solutions and capital markets access. We serve corpo-
rate, institutional and wealth management clients across the
globe and form a synergetic partnership with our wealth manage-
ment, personal and corporate banking and asset management
businesses.
The business division is organized into Corporate Client Solu-
tions and Investor Client Services, and also includes UBS Securities
Research. Our specialist teams work closely together, comple-
menting our global product offering with their regional expertise.
This enables us to understand our clients and provide services tai-
lored to their investment and financing needs.
Strategy and clients
We aspire to provide best-in-class services and solutions to our
corporate, institutional and wealth management clients, through
an integrated, solutions-led approach, driven by our intellectual
capital and leveraging our award-winning electronic platforms.
With our client-centric business model, we partner with our
wealth management, personal and corporate banking and asset
management businesses, and we believe we are well positioned
to provide our clients with market insight, global coverage of mar-
kets and products, and execution services.
Our focus remains on our traditional strengths in advisory, cap-
ital markets, equities and foreign exchange businesses, comple-
mented by a rates and credit platform, to deliver attractive and
sustainable risk-adjusted returns. Using our powerful research
and technology capabilities, we pioneer integrated solutions to
support our clients as they adapt to evolving market structures,
driven by changes to the regulatory, technological and economic
landscape.
We continue to invest in talent and technology and to
strengthen our operational risk framework. In 2016, we contin-
ued to implement our technology plan, aimed at enhancing the
effectiveness of our platform for clients and simplifying our pro-
cesses.
To support our goal of earning attractive returns on our allo-
cated capital, we operate within a tightly controlled framework of
balance sheet, risk-weighted assets and leverage ratio denomina-
tor. We evaluate our performance against key performance indi-
cators and our performance targets.
➔ Refer to the “Our strategy” section of this report for more
information on our performance targets and expectations
➔ Refer to the “Measurement of performance” section of this
report for information on our key performance indicators
Products and services
Corporate Client Solutions
In Corporate Client Solutions, we advise our clients on strategic
business opportunities and help them raise capital to fund their
business activities. Together with Investor Client Services, we offer
a full-service solution, which includes the distribution and risk
management of capital markets products and financing solutions.
Its main business lines are:
– Advisory consults clients on matters such as mergers and
acquisitions, spin-offs, exchange offers, leveraged buyouts,
joint ventures, exclusive sales, restructurings, takeover defense
and corporate broking.
– Equity Capital Markets offers comprehensive equity capital-
raising services, as well as related derivative products. This
includes managing initial public offerings and private place-
ments, as well as equity-linked transactions and other strategic
equities solutions.
– Debt Capital Markets provides financing advice and helps cli-
ents raise various types of debt capital, as well as hedge result-
ing exposures.
– Financing Solutions provides customized solutions across asset
classes via a wide range of financing capabilities, including
structured financing, real estate finance and special situations.
– Risk Management includes corporate lending and associated
hedging activities.
Investor Client Services
In Investor Client Services, we enable our clients to buy and sell
securities on capital markets across the globe and to manage their
risk and liquidity. Its businesses are:
39
Operating environment and strategy Operating environment and strategy
Investment Bank
Equities
As one of the world’s largest equities houses and leading equity
market participants in the primary and secondary markets, we
distribute, structure, execute, finance and clear equity cash and
derivative products. Our main business lines are:
– Cash offers trade execution and clearing for single stocks and
portfolios through both traditional and electronic channels,
along with investment advisory and consultancy services.
– Derivatives enables clients to manage risk and meet funding
requirements through a wide range of listed and over-the-
counter equity derivative instruments. We create and distribute
structured products and notes, enabling our clients to optimize
their investment returns.
– Financing Services provides our hedge fund and institutional
clients with a fully integrated platform for financing transac-
tions, which includes prime brokerage. In addition, we execute
and clear exchange-traded equity derivatives in more than 45
markets globally.
Foreign Exchange, Rates and Credit
Foreign Exchange, Rates and Credit provides execution services
and solutions with an emphasis on electronic trading and main-
tains high levels of balance sheet velocity. The main business lines
are:
– Foreign Exchange helps our clients manage their currency
exposures and is recognized as one of the leading foreign
exchange market-makers as well as the market leader in the
precious metals business.
– Rates and Credit encompasses sales, trading and market-mak-
ing in a selected range of rates and credit products. In addition,
we work closely with Corporate Client Solutions, providing
support to our debt capital markets businesses and tailoring
customized financing solutions for our clients.
UBS Securities Research
In UBS Securities Research, we offer clients key insights on securi-
ties in major financial markets around the globe. In our flagship Q
series reports, experts from across the UBS research team respond
to questions from clients, providing a coordinated perspective
across regions, sectors and asset classes.
The UBS Evidence Lab is a team of experienced primary
research experts and works closely with UBS Securities Research
analysts to uncover new evidence that is not yet reflected in mar-
ket prices.
Organizational structure
Our business is organized along the aforementioned products and
services and has a global reach.
We are governed by executive, risk and operating committees
and operate through UBS AG branches and other subsidiaries of
UBS Group. Securities activities in the US are conducted through
UBS Securities LLC, a registered broker-dealer. In the UK, Invest-
ment Bank activities are conducted mainly out of UBS AG London
branch and UBS Limited.
Competitors
The main competitors are the major global investment banks,
including Bank of America Merrill Lynch, Barclays, Citigroup,
Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase
and Morgan Stanley.
40
Corporate Center
Corporate Center is comprised of the functions that provide ser-
vices to the Group, which we present from a reporting perspective
organized under Services and Group Asset and Liability Manage-
ment (Group ALM). Corporate Center also includes the Non-core
and Legacy Portfolio unit.
Corporate Center – Services
Corporate Center – Services consists of the Group Chief Operat-
ing Officer area (Group Corporate Services, Group Operations,
Group Sourcing, Group Technology), Group Finance (excluding
Group ALM), Group Legal, Group Human Resources, Group Risk
Control, Group Communications and Branding, Group Regula-
tory and Governance, and UBS and Society.
Corporate Center – Services allocates the majority of its oper-
ating expenses to the business divisions and other Corporate Cen-
ter units based on service consumption. Each year, as part of the
annual business planning cycle, Corporate Center – Services
agrees with the business divisions and other Corporate Center
units cost allocations for services at fixed amounts or at variable
amounts based on fixed formulas, depending on capital and ser-
vice consumption levels as well as the nature of the service per-
formed. In 2015 and 2016, where costs incurred were different
from those expected, Corporate Center – Services recognized
over- and under-recoveries. In 2017, costs will be allocated to the
business divisions and other Corporate Center units based on
actual costs incurred by Corporate Center – Services.
Operating expenses remaining in Corporate Center – Services
after allocations relate mainly to Group governance functions and
other corporate activities, certain strategic and regulatory projects
and certain retained restructuring expenses.
Corporate Center – Group ALM
Group ALM manages the structural risks of our balance sheet,
including interest rate risk in the banking book, currency risk and
collateral risk, as well as the risks associated with the Group’s
liquidity and funding portfolios. Group ALM also seeks to opti-
mize the Group’s financial performance by better matching assets
and liabilities within the context of the Group’s liquidity, funding
and capital targets. Group ALM serves all business divisions and
other Corporate Center units through three main risk manage-
ment areas, and its risk management is fully integrated into the
Group’s risk governance framework.
Business division-aligned risk management activities performed
on behalf of business divisions and other Corporate Center units
include managing the interest rate risk in the banking book on
behalf of Wealth Management and Personal & Corporate Banking
and high-quality liquid asset (HQLA) portfolios on behalf of spe-
cific business divisions. Beginning in the third quarter of 2016, the
area also includes Risk Exposure Management, which performs
risk management over credit, debit and funding valuation adjust-
ments for our over-the-counter derivatives portfolio. Net income
generated by these activities is fully allocated to the associated
business divisions and Corporate Center units.
Capital investment and issuance activities consist of managing
the Group’s equity and capital instruments as well as instruments
that contribute to our total loss-absorbing capacity (TLAC). Reve-
nues from investing the Group’s equity and the incremental
expenses of issuing capital and TLAC instruments at the UBS
Group AG level (the holding company for the UBS Group) relative
to issuing senior debt out of operating subsidiaries are fully allo-
cated to the business divisions and other Corporate Center units
based on their attributed portion of the Group’s equity.
Group structural risk management activities are performed to
meet overall Group-wide risk management objectives. They
include managing the Group’s HQLA and long-term debt portfo-
lios. The net positive or negative income generated through these
activities is allocated to the business divisions and other Corporate
Center units based on their consumption of the underlying risks.
This consumption is determined by various liquidity and funding
models and, to reduce volatility, is allocated using stable, internal
benchmark rates rather than actual income earned by Group
ALM. Net positive or negative income not arising as a result of
business division consumption is retained by Group ALM.
As part of its risk management activities, Group ALM enters
into derivative hedges to manage the economic and the interest
rate risk of the different portfolios. The results of certain hedging
activities, including any non-economic volatility caused by the
applicable accounting treatment, are retained by Group ALM.
Corporate Center – Non-core and Legacy Portfolio
Corporate Center – Non-core and Legacy Portfolio is comprised of
the positions from businesses that were part of the Investment
Bank prior to its restructuring, and is overseen by a committee
chaired by the Group Chief Risk Officer.
Non-core and Legacy Portfolio pursues a primarily passive wind-
down strategy, focusing on a disciplined reduction of risk-weighted
assets, leverage ratio denominator and costs. Positions are man-
aged and exited over time with the objective of maximizing share-
holder value. Non-core and Legacy Portfolio also includes positions
relating to legal matters arising from businesses that were trans-
ferred to it.
➔ Refer to “Note 20 Provisions and contingent liabilities” in the
“Consolidated financial statements” section of this report for
more information
41
Operating environment and strategy Operating environment and strategy
Corporate Center
Roles and responsibilities within Corporate Center – Services
Functional
head
Group
Chief Financial
Officer1
Responsibilities
– Is responsible for ensuring transparency in, and the assessment of, the financial performance of the Group and business divisions, and for the Group’s financial
accounting, controlling, forecasting, planning and reporting processes
– Is responsible for treasury and capital management, including management and control of funding and liquidity risk with independent oversight from the
Group Chief Risk Officer, and for UBS’s regulatory capital ratios
– Ensures asset and liability management by balancing consumption of the firm’s financial resources through consolidation and management of the Group’s
structural risks enabling sustainable earnings generation
– Manages and controls the Group’s tax affairs
– Manages the divisional and Group financial control functions
– Makes proposals to the Board of Directors (BoD) regarding the accounting standards adopted by the Group, and defines financial reporting and disclosure
standards, after consultation with the Audit Committee of the BoD
– Provides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act of 2002
– Coordinates the working relationship with external auditors under the supervision of the Audit Committee of the BoD
– Supports the Group Chief Executive Officer (CEO) in strategy development and key strategic topics
– Provides advice on financial aspects of strategic projects and transactions
– Manages relations with investors and analysts, in coordination with the Group CEO
Group Chief
Operating
Officer
– Provides quality, cost-effective and differentiating Group-wide IT services and tools in line with the needs of the business divisions and Corporate Center
functions
– Delivers a wide range of operational services across all business divisions and regions
– Supplies real estate infrastructure and general administrative services, directs and controls all supply and demand management activities, supports the firm with
its third-party sourcing strategies and takes responsibility for the firm’s nearshore, offshore, outsourcing and supplier-related processes
– Formulates and agrees Group-wide operating strategies, objectives, and financial and execution plans for the Group Chief Operating Officer function in support
of each business division and the Group functions
– Delivers cross-divisional operational initiatives to enhance the firm’s operating platform
Group Chief
Risk Officer
– Manages the divisional, regional and firm-wide risk control functions and monitors and challenges the firm’s risk-taking activities
– Develops the Group’s risk appetite framework, risk management and control principles, and risk policies
– In accordance with the risk appetite framework approved by the BoD, is responsible for:
implementing appropriate independent control frameworks for the Group’s credit, market, treasury, country, compliance and operational risks
(i)
(ii) developing and implementing the frameworks for risk measurement, aggregation, portfolio controls and, jointly with the Group Chief Financial Officer,
for risk reporting
(iii) authorizing transactions, positions, exposures, portfolio limits, and credit risk provisions and allowances in accordance with the risk control authorities
delegated to this role
– Maintains a control framework to ensure that UBS meets relevant regulatory and professional standards in the conduct of its business and coordinates in
this respect with the Group General Counsel
Group General
Counsel
– Is responsible for legal matters, policies and processes and for managing the Group’s legal function
– Assumes responsibility for legal oversight in respect of the Group’s key regulatory interactions and maintains relationships with our key regulators with respect
to legal matters
– Reports legal risks and material litigation and manages litigation
Group Head
Human
Resources
Group Head
Communica-
tions and
Branding
Group Head
Regulatory and
Governance
Head UBS and
Society
– Defines and executes a human resources strategy aligned with UBS’s objectives and positions the Group as an employer of choice
– Ensures cost-efficient operational and advisory services to employees as well as strategic advice to managers and executives, supporting them to attract,
engage, develop and retain talent
– Maintains relationships with the Group’s key regulators with respect to compensation matters
– Manages UBS’s corporate and brand communication to its stakeholders in alignment with the Group’s overall strategy
– Develops UBS’s communications strategy, content and positioning with the primary purpose to build and protect the firm’s reputation and brand
– Manages and coordinates Group-wide marketing communications activities, including partnership marketing and sponsorship measures
– Provides shared service delivery of Group-wide communication channels
– Develops governmental policy and regulatory strategy and coordinates key external relationships
– Manages the Strategic Regulatory Initiatives portfolio and oversees the planning and execution of relevant initiatives
– Establishes global and local resolution planning and develops key resolvability improvement measures
– Designs the Group’s legal entity structure and further develops coherent corporate governance standards
– Governs the Group’s investigation portfolio and performs important investigations
– Coordinates the Group’s corporate responsibility and sustainability strategy activities
1 Relates to responsibilities for both Corporate Center – Services and Corporate Center – Group ALM.
42
Priorities and initiatives
Our Corporate Center functions strive to provide best-in-class
financial, risk, legal and shared services to the Group based on
commercially sound service management principles, including
transparency on both qualitative and quantitative components of
the services offered. Moreover, we continue to focus on achieving
greater effectiveness and efficiency through the strategic levers of
workforce and footprint, organization and process optimization,
and technology, and we remain fully committed to contributing
to the Group’s net cost reduction.
As of 31 December 2016, 31% of Corporate Center employ-
ees and contractors were in offshore or nearshore locations com-
pared with 18% three years earlier. In addition to lower person-
nel expenses, this allows us to tap growing talent pools and
realize efficiencies by reducing our footprint in high-cost real
estate locations.
We seek to increase value by leveraging common capabili-
ties and creating centralized functions. Within Group Technol-
ogy, we continue to modernize our infrastructure and simplify
our portfolio of applications. In 2016, we began the transfer of
the majority of shared service functions to our separate Group
service companies, which, in addition to meeting regulatory
requirements, allows us to further strengthen our approach to
service management without losing efficiency in the way we
operate.
➔ Refer to the “Our strategy” section of this report for more
information
➔ Refer to the “The legal structure of UBS Group” section of this
report for more information
43
Operating environment and strategy Operating environment and strategy
Risk factors
Risk factors
Certain risks, including those described below, may affect our
ability to execute our strategy or our business activities, financial
condition, results of operations and prospects. Because a broad-
based international financial services firm such as UBS is inher-
ently exposed to multiple risks many of which become apparent
only with the benefit of hindsight, risks of which we are not pres-
ently aware or which we currently do not consider to be material
could also adversely affect us. The order of presentation of the
risk factors below does not indicate the likelihood of their occur-
rence or the potential magnitude of their consequences.
Continuing low or negative interest rates may have
a detrimental effect on our capital strength, liquidity and
funding position, and profitability
Low and negative interest rates in Switzerland and the eurozone
negatively affected our net interest income in 2016 and a con-
tinuing low or negative interest rate environment may further
erode interest margins and adversely affect the net interest
income generated by our Personal & Corporate Banking and
Wealth Management businesses. Our performance is also affected
by the cost of maintaining the high-quality liquid assets required
to cover regulatory outflow assumptions embedded in the liquid-
ity coverage ratio (LCR). The Swiss National Bank permits Swiss
banks to make deposits up to a threshold at zero interest. Any
reduction in, or limitations on the use of this exemption from the
otherwise applicable negative interest rates could exacerbate the
effect of negative interest rates in Switzerland. Low and negative
interest rates may also affect customer behavior and hence our
overall balance sheet structure. Mitigating actions that we have
taken, or may take in the future, such as the introduction of selec-
tive deposit fees or minimum lending rates, have resulted and
may further result in the loss of customer deposits, a key source of
our funding, net new money outflows and / or a declining market
share in our domestic lending business.
Our equity and capital are also affected by changes in interest
rates. In particular, the calculation of our pension plan net defined
benefit assets and liabilities is sensitive to the discount rate
applied. Any further reduction in interest rates would lower the
discount rates and result in pension plan deficits due to the long
duration of corresponding liabilities. This would lead to a corre-
sponding reduction in our equity and fully applied common equity
tier 1 (CET1) capital.
44
Our global presence subjects us to risk from
currency fluctuations
We prepare our consolidated financial statements in Swiss francs.
However, a substantial portion of our assets, liabilities, invested
assets, revenues and expenses, equity of foreign operations and
risk-weighted assets (RWA) are denominated in US dollars, euros,
British pounds and in other foreign currencies. Accordingly,
changes in foreign exchange rates may adversely affect our prof-
its, balance sheet, including deferred tax assets, and capital, lever-
age and liquidity ratios. In particular, the portion of our operating
income denominated in non-Swiss franc currencies is greater than
the portion of operating expenses denominated in non-Swiss
franc currencies. Therefore, the appreciation of the Swiss franc
against other currencies generally has an adverse effect on our
profits, in the absence of any mitigating actions. Moreover, in
order to hedge our CET1 capital ratio, CET1 capital needs to have
foreign currency exposure, leading to currency sensitivity of CET1
capital. As a consequence, it is not possible to simultaneously fully
hedge both the amount of capital and the capital ratio. As the
proportion of RWA denominated in non-Swiss franc currencies
outweighs the capital in these currencies, a significant apprecia-
tion of the Swiss franc against these currencies could benefit our
capital ratios, while a significant depreciation of the Swiss franc
against these currencies could adversely affect our capital ratios.
Swiss counterparties are, in general, highly reliant on the
domestic economy and the economies to which they export, in
particular the EU and the US. In addition, the EUR / CHF exchange
rate is an important risk factor for Swiss corporates. The stronger
Swiss franc may have a negative effect on the Swiss economy,
particularly on exporters, which could adversely affect some of
the counterparties within our domestic lending portfolio and lead
to an increase in the level of credit loss expenses in future periods
from the low levels recently observed.
Regulatory and legal changes may adversely affect our
business and our ability to execute our strategic plans
Fundamental changes in the laws and regulations affecting finan-
cial institutions can have a material and adverse effect on our
business. In the wake of the 2007–2009 financial crisis and the
subsequent instability in global financial markets, regulators and
legislators are considering, have proposed or have adopted a wide
range of changes to these laws and regulations. These measures
are generally designed to address the perceived causes of the cri-
sis and to limit the systemic risks posed by major financial institu-
tions. They include:
– significantly higher regulatory capital requirements, including
changes in the definition and calculation of regulatory capital
as well as in the calculation of RWA;
– prudential adjustments to the valuation of assets at the discre-
tion of regulators;
– introduction of a more demanding leverage ratio as well as
new or significantly enhanced liquidity and stable funding
requirements;
– requirements to maintain liquidity and capital in jurisdictions in
which activities are conducted and booked, and requirements
to adopt risk, corporate and other governance structures at a
local jurisdiction or entity level;
– limitations on principal trading and other activities and limita-
tions on risk concentrations and maximum levels of risk;
– new licensing, registration and compliance regimes, and cross-
border market access restrictions;
– taxes and government levies that would effectively limit bal-
ance sheet growth or reduce the profitability of trading and
other activities;
– a variety of measures constraining, taxing or imposing addi-
tional requirements relating to compensation;
– requirements to maintain loss-absorbing capital or debt instru-
ments subject to write-down as part of recovery measures or a
resolution of the Group or a Group company, including require-
ments for subsidiaries to maintain such instruments;
– requirements to adopt structural and other changes designed
to reduce systemic risk and to make major financial institutions
easier to manage, restructure, disassemble or liquidate, includ-
ing ring-fencing certain activities and operations within sepa-
rate legal entities, and adoption of new liquidation regimes
intended to prioritize the preservation of systemically signifi-
cant functions.
There remains significant uncertainty regarding a number of
the measures referred to above, including whether, or the form in
which, they will be adopted, the timing and content of imple-
menting regulations and interpretations, and the dates of their
effectiveness. There is also uncertainty as to whether the laws and
regulations that have been adopted will be repealed or modified
as a result of geopolitical developments, particularly in the US
with its recent change in presidential administration.
Notwithstanding attempts by regulators to align their efforts,
the measures adopted or proposed differ significantly across the
major jurisdictions, making it increasingly difficult to manage a
global institution like UBS. Swiss regulatory changes with regard
to such matters as capital and liquidity have generally proceeded
more quickly than those in other major jurisdictions, and the
requirements for Swiss major international banks are among the
strictest of the major financial centers. This could put Swiss banks,
such as UBS, at a disadvantage when they compete with peer
financial institutions subject to more lenient regulation or with
unregulated non-bank competitors.
Planned and potential regulatory and legislative developments
in Switzerland and in other jurisdictions in which we have opera-
tions may have a material adverse effect on our ability to execute
our strategic plans, on the profitability or viability of certain busi-
ness lines globally or in particular locations, and in some cases, on
our ability to compete with other financial institutions, and may
require us to increase prices for or cease to offer certain services
and products. The developments have been and will likely con-
tinue to be costly to implement. They could also have a negative
effect on our legal structure or business model, potentially gener-
ating capital, liquidity and other resource inefficiencies, all of
which may adversely affect our profitability. Finally, the uncer-
tainty related to, or the implementation of, legislative and regula-
tory changes may have a negative impact on our relationships
with clients and our success in attracting client business.
Capital and TBTF regulation: As an internationally active Swiss
systemically relevant bank (SRB), we are subject to capital and
total loss-absorbing capacity (TLAC) requirements that are among
the most stringent in the world. New Swiss SRB capital require-
ments impose significantly higher requirements based on RWA
and a significantly higher leverage ratio requirement. In addition,
a TLAC requirement has become applicable.
We may be subject to further increases in capital requirements
in the future, from the imposition of further add-ons in the calcu-
lation of RWA or from other changes to other components of
minimum capital requirements. The Basel Committee on Banking
Supervision (BCBS) and other regulators are considering changes
to the Basel III capital framework, including revisions related to
the credit risk and operational risk frameworks, as well as the
introduction of an output floor. If the proposed changes to the
capital framework are adopted in their current form in Switzer-
land, we expect our overall RWA would significantly increase,
absent any mitigating measures. We also expect that we would
incur significant costs to implement the proposed changes.
Liquidity and funding: The requirements to maintain an LCR of
high-quality liquid assets to estimated stressed short-term net
cash outflows and a net stable funding ratio (NSFR), or other
similar liquidity and funding requirements we are subject to,
oblige us to maintain substantially higher levels of overall liquidity
than was previously the case, may limit our efforts to optimize
interest income and expense, make certain lines of business less
attractive and reduce our overall ability to generate profits. Both
the LCR and NSFR requirements are intended to ensure that we
are not overly reliant on short-term funding and that we have
sufficient long-term funding for illiquid assets, and the relevant
calculations make assumptions about the relative likelihood and
amount of outflows of funding and available sources of addi-
tional funding in a market- or firm-specific stress situation. There
can be no assurance that in an actual stress situation our funding
outflows would not exceed the assumed amounts. Moreover,
many of our subsidiaries must comply with minimum capital,
liquidity and similar requirements and as a result UBS Group AG
and UBS AG have contributed a significant portion of their capi-
tal and provide substantial liquidity to them. These funds are
available to meet funding and collateral needs in the relevant
jurisdictions, but are generally not readily available for use by the
Group as a whole.
45
Operating environment and strategy Operating environment and strategy
Risk factors
Banking structure and activity limitations: We have undertaken
and continue to undertake significant changes in our legal and
operational structure to meet legal and regulatory requirements
and expectations.
Changes to our legal and operational structure, particularly the
transfer of operations to subsidiaries, require significant time and
resources to implement and create operational, capital, liquidity,
funding and tax inefficiencies. In addition, they may increase our
aggregate credit exposure to counterparties as they transact with
multiple entities within the UBS Group, expose our businesses to
local capital, liquidity and funding requirements, and potentially
give rise to client and counterparty concerns about the credit
quality of individual subsidiaries. Such changes could also nega-
tively affect our funding model, limit our operational flexibility
and negatively affect our ability to benefit from synergies between
business units.
In the US, we have incurred substantial costs for implement-
ing a compliance and monitoring framework in connection with
the Volcker Rule under the Dodd-Frank Act. We have also been
required to modify our business activities both inside and outside
the US to conform to its activity limitations. The Volcker Rule
may also have a substantial impact on market liquidity and the
economics of market-making activities. We may incur additional
costs in the short term if aspects of the Volcker Rule are repealed
or modified. We may become subject to other similar regulations
substantively limiting the types of activities in which we may
engage or the way we conduct our operations. If adopted as
proposed, the rule on single counterparty risk proposed by the
US Federal Reserve Board may affect how we conduct our oper-
ations in the US, including our use of other financial firms for
payments and securities clearing services and as transactional
counterparties.
Resolvability and resolution and recovery planning: Under the
Swiss TBTF framework, and similar requirements in other jurisdic-
tions, we are required to put in place viable emergency plans to
preserve the operation of systemically important functions in the
event of a failure, to the extent that such activities are not suffi-
ciently separated in advance. If we adopt measures to reduce
resolvability risk beyond what is legally required, we are eligible for
a limited rebate on the gone concern requirements. Such actions
include changes to the legal structure of a bank group, such as the
creation of separate legal entities, in a manner that would insulate
parts of the group to exposure from risks arising from other parts
of the group, thereby making it easier to dispose of certain parts
of the group in a recovery scenario, to liquidate or dispose of cer-
tain parts of the group in a resolution scenario or to execute a debt
bail-in. Additionally, if a recovery or resolution plan that we are
required to produce in a jurisdiction is determined by the relevant
authority to be inadequate or not credible, relevant regulation may
permit the authority to place limitations on the scope or size of our
business in that jurisdiction, oblige us to hold higher amounts of
capital or liquidity, or to change our legal structure or business in
order to remove the relevant impediments to resolution.
The Swiss Banking Act and implementing ordinances provide
FINMA with significant powers to intervene in order to prevent a
failure of, or to resolve, a failing financial institution. FINMA has
considerable discretion in determining whether, when, or in what
manner to exercise such powers. In case of a threatened insol-
vency, FINMA may impose more onerous requirements on us,
including restrictions on the payment of dividends and interest.
FINMA could also require us, directly or indirectly, for example, to
alter our legal structure, including by separating lines of business
into dedicated entities, with limitations on intra-group funding
and certain guarantees, or to further reduce business risk levels in
some manner. FINMA also has the ability to write down or convert
into common equity the capital instruments and other liabilities of
UBS Group AG, UBS AG and UBS Switzerland AG in connection
with a resolution. Refer to “If we experience financial difficulties,
FINMA has the power to open resolution or liquidation proceed-
ings or impose protective measures in relation to UBS Group AG,
UBS AG or UBS Switzerland AG, and such proceedings or mea-
sures may have a material adverse effect on our shareholders and
creditors” below.
Market regulation: The implementation by the G20 countries
of the commitment to require all standardized OTC derivative
contracts to be traded on exchanges or trading facilities and
cleared through central counterparties has had and will continue
to have a significant effect on our OTC derivatives business, which
is conducted primarily in the Investment Bank. These market
changes are likely to reduce the revenue potential of certain lines
of business for market participants generally, and we may be
adversely affected. For example, we expect that, as a rule, the
shift of OTC derivatives trading to a central clearing model will
tend to reduce profit margins in these products. Also, these laws
may have a material impact on the market infrastructure that we
use, available platforms, collateral management and the way we
interact with clients, and may cause us to incur material imple-
mentation costs. Margin requirements for non-cleared OTC deriv-
atives will require significant changes to collateral agreements
with counterparties and our clients’ operational processes. In
some jurisdictions implementation is ongoing, while rule-making
and implementation are delayed in others. This may result in mar-
ket dislocation, disruption of cross-border trading, and concentra-
tion of counterparty trading. It also affects our ability to imple-
ment the required changes and may limit our ability to transact
with clients.
Some of the regulations applicable to UBS AG as a registered
swap dealer with the Commodity Futures Trading Commission
(CFTC) in the US, and certain regulations that will be applicable
when UBS AG registers as a security-based swap dealer with the
SEC, apply to UBS AG globally, including those relating to swap
data reporting, recordkeeping, compliance and supervision. As a
result, in some cases US rules will likely duplicate or conflict with
legal requirements applicable to us elsewhere, including in Swit-
zerland, and may place us at a competitive disadvantage to firms
that are not required to register in the US with the SEC or CFTC.
46
In many instances, we provide services on a cross-border basis,
and we are therefore sensitive to barriers restricting market access
for third-country firms. In particular, efforts in the EU to harmo-
nize the regime for third-country firms to access the European
market may have the effect of creating new barriers that adversely
affect our ability to conduct business in these jurisdictions from
Switzerland. In addition, a number of jurisdictions are increasingly
regulating cross-border activities based on determinations of
equivalence of home country regulation, substituted compliance
or similar principles of comity. A negative determination could
limit our access to the market in those jurisdictions and may neg-
atively influence our ability to act as a global firm. In addition, as
such determinations are typically applied on a jurisdictional level
rather than on an entity level, we will generally need to rely on
jurisdictions’ willingness to collaborate.
➔ Refer to the “Regulation and supervision” and “Regulatory and
legal developments” sections of this report for more information
If we are unable to maintain our capital strength, this
may adversely affect our ability to execute our strategy,
client franchise and competitive position
Maintaining our capital strength is a key component of our strat-
egy. It enables us to support the growth of our businesses as well
as to meet potential regulatory changes in capital requirements. It
provides comfort to our stakeholders, forms the basis for our cap-
ital return policy, and contributes to our credit ratings. Our capital
ratios are determined primarily by RWA, eligible capital and lever-
age ratio denominator (LRD), all of which may fluctuate based on
a number of factors, some of which are outside our control.
Our eligible capital may be reduced by losses recognized within
net profit or other comprehensive income. Eligible capital may
also be reduced for other reasons, including certain reductions in
the ratings of securitization exposures, acquisitions and divest-
ments changing the level of goodwill, adverse currency move-
ments affecting the value of equity, prudential adjustments that
may be required due to the valuation uncertainty associated with
certain types of positions, and changes in the value of certain
pension fund assets and liabilities or in the interest rate and other
assumptions used to calculate the changes in our net defined
benefit obligation recognized in other comprehensive income.
RWA are driven by our business activities, by changes in the
risk profile of our exposures, changes in our foreign currency
exposures and foreign exchange rates and by regulation. For
instance, substantial market volatility, a widening of credit
spreads, which is a major driver of our value-at-risk, adverse cur-
rency movements, increased counterparty risk, deterioration in
the economic environment, or increased operational risk could
result in a rise in RWA. We have significantly reduced our market
risk and credit risk RWA in recent years. However, increases in
operational risk RWA, particularly those arising from litigation,
regulatory and similar matters, and regulatory changes in the
calculation of RWA and regulatory add-ons to RWA have offset a
substantial portion of this reduction. Changes in the calculation of
RWA, or, as discussed above, the imposition of additional supple-
mental RWA charges or multipliers applied to certain exposures,
or the imposition of an RWA floor based on the standardized
approach or other methodology changes could substantially
increase our RWA. In addition, we may not be successful in our
plans to further reduce RWA, either because we are unable to
carry out fully the actions we have planned or because other busi-
ness or regulatory developments or actions counteract the effects
of our actions.
We are also subject to significantly higher leverage ratio-based
capital and TLAC requirements under the revised Swiss Capital
Adequacy Ordinance. The leverage ratio is a simple balance sheet
measure and therefore limits balance sheet-intensive activities,
such as lending, more than activities that are less balance sheet
intensive, and it may constrain our business activities even if we
satisfy other risk-based capital requirements. Our leverage ratio
denominator is driven by, among other things, the level of client
activity, including deposits and loans, foreign exchange rates,
interest rates and other market factors. Many of these factors are
wholly or partially outside our control.
➔ Refer to the “Regulatory and legal developments” section of this
report for more information
We may not be successful in the ongoing execution of our
strategic plans
In October 2012, we announced a significant acceleration in the
implementation of our strategy. The strategy included transform-
ing our Investment Bank to focus it on its traditional strengths,
very significantly reducing RWA and further strengthening our
capital position, and significantly reducing costs and improving
efficiency. We also set targets and expectations for our perfor-
mance. We have substantially completed the transformation of
our business. However, the risk remains that we may not succeed
in executing the rest of our plans, or may need to delay them, that
market events or other factors may adversely affect their imple-
mentation or that their effects may differ from those intended.
Macroeconomic conditions, geopolitical uncertainty, the changes
to the Swiss TBTF framework and the continuing costs of meeting
new regulatory requirements have prompted us to adapt our tar-
gets and expectations in the past and we may need to do so again
in the future.
We have substantially reduced the RWA and LRD usage of our
Corporate Center – Non-core and Legacy Portfolio positions, but
there is no assurance that we will continue to be able to exit the
remaining positions as quickly as our plans suggest or that we will
not incur significant losses in doing so. The continued illiquidity
and complexity of many of our legacy risk positions in particular
could make it difficult to sell or otherwise exit these positions and
reduce the RWA and LRD usage associated with these exposures.
47
Operating environment and strategy Operating environment and strategy
Risk factors
As part of our strategy, we also have a program underway to
achieve significant incremental cost reductions, but a number of
factors could negatively affect our plans. Higher permanent regu-
latory costs and business demand than we had originally antici-
pated have partly offset our gross cost reductions and delayed the
achievement of cost reduction targets in the past, and we could
continue to be challenged in the execution of our ongoing plans.
Moreover, as is often the case with major effectiveness and effi-
ciency programs, cost reduction plans involve significant risks,
including that restructuring costs may be higher and may be rec-
ognized sooner than projected, that we may not be able to iden-
tify feasible cost reduction opportunities that are also consistent
with our business goals, and that cost reductions may be realized
later or may be less than we anticipate. Changes in our workforce
as a result of outsourcing, nearshoring or offshoring or staff
reductions may introduce new operational risks that, if not effec-
tively addressed could affect our ability to recognize the desired
cost and other benefits from such changes or could result in oper-
ational losses. Such changes can also lead to expenses recognized
in the income statement well in advance of the cost savings
intended to be achieved through such workforce strategy, for
example, if provisions for real estate lease contracts need to be
recognized or when, in connection with the closure or disposal of
non-profitable operations, foreign currency translation losses pre-
viously recorded in other comprehensive income are reclassified to
the income statement.
As we implement our effectiveness and efficiency programs,
we may also experience unintended consequences, such as the
loss or degradation of capabilities that we need in order to main-
tain our competitive position, achieve our targeted returns or
meet existing or new regulatory requirements and expectations.
Material legal and regulatory risks arise in the conduct of
our business
As a global financial services firm operating in more than 50 coun-
tries, we are subject to many different legal, tax and regulatory
regimes and we are subject to extensive regulatory oversight and
exposed to significant liability risk. We are subject to a large num-
ber of claims, disputes, legal proceedings and government inves-
tigations, and we expect that our ongoing business activities will
continue to give rise to such matters in the future. The extent of
our financial exposure to these and other matters is material and
could substantially exceed the level of provisions that we have
established. We are not able to predict the financial and non-
financial consequences these matters may have when resolved.
Resolution of regulatory proceedings may require us to obtain
waivers of regulatory disqualifications to maintain certain opera-
tions, may entitle regulatory authorities to limit, suspend or termi-
nate licenses and regulatory authorizations, and may permit
financial market utilities to limit, suspend or terminate our par-
ticipation in such utilities. Failure to obtain such waivers, or any
limitation, suspension or termination of licenses, authorizations or
participations, could have material consequences for us.
Our settlements with governmental authorities in connection
with foreign exchange, LIBOR and benchmark interest rates
starkly illustrate the significantly increased level of financial and
reputational risk now associated with regulatory matters in major
jurisdictions. In December 2012, we announced settlements total-
ing approximately CHF 1.4 billion in fines by and disgorgements
to US, UK and Swiss authorities. We entered into a non-prosecu-
tion agreement (NPA) with the US Department of Justice (DOJ),
and UBS Securities Japan Co. Ltd. pleaded guilty to one count of
wire fraud relating to the manipulation of certain benchmark
interest rates. In May 2015, the DOJ exercised its discretion to
terminate the NPA based on its determination that certain UBS
employees had committed a US crime related to foreign exchange
matters. As a consequence, UBS AG has pleaded guilty to one
count of wire fraud for conduct in the LIBOR matter, and paid a
USD 203 million fine and is subject to a three-year term of proba-
tion. The very large fines and disgorgement amounts were
assessed against us, and we were required to enter guilty pleas,
despite our full cooperation with the authorities in the investiga-
tions, and despite our receipt of conditional leniency or condi-
tional immunity from antitrust authorities in a number of jurisdic-
tions, including the US and Switzerland. We understand that, in
determining the consequences for us, the authorities considered
the fact that it had in the recent past been determined that we
had engaged in serious misconduct in several other matters.
Ever since our material losses arising from the 2007–2009
financial crisis, we have been subject to a very high level of regula-
tory scrutiny and to certain regulatory measures that constrain our
strategic flexibility. While we believe that we have remediated the
deficiencies that led to those losses as well as to the unauthorized
trading incident announced in September 2011, the effects on
our reputation and relationships with regulatory authorities of the
LIBOR-related settlements of 2012 and settlements with some
regulators of matters related to our foreign exchange and pre-
cious metals business, have proven to be more difficult to over-
come. We are in active dialog with our regulators concerning the
actions that we are taking to improve our operational risk man-
agement and control framework, but there can be no assurance
that our efforts will have the desired effects. As a result of this
history, our level of risk with respect to regulatory enforcement
may be greater than that of some of our peers.
➔ Refer to “Note 20 Provisions and contingent liabilities” in the
“Consolidated financial statements” section of this report for
more information
48
Operational risks affect our business
Our businesses depend on our ability to process a large number of
transactions, many of which are complex, across multiple and
diverse markets in different currencies, to comply with require-
ments of many different legal and regulatory regimes to which we
are subject and to prevent, or promptly detect and stop, unau-
thorized, 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 pro-
cessors and central counterparties. Failure of our or third-party
systems could have an adverse effect on us. Our operational risk
management and control systems and processes are designed to
help ensure that the risks associated with our activities, including
those arising from process error, failed execution, misconduct,
unauthorized trading, fraud, system failures, financial crime,
cyberattacks, breaches of information security and failure of secu-
rity and physical protection, are appropriately controlled. If our
internal controls fail or prove ineffective in identifying and reme-
dying these risks, we could suffer operational failures that might
result in material losses, such as the loss from the unauthorized
trading incident announced in September 2011.
We and other financial services firms have been subject to
breaches of security and to cyber and other forms of attack, some
of which are sophisticated and targeted attacks intended to gain
access to confidential information or systems, disrupt service or
destroy data. It is possible that we may not be able to anticipate,
detect or recognize threats to our systems or data or that our
preventative measures will not be effective to prevent an attack or
a security breach. A successful breach or circumvention of security
of our systems or data could have significant negative conse-
quences for us, including disruption of our operations, misappro-
priation of confidential information concerning us or our custom-
ers, damage to our systems, financial losses for us or our
customers, violations of data privacy and similar laws, litigation
exposure and damage to our reputation.
A major focus of US and other countries’ governmental poli-
cies relating to financial institutions in recent years has been fight-
ing money laundering and terrorist financing. We are required to
maintain effective policies, procedures and controls to detect, pre-
vent and report money laundering and terrorist financing, and to
verify the identity of our clients. We are also subject to laws and
regulations related to corrupt and illegal payments to government
officials by others, such as the US Foreign Corrupt Practices Act
and the UK Bribery Act. We have implemented policies, proce-
dures and internal controls that are designed to comply with such
laws and regulations. Failure to maintain and implement adequate
programs to combat money laundering, terrorist financing or cor-
ruption, or any failure of our programs in these areas, could have
serious consequences both from legal enforcement action and
from damage to our reputation.
As a result of new and changed regulatory requirements and
the changes we have made in our legal structure to meet regula-
tory requirements and improve our resolvability, the volume, fre-
quency and complexity of our regulatory and other reporting has
significantly increased. Regulators have also significantly increased
expectations for our internal reporting and data aggregation. We
have incurred and continue to incur significant costs to implement
infrastructure to meet these requirements. Failure to timely and
accurately meet external reporting requirements or to meet regu-
latory expectations for internal reporting could result in enforce-
ment 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 accu-
rate and timely financial reports. Following the unauthorized trad-
ing incident announced in September 2011, management deter-
mined that we had a material weakness in our internal control
over financial reporting as of the end of 2010 and 2011, although
this did not affect the reliability of our financial statements for
either year.
In addition, despite the contingency plans we have in place,
our ability to conduct business may be adversely affected by a
disruption in the infrastructure that supports our businesses and
the communities in which we are located. This may include a dis-
ruption due to natural disasters, pandemics, civil unrest, war or
terrorism and involve electrical, communications, transportation
or other services used by us or third parties with whom we con-
duct business.
Our reputation is critical to the success of our business
Our reputation is critical to the success of our strategic plans, busi-
ness and prospects. Reputational damage is difficult to reverse, and
improvements tend to be slow and difficult to measure. Our very
large losses during the financial crisis, the investigations into our
cross-border private banking services to US private clients and the
settlements entered into with US authorities with respect to this
matter, and other events seriously damaged our reputation. Repu-
tational damage was an important factor in our loss of clients and
client assets across our asset-gathering businesses, and contributed
to our loss of, and difficulty in attracting, staff in 2008 and 2009.
These developments had short-term and also more lasting adverse
effects on our financial performance, and we recognized that
restoring our reputation would be essential to maintaining our rela-
tionships with clients, investors, regulators and the general public,
as well as with our employees. The unauthorized trading incident
announced in September 2011 and our involvement in the LIBOR
matter and investigations relating to our foreign exchange and pre-
cious metals business have also adversely affected our reputation.
Any further reputational damage could have a material adverse
effect on our operational results and financial condition and on our
ability to achieve our strategic goals and financial targets.
49
Operating environment and strategy Operating environment and strategy
Risk factors
Performance in the financial services industry is affected
by market conditions and the macroeconomic climate
Our businesses are materially affected by market and economic
conditions. Adverse changes in interest rates, credit spreads, secu-
rities’ 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 ulti-
mately our financial and capital positions.
A market downturn and weak macroeconomic conditions can
be precipitated by a number of factors, including geopolitical
events, changes in monetary or fiscal policy, trade imbalances,
natural disasters, pandemics, civil unrest, acts of violence, war or
terrorism. Macroeconomic and political developments can have
unpredictable and destabilizing effects and, because financial
markets are global and highly interconnected, even local and
regional events can have widespread impact well beyond the
countries in which they occur. We are closely monitoring develop-
ments in Europe following the UK referendum on EU member-
ship, with potential adverse consequences for the UK economy
and for the recovery of a weak EU economy. Moreover, if individ-
ual countries impose restrictions on cross-border payments or
other exchange or capital controls, or change their currency (for
example, if one or more countries should leave the eurozone), we
could suffer losses from enforced default by counterparties, be
unable to access our own assets, and / or be impeded in, or pre-
vented from, managing our risks.
We could be materially affected if a crisis develops, regionally
or globally, as a result of disruptions in emerging markets or
developed markets that are susceptible to macroeconomic and
political developments, or as a result of the failure of a major
market participant. Our strategic plans depend more heavily on
our ability to generate growth and revenue in emerging markets,
including China, causing us to be more exposed to the risks asso-
ciated with such markets. The binding scenario we use in our
combined stress test framework reflects these aspects, and
assumes a hard landing in China leading to severe contagion of
Asian and emerging markets economies and at the same time
multiple debt restructurings in Europe, related direct losses for
European banks and fear of a eurozone breakup severely affect-
ing developed markets such as Switzerland, the UK and the US.
➔ Refer to the “Risk measurement” section of this report for more
information on our stress testing framework
We have material exposures to a number of markets, and the
regional balance of our business mix also exposes us to risk. Our
Investment Bank’s Equities business, for example, is more heavily
weighted to Europe and Asia, and within this business our deriva-
tives business is more heavily weighted to structured products for
wealth management clients, in particular with European and
Asian underlyings. Turbulence in these markets can therefore
affect us more than other financial service providers.
A decrease in business and client activity and market volumes,
for example, as a result of significant market volatility, adversely
affects transaction fees, commissions and margins, particularly in
our wealth management businesses and in the Investment Bank,
as we experienced in 2016. A market downturn is likely to reduce
the volume and valuations of assets that we manage on behalf of
clients, reducing our asset and performance-based fees, and
could also cause a decline in the value of assets that we own and
account for as investments or trading positions. On the other
hand, reduced market liquidity or volatility limit trading opportu-
nities and impede our ability to manage risks, impacting both
trading income and performance-based fees.
Credit risk is an integral part of many of our activities, including
lending, underwriting and derivatives activities. Worsening eco-
nomic conditions and adverse market developments could lead to
impairments and defaults on credit exposures and on our trading
and investment positions. Losses may be exacerbated by declines
in the value of collateral we hold. We are exposed to credit risk in
activities, such as our prime brokerage, reverse repurchase and
Lombard lending, as the value or liquidity of the assets against
which we provide financing may decline rapidly. Macroeconomic
developments, such as the continuing strength of the Swiss franc
and its effect on Swiss exports, the adoption of negative interest
rates by the Swiss National Bank or other central banks or any
return of crisis conditions within the eurozone or the EU, and the
potential implications of the decision in Switzerland to reinstate
immigration quotas for EU and European Economic Area citizens,
could also adversely affect the Swiss economy, our business in
Switzerland in general and, in particular, our Swiss mortgage and
corporate loan portfolios.
The aforementioned developments have in the past affected,
and could materially affect, the financial performance of business
divisions and of UBS as a whole, including through impairment of
goodwill and the adjustment of deferred tax asset levels.
UK referendum on EU membership
Following the outcome of the June 2016 referendum on the UK’s
membership in the EU, the UK government has stated that it
intends to invoke Article 50 of the Treaty on European Union by
no later than the end of March 2017. This will trigger a two-year
period during which the UK will negotiate its withdrawal agree-
ment with the EU. Barring any changes to this time schedule, the
UK is expected to leave the EU in early 2019. The nature of the
UK’s future relationship with the EU remains unclear. Any future
limitations on providing financial services into the EU from our UK
operations could require us to make potentially significant
changes to our operations in the UK and our legal structure. We
are evaluating the potential effects of a UK exit from the EU and
potential mitigating actions, although the effects and actions may
vary considerably depending on the timing of withdrawal and the
nature of any transition or successor agreements with the EU.
50
We may not be successful in implementing changes in our
wealth management businesses to meet changing market,
regulatory and other conditions
Our wealth and asset management businesses operate in an envi-
ronment of increasing regulatory scrutiny and changing standards
also with respect to fiduciary and other standards of care and the
focus on mitigating or eliminating conflicts of interest between a
manager or advisor and the client, which require effective imple-
mentation across the global systems and processes of investment
managers and other industry participants. For example, the US
Department of Labor has adopted a rule expanding the definition
of “fiduciary” under the Employee Retirement Income Security Act
(ERISA), which will require us to comply with fiduciary standards
under ERISA when dealing with certain retirement plans. We will
likely be required to materially change business processes, policies
and the terms on which we interact with these clients in order to
comply with these rules if and when they become effective.
We are exposed to possible outflows of client assets in our
asset-gathering businesses and to changes affecting the profit-
ability of our wealth management businesses and we may not be
successful in implementing the business changes needed to
address them.
We experienced substantial net outflows of client assets in our
wealth management and asset management businesses in 2008
and 2009. The net outflows resulted from a number of different
factors, including our substantial losses, damage to our reputa-
tion, the loss of client advisors, difficulty in recruiting qualified
client advisors and tax, legal and regulatory developments con-
cerning our cross-border private banking business. Many of these
factors have been successfully addressed. However, long-term
changes affecting the cross-border private banking business
model will continue to affect client flows in the wealth manage-
ment businesses for an extended period of time.
We have experienced cross-border outflows over a number of
years as a result of heightened focus by fiscal authorities on cross-
border investment and fiscal amnesty programs, in anticipation of
the implementation in Switzerland of the global automatic
exchange of tax information, and as a result of the measures we
have implemented in response to these changes. Further changes
in local tax laws or regulations and their enforcement, the imple-
mentation of cross-border tax information exchange regimes,
national tax amnesty or enforcement programs or similar actions
may affect our clients’ ability or willingness to do business with us
and result in additional cross-border outflows.
In recent years, our Wealth Management net new money
inflows have come predominantly from clients in Asia Pacific and
in the ultra high net worth segment globally. Over time, inflows
from these lower-margin segments and markets have been
replacing outflows from higher-margin segments and markets, in
particular cross-border clients. This dynamic, combined with
changes in client product preferences as a result of which low-
margin products account for a larger share of our revenues than
in the past, has put downward pressure on our Wealth Manage-
ment’s margins.
Initiatives that we may implement to overcome the effects of
changes in the business environment on our profitability, balance
sheet and capital positions give no assurance that we will be able
to counteract those effects and may cause net new money out-
flows and reductions in client deposits, as happened with our bal-
ance sheet and capital optimization program in 2015. In addition,
we have made changes to our business offerings and pricing prac-
tices in line with the Swiss Supreme Court case concerning retro-
cessions and other industry developments. These changes may
adversely affect our margins on these products, and our current
offering may be less attractive to clients than the products it
replaces. There is no assurance that we will be successful in our
efforts to offset the adverse effect of these or similar trends and
developments.
We may be unable to identify or capture revenue or
competitive opportunities, or retain and attract qualified
employees
The financial services industry is characterized by intense competi-
tion, continuous innovation, restrictive, detailed, and sometimes
fragmented, regulation and ongoing consolidation. We face com-
petition 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 com-
petitive strength and market position could be eroded if we are
unable to identify market trends and developments, do not
respond to them by devising and implementing adequate busi-
ness strategies, adequately developing or updating our technol-
ogy, particularly in trading businesses, and our digital channels
and tools, or are unable to attract or retain the qualified people
needed to carry them out.
The amount and structure of our employee compensation is
affected not only by our business results but also by competitive
factors and regulatory considerations.
In recent years, in response to the demands of various stake-
holders, including regulatory authorities and shareholders, and in
order to better align the interests of our staff with those of other
stakeholders, we have made changes to the terms of compensa-
tion awards. Among other things, we have introduced individual
caps on the proportion of fixed to variable pay for the GEB mem-
bers, as well as certain other employees. We have increased aver-
age deferral periods for stock awards, expanded forfeiture provi-
sions, and, to a more limited extent, introduced claw-back
provisions for certain awards linked to business performance.
51
Operating environment and strategy Operating environment and strategy
Risk factors
Constraints on the amount or structure of employee compen-
sation, 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 employ-
ees. The loss of key staff and the inability to attract qualified
replacements, depending on which and how many roles are
affected, could seriously compromise our ability to execute our
strategy and to successfully improve our operating and control
environment and may affect our business performance.
We depend on our risk management and control processes
to avoid or limit potential losses in our businesses
Controlled risk-taking is a major part of the business of a financial
services firm. Some losses from risk-taking activities are inevitable,
but to be successful over time, we must balance the risks we take
against the returns we generate. We must, therefore, diligently
identify, assess, manage and control our risks, not only in normal
market conditions but also as they might develop under more
extreme, stressed conditions, when concentrations of exposures
can lead to severe losses.
As seen during the financial crisis of 2007–2009, we are not
always able to prevent serious losses arising from extreme or sud-
den market events that are not anticipated by our risk measures
and systems. The deterioration of financial markets since the
beginning of the crisis was extremely severe by historical stan-
dards. Value-at-risk, a statistical measure for market risk, is derived
from historical market data, and thus by definition could not have
anticipated the losses suffered in the stressed conditions of the
crisis. Moreover, stress loss and concentration controls and the
dimensions in which we aggregated risk to identify potentially
highly correlated exposures proved to be inadequate. As a result,
we recorded substantial losses on fixed income trading positions,
particularly in 2008 and 2009. Notwithstanding the steps we
have taken to strengthen our risk management and control
framework, we could suffer further losses in the future if, for
example:
– we do not fully identify the risks in our portfolio, in particular
risk concentrations and correlated risks;
– our assessment of the risks identified or our response to nega-
tive 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 secu-
rities we hold for our own account are severely affected by
events not anticipated by our models, and accordingly we suf-
fer defaults and impairments beyond the level implied by our
risk assessment; or
– collateral or other security provided by our counterparties
proves inadequate to cover their obligations at the time of
their default.
We hold positions related to real estate in various countries,
and could suffer losses on these positions. These positions include
a substantial Swiss mortgage portfolio. Although management
believes that this portfolio is prudently managed, we could never-
theless be exposed to losses if the concerns expressed by the
Swiss National Bank and others about unsustainable price escala-
tion in the Swiss real estate market come to fruition. In addition,
we continue to hold substantial legacy risk positions, primarily in
Corporate Center − Non-core and Legacy Portfolio. They remain
illiquid in many cases, and we continue to be exposed to the risk
that they may again deteriorate in value.
We also manage risk on behalf of our clients in our asset and
wealth management businesses. The performance of assets we
hold for our clients in these activities could be adversely affected
by the same factors mentioned above. If clients suffer losses or
the performance of their assets held with us is not in line with
relevant benchmarks against which clients assess investment per-
formance, we may suffer reduced fee income and a decline in
assets under management, or withdrawal of mandates.
Investment positions, such as equity investments made as part
of strategic initiatives and seed investments made at the inception
of funds that we manage, may also be affected by market risk
factors. These investments are often not liquid and generally are
intended or required to be held beyond a normal trading horizon.
They are subject to a distinct control framework. Deteriorations in
the fair value of these positions would have a negative effect on
our earnings.
Liquidity and funding management are critical to our
ongoing performance
The viability of our business depends on the availability of funding
sources, and our success depends on our ability to obtain funding
at times, in amounts, for tenors and at rates that enable us to
efficiently support our asset base in all market conditions. The
volume of our funding sources has generally been stable, but
could change in the future due to, among other things, general
market disruptions or widening credit spreads, which could also
influence the cost of funding. A substantial part of our liquidity
and funding requirements is met using short-term unsecured
funding sources, including retail and wholesale deposits and the
regular issuance of money market securities. A change in the
availability of short-term funding could occur quickly.
Moreover, more stringent capital and liquidity and funding
requirements will likely lead to increased competition for both
secured funding and deposits as a stable source of funding, and
to higher funding costs. The addition of loss-absorbing debt as a
component of capital requirements, the regulatory requirements
to maintain minimum TLAC at holding company level and / or at
subsidiaries level, as well as the power of resolution authorities to
bail in TLAC and other debt obligations, and uncertainty as to
how such powers will be exercised, will increase our cost of fund-
ing and could potentially increase the total amount of funding
required absent other changes in our business.
52
Reductions in our credit ratings may adversely affect the mar-
ket value of the securities and other obligations and increase our
funding costs, in particular with regard to funding from whole-
sale unsecured sources, and can affect the availability of certain
kinds of funding. In addition, as we experienced in connection
with Moody’s downgrade of our long-term rating in June 2012,
rating downgrades can require us to post additional collateral or
make additional cash payments under master trading agree-
ments relating to its derivatives businesses. Our credit ratings,
together with our capital strength and reputation, also contrib-
ute to maintaining client and counterparty confidence and it is
possible that rating changes could influence the performance of
some of our businesses.
Our financial results may be negatively affected by
changes to assumptions and valuations, as well as changes
to accounting standards
We prepare our consolidated financial statements in accordance
with IFRS. The application of these accounting standards requires
the use of judgment based on estimates and assumptions that may
involve significant uncertainty at the time they are made. This is the
case, for example, with respect to the measurement of fair value of
financial instruments, the recognition of deferred tax assets, or the
assessment of the impairment of goodwill. Such judgments, includ-
ing 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 state-
ments in the periods when changes occur. Moreover, if the esti-
mates and assumptions in future periods deviate from the current
outlook, our financial results may also be negatively affected.
Changes to IFRS or interpretations thereof, may cause our
future reported results and financial position to differ from cur-
rent expectations, or historical results to differ from those previ-
ously reported due to the adoption of accounting standards on a
retrospective basis. Such changes may also affect our regulatory
capital and ratios. Currently, there are a number of issued but not
yet effective IFRS changes, as well as potential IFRS changes, some
of which could be expected to affect our reported results, finan-
cial position and regulatory capital in the future. For example, IFRS
9, when fully adopted, will require us to record loans at inception
net of expected losses instead of recording credit losses on an
incurred loss basis and is generally expected to result in an increase
in recognized credit loss allowances.
➔ Refer to the “Critical accounting estimates and judgments”
section and “Note 1 Summary of significant accounting policies”
in the “Consolidated financial statements” section of this report
for more information
The effect of taxes on our financial results is significantly
influenced by reassessments of our deferred tax assets
Our effective tax rate is highly sensitive both to our performance
and our expectation of future profitability. Based on prior years’
tax losses, we have recognized deferred tax assets (DTAs) reflect-
ing the probable recoverable level based on future taxable profit
as informed by our business plans. If our performance is expected
to produce diminished taxable profit in future years, particularly in
the US or the UK, we may be required to write down all or a por-
tion of the currently recognized DTAs through the income state-
ment. This would have the effect of increasing our effective tax
rate in the year in which any write-downs are taken. Conversely,
if our performance is expected to improve, particularly in the US
or the UK, we could potentially recognize additional DTAs as a
result of that assessment. The effect of doing so would be to sig-
nificantly reduce our effective tax rate in years in which additional
DTAs are recognized and to increase our effective tax rate in
future years. We generally revalue our deferred tax assets in the
second half of the financial year based on a reassessment of
future profitability taking into account updated business plan
forecasts. Our results in recent periods have demonstrated that
changes in the recognition of DTAs can have a very significant
effect on our reported results.
Our full-year effective tax rate could also change if aggregate
tax expenses in respect of profits from branches and subsidiaries
without loss coverage differ from what is expected, or in case of
changes to the forecast period used for DTA recognition pur-
poses as part of the aforementioned reassessment of future prof-
itability. Moreover, tax laws or the tax authorities in countries
where we have undertaken legal structure changes may prevent
the transfer of tax losses incurred in one legal entity to newly
organized or reorganized subsidiaries or affiliates or may impose
limitations on the utilization of tax losses that relate to businesses
formerly conducted by the transferor. Were this to occur in situa-
tions where there were also limited planning opportunities to
utilize the tax losses in the originating entity, the DTAs associated
with such tax losses could be written down through the income
statement.
Our effective tax rate is also sensitive to any future reductions
in statutory tax rates, particularly in the US and Switzerland, which
would cause the expected future tax benefit from items such as
tax loss carry-forwards in the affected locations to diminish in
value. This in turn would cause a write-down of the associated
DTAs. For example, for every percentage point reduction in the US
federal corporate income tax rate, we would expect a CHF 0.2
billion decrease in the Group’s deferred tax assets. In addition,
statutory and regulatory changes, as well as changes to the way
in which courts and tax authorities interpret tax laws could cause
the amount of taxes ultimately paid by us to materially differ from
the amount accrued.
53
Operating environment and strategy Operating environment and strategy
Risk factors
Our stated capital returns objective is based, in part,
on capital ratios that are subject to regulatory change
and may fluctuate significantly
Our capital return policy envisages total capital returns to share-
holders of at least 50% of net profit attributable to shareholders,
provided that we maintain a fully applied CET1 capital ratio of at
least 13% and consistent with our objective of maintaining a
post-stress fully applied CET1 capital ratio of at least 10%.
Our ability to maintain a fully applied CET1 capital ratio of at
least 13% is subject to numerous risks, including the financial
results of our businesses, the effect of changes to capital stan-
dards such as those recently introduced in Switzerland, method-
ologies and interpretation that may adversely affect the calcula-
tion of our fully applied CET1 capital ratio, the imposition of risk
add-ons or capital buffers, and the application of additional capi-
tal, liquidity and similar requirements to subsidiaries. Refer to the
discussion of these risks earlier in this section and in particular to
“Continuing low or negative interest rates may have a detrimental
effect on our capital strength, liquidity and funding position, and
profitability” above for more information on the effect on capital
of changes to pension plan defined benefit obligations.
To calculate our post-stress CET1 capital ratio, we forecast
capital one year ahead based on internal projections of earnings,
expenses, distributions to shareholders and other factors affecting
CET1 capital, including our net defined benefit plan assets and
liabilities. We also forecast one-year developments in RWA. We
adjust these forecasts based on assumptions as to how they may
change as a result of a severe stress event. We then further deduct
from capital the stress loss estimated using our combined stress
test (CST) framework.
Our CST framework relies on various risk exposure measure-
ment methodologies, which are predominantly proprietary, on
our selection and definition of potential stress scenarios and on
our assumptions regarding estimates of changes in a wide range
of macroeconomic variables and certain idiosyncratic events for
each of those scenarios. We periodically review these methodolo-
gies. Assumptions are also subject to periodic review and change
on a regular basis. Our risk exposure measurement methodolo-
gies may change in response to developing market practice and
enhancements to our own risk control environment, and input
parameters for models may change due to changes in positions,
market parameters and other factors.
Our stress scenarios, the events comprising a scenario and the
assumed shocks and market and economic consequences applied
in each scenario are subject to periodic review and change. Our
business plans and forecasts are subject to inherent uncertainty,
our choice of stress test scenarios and the market and macroeco-
nomic assumptions used in each scenario are based on judg-
ments and assumptions about possible future events. Our risk
exposure measurement methodologies are subject to inherent
limitations, rely on numerous assumptions as well as on data
which may have inherent limitations. In particular, certain data is
not available on a monthly basis and we may therefore rely on
prior-month or prior-quarter data as an estimate. Changes to our
results, business plans and forecasts, in the assumptions used to
reflect the effect of a stress event on our business forecasts or in
the results of our CST, could have a material effect on our stress
scenario results and on the calculation of our post-stress fully
applied CET1 capital ratio. In assessing whether our post-stress
fully applied CET1 capital ratio objective has been met at any
time, we may consider both the current ratio and our expectation
as to its future developments.
As UBS Group AG is a holding company, its operating
results, financial condition and ability to pay dividends
and other distributions and / or to pay its obligations in
the future depend on funding, dividends and other
distributions received directly or indirectly from its
subsidiaries, which may be subject to restrictions
UBS Group AG’s ability to pay dividends and other distributions
and to pay its obligations in the future will depend on the level of
funding, dividends and other distributions, if any, received from
UBS AG and other subsidiaries. The ability of such subsidiaries to
make loans or distributions, directly or indirectly, to UBS Group
AG may be restricted as a result of several factors, including
restrictions in financing agreements and the requirements of
applicable law and regulatory, fiscal or other restrictions. In par-
ticular, UBS Group AG’s direct and indirect subsidiaries, including
UBS AG, UBS Switzerland AG, UBS Limited and UBS Americas
Holding LLC, are subject to laws and regulations that restrict divi-
dend payments, authorize regulatory bodies to block or reduce
the flow of funds from those subsidiaries to UBS Group AG, could
impact their ability to repay any loans made to, or other invest-
ments in, such subsidiary by UBS Group AG or another member
of the Group, or limit or prohibit transactions with affiliates, and
could be subject to additional restrictions in the future. Restric-
tions and regulatory actions of this kind could impede access to
funds that UBS Group AG may need to make payments. In addi-
tion, UBS Group AG’s right to participate in a distribution of assets
upon a subsidiary’s liquidation or reorganization is subject to all
prior claims of the subsidiary’s creditors.
Our capital instruments may contractually prevent UBS Group
AG from proposing the distribution of dividends to shareholders,
other than in the form of shares, if we do not pay interest on
these instruments.
Furthermore, UBS Group AG may guarantee some of the pay-
ment 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 liquid-
ity to fund its own obligations.
The credit ratings of UBS Group AG or its subsidiaries used for
funding purposes could be lower than the ratings of the Group’s
operating subsidiaries, which may adversely affect the market
value of the securities and other obligations of UBS Group AG or
those subsidiaries on a standalone basis.
54
If we experience financial difficulties, FINMA has the
power to open resolution or liquidation proceedings or
impose protective measures in relation to UBS Group AG,
UBS AG or UBS Switzerland AG, and such proceedings
or measures may have a material adverse effect on our
shareholders and creditors
Under the Swiss Banking Act, FINMA is able to exercise broad
statutory powers with respect to Swiss banks and Swiss parent
companies of financial groups, such as UBS AG, UBS Group AG
and UBS Switzerland AG, if there is justified concern that the
entity is over-indebted, has serious liquidity problems or, after the
expiration of any relevant deadline, no longer fulfils capital ade-
quacy requirements. Such powers include ordering protective
measures, instituting restructuring proceedings (and exercising
any Swiss resolution powers in connection therewith), and insti-
tuting liquidation proceedings, all of which may have a material
adverse effect on our shareholders and creditors or may prevent
UBS Group AG, UBS AG or UBS Switzerland AG from paying divi-
dends or making payments on debt obligations.
Protective measures may include, but are not limited to, certain
measures that could require or result in a moratorium on, or the
deferment of, payments. We would have limited ability to chal-
lenge any such protective measures, and creditors would have no
right under Swiss law or in Swiss courts to reject them, seek their
suspension, or challenge their imposition, including measures that
require or result in the deferment of payments.
If restructuring proceedings are opened with respect to UBS
Group AG, UBS AG or UBS Switzerland AG, the resolution pow-
ers that FINMA may exercise include the power to (i) transfer all
or some of the assets, debt and other liabilities, and contracts of
the entity subject to proceedings to another entity, (ii) stay for a
maximum of two business days the termination of, or the exer-
cise of rights to terminate, netting rights, rights to enforce or
dispose of certain types of collateral or rights to transfer claims,
liabilities or certain collateral, under contracts to which the entity
subject to proceedings is a party, and / or (iii) partially or fully write
down the equity capital and, if such equity capital is fully written
down, convert into equity or write down the capital and other
debt instruments of the entity subject to proceedings. Sharehold-
ers 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 pro-
cess or otherwise.
Upon full or partial write-down of the equity and of the debt
of the entity subject to restructuring proceedings, the relevant
shareholders and creditors would receive no payment in respect
of the equity and debt that is written down, the write-down
would be permanent, and the investors would not, at such time
or at any time thereafter, receive any shares or other participation
rights, or be entitled to any write-up or any other compensation
in the event of a potential recovery of the debtor. If FINMA orders
the conversion of debt of the entity subject to restructuring pro-
ceedings 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, credi-
tors receiving equity would be effectively subordinated to all cred-
itors in the event of a subsequent winding up, liquidation or dis-
solution of the entity subject to restructuring proceedings, which
would increase the risk that investors would lose all or some of
their investment.
FINMA has broad powers and significant discretion in the
exercise of its powers in connection with a resolution proceeding.
Furthermore, certain categories of debt obligations, such as cer-
tain types of deposits, are subject to preferential treatment. As a
result, holders of obligations of an entity subject to a Swiss
restructuring proceeding may have their obligations written
down or converted into equity even though obligations ranking
on par with or junior to such obligations are not written down or
converted.
Moreover, FINMA has expressed its preference for a “single-
point-of-entry” resolution strategy for global systemically impor-
tant financial groups, led by the bank’s home supervisory and
resolution authorities and focused on the top-level group com-
pany. This would mean that, if UBS AG or one of UBS Group AG’s
other subsidiaries faces substantial losses, FINMA could open
restructuring proceedings with respect to UBS Group AG only and
order a bail-in of its liabilities if there is a justified concern that in
the near future such losses could impact UBS Group AG. In that
case, it is possible that the obligations of UBS AG or any other
subsidiary of UBS Group AG would remain unaffected and out-
standing, while the equity capital and the capital and other debt
instruments of UBS Group AG would be written down and / or
converted into equity of UBS Group AG in order to recapitalize
UBS AG or such other subsidiary.
55
Operating environment and strategy Financial and
operating
performance
Management report
.
Financial and operating performance
Critical accounting estimates and judgments
Critical accounting estimates and judgments
In preparing our financial statements in accordance with Interna-
tional Financial Reporting Standards (IFRS), as issued by the Inter-
nal 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 experi-
ence, expectations of the future and other pertinent factors, to
determine their continuing relevance based on current conditions
and we update them as necessary. Changes in estimates and
assumptions may have a significant impact on the financial state-
ments. 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 consoli-
dated and individual financial statements include:
– Consolidation of structured entities
– Fair value of financial instruments
– Allowances and provisions for credit losses
– Pension and other post-employment benefit plans
– Income taxes
– Goodwill
– Provisions and contingent liabilities
We believe that the judgments, estimates and assumptions we
have made are appropriate under the circumstances and that our
financial statements fairly present, in all material respects, the
financial position of UBS as of 31 December 2016 and the results
of our operations and cash flows for the year ended on 31 Decem-
ber 2016 in accordance with IFRS.
➔ Refer to “Note 1a Significant accounting policies” in the
“Consolidated financial statements” section of this report for
more information
➔ Refer to the “Risk factors” section of this report for more
information
58
Significant accounting and financial
reporting changes
Significant accounting changes
Significant financial reporting changes
Own credit
In 2016, we adopted the own credit presentation requirements of
IFRS 9, Financial Instruments for financial liabilities designated at
fair value through profit or loss. From this date onward, changes
in the fair value of financial liabilities designated at fair value
through profit or loss related to own credit are recognized in
Other comprehensive income directly within Retained earnings.
Balance sheet classification of newly purchased high-quality
liquid debt securities
In 2016, we generally classified newly purchased debt securities
held as high-quality liquid assets (HQLA) and managed by Corpo-
rate Center – Group Asset and Liability Management (Group
ALM) as either financial assets designated at fair value through
profit or loss or financial assets held to maturity.
Debt securities acquired prior to 2016 and held for liquidity
purposes remain classified as financial assets available for sale.
Interest rate swaps converted to a settlement model
In 2016, we elected to convert our interest rate swaps (IRS) traded
with the London Clearing House and Japan Securities Clearing
Corporation from the previous collateral model to a settlement
model. The IRS are now legally settled on a daily basis, resulting in
derecognition of the associated assets and liabilities.
Derecognition of exchange-traded derivative client cash balances
from the Group’s balance sheet
In 2016, we formally and legally waived certain rights available to
us under the rules of the US Commodity Futures Trading Commis-
sion that had previously enabled us to invest certain client cash
balances in other assets, making them a source of benefit to the
Group. As a result, we derecognized related client cash balances.
➔ Refer to “Note 1b Changes in accounting policies, comparability
and other adjustments” in the “Consolidated financial state-
ments” section of this report for more information
Revised regulatory framework for Swiss SRBs and
change in equity attribution framework
On 1 July 2016, a revised regulatory framework, reflecting amend-
ments to the too big to fail (TBTF) provisions applicable to Swiss
systemically relevant banks (SRBs), became effective.
Effective 1 January 2017, we have revised our equity attribu-
tion framework to reflect the revision of these TBTF provisions.
➔ Refer to the “Capital management” section of this report for
more information
Revised Pillar 3 disclosure requirements
During 2015, the Basel Committee on Banking Supervision (BCBS)
issued revised Pillar 3 disclosure requirements that aim to improve
comparability and consistency of disclosures by introducing har-
monized templates. Moreover, FINMA published its associated
Pillar 3 disclosure requirements for Swiss banking institutions in its
Circular 2016 / 01, Disclosures – banks. The revised Pillar 3 disclo-
sure requirements relate to information on risk management, the
linkage between a bank’s financial statements and its regulatory
exposures, credit risk, counterparty credit risk, securitization and
market risk. In August 2016, BCBS issued additional guidance on
the revised Pillar 3 disclosure requirements in a Frequently asked
questions document. In December 2016, FINMA issued additional
disclosure requirements relating to the Swiss too big to fail provi-
sions within its Circular 2016 / 01, Disclosures – banks. The Circu-
lar includes additional disclosure requirements effective as of
31 December 2016, as well as certain requirements that will
become effective in 2017.
The disclosures in our Basel III Pillar 3 2016 report or in other
documents referenced within this report are based on the revised
requirements effective in 2016.
➔ Refer to the Basel III Pillar 3 UBS Group AG 2016 report under
“Pillar 3, SEC filings & other disclosures” at www.ubs.com/
investors for more information
A consultative document issued by BCBS in March 2016 pro-
posing further enhancements to the Pillar 3 framework for selec-
tive disclosure topics is subject to finalization.
Corporate Center – Group ALM
To further enhance the transparency of Corporate Center – Group
ALM, effective 2016, Corporate Center – Group ALM’s results are
disclosed for its three main risk management activities: (i) business
division-aligned risk management, (ii) capital investment and issu-
ance and (iii) Group structural risk management.
59
Financial and operating performance
Financial and operating performance
Significant accounting and financial reporting changes
Also, in 2016 we transferred the Risk Exposure Management
function from Corporate Center – Non-core and Legacy Portfolio
to Corporate Center – Group ALM.
➔ Refer to the “Corporate Center” sections in “Operating
environment and strategy” and in ”Financial and operating
performance” of this report for more information
➔ Refer to “Note 1b Changes in accounting policies, comparability
and other adjustments” in the “Consolidated financial state-
ments” section of this report for more information
Implementation of IFRS 9, Financial Instruments
In July 2014, the International Accounting Standards Board (IASB)
issued the final International Financial Reporting Standard (IFRS)
9, Financial Instruments, which will become mandatory as of
1 January 2018. The standard reflects the classification and mea-
surement, impairment and hedge accounting phases of the IASB’s
project to replace the International Accounting Standard IAS 39,
Financial instruments: Recognition and Measurement.
IFRS 9 requires all financial assets, except equity instruments,
to be classified at amortized cost, fair value through other com-
prehensive income (OCI) or fair value through profit or loss, on
the basis of the entity’s business model for managing the finan-
cial assets and its contractual cash flow characteristics. If a finan-
cial asset meets the criteria to be measured at amortized cost or
at fair value through OCI, it can be designated at fair value
through profit or loss under the fair value option if doing so
would significantly reduce or eliminate an accounting mismatch.
Equity instruments that are not held for trading may be accounted
for at fair value through OCI, with no subsequent reclassification
of realized gains or losses to the income statement, while all
other equity instruments will be accounted for at fair value
through profit or loss.
IFRS 9 classification and measurement requirements for liabili-
ties are unchanged except that any gain or loss arising on a finan-
cial liability designated at fair value through profit or loss that is
attributable to changes in the issuer’s own credit risk (own credit)
is presented in OCI and not recognized in the income statement.
We early adopted the own credit presentation change in 2016, as
mentioned on the previous page.
IFRS 9 further introduces a forward-looking expected credit
loss (ECL) approach, replacing the incurred-loss impairment
approach for financial instruments in IAS 39 and the loss-provi-
sioning approach for financial guarantees and loan commitments
in IAS 37, Provisions, contingent liabilities and contingent assets.
In November 2015, the Enhanced Disclosure Task Force (EDTF)
published disclosure recommendations for IFRS 9 in its report
“Impact of Expected Credit Loss Approaches on Bank Risk Disclo-
sures.” Disclosures are recommended before transition and once
IFRS 9 is fully adopted, to ensure that changes and effects arising
from using an expected loss model are transparent, understand-
able and consistently applied. We began addressing these recom-
mendations in our Annual Report 2015 and will continue to do so
beyond the full adoption of IFRS 9 in 2018. In addition, we have
considered and we address further guidance issued by relevant
bodies, including “The implementation of IFRS 9 impairment
requirements by banks – Considerations for those charged with
governance of systemically important banks” issued in November
2016 by the Global Public Policy Committee (GPPC), which con-
sists of representatives of the six largest accounting networks, and
the Basel Committee on Banking Supervision (BCBS) guidelines
related to expected credit losses.
IFRS 9 is a key strategic initiative for UBS and is implemented
under the joint sponsorship of the Group Chief Risk Officer and
the Group Chief Financial Officer. The implementation project
structure is defined to address the critical requirements of the
standard and to manage the appropriate involvement of key
stakeholders, including Risk Control, Finance, Group Technology
and the business divisions. The steering committee, operating
committee, technical board and individual work streams continue
to ensure a streamlined implementation with appropriate controls
and governance over all key decisions. The program has identified
the primary changes to existing systems, processes, data and
models required for the purposes of meeting the IFRS 9 require-
ments and to allow for a sound front-to-back implementation.
We made significant progress in 2016 toward achieving key mile-
stones across all work streams.
We intend to perform a parallel run in 2017 and to disclose the
potential financial effects of adopting IFRS 9 no later than in our
Annual Report 2017. As permitted under IFRS 9, we do not intend
to restate prior periods and will recognize the difference between
carrying amounts as of 31 December 2017 and those on adoption
of IFRS 9 on 1 January 2018 directly in retained earnings as of
1 January 2018.
Classification and measurement
Based on the revised classification and measurement require-
ments for financial instruments, we have assessed all material
positions and do not expect significant effects on our financial
statements. A number of debt instruments, mainly in the Invest-
ment Bank and in Corporate Center – Group Asset and Liability
Management (Group ALM), no longer qualify for amortized cost
accounting due to their cash flow characteristics or the underlying
business model within which they are held and will be measured
at fair value through profit or loss under IFRS 9. However, a sig-
nificant change in carrying value is not expected as a majority of
the respective instruments are collateralized short-term lending
arrangements with no material differences between their amor-
tized cost value and fair value. In addition, our financial assets
currently designated at fair value will continue to be measured at
fair value, albeit on a mandatory basis under IFRS 9, and we will
elect the fair value option for certain liabilities to prevent an
accounting mismatch with assets that are newly measured at fair
value through profit or loss under IFRS 9.
60
We are monitoring the IASB’s project to amend IFRS 9 to the
effect that basic lending arrangements with symmetrical break
clauses continue to qualify for amortized cost accounting. These
clauses are common features in Personal & Corporate Banking
and Wealth Management private mortgage contracts as a conse-
quence of Swiss Law as well as in corporate lending due to mar-
ket practice and may result in compensation for early termination
being paid by either the borrower or UBS. The IASB is expected to
issue an exposure draft in April 2017, effective 1 January 2018 in
line with IFRS 9’s effective date. Based on these anticipated
amendments, we expect that we can continue to measure our
private mortgages and corporate loans at amortized cost.
Expected credit loss
Under the current incurred-loss impairment approach in IAS 39, a
financial asset or group of financial assets held at amortized cost
is impaired if there is objective evidence that we will be unable to
collect all amounts under the contract. Once such evidence is
obtained, we recognize credit losses based on the difference
between the carrying value and the present value of estimated
future cash flows.
IFRS 9 requires credit losses to be recognized irrespective of
whether a loss event has occurred. Entities will be required to
recognize a 12-month ECL for financial assets measured at amor-
tized cost, debt instruments measured at fair value through OCI,
lease receivables, financial guarantees and loan commitments
from initial recognition. This 12-month ECL reflects cash shortfalls
from default events expected to occur within 12 months from the
reporting date. We refer to assets with a 12-month ECL as assets
in stage 1. If there is a significant increase in credit risk (SICR) after
the instrument’s initial recognition, a lifetime ECL is required to be
recognized capturing cash shortfalls related to default events
expected to occur over the life of an asset. Lifetime ECLs are
always recognized for credit-impaired financial assets. We refer to
financial assets with a lifetime ECL due to an SICR as assets in
stage 2 and to credit-impaired financial assets as assets in stage 3.
Where the period over which UBS is exposed to credit risk is
shorter than 12 months, any ECL covers this shorter period.
The ECL must reflect an unbiased and probability-weighted
estimate of credit losses, which is determined by evaluating a
range of possible outcomes and which incorporates reasonable
and supportable information about past events, current condi-
tions, forecasts of future economic conditions and the time value
of money.
The method we will use for measuring ECL is mainly based on
a combination of the following principal factors: probability of
default (PD), loss given default (LGD), exposure at default (EAD)
and discounting. The ECL calculation will use point in time (PIT)
based parameters, including PIT PD and PIT LGD, leveraging the
respective parameters determined under the Basel III through the
cycle (TTC) based approach. Adjustments will be made to account
for current conditions and to incorporate forward-looking eco-
nomic information, which will include gross domestic product
forecasts, interest and foreign exchange rates, unemployment
rates, real estate price indices and other relevant risk parameters.
In addition, the prudential adjustments from Basel III, such as
downturn LGD assumptions and floors, will be removed.
For the ECL calculation, we will consider the maximum con-
tractual period over which we are exposed to credit risk, taking
into account the counterparties’ contractual extension, termina-
tion and prepayment options. For certain master credit facilities,
business current accounts and credit card facilities without a
defined contractual end date, which are callable on demand and
where the drawn and undrawn portions are managed as one unit,
the period over which UBS is exposed to credit risk exceeds the
contractual notice period and will therefore be used instead in the
ECL calculation. For portfolios including Lombard loans and secu-
rity financing transactions the period which is used in the ECL
calculation may be shorter, but not longer than the contractual
period of a position. This is driven by the fact that those types of
portfolios are subject to specific credit risk monitoring processes,
such as daily monitoring, margin calls and close-out processes,
and therefore the period over which UBS is exposed to credit risk
is limited to the period needed to execute any credit risk mitiga-
tion actions.
We will determine whether an SICR has occurred at the report-
ing date by assessing changes in an instrument’s risk of default
since initial recognition based on the PIT PD, primarily at an indi-
vidual financial asset level. Additional information will also be
considered, including internal indicators of credit risk and external
market indicators of credit risk or general economic conditions.
Exception management will be applied allowing for individual and
collective adjustments on exposures sharing the same credit risk
characteristics to take into account specific situations which are
not otherwise fully reflected.
In line with BCBS expectations, we do not intend to apply the
low-credit-risk exemption practical expedient in determining
whether an SICR has occurred. Furthermore, the 30-days-past-
due SICR indicator will predominantly be used as a backstop,
except for our retail credit portfolio where it will be the primary
indicator. The 30-days-past-due presumption is only expected to
be rebutted in rare circumstances.
The SICR process will have no effect on certain portfolios,
mainly Lombard loans and reverse repurchase agreements, due to
the risk management practices adopted, including regular margin
calls. ECL on these positions is expected to be low. If margin calls
are not satisfied, the position will be closed out immediately with
any shortfall generally classified as a stage 3 position.
61
Financial and operating performance Financial and operating performance
Significant accounting and financial reporting changes
We progressed throughout 2016 with respect to the develop-
ment of material models. Existing internal ratings-based (IRB) Pillar 1
models are used as a basis to derive IFRS 9 relevant PDs on a PIT
basis and are currently being significantly adjusted for the purposes
of IFRS 9 to take into account forward-looking macroeconomic
information. In addition, we are working on an appropriate selec-
tion of a range of scenarios to capture material non-linearity and
asymmetries between different possible forward-looking scenarios
and associated credit losses and we determine adequate weights to
reflect a likelihood of their occurrence. Although the ECL concept
is not a stress loss concept, we leverage our existing stress loss
models for this purpose and develop scenarios that reflect a range
of probable outcomes. We will align our baseline scenario selection
with the baseline used for business planning purposes.
Implementation of the IFRS 9 ECL approach is generally
expected to lead to an increase in recognized credit losses com-
pared with the current incurred-loss approach. This is partly due
to the 12-month ECL, which will have to be reported for all in-
scope instruments, and to the lifetime ECL, which will apply to
positions following an SICR and prior to an incurred credit loss
event. In addition, we expect income statement volatility to
increase, due to the use of uncertain forward-looking assump-
tions and the application of the SICR approach.
In 2016, we performed an initial ECL impact assessment in a
prototype environment using preliminary models and scenarios.
The calculations covered key portfolios that are expected to con-
tribute to the loss impact, including mortgage loans and corpo-
rate lending in Personal & Corporate Banking and Wealth Man-
agement and corporate lending in the Investment Bank. We
observed sensitivities to changes in the economic environment
through a range of expected credit loss outcomes, which will be
further analyzed for continued model development and refine-
ment. The ECL results calculated in the prototype environment
indicate an increase in credit losses, which should not have a sig-
nificant impact on equity on adoption, due to the relatively short
contractual maturities, the high quality of our loan book and the
current benign credit environment. Actual results as of 1 January
2018 may differ significantly, given the preliminary status of the
models and data included in the prototype and the possibility of
changes in the macroeconomic environment. We continue to
monitor the potential effects of IFRS 9 on our regulatory capital
requirements but do not expect a material impact.
➔ Refer to “Key international developments” in the “Regulatory
and legal developments” section of this report for more
information
The definition and assessment of what constitutes an SICR,
and the incorporation of forward-looking information are inher-
ently subjective and will involve the use of significant judgment.
Therefore, we focus on developing effective and robust gover-
nance over the ECL calculation process and on defining a front-to-
back control framework in compliance with the Sarbanes-Oxley
Act requirements.
Our economists, risk methodology personnel and credit risk
officers are involved in developing the forward-looking macroeco-
nomic assumptions to be used in the ECL calculation. Those
assumptions will be validated and approved through a new gov-
ernance process, which will also provide for a consistent use of
forward-looking information throughout UBS, including our busi-
ness planning process. New models will be approved as part of
our existing model validation and oversight processes. Gover-
nance will also specifically be established around exception han-
dling given the extent of management involvement required. We
intend to build a risk simulation engine to test ECL and SICR
inputs in a controlled environment.
Significant new complex disclosures will be required, including
a reconciliation of any changes in the expected loss allowances
and provisions during the reporting period. We will disclose
required information at an appropriate level of granularity consid-
ering respective transactions and their risk characteristics.
The IFRS 9 determination of whether an asset is credit-impaired
follows the same principles as determining impairment under IAS
39. Therefore, we do not expect credit-impaired financial assets
under IFRS 9 to differ significantly from impaired assets under IAS
39. However, the ECL for credit-impaired financial assets under
IFRS 9 may differ from the impairment loss under IAS 39 due to
additional scenario considerations to be made under IFRS 9. We
also do not expect the definition of credit-impaired under IFRS 9
to differ from the definition of default used for the purpose of our
advanced internal ratings-based approach.
The table below sets out certain key differences between the
definitions we apply in determining expected losses under the
current Basel III framework and those planned to be used in deter-
mining ECL for IFRS 9 purposes.
➔ Refer to “Credit risk models” in the “Risk management and
control” section of this report for more information
Hedging
IFRS 9 includes an optional revised hedge accounting model,
which further aligns the accounting treatment with risk manage-
ment practices. We are currently assessing the changes but do not
expect any significant effects, and intend to conclude our adop-
tion decision during the first half of 2017.
Irrespective of the adoption of the revised hedge accounting
model, new mandatory hedge accounting disclosures will be
adopted on 1 January 2018 as required, providing additional
information on the hedging strategies by the hedged risk and
hedge type.
62
Current Basel III (advanced internal ratings-based approach)
IFRS 9 treatment
Scope
The Basel III advanced internal ratings-based (A-IRB) treatment applies to
most credit risk exposures. It includes transactions measured at amortized
cost, at fair value through profit or loss and at fair value through other
comprehensive income (OCI).
The IFRS 9 expected loss calculation mainly applies to financial assets
measured at amortized cost and debt instruments measured at fair value
through OCI, as well as loan commitments and financial guarantee con-
tracts not at fair value through profit or loss.
12-month versus lifetime
expected loss
The Basel III A-IRB approach takes into account lifetime expected losses
resulting from expected default events over a 12-month period.
In the absence of an SICR event, IFRS 9 takes into account lifetime
expected losses considering expected default events over a maximum
period of 12 months from the reporting date. Once an SICR event has
occurred, expected default events over the life of a transaction have to be
considered.
Exposure at default
(EAD)
EAD is the amount we expect a counterparty to owe us at the time of a
possible default. For banking products, the EAD equals the book value as
of the reporting date, whereas for traded products, such as securities
financing transactions, the EAD is modeled. The EAD is expected to
remain constant over the 12-month period. For loan commitments, a
credit conversion factor is applied to model expected future drawdowns
over the 12-month period.
For IFRS 9 purposes, the EAD is generally calculated on the basis of the
cash flows that are expected to be outstanding at the individual points in
time during the period over which UBS is exposed to credit risk, dis-
counted to the reporting date using the effective interest rate. For loan
commitments, a credit conversion factor is applied to model expected
future drawdowns over the period that UBS is exposed to credit risk,
which is capped at 12 months, unless an SICR were to occur.
Probability of default
(PD)
PD estimates are determined on a TTC basis. They represent historical
average PDs, taking into account observed losses over a prolonged histor-
ical period, and are therefore less sensitive to movements in the underly-
ing economy.
PD estimates will be determined on a PIT basis, based on current condi-
tions and incorporating forecasts for future economic conditions at the
reporting date.
Loss given default
(LGD)
LGD includes prudential adjustments, such as downturn LGD assumptions
and floors. Similar to PD, LGD is determined on a TTC basis.
Use of scenarios
N / A
LGD should reflect the losses that are reasonably expected and prudential
adjustments should therefore not be applied. Similar to PD, LGD is deter-
mined on the basis of a PIT approach.
Multiple forward-looking scenarios have to be taken into account to
determine a probability-weighted ECL.
63
Financial and operating performance For the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
6,413
(37)
6,376
16,397
4,948
4,948
599
28,320
11,361
15,720
7,434
985
91
24,230
4,090
805
3,286
82
3,204
2,170
352
1,817
6,732
(117)
6,615
17,140
5,742
5,190
553
1,107
30,605
12,474
15,981
8,107
920
107
25,116
5,489
(898)
6,386
183
6,203
5,781
83
5,698
6,555
(78)
6,477
17,076
3,842
3,551
292
632
28,027
10,397
15,280
9,387
817
83
25,567
2,461
(1,180)
3,640
142
32
3,466
5,220
221
79
4,920
(5)
(68)
(4)
(4)
(14)
(5)
(100)
(46)
(7)
(9)
(2)
(8)
7
(15)
(4)
(25)
(49)
(55)
(48)
(62)
324
(68)
Financial and operating performance
Group performance
Group performance
Income statement
CHF million
Net interest income
Credit loss (expense) / recovery
Net interest income after credit loss expense
Net fee and commission income
Net trading income
of which: net trading income excluding own credit
of which: own credit on financial liabilities designated at fair value
Other income
Total operating income
of which: net interest and trading income
Personnel expenses
General and administrative expenses
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Net profit / (loss) attributable to preferred noteholders
Net profit / (loss) attributable to non-controlling interests
Net profit / (loss) attributable to shareholders
Comprehensive income
Total comprehensive income
Total comprehensive income attributable to preferred noteholders
Total comprehensive income attributable to non-controlling interests
Total comprehensive income attributable to shareholders
64
Performance by business division and Corporate Center unit – reported and adjusted1, 2
CHF million
Operating income as reported
of which: gains on sale of financial assets available for sale4
of which: gains on sales of real estate
of which: gains related to investments in associates
of which: net foreign currency translation losses5
of which: losses on sales of subsidiaries and businesses
Wealth
Manage-
ment
Wealth
Manage-
ment
Americas
7,291
7,782
21
10
For the year ended 31.12.16
Personal &
Corporate
Banking
Asset
Manage-
ment
1,931
3,984
102
21
Investment
Bank
7,688
78
CC –
Services3
(102)
120
(23)
CC –
Group
ALM
(219)
CC – Non-
core and
Legacy
Portfolio
UBS
(36) 28,320
211
120
21
(122)
(23)
(122)
Operating income (adjusted)
7,293
7,772
3,861
1,931
7,610
(222)
(97)
(36) 28,113
Operating expenses as reported
5,343
6,675
2,224
1,479
6,684
of which: personnel-related restructuring expenses6
of which: non-personnel-related restructuring expenses6
of which: restructuring expenses allocated from CC – Services6
Operating expenses (adjusted)
of which: expenses for provisions for litigation, regulatory and
similar matters
53
55
339
4,896
7
0
132
6,536
4
0
113
2,107
15
15
70
154
14
410
747
518
623
(1,084)
1,379
6,107
690
69
96
3
(2)
42
2
(1)
1,078 24,230
0
0
0
(1)
0
1
0
21
751
706
0
1,057 22,772
584
795
Operating profit / (loss) before tax as reported
Operating profit / (loss) before tax (adjusted)
1,948
2,397
1,107
1,236
1,760
1,754
452
552
1,004
1,503
(849)
(912)
(218)
(96)
(1,114)
4,090
(1,093)
5,341
CHF million
Operating income as reported
of which: own credit on financial liabilities designated at fair value7
of which: gains on sales of real estate
of which: gains on sales of subsidiaries and businesses
of which: net foreign currency translation gains5
of which: gains related to investments in associates
of which: gains on sale of financial assets available for sale4
of which: net losses related to the buyback of debt
For the year ended 31.12.15
Wealth
Manage-
ment
Wealth
Manage-
ment
Americas
Personal &
Corporate
Banking
Asset
Manage-
ment
Investment
Bank
8,155
7,381
3,877
2,057
8,821
CC –
Services3
241
378
169
15
56
66
11
Operating income (adjusted)
7,971
7,381
3,811
2,001
8,810
(137)
Operating expenses as reported
5,465
6,663
2,231
1,474
6,929
1,059
of which: personnel-related restructuring expenses6
of which: non-personnel-related restructuring expenses6
of which: restructuring expenses allocated from CC – Services6
of which: a gain related to a change to retiree benefit plans in the US
20
38
265
0
0
137
(21)
2
0
99
4
11
68
of which: impairment of an intangible asset
Operating expenses (adjusted)
of which: expenses for provisions for litigation, regulatory and
similar matters
Operating profit / (loss) before tax as reported
Operating profit / (loss) before tax (adjusted)
5,142
6,547
2,130
1,392
(2)
(3)
2
104
2,689
2,828
351
718
834
14
7
376
11
6,522
406
719
(986)
919
15
CC –
Group
ALM
277
553
88
(257)
(107)
(5)
0
0
0
(5)
0
CC – Non-
core and
Legacy
Portfolio
UBS
(203) 30,605
553
378
225
88
81
11
(257)
(203) 29,526
1,301
25,116
14
0
43
460
775
0
(21)
11
1,245
23,891
620
1,087
1,646
1,681
584
610
1,892
2,288
(818)
(1,056)
282
(102)
(1,503)
5,489
(1,447)
5,635
65
Financial and operating performance Financial and operating performance
Group performance
Performance by business division and Corporate Center unit – reported and adjusted (continued)1, 2
For the year ended 31.12.14
CHF million
Operating income as reported
of which: own credit on financial liabilities designated at fair value7
of which: gains on sales of real estate
of which: losses on sale of financial assets available for sale4
Wealth
Manage-
ment
Wealth
Manage-
ment
Americas
Personal &
Corporate
Banking
Asset
Manage-
ment
Investment
Bank
7,901
6,998
3,741
1,902
8,308
CC –
Group
ALM
2
292
CC –
Services3
37
44
CC – Non-
core and
Legacy
Portfolio
UBS
(862) 28,027
292
44
(5)
(7)
(290)
(862) 27,696
(5)
8,313
Operating income (adjusted)
7,901
6,998
3,741
1,902
Operating expenses as reported
5,574
6,099
2,235
1,435
8,392
of which: personnel-related restructuring expenses6
of which: non-personnel-related restructuring expenses6
of which: restructuring expenses allocated from CC – Services6
of which: a gain related to changes to retiree benefit plans in the US
18
49
119
0
0
0
55
(9)
4
0
60
0
19
2
30
(8)
64
36
161
(20)
Operating expenses (adjusted)
5,389
6,053
2,171
1,393
8,151
688
221
263
(454)
0
658
of which: expenses for provisions for litigation, regulatory and similar
matters
Operating profit / (loss) before tax as reported
Operating profit / (loss) before tax (adjusted)
394
2,326
2,511
163
900
946
59
55
1,855
(125)
1,506
1,570
467
509
(84)
162
(652)
(666)
0
0
0
0
0
0
0
2
1,144
25,567
1
0
29
(3)
327
350
0
(41)
1,116
24,931
193
2,594
(2,005)
2,461
(290)
(1,977)
2,766
1 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 2 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments
following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 3 CC – Services operating
expenses presented in this table are after service allocations to business divisions and other Corporate Center units. 4 Includes gains on partial sales of our investment in IHS Markit in 2016, 2015 and 2014 in the
Investment Bank, a gain on the sale of our investment in Visa Europe in 2016 in Wealth Management and Personal & Corporate Banking as well as an impairment of an investment in the Investment Bank in
2014. 5 Related to the disposal of foreign subsidiaries and branches. 6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more
information. 7 Refer to the “Significant accounting and financial reporting changes” section of this report for more information on own credit.
66
2016 compared with 2015
Results
We recorded net profit attributable to shareholders of CHF
3,204 million in 2016, which included a net tax expense of CHF
805 million. In 2015, net profit attributable to shareholders was
CHF 6,203 million, which included a net tax benefit of CHF 898
million.
Profit before tax was CHF 4,090 million in 2016 compared
with CHF 5,489 million in the prior year. Operating income
decreased by CHF 2,285 million or 7%, mainly due to CHF 1,113
million lower combined net interest and trading income, primar-
ily in the Investment Bank and Corporate Center – Group Asset
and Liability Management (Group ALM), and a decline of CHF
743 million in net fee and commission income, primarily in
Wealth Management. Operating expenses decreased by CHF 886
million or 4%, mainly due to CHF 673 million lower general and
administrative expenses and a decline of CHF 261 million in per-
sonnel expenses.
As of 31 December 2016, the Group achieved CHF 1.6 billion
of annualized net cost savings, an improvement from CHF 1.1 bil-
lion at year-end 2015. We measure our net cost saving as the
difference between our year-end exit cost on an adjusted basis
and further excluding temporary regulatory costs and provisions
for litigation, regulatory and similar matters compared with full
year costs in 2013 for Corporate Center and 2015 for the busi-
ness divisions.
In addition to reporting our results in accordance with IFRS,
we report adjusted results that exclude items that management
believes are not representative of the underlying performance
of our businesses. Such adjusted results are non-GAAP financial
measures as defined by SEC regulations. For the purpose of
determining adjusted results for 2016, we excluded gains of
CHF 211 million on sale of financial assets available for sale,
gains on sales of real estate of CHF 120 million, gains of CHF 21
million related to investments in associates, net foreign currency
translation losses of CHF 122 million, losses on sales of subsid-
iaries and businesses of CHF 23 million and net restructuring
expenses of CHF 1,458 million. For 2015, we excluded an own
credit gain of CHF 553 million, gains on sales of real estate of
CHF 378 million, gains on sales of subsidiaries and businesses of
CHF 225 million, net foreign currency translation gains of CHF
88 million, gains of CHF 81 million related to investments in
associates, gains of CHF 11 million on sale of financial assets
available for sale, net losses related to the buyback of debt in a
tender offer of CHF 257 million, net restructuring expenses of
CHF 1,235 million, a gain of CHF 21 million related to a change
to retiree benefit plans in the US and an impairment of an intan-
gible asset of CHF 11 million.
On this adjusted basis, profit before tax was CHF 5,341 million
in 2016 compared with CHF 5,635 million in the prior year, reflect-
ing CHF 1,413 million lower operating income, largely offset by
CHF 1,119 million lower operating expenses.
Operating income
Total operating income was CHF 28,320 million compared with
CHF 30,605 million. On an adjusted basis, total operating income
decreased by CHF 1,413 million or 5% to CHF 28,113 million,
mainly reflecting a decrease of CHF 743 million in net fee and
commission income and CHF 560 million lower combined net
interest and trading income.
Net interest and trading income
Total combined net interest and trading income decreased by CHF
1,113 million to CHF 11,361 million. Excluding the own credit
gain of CHF 553 million in 2015, adjusted net interest and trading
income decreased by CHF 560 million.
In Wealth Management, net interest and trading income
decreased by CHF 36 million to CHF 2,998 million, mainly reflect-
ing reduced client activity.
Wealth Management Americas net interest and trading income
increased by CHF 302 million to CHF 1,839 million, primarily due
to an increase in net interest income, reflecting higher short-term
interest rates as well as growth in loan and deposit balances.
In Personal & Corporate Banking, net interest and trading
income declined by CHF 81 million to CHF 2,532 million, mainly
due to lower treasury-related income from Corporate Center –
Group ALM and lower deposit-related income.
In the Investment Bank, net interest and trading income
decreased by CHF 909 million to CHF 4,277 million, primarily due
to a CHF 513 million decline in Equities, with lower revenues in
Derivatives and Financing Services. In addition, net interest and
trading income decreased by CHF 217 million in our Foreign
Exchange, Rates and Credit businesses, mainly as 2015 benefited
from higher volatility and client activity levels following the Swiss
National Bank’s actions in January 2015.
Corporate Center – Group ALM net interest and trading
income, excluding the effect of own credit, improved by CHF 23
million.
In Corporate Center – Non-core and Legacy Portfolio, net
interest and trading income improved by CHF 251 million, primar-
ily as the prior year included higher losses related to unwind and
novation activities.
➔ Refer to the “Significant accounting and financial reporting
changes” section of this report for more information on own
credit
➔ Refer to “Note 3 Net interest and trading income” in the
“Consolidated financial statements” section of this report for
more information
67
Financial and operating performance Financial and operating performance
Group performance
Net interest and trading income
CHF million
Net interest and trading income
Net interest income
Net trading income
Total net interest and trading income
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
of which: Corporate Client Solutions
of which: Investor Client Services
Corporate Center
of which: Services
of which: Group ALM
of which: own credit on financial liabilities designated at fair value
of which: Non-core and Legacy Portfolio
Total net interest and trading income
For the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
6,413
4,948
11,361
2,998
1,839
2,532
(29)
4,277
822
3,455
(256)
(89)
(104)
(62)
11,361
6,732
5,742
12,474
3,034
1,537
2,613
(5)
5,186
1,001
4,185
110
(3)
426
553
(313)
6,555
3,842
10,397
2,845
1,352
2,536
0
4,517
1,030
3,487
(854)
34
16
292
(904)
12,474
10,397
(5)
(14)
(9)
(1)
20
(3)
480
(18)
(18)
(17)
(100)
(80)
(9)
Credit loss expense / recovery
The net credit loss expense was CHF 37 million compared with
CHF 117 million. The Investment Bank recorded a net credit loss
expense of CHF 11 million compared with CHF 68 million in the
prior year, reflecting lower expenses related to the energy sector.
Net credit loss expense in Personal & Corporate Banking was CHF
6 million compared with CHF 37 million, mainly due to higher net
recoveries on existing impaired positions.
➔ Refer to the “Risk management and control” section of this
report for more information
Credit loss (expense) / recovery
CHF million
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Investment Bank
Corporate Center
of which: Non-core and Legacy Portfolio
Total
For the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
(5)
(3)
(6)
(11)
(13)
(13)
(37)
0
(4)
(37)
(68)
(8)
(8)
(117)
(1)
15
(95)
2
2
2
(78)
(25)
(84)
(84)
63
63
(68)
68
Personnel expenses
Personnel expenses decreased by CHF 261 million to CHF 15,720
million and included net restructuring expenses of CHF 751 mil-
lion compared with CHF 460 million, largely related to our transi-
tioning activities to nearshore and offshore locations and our cost
reduction programs. On an adjusted basis, personnel expenses
decreased by CHF 573 million to CHF 14,969 million.
Adjusted expenses for salaries decreased by CHF 175 million to
CHF 5,795 million, mainly reflecting our cost reduction programs.
Adjusted expenses for total variable compensation decreased
by CHF 331 million, reflecting a decrease of CHF 361 million in
expenses for current-year awards.
Adjusted other personnel expenses decreased by CHF 217 mil-
lion, largely due to CHF 149 million lower pension costs for our
Swiss pension plan, reflecting the effect of changes to demo-
graphic and financial assumptions, and a decline of CHF 76 mil-
lion in social security expenses.
Financial advisor compensation in Wealth Management
Americas increased by CHF 145 million to CHF 3,697 million, mainly
due to currency effects and higher expenses for compensation
commitments, reflecting the recruitment of financial advisors.
➔ Refer to the “Compensation” section of this report for more
information
➔ Refer to “Note 6 Personnel expenses,” “Note 26 Pension and
other post-employment benefit plans” and “Note 27 Equity
participation and other compensation plans” in the “Consoli-
dated financial statements” section of this report for more
information
General and administrative expenses
General and administrative expenses decreased by CHF 673 mil-
lion to CHF 7,434 million. Excluding net restructuring expenses of
CHF 695 million compared with CHF 761 million, adjusted gen-
eral and administrative expenses decreased by CHF 607 million,
primarily reflecting CHF 292 million lower net expenses for provi-
sions for litigation, regulatory and similar matters, a decrease of
CHF 95 million in professional fees and CHF 79 million lower
expenses for outsourcing of IT and other services. Also, the net
expense for the annual UK bank levy was CHF 123 million com-
pared with CHF 166 million, primarily related to currency effects.
This net expense was mainly recorded in the Investment Bank and
Corporate Center – Non-core and Legacy Portfolio.
Net fee and commission income
Net fee and commission income decreased by CHF 743 million to
CHF 16,397 million.
Investment fund fees declined by CHF 412 million to CHF
3,155 million, mainly in Wealth Management, primarily due to
the effects of cross-border outflows and shifts into retrocession-
free products, as well as changes in clients’ asset allocation.
Underwriting fees decreased by CHF 300 million to CHF 946
million due to lower equity underwriting revenues, predominantly
in the Investment Bank.
Net brokerage fees declined by CHF 276 million to CHF 2,784
million, mainly in Wealth Management and the Investment Bank,
largely driven by reduced client activity.
Portfolio management and advisory fees increased by CHF 177
million to CHF 8,035 million, primarily in Wealth Management
Americas, mainly due to increased managed account fees, reflect-
ing higher invested asset levels.
➔ Refer to “Note 4 Net fee and commission income” in the
“Consolidated financial statements” section of this report for
more information
Other income
Other income was CHF 599 million compared with CHF 1,107
million. Excluding certain gains on sales of financial assets avail-
able for sale and real estate, gains related to investments in asso-
ciates, net foreign currency translation gains and losses, and gains
and losses on sales of subsidiaries and businesses, adjusted other
income decreased by CHF 189 million. This decline was mainly
due to lower gains on sale of financial assets available for sale.
➔ Refer to “Note 5 Other income” in the “Consolidated financial
statements” section of this report for more information
Operating expenses
Total operating expenses decreased by CHF 886 million or 4% to
CHF 24,230 million. Net restructuring expenses were CHF 1,458
million compared with CHF 1,235 million, reflecting an increase
of CHF 291 million in personnel-related restructuring expenses,
mainly related to our transitioning activities to nearshore and off-
shore locations, partly offset by a decrease of CHF 69 million in
non-personnel-related restructuring expenses.
Adjusted total operating expenses decreased by CHF 1,119 mil-
lion or 5% to CHF 22,772 million. This decrease was mainly due to
a decline of CHF 607 million in adjusted general and administrative
expenses, of which CHF 292 million related to net expenses for pro-
visions for litigation, regulatory and similar matters, and a decrease
of CHF 573 million in adjusted personnel expenses, primarily due to
lower expenses for salaries and variable compensation.
➔ Refer to “Note 30 Changes in organization and disposals” in the
“Consolidated financial statements” section of this report for
more information on restructuring expenses
69
Financial and operating performance Financial and operating performance
Group performance
Operating expenses
CHF million
Operating expenses as reported
Personnel expenses
General and administrative expenses
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses as reported
Adjusting items
Personnel expenses
of which: restructuring expenses1
of which: a gain related to a change to retiree benefit plans in the US
General and administrative expenses2
Depreciation and impairment of property, equipment and software2
Amortization and impairment of intangible assets
of which: restructuring expenses1
of which: impairment of an intangible asset
Total adjusting items
Operating expenses (adjusted)3
Personnel expenses
of which: salaries
of which: total variable compensation
of which: relating to current year4
of which: relating to prior years5
of which: Wealth Management Americas – Financial advisor compensation6
of which: other personnel expenses7
General and administrative expenses
of which: expenses for provisions for litigation, regulatory and similar matters
of which: other general and administrative expenses
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses (adjusted)
For the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
15,720
7,434
985
91
15,981
8,107
920
107
15,280
9,387
817
83
24,230
25,116
25,567
751
751
695
11
0
0
439
460
(21)
761
12
13
2
11
1,458
1,225
286
327
(41)
319
29
2
2
636
14,969
15,542
14,994
5,795
3,079
2,249
832
3,697
2,396
6,739
795
5,944
974
91
5,970
3,410
2,610
799
3,552
2,613
7,346
1,087
6,259
908
94
6,124
3,113
2,338
775
3,385
2,372
9,068
2,594
6,474
788
81
22,772
23,891
24,931
(2)
(8)
7
(15)
(4)
(4)
(3)
(10)
(14)
4
4
(8)
(8)
(27)
(5)
7
(3)
(5)
1 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information. 2 Consists of restructuring expenses. 3 Adjusted results are non-
GAAP financial measures as defined by SEC regulations. 4 Includes expenses relating to performance awards and other variable compensation for the respective performance year. 5 Consists of amortization of prior
years’ awards relating to performance awards and other variable compensation. 6 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial
advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, assets and other variables. It also includes expenses related to compensation commitments with financial
advisors entered into at the time of recruitment that are subject to vesting requirements. 7 Consists of expenses related to contractors, social security, pension and other post-employment benefit plans and other
personnel expenses. Refer to “Note 6 Personnel expenses” in the “Consolidated financial statements” section of this report for more information.
At this point in time, we believe that the industry continues to
operate in an environment in which expenses associated with liti-
gation, 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.
Depreciation, impairment and amortization
Depreciation and impairment of property, equipment and soft-
ware increased by CHF 65 million to CHF 985 million, largely
driven by higher depreciation expenses related to internally gener-
ated capitalized software.
Amortization and impairment of intangible assets was CHF 91
million compared with CHF 107 million. On an adjusted basis,
these expenses were broadly unchanged.
➔ Refer to “Note 7 General and administrative expenses” and
“Note 20 Provisions and contingent liabilities” in the “Consoli-
➔ Refer to “Note 1b Changes in accounting policies, comparability
and other adjustments” in the “Consolidated financial state-
dated financial statements” section of this report for more
ments” section of this report for more information on the
information
70
estimated useful life of certain IT hardware and software
➔ Refer to “Note 14 Property, equipment and software” and
“Note 15 Goodwill and intangible assets” in the “Consolidated
financial statements” section of this report for more information
Tax
Total comprehensive income attributable to shareholders
We recognized a net income tax expense of CHF 805 million for
2016, which included a net Swiss tax expense of CHF 1,094 mil-
lion and a net non-Swiss tax benefit of CHF 289 million.
In 2016, total comprehensive income attributable to shareholders
was CHF 1,817 million, reflecting net profit of CHF 3,204 million,
partly offset by negative OCI of CHF 1,386 million.
The Swiss tax expense included a current tax expense of CHF
459 million related to taxable profits, mainly earned by Swiss sub-
sidiaries, against which no losses were available to offset. In addi-
tion, it included a deferred tax expense of CHF 635 million, which
reflected a decrease in deferred tax assets previously recognized in
relation to tax losses carried forward and temporary differences.
Defined benefit plan OCI was negative CHF 824 million com-
pared with positive CHF 298 million. In 2016, we updated and
refined certain actuarial assumptions used in calculating our
defined benefit obligations (DBOs). This resulted in net OCI gains
of CHF 319 million related to the Swiss defined benefit plan and
an OCI gain of CHF 63 million related to the UK pension plan.
The net non-Swiss tax benefit included a current tax expense
of CHF 353 million related to taxable profits earned by non-Swiss
subsidiaries and branches, against which no losses were available
to offset. This was more than offset by a net deferred tax benefit
of CHF 642 million, primarily due to an increase in our US deferred
tax assets, reflecting updated profit forecasts.
We recognized a tax expense in 2016 compared with a tax
benefit in 2015, mainly due to an upward revaluation of US
deferred tax assets in 2015 in relation to the extension of the
forecast period for US taxable profits to seven years from six. In
2016, there was no extension of the forecast period.
We consider the performance of our businesses and the accu-
racy of historical forecasts and other factors in evaluating the
recoverability of our deferred tax assets, including the remaining
tax loss carry-forward period, and our assessment of expected
future taxable profits in the forecast period used for recognizing
deferred tax assets. Estimating future profitability is inherently
subjective and is particularly sensitive to future economic, market
and other conditions, which are difficult to predict.
For 2017, we forecast a full-year tax rate of approximately
25%, excluding the effects of any change in the level of deferred
tax assets resulting from their reassessment or any statutory tax
rate changes. Consistent with past practice, we expect to revalue
our deferred tax assets in the second half of 2017 based on a
reassessment of future profitability taking into account updated
business plan forecasts. The full-year effective tax rate could
change significantly on the basis of this reassessment. It could also
change if aggregate tax expenses in respect of profits from
branches and subsidiaries without loss coverage differ from what
is expected. Furthermore, any change in statutory tax rates could
significantly impact the level of our deferred tax assets, when the
law change is enacted. For every percentage point reduction in
the US federal corporate income tax rate, we would expect a CHF
0.2 billion decrease in the Group’s deferred tax assets.
➔ Refer to “Note 8 Income taxes” in the “Consolidated financial
statements” section of this report for more information
➔ Refer to the “Risk factors” section of this report for more
information
Total pre-tax OCI related to UK defined benefit plans was neg-
ative CHF 615 million, reflecting an OCI loss of CHF 928 million
due to a net increase in the DBO, mainly due to a decrease in the
applicable discount rate, partly offset by the aforementioned gain
of CHF 63 million from changes in assumptions. The OCI loss
related to the net increase in the DBO was partly offset by OCI
gains of CHF 312 million from an increase in the fair value of the
underlying plan assets.
Total pre-tax OCI related to the Swiss defined benefit plan was
a loss of CHF 105 million. This reflected an OCI loss of CHF 477
million related to a net DBO increase and a loss of CHF 452 million
representing an increase in the excess of the pension surplus over
the estimated future economic benefit, largely offset by an OCI
gain of CHF 824 million due to an increase in the fair value of the
underlying plan assets. The OCI loss of CHF 477 million related to
the net DBO increase was mainly due to an experience loss of CHF
438 million, reflecting the effects of differences between the pre-
vious actuarial assumptions and what actually occurred, and a loss
of CHF 433 million from a decline in the applicable discount rate,
partly offset by the aforementioned net gain of CHF 319 million
from changes in assumptions.
OCI related to cash flow hedges was negative CHF 666 million,
which primarily reflected a decrease in unrealized gains on hedg-
ing derivatives due to an increase in US dollar long-term interest
rates. In 2015, OCI related to cash flow hedges was negative CHF
509 million.
OCI related to own credit on financial liabilities designated at
fair value was negative CHF 115 million in 2016, mainly reflecting
a downward shift in LIBOR curves.
OCI associated with financial assets available for sale was neg-
ative CHF 73 million compared with negative CHF 63 million and
primarily reflected the reclassification of net gains from OCI to the
income statement upon sale of assets, partly offset by net unreal-
ized gains following decreases in the respective long-term interest
rates.
71
Financial and operating performance Financial and operating performance
Group performance
Foreign currency translation OCI was CHF 292 million, mainly
resulting from the strengthening of the US dollar against the
Swiss franc, partly offset by the significant weakening of the
British pound against the Swiss franc. In addition, net losses totaling
CHF 126 million were reclassified to the income statement follow-
ing the disposal of foreign subsidiaries and branches.
➔ Refer to the “Significant accounting and financial reporting
Should interest rates remain constant at the levels prevailing at
the end of 2016, the corresponding cumulative increase in net
interest income for 2017 to 2019 compared with 2016 levels
would be around CHF 0.2 billion.
The above estimates further assume no change to balance
sheet size and structure, constant foreign exchange rates and no
management action.
changes” section of this report for more information on own
credit
Net profit attributable to non-controlling interests
➔ Refer to the “Statement of comprehensive income” in the
“Consolidated financial statements” section of this report for
more information
➔ Refer to “Note 26 Pension and other post-employment benefit
plans” in the “Consolidated financial statements” section of this
report for more information on defined benefit plans
Sensitivity to interest rate movements
As of 31 December 2016, we estimate that a parallel shift in yield
curves by +100 basis points could lead to a combined increase in
annual net interest income of approximately CHF 0.7 billion in
Wealth Management, Wealth Management Americas and Personal
& Corporate Banking. Of this increase, approximately CHF 0.4 bil-
lion would result from changes in US dollar interest rates. Including
the estimated impact related to pension fund assets and liabilities,
the immediate effect of such a shift on shareholders’ equity would
be a decrease of approximately CHF 1.6 billion recognized in OCI,
of which approximately CHF 1.3 billion would result from changes
in US dollar interest rates. Since the majority of this negative OCI
impact on shareholders’ equity is related to cash flow hedges,
which is not recognized for the purposes of calculating regulatory
capital, the immediate impact on regulatory capital would be an
increase of approximately CHF 0.3 billion. The aforementioned esti-
mates are based on an immediate increase in interest rates, equal
across all currencies and relative to implied forward rates applied to
our banking book and available-for-sale portfolios.
We estimate that if interest rates implied by forward rates at
the end of 2016 were to materialize over the next three years, our
net interest income in Wealth Management, Wealth Manage-
ment Americas and Personal & Corporate Banking would increase
compared with 2016 levels by around CHF 0.2 billion in 2017 and
by around CHF 1.1 billion cumulatively for 2017 to 2019. This
increase would primarily be driven by Wealth Management and
Wealth Management Americas, which would benefit most from
an increase in US dollar interest rates, and would more than offset
a decline in Personal & Corporate Banking, whose net interest
income is mostly generated in Swiss francs and where forward
rates imply continued negative interest rates.
Net profit attributable to non-controlling interests was CHF 82
million in 2016 compared with CHF 183 million in the prior year.
This mainly related to dividends of CHF 79 million that were paid
to preferred noteholders, for which no accrual was required in a
prior period.
For 2017, we currently expect to attribute approximately CHF
70 million of net profit to non-controlling interests, of which CHF
45 million in the first quarter and CHF 25 million in the fourth
quarter. From 2018, we expect to attribute less than CHF 10 mil-
lion per year.
Key figures
Cost / income ratio
The cost / income ratio was 85.4% compared with 81.8%. On an
adjusted basis, the cost / income ratio was 80.9% compared with
80.6% and was above our target range of 60–70%.
Return on tangible equity
The return on tangible equity (RoTE) was 6.9% compared with
13.7%. On an adjusted basis, the RoTE was 9.0% compared with
13.7% and was below our target of more than 15% in a normal-
ized market environment.
Common equity tier 1 capital ratio / risk-weighted assets
Our fully applied CET1 capital ratio decreased 0.7 percentage
points to 13.8% as of 31 December 2016, exceeding our target
ratio of 13.0%. The decrease primarily reflected a CHF 15 billion
increase in risk-weighted assets (RWA), partly offset by a CHF 0.7
billion increase in CET1 capital.
Our RWA increased by CHF 15 billion to CHF 223 billion on a
fully applied basis as of 31 December 2016. Credit risk RWA
increased by CHF 8 billion, primarily driven by methodology and
policy changes. Market risk RWA and operational risk RWA both
increased by CHF 3 billion.
➔ Refer to the “Investment Bank,” “Corporate Center” and “Capital
management” sections of this report for more information
72
Leverage ratio / leverage ratio denominator
As of 31 December 2016, our fully applied going concern lever-
age ratio was 4.6%, of which the common equity tier 1 leverage
ratio was 3.5%.
Our fully applied LRD decreased by CHF 27 billion to CHF 870
billion as of 31 December 2016, mainly reflecting incremental
netting and collateral mitigation.
➔ Refer to the “Investment Bank,” “Corporate Center” and “Capital
management” sections of this report for more information
Net new money and invested assets
Management’s discussion and analysis on net new money and
invested assets is provided in the “Wealth Management,”
“Wealth Management Americas” and “Asset Management” sec-
tions of this report.
Seasonal characteristics
Our main businesses may show seasonal patterns. The Investment
Bank’s revenues have been affected in some years by the seasonal
characteristics of general financial market activity and deal flows
in investment banking. Other business divisions may also be
impacted by seasonal components, such as lower client activity
levels related to the summer and end-of-year holiday seasons,
annual income tax payments (which are concentrated in the sec-
ond quarter in the US) and asset withdrawals that tend to occur
in the fourth quarter.
Return on equity
CHF million, except where indicated
Net profit
Net profit attributable to shareholders
Amortization and impairment of intangible assets
Pre-tax adjusting items1, 2
Tax effect on adjusting items3
Adjusted net profit attributable to shareholders
Equity
Equity attributable to shareholders
Less: goodwill and intangible assets4
Tangible equity attributable to shareholders
Return on equity
Return on equity (%)
Return on tangible equity (%)
Adjusted return on tangible equity (%)1
As of or for the year ended
31.12.16
31.12.15
31.12.14
3,204
91
1,251
(275)
4,271
53,621
6,556
47,065
5.9
6.9
9.0
6,203
107
135
(140)
6,305
55,313
6,568
48,745
11.8
13.7
13.7
3,466
83
305
(125)
3,729
50,608
6,564
44,044
7.0
8.2
8.6
1 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 2 Refer to the “Performance by business division and Corporate Center unit – reported and adjusted” table in this section for more
information. 3 Generally reflects an indicative tax rate of 22% on pre-tax adjusting items. 2015 and 2014 included own credit on financial liabilities designated at fair value as an adjusting item with an indicative tax
rate of 2%. 4 Goodwill and intangible assets used in the calculation of tangible equity attributable to shareholders as of 31 December 2014 have been adjusted to reflect the non-controlling interests in UBS AG.
73
Financial and operating performance
Financial and operating performance
Group performance
Net new money1
CHF billion
Wealth Management
Wealth Management (adjusted)2
Wealth Management Americas
Asset Management
of which: excluding money market flows
of which: money market flows
For the year ended
31.12.16
31.12.15
31.12.14
26.8
26.8
15.4
(15.5)
(22.5)
7.0
12.9
22.8
21.3
(5.4)
(0.7)
(4.7)
34.4
34.4
9.6
15.9
22.6
(6.7)
1 Net new money excludes interest and dividend income. 2 Adjusted net new money excludes the negative effect on net new money of CHF 9.9 billion in 2015 from our balance sheet and capital optimization program.
Invested assets
CHF billion
Wealth Management
Wealth Management Americas
Asset Management
of which: excluding money market funds
of which: money market funds
As of
% change from
31.12.16
31.12.15
31.12.14
31.12.15
977
1,131
656
591
66
947
1,035
650
592
58
987
1,027
664
600
64
3
9
1
0
14
74
2015 compared with 2014
Results
We recorded a profit before tax of CHF 5,489 million compared
with CHF 2,461 million, largely reflecting an increase of CHF
2,578 million in operating income, mainly due to increased net
interest and trading income in the Investment Bank and our
wealth management businesses, as well as reduced losses in Cor-
porate Center – Non-core and Legacy Portfolio. Operating
expenses decreased by CHF 451 million, mainly driven by CHF
1,507 million lower net expenses for provisions for litigation, reg-
ulatory and similar matters, partly offset by higher restructuring
expenses and increased personnel expenses.
In addition to reporting our results in accordance with IFRS, we
report adjusted results that exclude items that management
believes are not representative of the underlying performance of
our businesses. Such adjusted results are non-GAAP financial
measures as defined by SEC regulations. For the purpose of deter-
mining adjusted results for 2015, we excluded an own credit gain
of CHF 553 million, gains on sales of real estate of CHF 378 mil-
lion, gains on sales of subsidiaries and businesses of CHF 225
million, net foreign currency translation gains of CHF 88 million,
gains of CHF 81 million related to investments in associates, gains
of CHF 11 million on sale of financial assets available for sale, net
losses related to the buyback of debt in a tender offer of CHF 257
million, net restructuring expenses of CHF 1,235 million, a gain of
CHF 21 million related to a change to retiree benefit plans in the
US and an impairment of an intangible asset of CHF 11 million.
For 2014, we excluded an own credit gain of CHF 292 million,
gains on sales of real estate of CHF 44 million, losses of CHF 5
million on sale of financial assets available for sale, net restructur-
ing expenses of CHF 677 million and a gain of CHF 41 million
related to changes to retiree benefit plans in the US.
On this adjusted basis, profit before tax was CHF 5,635 million
compared with CHF 2,766 million in the prior year.
Adjusted operating income increased by CHF 1,830 million to
CHF 29,526 million, largely due to an increase of CHF 1,816 mil-
lion in adjusted net interest and trading income, reflecting
increases in the Investment Bank and our wealth management
businesses, as well as reduced losses in Corporate Center – Non-
core and Legacy Portfolio.
Adjusted operating expenses decreased by CHF 1,040 million
to CHF 23,891 million, mainly due to CHF 1,507 million lower
net expenses for provisions for litigation, regulatory and similar
matters, partly offset by CHF 548 million higher personnel
expenses.
Operating income
Total operating income was CHF 30,605 million compared with
CHF 28,027 million. On an adjusted basis, total operating income
increased by CHF 1,830 million to CHF 29,526 million. Adjusted
net interest and trading income increased by CHF 1,816 million,
reflecting increases in the Investment Bank and our wealth man-
agement businesses, as well as reduced losses in Corporate Cen-
ter – Non-core and Legacy Portfolio. Net fee and commission
income increased by CHF 64 million, mainly in Wealth Manage-
ment Americas and Asset Management.
Net interest and trading income
Net interest and trading income increased by CHF 2,077 million
to CHF 12,474 million. 2015 included an own credit gain on
financial liabilities designated at fair value of CHF 553 million
compared with a gain of CHF 292 million. In 2015, we made
further enhancements to our valuation methodology for the
own credit component of fair value of financial liabilities desig-
nated at fair value. This change in accounting estimate resulted
in a gain of CHF 260 million. Excluding the effect of own credit
in both years, net interest and trading income increased by CHF
1,816 million to CHF 11,921 million, reflecting increases in the
Investment Bank and our wealth management businesses, as
well as reduced losses in Corporate Center – Non-core and Leg-
acy Portfolio.
Credit loss expense / recovery
Net credit loss expense was CHF 117 million compared with CHF
78 million. The Investment Bank recorded a net credit loss expense
of CHF 68 million, mainly related to the energy sector, compared
with a net recovery of CHF 2 million. Net credit loss expense in
Personal & Corporate Banking was CHF 37 million compared with
CHF 95 million, predominantly due to lower expenses for newly
impaired positions.
75
Financial and operating performance Financial and operating performance
Group performance
Net fee and commission income
Net fee and commission income increased by CHF 64 million to
CHF 17,140 million.
and similar matters, partly offset by CHF 548 million higher
adjusted personnel expenses, primarily reflecting an increase in
expenses for variable compensation.
Portfolio management and advisory fees increased by CHF 515
million to CHF 7,858 million, primarily in Wealth Management
Americas, largely due to an increase in managed account fees,
reflecting higher invested asset levels. Portfolio management and
advisory fees also increased in Wealth Management and Asset
Management.
Underwriting fees decreased by CHF 224 million, reflecting
lower equity and debt underwriting fees, largely in the Investment
Bank.
Investment fund fees declined by CHF 150 million, primarily
reflecting a decrease in mutual fund-related fees in Wealth Man-
agement Americas and lower transaction-based income in Wealth
Management. This was partly offset by an increase in Asset Man-
agement.
Other income
Other income was CHF 1,107 million compared with CHF 632
million. On an adjusted basis, other income decreased by CHF 12
million. Adjusted income related to associates and subsidiaries
decreased by CHF 124 million, mainly as 2014 included a gain of
CHF 65 million on an investment in an associate which was reclas-
sified to a financial asset available for sale following its initial pub-
lic offering, as well as a gain of CHF 58 million related to the
release of a provision for litigation, regulatory and similar matters
that was recorded as other income. This was partly offset by CHF
92 million higher adjusted income from financial assets available
for sale, primarily related to net gains on sales of equity invest-
ments in 2015, mainly within the Investment Bank.
Operating expenses
Total operating expenses decreased by CHF 451 million to CHF
25,116 million. Restructuring expenses were CHF 1,235 million
compared with CHF 677 million, largely related to our transition-
ing activities to nearshore and offshore locations. Personnel-
related restructuring expenses increased by CHF 133 million to
CHF 460 million, while non-personnel-related restructuring
expenses increased by CHF 425 million to CHF 775 million.
On an adjusted basis, excluding restructuring expenses and
gains related to changes to retiree benefit plans in the US in both
years and an impairment of an intangible asset in 2015, total
operating expenses decreased by CHF 1,040 million to CHF
23,891 million. This decrease was mainly due to CHF 1,507 mil-
lion lower net expenses for provisions for litigation, regulatory
Personnel expenses
Personnel expenses increased by CHF 701 million to CHF 15,981
million and included restructuring expenses of CHF 460 million
compared with CHF 327 million, largely related to our transition-
ing activities to nearshore and offshore locations. On an adjusted
basis, excluding restructuring expenses and gains related to
changes to retiree benefit plans in the US, personnel expenses
increased by CHF 548 million to CHF 15,542 million.
Expenses for salaries, excluding restructuring expenses,
decreased by CHF 154 million to CHF 5,970 million, primarily
reflecting a reduction in staff levels.
Excluding restructuring expenses, total variable compensation
expenses increased by CHF 297 million. Expenses for current-year
awards increased by CHF 272 million, reflecting improved busi-
ness performance. Expenses relating to the amortization of prior
years’ awards increased by CHF 24 million.
Financial advisor compensation in Wealth Management Americas
increased by CHF 167 million to CHF 3,552 million, primarily due
to unfavorable foreign currency translation effects.
Other personnel expenses, excluding restructuring expenses
and the aforementioned gains related to changes to retiree ben-
efit plans in the US, increased by CHF 241 million to CHF 2,613
million, mainly due to an increase of CHF 113 million in costs for
pension and other post-employment benefits plans and CHF 113
million higher expenses for contractors.
General and administrative expenses
General and administrative expenses decreased by CHF 1,280 mil-
lion to CHF 8,107 million. Net restructuring expenses increased to
CHF 761 million from CHF 319 million, largely related to our tran-
sitioning activities to nearshore and offshore locations. On an
adjusted basis, excluding net restructuring expenses, general and
administrative expenses decreased by CHF 1,722 million, mainly
due to CHF 1,507 million lower net expenses for provisions for
litigation, regulatory and similar matters.
Excluding restructuring expenses, other general and adminis-
trative expenses decreased by CHF 215 million, primarily as 2014
included net expenses of CHF 120 million related to certain dis-
puted receivables. Furthermore, occupancy costs and expenses
for outsourcing of IT and other services decreased.
General and administrative expenses also included a net
expense of CHF 166 million for the annual UK bank levy com-
pared with CHF 123 million.
76
Tax
We recognized a net income tax benefit of CHF 898 million for
2015, which included a net Swiss tax expense of CHF 569 million
and a net non-Swiss tax benefit of CHF 1,467 million, primarily
relating to the upward revaluation of US deferred tax assets.
The Swiss tax expense included a current tax expense of CHF
239 million related to taxable profits, mainly earned by Swiss sub-
sidiaries, against which no losses were available to offset. In addi-
tion, it included a net deferred tax expense of CHF 330 million,
which mainly reflected a net decrease in deferred tax assets previ-
ously recognized in relation to tax losses carried forward, partly
offset by an increase in recognized deferred tax assets in relation
to temporary differences.
The net non-Swiss tax benefit included a current tax expense
of CHF 476 million in respect of taxable profits earned by non-
Swiss subsidiaries and branches, against which no losses were
available to offset. This was more than offset by a net deferred tax
benefit of CHF 1,943 million, primarily due to an increase in our
US deferred tax assets, reflecting updated profit forecasts and an
extension of the relevant taxable profit forecast period used in
valuing our deferred tax assets.
Total comprehensive income attributable to shareholders
Total comprehensive income attributable to shareholders was CHF
5,698 million, reflecting net profit of CHF 6,203 million, partly
offset by negative OCI of CHF 506 million.
In 2015, OCI related to cash flow hedges was negative CHF
509 million compared with positive CHF 689 million in 2014, pri-
marily reflecting lower unrealized gains on hedging derivatives
from decreases in long-term interest rates.
Foreign currency translation OCI was negative CHF 231 mil-
lion, primarily resulting from the significant weakening of the
euro and British pound against the Swiss franc, combined with
the reclassification of net gains totaling CHF 90 million to the
income statement.
OCI associated with financial assets available for sale was neg-
ative CHF 63 million, mainly as previously unrealized net gains
were reclassified from OCI to the income statement upon sale of
investments, partly offset by net unrealized gains following
decreases in long-term interest rates.
Defined benefit plan OCI was CHF 298 million. In 2015, we
carried out a methodology review of the actuarial assumptions
used in calculating our DBOs. This resulted in an OCI gain of CHF
2,002 million related to the Swiss pension plan and an OCI gain
of CHF 188 million related to the UK pension plan. Total pre-tax
OCI related to UK defined benefit plans was CHF 321 million,
reflecting a net reduction in the DBO of CHF 444 million, primarily
resulting from the aforementioned changes in assumptions and
an increase in the applicable discount rate, partly offset by a
decrease of CHF 123 million in the fair value of the underlying
plan assets. In addition, we recorded total net pre-tax OCI gains of
CHF 53 million on our Swiss pension plan. This reflected an OCI
gain of CHF 1,212 million related to a net DBO reduction, primar-
ily due to the aforementioned changes in assumptions, partly off-
set by a market-driven decline in the applicable discount rate, as
well as an OCI gain of CHF 105 million due to an increase in the
fair value of the underlying plan assets. These OCI gains were
almost entirely offset by an OCI decrease of CHF 1,265 million
representing the excess of the pension surplus over the estimated
future economic benefit.
Net profit attributable to preferred noteholders and
non-controlling interests
Net profit attributable to preferred noteholders was zero in 2015
compared with CHF 142 million in the prior year. Subsequent to
the exchange offer in the fourth quarter of 2014, the preferred
notes issued by UBS AG were reclassified in 2015 to equity attrib-
utable to non-controlling interests in the UBS Group AG consoli-
dated financial statements.
Net profit attributable to non-controlling interests was CHF
183 million in 2015 compared with CHF 32 million in the prior
year. This mainly related to net profit attributable to non-control-
ling interests in UBS AG which was CHF 103 million in 2015. As a
result of the completion of the SESTA procedure in the third quar-
ter of 2015, UBS Group AG owns 100% of the issued shares of
UBS AG. Since then, profits of UBS AG have been fully attribut-
able to UBS Group AG shareholders.
Furthermore, dividends of CHF 76 million were paid to pre-
ferred noteholders, for which no accrual was required in a prior
period.
77
Financial and operating performance Financial and operating performance
Wealth Management
Wealth Management
Wealth Management1
CHF million, except where indicated
Results
Net interest income
Recurring net fee income2
Transaction-based income3
Other income
Income
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from Corporate Center and other business divisions
of which: services from CC – Services
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses4
Business division operating profit / (loss) before tax
Adjusted results5
Total operating income as reported
of which: gains / (losses) on sales of subsidiaries and businesses
of which: gains related to investments in associates
of which: gains on sale of financial assets available for sale6
Total operating income (adjusted)
Total operating expenses as reported
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
of which: restructuring expenses allocated from CC – Services
Total operating expenses (adjusted)
Business division operating profit / (loss) before tax as reported
Business division operating profit / (loss) before tax (adjusted)
Key performance indicators7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
Adjusted key performance indicators5, 7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
78
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
2,331
3,548
1,397
20
7,296
(5)
7,291
2,349
640
2,348
2,256
2
4
5,343
1,948
7,291
(23)
21
7,293
5,343
53
55
339
4,896
1,948
2,397
(27.6)
73.2
2.8
77
21
(15.2)
67.1
2.8
77
25
2,326
3,820
1,778
231
8,155
0
8,155
2,532
637
2,289
2,209
5
3
5,465
2,689
8,155
169
15
7,971
5,465
20
38
265
5,142
2,689
2,828
15.6
67.0
1.3
86
28
12.6
64.5
2.3
84
30
2,165
3,783
1,928
25
7,902
(1)
7,901
2,467
918
2,180
2,122
4
5
5,574
2,326
7,901
7,901
5,574
18
49
119
5,389
2,326
2,511
3.5
70.5
3.9
85
25
3.5
68.2
3.9
85
27
0
(7)
(21)
(91)
(11)
(11)
(7)
0
3
2
(60)
33
(2)
(28)
(11)
(9)
(2)
(5)
(28)
(15)
(10)
(25)
(8)
(17)
Wealth Management (continued)1
CHF million, except where indicated
Additional information
Recurring income8
Recurring income as a percentage of income (%)
Average attributed equity (CHF billion)9
Return on attributed equity (%)
Risk-weighted assets (fully applied, CHF billion)10
Return on risk-weighted assets, gross (%)11
Leverage ratio denominator (fully applied, CHF billion)12
Goodwill and intangible assets (CHF billion)
Net new money (CHF billion)
Net new money adjusted (CHF billion)13
Invested assets (CHF billion)
Client assets (CHF billion)
Loans, gross (CHF billion)
Due to customers (CHF billion)
Personnel (full-time equivalents)
Client advisors (full-time equivalents)
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
5,880
80.6
3.5
56.1
25.8
28.1
115.5
1.3
26.8
26.8
977
1,157
101.9
192.3
9,721
3,859
6,146
75.4
3.5
77.4
25.3
31.7
119.0
1.3
12.9
22.8
947
1,122
105.2
172.3
10,239
4,019
5,949
75.3
3.4
67.9
25.4
34.5
138.3
1.4
34.4
34.4
987
1,160
112.7
191.3
10,337
4,250
(4)
0
2
(3)
0
3
3
(3)
12
(5)
(4)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio management fees,
asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and commission income,
mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Refer to “Note 30 Changes in organization
and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 5 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 6 Reflects
a gain on the sale of our investment in Visa Europe. 7 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 8 Recurring income consists of net interest
income and recurring net fee income. 9 Refer to the “Capital management” section of this report for more information. 10 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs).
Refer to the “Capital management” section of this report for more information. 11 Based on fully applied RWA. 12 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this
report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance
with former Swiss SRB rules and are therefore not fully comparable. 13 Adjusted net new money excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital optimization
program.
Regional breakdown of key figures1, 2
As of or for the year ended 31.12.16
Europe
Asia Pacific
Switzerland
Emerging markets
Net new money (CHF billion)
Net new money growth (%)
Invested assets (CHF billion)
Gross margin on invested assets (bps)
Client advisors (full-time equivalents)
8.1
2.4
353
69
1,317
20.8
7.6
292
72
1,016
5.0
2.9
180
86
744
(6.2)
(4.0)
149
96
681
of which: ultra high
net worth
27.3
5.4
552
52
8055
of which: Global
Family Office3
11.2
14.7
94
474
1 Refer to the "Measurement of performance” section of this report for the definitions of our key performance indicators. 2 Based on the Wealth Management business area structure and excluding minor functions
with 101 client advisors, CHF 3 billion of invested assets, and CHF 0.9 billion of net new money outflows in 2016. 3 Joint venture between Wealth Management and the Investment Bank. Global Family Office is reported
as a sub-segment of ultra high net worth and is included in the ultra high net worth figures. 4 Gross margin includes income booked in the Investment Bank. Gross margin only based on income booked in Wealth
Management is 28 basis points. 5 Represents client advisors who exclusively serve ultra high net worth clients. In addition to these, other client advisors may also serve certain ultra high net worth clients, but not
exclusively.
79
Financial and operating performance Financial and operating performance
Wealth Management
2016 compared with 2015
Results
Profit before tax decreased by CHF 741 million or 28% to CHF
1,948 million and adjusted profit before tax decreased by CHF
431 million or 15% to CHF 2,397 million, reflecting lower operat-
ing income, partly offset by decreased operating expenses.
Operating income
Total operating income decreased by CHF 864 million or 11% to
CHF 7,291 million. 2016 included a loss on the sale of subsidiaries
and businesses of CHF 23 million and a gain of CHF 21 million on
the sale of our investment in Visa Europe. 2015 included net gains
of CHF 169 million on the sale of subsidiaries and businesses and
a CHF 15 million gain related to our investment in the SIX Group.
Excluding these items, adjusted operating income decreased by
CHF 678 million or 9% to CHF 7,293 million, mainly due to lower
transaction-based income and recurring net fee income.
Net interest income increased by CHF 5 million to CHF 2,331
million, mainly due to higher deposit revenues, partly offset by
lower treasury-related income from Corporate Center – Group
Asset and Liability Management (Group ALM).
Recurring net fee income decreased by CHF 272 million to CHF
3,548 million due to the effects of cross-border outflows and
shifts into retrocession-free products, changes in clients’ asset
allocation and the effect of our exit from the Australian and Bel-
gian domestic businesses. This was partly offset by the effects of
increases in discretionary and advisory mandate penetration and
pricing measures.
Transaction-based income decreased by CHF 381 million to
CHF 1,397 million across all regions and most products, mainly
due to reduced client activity, most notably in Asia Pacific and
emerging markets. Additionally, 2015 included a fee of CHF 45
million received from Personal & Corporate Banking for the shift
of clients, as a result of a detailed client segmentation review.
Other income decreased by CHF 211 million to CHF 20 million,
mainly related to the aforementioned net gains on the sale of
subsidiaries and businesses in 2015.
Operating expenses
Total operating expenses decreased by CHF 122 million or 2% to
CHF 5,343 million and adjusted operating expenses decreased by
CHF 246 million or 5% to CHF 4,896 million.
Personnel expenses decreased by CHF 183 million to CHF
2,349 million and adjusted personnel expenses decreased by CHF
216 million to CHF 2,296 million, driven by a decrease in staff
levels and lower variable compensation expenses, as well as lower
pension costs for our Swiss pension plan, reflecting the effect of
changes to demographic and financial assumptions.
General and administrative expenses increased by CHF 3 mil-
lion to CHF 640 million, and adjusted general and administrative
expenses decreased by CHF 14 million to CHF 585 million. This
was driven by a CHF 35 million decrease in net expenses for provi-
sions for litigation, regulatory and similar matters, partly offset by
higher professional fees.
Net expenses for services from Corporate Center and other
business divisions increased by CHF 59 million to CHF 2,348 mil-
lion and adjusted net expenses for services decreased by CHF 15
million to CHF 2,009 million, mainly reflecting lower expenses
from Group Operations partly offset by higher occupancy
expenses from Group Corporate Services.
Net new money
Net new money was CHF 26.8 billion compared with adjusted net
new money of CHF 22.8 billion in the prior year, which excluded
the negative effect of CHF 9.9 billion from our balance sheet and
capital optimization program. The net new money growth rate
was 2.8% compared with an adjusted growth rate of 2.3%, and
was below our target range of 3% to 5%. Net new money was
driven predominantly by inflows in Asia Pacific, but also Europe
and Switzerland, partly offset by outflows in emerging markets,
mainly due to cross-border outflows. Total cross-border outflows
were CHF 14 billion compared with CHF 8 billion, mainly driven by
outflows in emerging markets. On a global basis, net new money
from ultra high net worth clients was CHF 27.3 billion compared
with adjusted net new money of CHF 23.4 billion.
Invested assets
Invested assets increased by CHF 30 billion to CHF 977 billion,
primarily reflecting net new money of CHF 27 billion and positive
market performance of CHF 19 billion, partly offset by a CHF 13
billion decrease due to the sale of subsidiaries and businesses that
did not affect net new money, and negative foreign currency
translation effects of CHF 1 billion. Discretionary and advisory
mandate penetration increased to 26.9% from 26.4%.
Cost / income ratio
The cost / income ratio increased to 73.2% from 67.0%. On an
adjusted basis, the ratio increased to 67.1% from 64.5% and was
above our target range of 55% to 65%.
Personnel
Wealth Management employed 9,721 personnel compared with
10,239. The number of client advisors decreased by 160 to 3,859
and the number of non-client facing staff decreased by 358 to
5,862, both driven by our cost reduction programs and our exit
from the Australian domestic business. Of the aforementioned
decrease in client advisors, 82 were related to our exit from the
Australian domestic business.
80
2015 compared with 2014
Results
Profit before tax increased by CHF 363 million or 16% to CHF
2,689 million and adjusted profit before tax increased by CHF 317
million or 13% to CHF 2,828 million, reflecting lower operating
expenses and higher operating income.
Operating income
Total operating income increased by CHF 254 million or 3% to
CHF 8,155 million. Excluding net gains of CHF 169 million on the
sale of subsidiaries and businesses and a CHF 15 million gain
related to our investment in the SIX Group, adjusted operating
income increased by CHF 70 million or 1% to CHF 7,971 million,
mainly due to higher net interest income and recurring net fee
income, partly offset by lower transaction-based income.
Net interest income increased by CHF 161 million to CHF 2,326
million, mainly due to higher lending revenues and an increase in
allocated revenues from Corporate Center – Group Asset and
Liability Management (Group ALM).
Recurring net fee income increased by CHF 37 million to CHF
3,820 million, reflecting the positive effects of a continued
increase in discretionary and advisory mandate penetration and
pricing measures, partly offset by lower income due to the ongo-
ing effects of cross-border outflows.
Transaction-based income decreased by CHF 150 million to
CHF 1,778 million across all regions, mainly due to reduced client
activity, most notably in Europe and emerging markets. The over-
all decrease was mainly related to investment funds, fixed income
cash products and structured products, partly offset by higher for-
eign exchange trading and mandate revenues. Transaction-based
revenues allocated from Group ALM also decreased. These
decreases were partly offset by a fee of CHF 45 million received
from Personal & Corporate Banking for the shift of clients as a
result of a detailed client segmentation review.
Other income increased by CHF 206 million to CHF 231 mil-
lion, mainly related to the aforementioned net gains.
tive expenses decreased by CHF 271 million to CHF 599 million,
mainly due to the aforementioned decreased net expenses for
provisions for litigation, regulatory and similar matters.
Net expenses for services from other business divisions and
Corporate Center increased by CHF 109 million to CHF 2,289 mil-
lion and adjusted net expenses for services decreased by CHF 37
million to CHF 2,024 million, mainly due to lower expenses from
Group Operations and Group Corporate Services, partly offset by
higher expenses from Group ALM.
Net new money
Adjusted net new money, which excludes net outflows of CHF
9.9 billion from our balance sheet and capital optimization pro-
gram, was CHF 22.8 billion and was driven by inflows in Asia
Pacific, Switzerland and Europe, partly offset by outflows in
emerging markets. This resulted in an adjusted net new money
growth rate of 2.3% compared with 3.9%, below our target
range of 3% to 5%. Adjusted net new money was negatively
affected by client deleveraging and cross-border outflows. On a
global basis, adjusted net new money from ultra high net worth
clients was CHF 23.4 billion compared with CHF 29.8 billion. On
a reported basis, total net new money was CHF 12.9 billion from
CHF 34.4 billion.
Invested assets
Invested assets decreased by CHF 40 billion to CHF 947 billion due
to foreign currency translation effects of CHF 25 billion, a CHF 16
billion reduction due to the aforementioned sale of subsidiaries
and businesses that did not affect net new money and negative
market performance of CHF 9 billion, partly offset by net new
money inflows of CHF 13 billion, which included net outflows of
CHF 10 billion from our balance sheet and capital optimization
program. Discretionary and advisory mandate penetration
increased to 26.4% compared with 24.4%.
Cost / income ratio
The cost / income ratio was 67.0% compared with 70.5%. On an
adjusted basis, the cost / income ratio was 64.5% compared with
68.2% and was within our target range of 55% to 65%.
Operating expenses
Total operating expenses decreased by CHF 109 million or 2% to
CHF 5,465 million and adjusted operating expenses decreased by
CHF 247 million or 5% to CHF 5,142 million, mainly as net
expenses for provisions for litigation, regulatory and similar mat-
ters declined to CHF 104 million from CHF 394 million.
Personnel expenses increased by CHF 65 million to CHF 2,532
million and adjusted personnel expenses increased by CHF 63 mil-
lion to CHF 2,512 million, mainly due to higher pension-related
costs and increased expenses for variable compensation, as well
as salary increases, partly offset by favorable foreign currency
translation effects and the effect of personnel reductions.
General and administrative expenses decreased by CHF 281
million to CHF 637 million, and adjusted general and administra-
Personnel
Wealth Management employed 10,239 personnel as of 31 Decem-
ber 2015 compared with 10,337 as of 31 December 2014.
The number of client advisors decreased by 231 to 4,019 with
reductions in Europe, Asia Pacific and emerging markets, mainly
due to a reduction in the number of lower-producing advisors and
the reclassification of certain staff from client advisors to non-
client facing staff.
The number of non-client facing staff increased by 133 to
6,220, mainly due to hiring for our strategic and regulatory pri-
orities, the shift of a team of real estate financing experts from
Personal & Corporate Banking to Wealth Management, and the
aforementioned reclassification, partly offset by the effect of the
sale of subsidiaries and businesses in 2015.
81
Financial and operating performance Financial and operating performance
Wealth Management Americas
Wealth Management Americas
Wealth Management Americas – in US dollars1
USD million, except where indicated
Results
Net interest income
Recurring net fee income2
Transaction-based income3
Other income
Income
Credit loss (expense) / recovery
Total operating income
Personnel expenses
Financial advisor compensation4
Compensation commitments with recruited financial advisors5
Salaries and other personnel costs
General and administrative expenses
Services (to) / from Corporate Center and other business divisions
of which: services from CC – Services
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses6
Business division operating profit / (loss) before tax
Adjusted results7
Total operating income as reported
of which: gains on sale of financial assets available for sale
Total operating income (adjusted)
Total operating expenses as reported
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
of which: restructuring expenses allocated from CC – Services
of which: a gain related to a change to retiree benefit plans in the US
Total operating expenses (adjusted)
Business division operating profit / (loss) before tax as reported
Business division operating profit / (loss) before tax (adjusted)
Key performance indicators8
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
Adjusted key performance indicators7, 8
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
82
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
1,484
4,880
1,474
35
7,873
(3)
7,871
4,874
2,931
808
1,135
576
1,250
1,236
2
50
6,752
1,118
7,871
10
7,861
6,752
7
0
134
6,610
1,118
1,250
48.3
85.8
1.5
73
10
43.0
84.1
1.5
73
12
1,215
4,795
1,614
32
7,657
(4)
7,653
4,746
2,921
761
1,064
845
1,252
1,236
3
53
6,899
754
7,653
7,653
6,899
0
0
141
(21)
6,779
754
874
(23.1)
90.1
2.1
74
7
(15.1)
88.5
2.1
74
8
1,067
4,666
1,825
33
7,590
16
7,606
4,741
2,944
733
1,063
597
1,234
1,217
0
52
6,625
981
7,606
7,606
6,625
0
0
59
(10)
6,576
981
1,030
5.8
87.3
1.0
76
10
3.9
86.6
1.0
76
10
22
2
(9)
9
3
(25)
3
3
0
6
7
(32)
0
0
(33)
(6)
(2)
48
3
3
(2)
(2)
48
43
(1)
43
(1)
50
Wealth Management Americas – in US dollars (continued)1
USD million, except where indicated
Additional information
Recurring income9
Recurring income as a percentage of income (%)
Average attributed equity (USD billion)10
Return on attributed equity (%)
Risk-weighted assets (fully applied, USD billion)11
Return on risk-weighted assets, gross (%)12
Leverage ratio denominator (fully applied, USD billion)13
Goodwill and intangible assets (USD billion)
Net new money (USD billion)
Net new money including interest and dividend income (USD billion)14
Invested assets (USD billion)
Client assets (USD billion)
Loans, gross (USD billion)
Due to customers (USD billion)
Recruitment loans to financial advisors
Other loans to financial advisors
Personnel (full-time equivalents)
Financial advisors (full-time equivalents)
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
6,364
6,010
5,733
80.8
2.6
43.0
23.4
33.9
66.9
3.7
15.4
40.8
1,111
1,160
51.6
89.2
3,033
462
13,526
7,025
78.5
2.6
29.3
21.9
34.0
62.8
3.7
21.4
47.8
1,033
1,084
48.7
83.1
3,179
418
13,611
7,140
75.5
2.9
33.8
21.8
29.4
63.7
3.8
10.0
37.2
1,032
1,087
44.6
73.5
2,925
374
13,322
6,997
6
0
7
7
0
8
7
6
7
(5)
11
(1)
(2)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio management fees,
asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and commission income,
mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Financial advisor compensation consists of
grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, assets and other
variables. 5 Compensation commitments with recruited financial advisors represents expenses related to compensation commitments granted to financial advisors at the time of recruitment that are subject to vesting
requirements. 6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 7 Adjusted results are non-GAAP
financial measures as defined by SEC regulations. 8 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 9 Recurring income consists of net interest
income and recurring net fee income. 10 Refer to the “Capital management” section of this report for more information. 11 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs).
Refer to the “Capital management” section of this report for more information. 12 Based on fully applied RWA. 13 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this
report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance
with former Swiss SRB rules and are therefore not fully comparable. 14 Presented in line with historical reporting practice in the US market.
83
Financial and operating performance Financial and operating performance
Wealth Management Americas
2016 compared with 2015
Results
Profit before tax increased by USD 364 million or 48% to USD
1,118 million, and adjusted profit before tax increased by USD
376 million or 43% to USD 1,250 million due to higher operating
income and lower operating expenses.
Operating income
Total operating income increased by USD 218 million or 3% to
USD 7,871 million. Adjusted operating income increased by USD
208 million or 3% to USD 7,861 million, due to higher net interest
income and recurring net fee income, partly offset by lower trans-
action-based income.
Net interest income increased by USD 269 million to USD
1,484 million, due to higher short-term interest rates and growth
in loan and deposit balances. The average mortgage portfolio bal-
ance increased 12% and the average securities-backed lending
portfolio balance increased 6%.
Recurring net fee income increased by USD 85 million to USD
4,880 million, mainly due to increased managed account fees,
reflecting higher invested asset levels.
Transaction-based income decreased by USD 140 million to
USD 1,474 million, primarily due to lower client activity levels.
Operating expenses
Operating expenses decreased by USD 147 million or 2% to USD
6,752 million and adjusted operating expenses decreased by USD
169 million or 2% to USD 6,610 million, due to USD 260 million
lower net expenses for provisions for litigation, regulatory and sim-
ilar matters, partly offset by higher adjusted personnel expenses.
Personnel expenses increased by USD 128 million to USD 4,874
million and adjusted personnel expenses increased by USD 101
million to USD 4,867 million, mainly due to higher salary costs
and other personnel costs due to an increase in support staff, as
well as higher expenses for compensation commitments, reflect-
ing the recruitment of financial advisors.
General and administrative expenses decreased by USD 269
million to USD 576 million, mainly due to the aforementioned
reduction in net expenses for provisions for litigation, regulatory
and similar matters.
Cost / income ratio
The cost / income ratio was 85.8% compared with 90.1%. On an
adjusted basis, the cost / income ratio was 84.1% compared with
88.5% and was within our target range of 75% to 85%.
Net new money
Net new money was USD 15.4 billion compared with USD 21.4
billion, reflecting lower inflows from financial advisors employed
with UBS for more than one year. The net new money growth rate
was 1.5% compared with 2.1%, and was below our target range
of 2% to 4%.
Invested assets
Invested assets increased by USD 78 billion to USD 1,111 billion,
reflecting positive market performance of USD 62 billion and net
new money inflows of USD 15 billion. Managed account assets
increased by USD 35 billion to USD 386 billion and comprised
34.7% of invested assets compared with 34.0%.
Personnel
As of 31 December 2016, Wealth Management Americas
employed 13,526 personnel, a decrease of 85 from 31 December
2015. Financial advisor headcount decreased by 115 to 7,025,
due to attrition. Non-financial advisor headcount increased by 30
to 6,501.
84
2015 compared with 2014
Results
Profit before tax was USD 754 million compared with USD 981
million, mainly reflecting higher net expenses for provisions for
litigation, regulatory and similar matters. Adjusted profit before
tax decreased to USD 874 million from USD 1,030 million.
Operating income
Total operating income increased by USD 47 million to USD 7,653
million due to higher net interest income and continued growth
in managed account fees, partly offset by lower transaction-based
income and a net credit loss expense in 2015 compared with a net
credit loss recovery in 2014.
Net interest income increased by USD 148 million to USD
1,215 million, reflecting continued growth in loan and deposit
balances. The average mortgage portfolio balance increased 16%
and the average securities-backed lending portfolio balance
increased 12%.
Recurring net fee income increased by USD 129 million to USD
4,795 million, mainly due to increased managed account fees,
reflecting higher invested asset levels.
Transaction-based income decreased by USD 211 million to
USD 1,614 million, primarily due to lower client activity.
We incurred a net credit loss expense of USD 4 million com-
pared with a net recovery of USD 16 million. The 2014 net recov-
ery included the full release of a loan loss allowance for a single
client as well as releases of loan loss allowances on securities-
backed lending facilities collateralized by Puerto Rico municipal
securities and related funds.
Operating expenses
Operating expenses increased by USD 274 million or 4% to USD
6,899 million. Adjusted operating expenses increased by USD 203
million or 3% to USD 6,779 million, primarily due to USD 178 mil-
lion higher net expenses for provisions for litigation, regulatory and
similar matters, and an increase in other provisions and legal fees,
partly offset by lower expenses from Corporate Center – Services.
Personnel expenses increased by USD 5 million to USD 4,746
million and adjusted personnel expenses increased by USD 18 mil-
lion to USD 4,766 million, mainly due to higher compensation
commitments for recruited financial advisors, partly offset by
lower financial advisor compensation, reflecting lower compen-
sable revenues.
General and administrative expenses increased by USD 248
million to USD 845 million, mainly as the net expenses for provi-
sions for litigation, regulatory and similar matters increased to
USD 356 million from USD 178 million. Furthermore, we recorded
higher expenses for other provisions and increased legal fees.
Net expenses for services from Corporate Center and other
business divisions increased by USD 18 million to USD 1,252 mil-
lion and adjusted net expenses for services decreased by USD 64
million to USD 1,113 million, reflecting lower expenses from Cor-
porate Center – Services.
Cost / income ratio
The cost / income ratio was 90.1% compared with 87.3%. On an
adjusted basis, the cost / income ratio was 88.5% compared with
86.6% and was above our target range of 75% to 85%.
Net new money
Net new money was USD 21.4 billion, reflecting strong inflows
from advisors who have been with the firm for more than one
year, as well as net inflows from newly recruited advisors. Net new
money growth was 2.1% compared with 1.0%, within our target
range of 2% to 4%.
Invested assets
Invested assets increased by USD 1 billion to USD 1,033 billion,
reflecting strong net new money inflows of USD 21 billion, mostly
offset by negative market performance of USD 20 billion. Managed
account assets increased by USD 5 billion to USD 351 billion and
comprised 34% of invested assets, unchanged from 31 December
2014.
Personnel
As of 31 December 2015, Wealth Management Americas
employed 13,611 personnel, an increase of 289 from 31 Decem-
ber 2014. Financial advisor headcount increased by 143 to 7,140,
reflecting the hiring of experienced financial advisors and contin-
ued low financial advisor attrition. Non-financial advisor head-
count increased by 146 to 6,471, due to an increase in financial
advisor support staff.
85
Financial and operating performance Financial and operating performance
Wealth Management Americas
Wealth Management Americas – in Swiss francs1
CHF million, except where indicated
Results
Net interest income
Recurring net fee income2
Transaction-based income3
Other income
Income
Credit loss (expense) / recovery
Total operating income
Personnel expenses
Financial advisor compensation4
Compensation commitments with recruited financial advisors5
Salaries and other personnel costs
General and administrative expenses
Services (to) / from Corporate Center and other business divisions
of which: services from CC – Services
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses6
Business division operating profit / (loss) before tax
Adjusted results7
Total operating income as reported
of which: gains on sale of financial assets available for sale
Total operating income (adjusted)
Total operating expenses as reported
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
of which: restructuring expenses allocated from CC – Services
of which: a gain related to a change to retiree benefit plans in the US
Total operating expenses (adjusted)
Business division operating profit / (loss) before tax as reported
Business division operating profit / (loss) before tax (adjusted)
Key performance indicators8
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
Adjusted key performance indicators7, 8
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
86
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
1,467
4,825
1,458
35
7,785
(3)
7,782
4,819
2,898
799
1,122
570
1,235
1,221
2
50
6,675
1,107
7,782
10
7,772
6,675
7
0
132
6,536
1,107
1,236
54.2
85.7
1.5
74
10
48.2
84.1
1.5
74
12
1,174
4,623
1,555
31
7,384
(4)
7,381
4,579
2,817
735
1,027
822
1,209
1,193
3
51
6,663
718
7,381
7,381
6,663
0
0
137
(21)
6,547
718
834
(20.2)
90.2
2.1
74
7
(11.8)
88.7
2.1
74
8
983
4,294
1,678
30
6,984
15
6,998
4,363
2,710
675
979
550
1,137
1,121
0
48
6,099
900
6,998
6,998
6,099
0
0
55
(9)
6,053
900
946
4.9
87.3
1.1
76
10
3.2
86.7
1.1
76
10
25
4
(6)
13
5
(25)
5
5
3
9
9
(31)
2
2
(33)
(2)
0
54
5
5
0
0
54
48
0
43
0
50
Wealth Management Americas – in Swiss francs (continued)1
CHF million, except where indicated
Additional information
Recurring income9
Recurring income as a percentage of income (%)
Average attributed equity (CHF billion)10
Return on attributed equity (%)
Risk-weighted assets (fully applied, CHF billion)11
Return on risk-weighted assets, gross (%)12
Leverage ratio denominator (fully applied, CHF billion)13
Goodwill and intangible assets (CHF billion)
Net new money (CHF billion)
Net new money including interest and dividend income (CHF billion)14
Invested assets (CHF billion)
Client assets (CHF billion)
Loans, gross (CHF billion)
Due to customers (CHF billion)
Recruitment loans to financial advisors
Other loans to financial advisors
Personnel (full-time equivalents)
Financial advisors (full-time equivalents)
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
6,292
5,798
5,276
80.8
2.6
43.4
23.8
34.3
68.1
3.7
15.4
40.5
1,131
1,181
52.5
90.8
3,087
471
13,526
7,025
78.5
2.5
29.0
21.9
33.8
62.9
3.7
21.3
46.9
1,035
1,085
48.8
83.2
3,184
418
13,611
7,140
75.5
2.7
33.6
21.7
29.7
63.3
3.7
9.6
35.0
1,027
1,081
44.4
73.1
2,909
372
13,322
6,997
9
4
9
8
0
9
9
8
9
(3)
13
(1)
(2)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio management fees,
asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and commission income,
mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Financial advisor compensation consists of
grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated on the basis of financial advisor productivity, firm tenure, assets and other
variables. 5 Compensation commitments with recruited financial advisors represents expenses related to compensation commitments granted to financial advisors at the time of recruitment that are subject to vesting
requirements. 6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 7 Adjusted results are non-GAAP
financial measures as defined by SEC regulations. 8 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 9 Recurring income consists of net interest
income and recurring net fee income. 10 Refer to the “Capital management” section of this report for more information. 11 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs).
Refer to the “Capital management” section of this report for more information. 12 Based on fully applied RWA. 13 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this
report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance
with former Swiss SRB rules and are therefore not fully comparable. 14 Presented in line with historical reporting practice in the US market.
87
Financial and operating performance Financial and operating performance
Personal & Corporate Banking
Personal & Corporate Banking
Personal & Corporate Banking1
CHF million, except where indicated
Results
Net interest income
Recurring net fee income2
Transaction-based income3
Other income
Income
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from Corporate Center and other business divisions
of which: services from CC – Services
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses4
Business division operating profit / (loss) before tax
Adjusted results5
Total operating income as reported
of which: gains related to investments in associates
of which: gains on sale of financial assets available for sale6
Total operating income (adjusted)
Total operating expenses as reported
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
of which: restructuring expenses allocated from CC – Services
Total operating expenses (adjusted)
Business division operating profit / (loss) before tax as reported
Business division operating profit / (loss) before tax (adjusted)
Key performance indicators7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net interest margin (bps)
Net new business volume growth for personal banking (%)
Adjusted key performance indicators5, 7
Pre-tax profit growth (%)
Cost / income ratio (%)
Net interest margin (bps)
Net new business volume growth for personal banking (%)
88
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
2,199
553
1,028
211
3,990
(6)
3,984
845
285
1,080
1,186
15
0
2,224
1,760
3,984
21
102
3,861
2,224
4
0
113
2,107
1,760
1,754
6.9
55.7
163
3.1
4.3
54.5
163
3.1
2,270
544
959
140
3,913
(37)
3,877
873
264
1,077
1,180
17
0
2,231
1,646
3,877
66
3,811
2,231
2
0
99
2,130
1,646
1,681
9.3
57.0
167
2.4
7.1
55.4
167
2.4
2,184
556
1,022
75
3,836
(95)
3,741
850
293
1,074
1,196
17
0
2,235
1,506
3,741
3,741
2,235
4
0
60
2,171
1,506
1,570
3.3
58.3
159
2.3
3.8
56.6
159
2.3
(3)
2
7
51
2
(84)
3
(3)
8
0
1
(12)
0
7
3
1
0
(1)
7
4
(2)
(2)
Personal & Corporate Banking (continued)1
CHF million, except where indicated
Additional information
Average attributed equity (CHF billion)8
Return on attributed equity (%)
Risk-weighted assets (fully applied, CHF billion)9
Return on risk-weighted assets, gross (%)10
Leverage ratio denominator (fully applied, CHF billion)11
Goodwill and intangible assets (CHF billion)
Business volume for personal banking (CHF billion)
Net new business volume for personal banking (CHF billion)
Client assets (CHF billion)
Due to customers (CHF billion)
Loans, gross (CHF billion)
Secured loan portfolio as a percentage of total loan portfolio, gross (%)
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)12
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
4.1
43.2
41.6
10.4
152.2
0.0
149
4.6
466
135.9
133.9
92.9
0.6
5,143
3.9
41.9
34.6
11.3
153.8
0.0
148
3.4
444
132.4
135.6
93.9
0.6
5,058
4.1
36.7
33.1
11.8
165.9
0.0
143
3.2
434
137.3
137.4
93.1
0.8
5,206
5
20
(1)
1
5
3
(1)
2
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Recurring net fee income consists of fees for services provided on an ongoing basis such as portfolio management fees,
asset-based investment fund fees, custody fees and account-keeping fees, which are generated on client assets. 3 Transaction-based income consists of the non-recurring portion of net fee and commission income,
mainly consisting of brokerage and transaction-based investment fund fees as well as credit card fees and fees for payment transactions, together with net trading income. 4 Refer to “Note 30 Changes in organization
and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 5 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 6 Reflects
a gain on the sale of our investment in Visa Europe. 7 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 8 Refer to the “Capital management”
section of this report for more information. 9 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more
information. 10 Based on fully applied RWA. 11 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the
leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully
comparable. 12 Refer to the “Risk management and control” section of this report for more information on impaired loan exposures.
89
Financial and operating performance Operating expenses
Operating expenses decreased by CHF 7 million to CHF 2,224 mil-
lion and adjusted operating expenses decreased by CHF 23 million
to CHF 2,107 million.
Personnel expenses decreased by CHF 28 million to CHF 845
million, mainly due to lower pension costs for our Swiss pension
plan, reflecting the effect of changes to demographic and finan-
cial assumptions, as well as lower variable compensation expenses.
This was partly offset by higher expenses due to a shift of staff
from Wealth Management to Personal & Corporate Banking.
General and administrative expenses increased by CHF 21 mil-
lion to CHF 285 million, mainly reflecting higher capital-related
levies in Switzerland.
Net expenses for services from Corporate Center and other
business divisions increased by CHF 3 million to CHF 1,080 mil-
lion. Adjusted net expenses decreased by CHF 11 million to CHF
967 million, mainly reflecting lower allocations from Group Oper-
ations and Group Technology.
Cost / income ratio
The cost / income ratio decreased to 55.7% from 57.0%. On an
adjusted basis, the ratio decreased to 54.5% compared with
55.4% and remained within our target range of 50% to 60%.
Net interest margin
The net interest margin decreased 4 basis points to 163 basis
points on both a reported and adjusted basis, and remained
within our target range of 140 to 180 basis points.
Net new business volume growth for personal banking
The net new business volume growth rate for our personal bank-
ing business was 3.1% compared with 2.4% and remained within
our target range of 1% to 4%. Net new client assets and, to a
lesser extent, net new loans were positive.
Personnel
Personal & Corporate Banking employed 5,143 personnel as of
31 December 2016, an increase of 85 compared with 5,058 per-
sonnel as of 31 December 2015, mainly reflecting a shift of staff
from Wealth Management to Personal & Corporate Banking.
Financial and operating performance
Personal & Corporate Banking
2016 compared with 2015
Results
Profit before tax increased by CHF 114 million or 7% to CHF
1,760 million. Adjusted profit before tax increased by CHF 73 mil-
lion or 4% to CHF 1,754 million, due to higher operating income
and lower operating expenses.
Operating income
Total operating income increased by CHF 107 million or 3% to
CHF 3,984 million. 2016 included a gain on the sale of our invest-
ment in Visa Europe of CHF 102 million, as well as gains related
to investments in associates of CHF 21 million, compared with
CHF 66 million. Excluding these items, adjusted operating income
increased by CHF 50 million to CHF 3,861 million, mainly reflect-
ing higher transaction-based income and a lower net credit loss
expense, partly offset by decreased net interest income.
Net interest income decreased by CHF 71 million to CHF 2,199
million, mainly due to lower treasury-related income from Corpo-
rate Center – Group Asset and Liability Management (Group
ALM) and lower deposit-related income driven by the adverse
effect of persistently low interest rates on our replication portfo-
lios. This was partly offset by higher loan-related income.
➔ Refer to the “Corporate Center – Group Asset and Liability
Management” section in “Financial and operating performance”
of this report for more information
Recurring net fee income increased by CHF 9 million to CHF
553 million, mainly reflecting higher account-keeping fees partly
offset by lower fee income allocated from Group ALM for the
provision of collateral in relation to issued covered bonds.
Transaction-based income increased by CHF 69 million to CHF
1,028 million, mainly as 2015 included a fee of CHF 45 million
paid to Wealth Management for the shift of clients as a result of
a detailed client segmentation review. Additionally, 2016 included
higher fees from corporate finance activity.
Other income increased by CHF 71 million to CHF 211 million,
mainly due to the aforementioned gains on the sale of our invest-
ment in Visa Europe and investments in associates.
We recorded a net credit loss expense of CHF 6 million com-
pared with CHF 37 million, mainly due to higher net recoveries on
existing impaired positions.
➔ Refer to the “Risk management and control” section of this
report for more information
90
2015 compared with 2014
Results
Profit before tax increased by CHF 140 million or 9% to CHF
1,646 million. Adjusted profit before tax increased by CHF 111
million or 7% to CHF 1,681 million, reflecting higher operating
income and lower operating expenses.
Operating income
Total operating income increased by CHF 136 million to CHF
3,877 million and included a gain of CHF 66 million related to our
investment in the SIX Group. Excluding this gain, adjusted operat-
ing income increased by CHF 70 million to CHF 3,811 million,
reflecting higher net interest income and a lower net credit loss
expense, partly offset by decreased transaction-based and recur-
ring net fee income.
Net interest income increased by CHF 86 million to CHF 2,270
million, primarily due to higher income from loans and deposits,
reflecting our pricing measures.
Recurring net fee income decreased by CHF 12 million to CHF
544 million, mainly reflecting lower treasury-related income from
Group ALM for the provision of collateral in relation to issued
covered bonds, as well as decreased revenues from non-asset-
based products. This was partly offset by increased revenues for
account keeping, banking packages and custody services.
Transaction-based income decreased by CHF 63 million to CHF
959 million, mainly driven by a fee of CHF 45 million paid to
Wealth Management for the shift of clients as a result of a detailed
client segmentation review, as well as lower credit card fees.
Other income increased by CHF 65 million to CHF 140 million,
mainly due to the aforementioned gain related to our investment
in the SIX Group.
We recorded a net credit loss expense of CHF 37 million com-
pared with CHF 95 million, predominantly due to lower expenses
for newly impaired positions.
Operating expenses
Operating expenses decreased by CHF 4 million to CHF 2,231 mil-
lion and adjusted operating expenses decreased by CHF 41 million
or 2% to CHF 2,130 million.
Personnel expenses increased by CHF 23 million to CHF 873
million, mainly reflecting increased expenses for variable compen-
sation and higher pension-related costs.
General and administrative expenses decreased by CHF 29 mil-
lion to CHF 264 million, mainly reflecting a net release of CHF 2
million of provisions for litigation, regulatory and similar matters
compared with net expenses of CHF 59 million in the prior year.
This was partly offset by higher marketing expenses, which
included a one-time reversal of an accrual in 2014.
Net expenses for services from Corporate Center and other
business divisions increased by CHF 3 million to CHF 1,077 mil-
lion. Adjusted net expenses for services decreased by CHF 36 mil-
lion to CHF 978 million, reflecting lower expenses from Group
Operations and Group Corporate Services, partly offset by higher
expenses from Group Technology.
Cost / income ratio
The cost / income ratio was 57.0% compared with 58.3%. On an
adjusted basis, the cost / income ratio was 55.4% compared with
56.6% and remained within our target range of 50% to 60%.
Net interest margin
The net interest margin increased 8 basis points to 167 basis
points and remained within our target range of 140 to 180 basis
points.
Net new business volume growth for personal banking
The net new business volume growth rate for our personal bank-
ing business was 2.4% compared with 2.3% and remained within
our target range of 1% to 4%. Net new client assets were positive
while net new loans were slightly negative.
Personnel
Personal & Corporate Banking employed 5,058 personnel as of
31 December 2015, a decrease of 148 compared with 5,206 per-
sonnel as of 31 December 2014, reflecting the shift of a team of
real estate financing experts from Personal & Corporate Banking
to Wealth Management, as well as staff reductions, including
those related to our ongoing cost reduction programs.
91
Financial and operating performance Financial and operating performance
Asset Management
Asset Management
Asset Management1
CHF million, except where indicated
Results
Net management fees2
Performance fees
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from Corporate Center and other business divisions
of which: services from CC – Services
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses3
Business division operating profit / (loss) before tax
Adjusted results4
Total operating income as reported
of which: gains / (losses) on sales of subsidiaries and businesses
Total operating income (adjusted)
Total operating expenses as reported
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
of which: restructuring expenses allocated from CC – Services
of which: a gain related to a change to retiree benefit plans in the US
Total operating expenses (adjusted)
Business division operating profit / (loss) before tax as reported
Business division operating profit / (loss) before tax (adjusted)
Key performance indicators5
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth excluding money market flows (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
Adjusted key performance indicators4, 5
Pre-tax profit growth (%)
Cost / income ratio (%)
Net new money growth excluding money market flows (%)
Gross margin on invested assets (bps)
Net margin on invested assets (bps)
Information by business line
Operating income
Equities, Multi Asset & O’Connor
Fixed Income
Global Real Estate
Infrastructure and Private Equity
Solutions
Fund Services
Total operating income
92
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
1,810
122
1,931
727
241
506
530
1
4
1,479
452
1,931
1,931
1,479
15
15
70
1,379
452
552
(22.6)
76.6
(3.8)
30
7
(9.5)
71.4
(3.8)
30
9
888
297
444
66
109
127
1,903
154
2,057
729
232
502
523
2
8
1,474
584
2,057
56
2,001
1,474
4
11
68
1,392
584
610
25.1
71.7
(0.1)
32
9
19.8
69.6
(0.1)
31
9
921
292
403
57
128
257
1,756
146
1,902
643
305
478
495
2
9
1,435
467
1,902
1,902
1,435
19
2
30
(8)
1,393
467
509
(18.9)
75.4
4.4
31
8
(13.0)
73.2
4.4
31
8
862
332
353
42
135
178
1,931
2,057
1,902
(5)
(21)
(6)
0
4
1
1
(50)
(50)
0
(23)
(6)
(3)
0
(1)
(23)
(10)
(6)
(22)
(3)
0
(4)
2
10
16
(15)
(51)
(6)
Asset Management (continued)1
CHF million, except where indicated
Gross margin on invested assets (bps)
Equities, Multi Asset & O’Connor
Fixed Income
Global Real Estate
Infrastructure and Private Equity
Solutions
Total gross margin
Net new money (CHF billion)
Equities, Multi Asset & O’Connor
Fixed Income
Global Real Estate
Infrastructure and Private Equity
Solutions
Total net new money
Net new money excluding money market flows
of which: from third parties
of which: from UBS’s wealth management businesses
Money market flows
of which: from third parties
of which: from UBS’s wealth management businesses
Invested assets (CHF billion)
Equities, Multi Asset & O’Connor
Fixed Income
Global Real Estate
Infrastructure and Private Equity
Solutions
Total invested assets
of which: excluding money market funds
of which: money market funds
Assets under administration by Fund Services
Assets under administration (CHF billion)6
Net new assets under administration (CHF billion)7
Gross margin on assets under administration (bps)
Additional information
Average attributed equity (CHF billion)8
Return on attributed equity (%)
Risk-weighted assets (fully applied, CHF billion)9
Return on risk-weighted assets, gross (%)10
Leverage ratio denominator (fully applied, CHF billion)11
Goodwill and intangible assets (CHF billion)
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
28
14
82
72
21
30
(13.7)
(3.1)
2.4
(0.6)
(0.5)
(15.5)
(22.5)
(12.5)
(10.0)
7.0
3.4
3.5
326
210
57
9
54
656
591
66
420
0.3
3
1.4
32.3
3.9
65.7
2.7
1.4
28
14
84
62
26
32
(11.9)
(3.2)
3.4
(0.2)
6.4
(5.4)
(0.7)
(7.7)
7.0
(4.7)
(3.4)
(1.3)
327
208
52
10
53
650
592
58
407
24.0
5
1.6
36.5
2.6
62.3
2.7
1.4
27
16
84
49
30
31
14.5
(2.1)
2.3
(0.5)
1.7
15.9
22.6
11.3
11.3
(6.7)
0.0
(6.7)
343
218
46
9
48
664
600
64
520
43.9
4
1.7
27.5
3.8
52.3
14.9
1.5
2,308
2,277
2,323
0
0
(2)
16
(19)
(6)
0
1
10
(10)
2
1
0
14
3
(40)
(13)
50
0
0
1
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Net management fees include transaction fees, fund administration revenues (including net interest and trading income
from lending activities and foreign exchange hedging as part of the fund services offering), gains or losses from seed money and co-investments, funding costs, gains and losses on the sale of subsidiaries and businesses
and other items that are not performance fees. 3 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring
expenses. 4 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 5 Refer to the “Measurement of performance” section of this report for the definitions of our key performance
indicators. 6 Includes UBS and third-party fund assets, for which the fund services unit provides professional services, including fund setup, accounting and reporting for traditional investment funds and alternative
funds. 7 Inflows of assets under administration from new and existing funds less outflows from existing funds or fund exits. 8 Refer to the “Capital management” section of this report for more information. 9 Based
on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 10 Based on fully applied RWA. 11 Calculated in
accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III
rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.
93
Financial and operating performance Financial and operating performance
Asset Management
2016 compared with 2015
Results
Profit before tax decreased by CHF 132 million or 23% to CHF
452 million, partly as 2015 included a gain of CHF 56 million on
the sale of our Alternative Fund Services (AFS) business. Adjusted
profit before tax decreased by CHF 58 million or 10% to CHF 552
million, primarily reflecting lower operating income.
Operating income
Total operating income decreased by CHF 126 million or 6% to
CHF 1,931 million. Excluding the aforementioned gain on sale of
our AFS business, adjusted operating income decreased by CHF
70 million or 3%. Adjusted net management fees decreased by
CHF 37 million to CHF 1,810 million, mainly in Fund Services,
reflecting the reduced size of our Fund Services business following
the sale of AFS. This was partly offset by an increase in Global Real
Estate. Performance fees decreased by CHF 32 million to CHF 122
million, primarily in Equities, Multi Asset & O’Connor.
As of 31 December 2016, approximately 43% of performance
fee-eligible assets within our hedge fund businesses exceeded
high-water marks compared with 26%. These assets are reported
within Equities, Multi Asset & O’Connor and Solutions.
Operating expenses
Total operating expenses increased by CHF 5 million to CHF 1,479
million and adjusted operating expenses decreased by CHF 13
million or 1% to CHF 1,379 million.
Personnel expenses decreased by CHF 2 million to CHF 727
million and adjusted personnel expenses decreased by CHF 13
million to CHF 712 million. The decrease in adjusted personnel
expenses was mainly driven by lower variable compensation
expenses and lower salary costs as a result of the aforementioned
sale of our AFS business, partly offset by higher average staffing
levels, primarily in distribution and investments areas.
General and administrative expenses increased by CHF 9 mil-
lion to CHF 241 million. Adjusted general and administrative
expenses increased by CHF 3 million to CHF 226 million, mainly
driven by higher professional fees and increased costs for market
data services, partly offset by lower travel and entertainment
expenses.
Cost / income ratio
The cost / income ratio was 76.6% compared with 71.7%. On an
adjusted basis, the cost / income ratio was 71.4% compared with
69.6%, and was above our target range of 60% to 70%.
Net new money
Excluding money market flows, net new money outflows were
CHF 22.5 billion compared with CHF 0.7 billion, which resulted in
a negative net new money growth rate of 3.8% compared with
negative 0.1%, below our target range of 3% to 5%. By client
segment, net outflows from third parties were CHF 12.5 billion,
which included a CHF 7.2 billion pricing-related outflow from one
client and asset allocation changes, compared with CHF 7.7 bil-
lion. Net outflows were mainly from clients serviced from Asia
Pacific, the Americas and Europe, partly offset by inflows in Swit-
zerland. Net new money outflows from clients of UBS’s wealth
management businesses were CHF 10.0 billion compared with
inflows of CHF 7.0 billion, largely driven by changes in asset allo-
cation in the fourth quarter of 2016.
Invested assets
Invested assets increased to CHF 656 billion from CHF 650 billion,
reflecting positive market performance of CHF 22 billion, partly
offset by net new money outflows of CHF 16 billion.
As of 31 December 2016, CHF 385 billion or 59% of invested
assets were managed in active, non-money market strategies and
CHF 206 billion, or 31%, of invested assets were managed in pas-
sive strategies. The remaining CHF 66 billion, or 10%, were man-
aged in money market assets. On a regional basis, 34% of
invested assets related to clients serviced from Switzerland, 24%
from the Americas, 22% from Europe, Middle East and Africa,
and 20% from Asia Pacific.
Assets under administration
Total assets under administration increased to CHF 420 billion
from CHF 407 billion, primarily reflecting positive market perfor-
mance of CHF 13 billion.
Personnel
Asset Management employed 2,308 personnel as of 31 Decem-
ber 2016 compared with 2,277 personnel as of 31 December
2015.
94
Investment performance
Investment performance was mixed across our equity funds, with
underperformance in growth and concentrated alpha strategies,
while Asia and emerging markets performed well. UK value and
income funds generally also performed well.
The majority of our fixed income strategies performed solidly in
2016, with an overall moderate active risk exposure across many
portfolios. Our multi-sector and investment grade credit strategies
delivered particularly strong results, and our high-yield strategies
performed relatively well compared with key peers, although
some lagged behind indices.
Our multi-asset strategies overall had a challenging year versus
benchmark, but they showed a strong performance compared
with peers. A cautious stance on equities over the summer
reduced performance, while increasing our exposure to emerging
market assets as well as inflation-protected bonds in the US, con-
tributed positively in the latter half of the year.
Although Global Real Estate’s US composite (including farm-
land) and the Swiss direct real estate businesses produced positive
absolute returns in 2016, on a relative basis, the US composite
underperformed its benchmark due to its lower leverage com-
pared with its index. The Swiss composite also underperformed its
benchmark, given its sizeable weighting in the index.
Our O’Connor multi-strategy fund had a positive absolute per-
formance net of fees, but underperformed against the broader
hedge fund average. Credit and merger arbitrage strategies pro-
duced solid returns for the year, but market-neutral and equity
long / short strategies underperformed. Hedge Fund Solutions had
a positive absolute performance in 2016, unlike many competi-
tors, although equity-hedged allocations had mixed results in
what was a difficult year for this sub-strategy and fundamental
stock picking in general.
Passive strategies and alternative index, or smart beta, prod-
ucts tracked indices closely.
Investment performance as of 31 December 2016
Active funds versus benchmark
Percentage of fund assets equaling or exceeding benchmark
Equities1
Fixed income1
Multi-asset1
Total traditional investments
Real estate2
Active funds versus peers
Percentage of fund assets ranking in first or second quartile / equaling or exceeding peer index
Equities1
Fixed income1
Multi-asset1
Total traditional investments
Real estate2
Hedge funds3
Passive funds tracking accuracy
Percentage of passive fund assets within applicable tracking tolerance
All asset classes4
Annualized
1 year
3 years
5 years
34
77
20
44
23
43
70
72
62
18
30
85
63
79
63
69
21
70
63
65
66
18
31
89
62
88
88
82
37
79
72
78
76
11
27
92
1 Percentage of active fund assets above benchmark (gross of fees) / peer median. Based on the universe of European domiciled active wholesale funds available to UBS’s wealth management businesses and other
wholesale intermediaries as of 31 December 2016. Source of comparison versus peers: ThomsonReuters LIM (Lipper Investment Management). Source of comparison versus benchmark: UBS. Universe represents
approximately 69% of all active fund assets and 17% of all actively managed assets (including segregated accounts) in these asset classes globally as of 31 December 2016. 2 Percentage of real estate fund assets
above benchmark (gross of fess) / peer median. Universe (versus benchmark) includes all fully discretionary real estate funds with a benchmark representing approximately 70% of real estate gross invested assets as of
31 December 2016. Source: IPD, NFI-ODCE, SXI Real Estate Funds TR. Universe (versus peers) includes all real estate funds with externally verifiable peer groups representing approximately 22% of real estate gross
invested assets as of 31 December 2016. Source: ThomsonReuters LIM (Lipper Investment Management). 3 Percentage of fund assets above appropriate HFRI peer indices. Universe of key hedge funds and fund-of-fund
products managed on a fully discretionary basis representing approximately 32% of total O’Connor and Hedge Fund Solutions invested assets. 4 Percentage of passive fund assets within applicable tracking tolerance
on a gross of fees basis. Performance information represents a universe of European domiciled institutional and wholesale funds representing approximately 49% of total passive invested assets as of 31 December 2016.
Source: UBS.
95
Financial and operating performance Financial and operating performance
Asset Management
2015 compared with 2014
Results
Profit before tax increased by 25% to CHF 584 million. Adjusted
profit before tax increased by 20% to CHF 610 million, primarily
reflecting higher management fees.
Operating income
Total operating income increased by CHF 155 million or 8% to
CHF 2,057 million. Excluding a gain of CHF 56 million on the sale
of our AFS business, adjusted operating income increased by CHF
99 million or 5% to CHF 2,001 million. Adjusted net manage-
ment fees increased by CHF 91 million to CHF 1,847 million, pri-
marily in Global Real Estate and Fund Services. Performance fees
increased by CHF 8 million to CHF 154 million, mainly in Equities
and Global Real Estate, partly offset by lower revenues in
O’Connor and Hedge Fund Solutions.
As of December 2015, approximately 25% of performance
fee-eligible assets within our hedge fund businesses exceeded
high-water marks compared with 65%. These assets are reported
within Equities, Multi Asset & O’Connor and Solutions.
Operating expenses
Total operating expenses increased by CHF 39 million or 3% to
CHF 1,474 million, and adjusted operating expenses were CHF
1,392 million, broadly unchanged from 2014.
Personnel expenses were CHF 729 million compared with CHF
643 million. Adjusted personnel expenses increased by CHF 97
million to CHF 725 million, mainly driven by higher salary-related
costs as a result of increased staffing levels, excluding the effect of
the aforementioned sale of AFS, as well as higher expenses for
variable compensation.
General and administrative expenses were CHF 232 million
compared with CHF 305 million. Adjusted general and adminis-
trative expenses decreased by CHF 81 million to CHF 223 million,
mainly due to net expenses for litigation, regulatory and similar
matters of CHF 55 million in 2014, as well as an expense of CHF
14 million in 2014 for a provision for a settlement related to a
fund liquidation.
Net expenses for services from other business divisions and
Corporate Center were CHF 502 million compared with CHF 478
million. Adjusted net expenses for services from other business
divisions and Corporate Center decreased by CHF 18 million to
CHF 434 million as lower expenses from Group Operations were
partly offset by higher expenses from Group Technology.
Cost / income ratio
The cost / income ratio was 71.7% compared with 75.4%. On an
adjusted basis, the cost / income ratio was 69.6% compared with
73.2% and was within our target range of 60% to 70%.
Net new money
Excluding money market flows, net new money outflows were
CHF 0.7 billion compared with net inflows of CHF 22.6 billion,
which resulted in a negative net new money growth rate of 0.1%
compared with a positive growth rate of 4.4%, below our target
range of 3% to 5%. By client segment, net outflows from third
parties were CHF 7.7 billion compared with net inflows of CHF
11.3 billion. 2015 included CHF 33 billion of outflows driven by
client liquidity needs, largely from lower-margin passive products.
Net outflows were mainly from clients serviced from Europe. Net
new money inflows from clients of UBS’s wealth management
businesses were CHF 7.0 billion compared with CHF 11.3 billion,
mainly from clients serviced from Asia Pacific and Switzerland.
Money market net outflows were CHF 4.7 billion compared
with CHF 6.7 billion.
Invested assets
Invested assets were CHF 650 billion compared with CHF 664 bil-
lion, reflecting negative foreign currency translation effects of
CHF 11 billion and net new money outflows of CHF 5 billion,
partly offset by favorable market performance of CHF 4 billion.
As of 31 December 2015, CHF 397 billion, or 61%, of invested
assets was managed in active, non-money market strategies, CHF
195 billion, or 30%, of invested assets was managed in passive
strategies, and the remaining CHF 58 billion, or 9%, was money
market assets. On a regional basis, 34% of invested assets related
to clients serviced from Switzerland, 23% from the Americas, 22%
from Europe, Middle East and Africa, and 21% from Asia Pacific.
Assets under administration
Total assets under administration decreased to CHF 407 billion as
of 31 December 2015 from CHF 520 billion as of 31 December
2014. This was due to a decrease of CHF 132 billion related to the
sale of our AFS business and negative foreign currency translation
effects of CHF 5 billion, partly offset by net new assets under
administration inflows of CHF 24 billion.
Personnel
Asset Management employed 2,277 personnel as of 31 Decem-
ber 2015 compared with 2,323 personnel as of 31 December
2014, mainly reflecting the aforementioned sale of our AFS busi-
ness, partly offset by higher staffing levels in distribution and
investments areas.
96
Investment Bank
Investment Bank1
CHF million, except where indicated
Results
Corporate Client Solutions
Advisory
Equity Capital Markets
Debt Capital Markets
Financing Solutions
Risk Management
Investor Client Services
Equities
Foreign Exchange, Rates and Credit
Income
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from Corporate Center and other business divisions
of which: services from CC – Services
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses2
Business division operating profit / (loss) before tax
Adjusted results3
Total operating income as reported
of which: gains / (losses) on sale of financial assets available for sale4
Total operating income (adjusted)
Total operating expenses as reported
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
of which: restructuring expenses allocated from CC – Services
of which: a gain related to a change to retiree benefit plans in the US
of which: impairment of an intangible asset
Total operating expenses (adjusted)
Business division operating profit / (loss) before tax as reported
Business division operating profit / (loss) before tax (adjusted)
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
2,382
691
674
740
360
(84)
5,318
3,486
1,831
7,699
(11)
7,688
3,082
805
2,765
2,675
21
12
6,684
1,004
7,688
78
7,610
6,684
154
14
410
6,107
1,004
1,503
2,960
709
1,047
691
441
73
5,929
3,962
1,967
8,889
(68)
8,821
3,220
841
2,817
2,731
26
24
6,929
1,892
8821
11
8,810
6,929
14
7
376
11
6,522
1,892
2,288
3,189
708
1,021
1,005
497
(42)
5,118
3,659
1,459
8,306
2
8,308
2,964
2,671
2,711
2,658
32
15
8,392
(84)
8308
(5)
8,313
8,392
64
36
161
(20)
8,151
(84)
162
(20)
(3)
(36)
7
(18)
(10)
(12)
(7)
(13)
(84)
(13)
(4)
(4)
(2)
(2)
(19)
(50)
(4)
(47)
(13)
(14)
(4)
(6)
(47)
(34)
97
Financial and operating performance Financial and operating performance
Investment Bank
Investment Bank (continued)1
CHF million, except where indicated
Key performance indicators5
Pre-tax profit growth (%)
Cost / income ratio (%)
Return on attributed equity (%)6
Return on assets, gross (%)
Average VaR (1-day, 95% confidence, 5 years of historical data)
Adjusted key performance indicators3, 5
Pre-tax profit growth (%)
Cost / income ratio (%)
Return on attributed equity (%)6
Return on assets, gross (%)
Average VaR (1-day, 95% confidence, 5 years of historical data)
Additional information
Total assets (CHF billion)7
Average attributed equity (CHF billion)6
Risk-weighted assets (fully applied, CHF billion)8
Return on risk-weighted assets, gross (%)9
Leverage ratio denominator (fully applied, CHF billion)10
Goodwill and intangible assets (CHF billion)
Compensation ratio (%)
Impaired loan portfolio as a percentage of total loan portfolio, gross (%)11
Personnel (full-time equivalents)
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
(46.9)
86.8
13.1
3.0
9
(34.3)
80.1
19.6
3.0
9
242.3
7.7
70.4
11.9
231.2
0.1
40.0
0.9
4,734
78.0
25.9
3.2
12
73.5
31.3
3.2
12
253.5
7.3
62.9
13.7
268.0
0.1
36.2
1.5
5,243
101.0
(1.1)
3.2
12
(92.9)
98.1
2.1
3.2
12
292.3
7.6
66.7
12.9
288.3
0.1
35.7
0.3
5,194
(4)
5
12
(14)
0
(10)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this
report for information on restructuring expenses. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 4 Includes gains on partial sales of our investment in IHS Markit in 2016, 2015
and 2014 as well as an impairment of an investment in 2014. 5 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 6 Refer to the “Capital
management” section of this report for more information. 7 Based on third-party view, i.e., without intercompany balances. 8 Based on the Basel III framework as applicable for Swiss systemically relevant banks
(SRBs). Refer to the “Capital management” section of this report for more information. 9 Based on fully applied RWA. 10 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section
of this report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in
accordance with former Swiss SRB rules and are therefore not fully comparable. 11 Refer to the “Risk management and control” section of this report for more information on impaired loan exposures.
98
2016 compared with 2015
Results
Profit before tax decreased by CHF 888 million or 47% to CHF
1,004 million, and adjusted profit before tax decreased by CHF
785 million or 34% to CHF 1,503 million, primarily due to lower
operating income, partly offset by lower operating expenses.
Operating income
Total operating income decreased by CHF 1,133 million or 13% to
CHF 7,688 million. On an adjusted basis, excluding gains related
to partial sales of our investment in IHS Markit of CHF 78 million
in 2016 and CHF 11 million in 2015, total operating income
decreased by CHF 1,200 million or 14% to CHF 7,610 million
from CHF 8,810 million, as revenues in Investor Client Services
decreased by CHF 678 million, and revenues in Corporate Client
Solutions decreased by CHF 578 million. Net credit loss expense
was CHF 11 million compared with CHF 68 million, reflecting
lower expenses related to the energy sector. In US dollar terms,
adjusted operating income decreased 16%.
➔ Refer to the “Risk management and control” section of this
report for more information on credit loss expenses
Operating income by business unit:
Corporate Client Solutions
Corporate Client Solutions revenues decreased by CHF 578 mil-
lion or 20% to CHF 2,382 million, largely due to lower revenues
in Equity Capital Markets, Risk Management and Financing Solu-
tions. In US dollar terms, revenues decreased 22%.
Advisory revenues decreased by CHF 18 million to CHF 691
million, reflecting lower revenues from private transactions, partly
offset by increased revenues from merger and acquisition transac-
tions against a broadly unchanged global fee pool.
Equity Capital Markets revenues decreased by CHF 373 million
to CHF 674 million, mainly due to lower revenues from public
offerings as the global fee pool declined 25%, as well as lower
revenues from private transactions.
Debt Capital Markets revenues increased by CHF 49 million to
CHF 740 million, largely due to higher revenues from leveraged
finance against a global fee pool decline of 2%. This increase was
partly offset by lower investment grade revenues.
Financing Solutions revenues decreased by CHF 81 million to
CHF 360 million, mainly reflecting lower structured finance
revenues.
Risk Management revenues were negative CHF 84 million
compared with positive CHF 73 million, mainly due to losses
on portfolio macro hedges largely reflecting tightening credit
spreads.
Investor Client Services
Investor Client Services revenues decreased by CHF 611 million or
10% to CHF 5,318 million. Excluding the aforementioned gains
of CHF 78 million in 2016 and CHF 11 million in 2015, adjusted
revenues decreased by CHF 678 million or 11% to CHF 5,240 mil-
lion due to lower revenues in both the Equities and Foreign
Exchange, Rates and Credit businesses. In US dollar terms,
adjusted revenues decreased 14%.
Equities
Equities revenues decreased by CHF 476 million to CHF 3,486
million.
Cash revenues decreased by CHF 146 million to CHF 1,225
million, mainly due to lower trading revenues.
Derivatives revenues decreased by CHF 324 million to CHF 722
million, reflecting lower client activity levels and weaker trading
revenues.
Financing Services revenues decreased by CHF 52 million to
CHF 1,529 million, due to weaker trading revenues in Equity
Financing from a strong 2015.
Foreign Exchange, Rates and Credit
Foreign Exchange, Rates and Credit revenues decreased by CHF
136 million to CHF 1,831 million. Excluding the aforementioned
gain of CHF 78 million compared with CHF 11 million, adjusted
revenues decreased to CHF 1,753 million from CHF 1,956 million,
mainly as the first quarter of 2015 benefited from higher volatility
and client activity levels following the Swiss National Bank’s
actions in January 2015.
Operating expenses
Total operating expenses decreased by CHF 245 million or 4% to
CHF 6,684 million, and adjusted operating expenses decreased by
CHF 415 million or 6% to CHF 6,107 million. In US dollar terms,
adjusted operating expenses decreased 9%.
Personnel expenses decreased to CHF 3,082 million from CHF
3,220 million, and adjusted personnel expenses decreased to CHF
2,928 million from CHF 3,206 million, mainly due to lower vari-
able compensation expenses and lower salary expenses as a result
of our cost reduction programs.
General and administrative expenses decreased to CHF 805
million from CHF 841 million and on an adjusted basis decreased
to CHF 791 million from CHF 834 million, mainly due to reduced
professional fees and travel and entertainment expenses, partly
offset by CHF 44 million higher expenses for provisions for litiga-
tion, regulatory and similar matters. The expense for the annual
UK bank levy was CHF 80 million compared with CHF 98 million.
Net expenses for services from other business divisions and
Corporate Center decreased to CHF 2,765 million from CHF
2,817 million and on an adjusted basis decreased to CHF 2,355
million from CHF 2,441 million.
99
Financial and operating performance Financial and operating performance
Investment Bank
Cost / income ratio
The cost / income ratio increased to 86.8% from 78.0%. On an
adjusted basis, the cost / income ratio increased to 80.1% from
73.5% and was slightly above our target range of 70% to 80%.
Return on attributed equity
Return on attributed equity (RoAE) for 2016 was 13.1%, and
19.6% on an adjusted basis, above our target of over 15%.
➔ Refer to “Equity attribution framework” in the “Capital
Leverage ratio denominator
The fully applied leverage ratio denominator decreased by CHF 37
billion to CHF 231 billion as of 31 December 2016 and remained
below our short- to medium-term expectation of around CHF 325
billion. The reduction during 2016 was mainly due to effective
resource management.
➔ Refer to the “Capital Management” section of this report for
more information
management” section of this report for more information
Personnel
Risk-weighted assets
Fully applied risk-weighted assets (RWA) increased by CHF 7.5 bil-
lion to CHF 70.4 billion as of 31 December 2016, below our short-
to medium-term expectation of around CHF 85 billion. The
increase was driven by an increase of CHF 3.5 billion in market risk
RWA as well as increases of CHF 2.7 billion in operational risk
RWA and CHF 1.5 billion in credit risk RWA.
➔ Refer to the “Capital management” section of this report for
more information
The Investment Bank employed 4,734 personnel as of 31 Decem-
ber 2016, a decrease of 509 compared with 5,243 as of 31 Decem-
ber 2015, largely reflecting our cost reduction programs.
100
2015 compared with 2014
Results
The Investment Bank recorded a profit before tax of CHF 1,892
million compared with a loss before tax of CHF 84 million and on
an adjusted basis recorded a profit before tax of CHF 2,288 mil-
lion compared with CHF 162 million, mainly due to CHF 1,853
million lower net expenses for provisions for litigation, regulatory
and similar matters, as well as increased revenues in Investor Cli-
ent Services, partly offset by lower revenues in Corporate Client
Solutions.
Operating income
Total operating income increased by CHF 513 million or 6% to
CHF 8,821 million, as revenues in Investor Client Services increased
by CHF 811 million, partly offset by CHF 229 million lower reve-
nues in Corporate Client Solutions. On an adjusted basis, exclud-
ing gains of CHF 11 million in 2015 and CHF 43 million in 2014
related to partial sales of our investment in IHS Markit, as well as
an impairment loss of CHF 48 million on a financial investment in
2014, total operating income increased by CHF 497 million or 6%
to CHF 8,810 million from CHF 8,313 million. Net credit loss
expense was CHF 68 million, mainly related to the energy sector,
compared with a recovery of CHF 2 million in the prior year. In US
dollar terms, adjusted operating income increased 1%.
Operating income by business unit:
Corporate Client Solutions
Corporate Client Solutions revenues decreased by CHF 229 mil-
lion or 7% to CHF 2,960 million, largely due to lower revenues in
Debt Capital Markets and Financing Solutions. In US dollar terms,
revenues decreased 12%.
Advisory and Equity Capital Markets revenues were both
broadly in line with 2014 at CHF 709 million and CHF 1,047 mil-
lion, respectively.
Debt Capital Markets revenues decreased by CHF 314 million
to CHF 691 million, mainly due to lower revenues from leveraged
finance following a global fee pool decline of 23%. Investment
grade revenues were broadly in line with 2014.
Financing Solutions revenues decreased by CHF 56 million to
CHF 441 million, reflecting lower volumes and margin compres-
sion in 2015.
Risk Management revenues improved to positive CHF 73 mil-
lion from negative CHF 42 million, mainly due to gains on portfo-
lio macro hedges and lower risk management costs associated
with corporate lending.
Investor Client Services
Investor Client Services revenues increased by CHF 811 million or
16% to CHF 5,929 million and on an adjusted basis by 795 million
to 5,918 million due to higher revenues in both the Equities and
Foreign Exchange, Rates and Credit businesses. In US dollar terms,
adjusted revenues increased 11%.
Equities
Equities revenues increased by CHF 303 million to CHF 3,962 mil-
lion. Excluding the aforementioned gains and impairment loss on
financial investments in 2014, adjusted revenues increased by
CHF 259 million to CHF 3,962 million due to higher revenues in
Financing Services and, to a lesser extent, in Cash, partly offset by
lower revenues in Derivatives.
Cash revenues increased by CHF 19 million to CHF 1,371 mil-
lion. Excluding a gain related to a financial investment of CHF 4
million in 2014, adjusted revenues increased by CHF 23 million to
CHF 1,371 million, mainly due to higher commission income as
client activity levels increased.
Derivatives revenues decreased by CHF 43 million to CHF 1,046
million, driven by weaker performance in Europe, Middle East and
Africa, partly offset by increased revenues in the Americas and
Asia Pacific.
Financing Services revenues increased by CHF 292 million to
CHF 1,581 million, driven primarily by increased client activity in
Prime Brokerage and Equity Financing.
Foreign Exchange, Rates and Credit
Foreign Exchange, Rates and Credit revenues increased by CHF
508 million to CHF 1,967 million. Excluding gains related to finan-
cial investments of CHF 11 million compared with CHF 39 million,
adjusted revenues increased by CHF 536 million to CHF 1,956
million, mainly due to higher revenues in our Foreign Exchange
and Rates businesses, reflecting elevated client activity and higher
volatility, particularly heightened following the Swiss National
Bank’s actions of 15 January 2015.
Operating expenses
Total operating expenses decreased by CHF 1,463 million or 17%
to CHF 6,929 million. Excluding restructuring expenses of CHF
396 million compared with CHF 261 million, an impairment loss
of CHF 11 million on an intangible asset in 2015 and gains of CHF
20 million related to changes to retiree benefit plans in the US in
2014, total adjusted operating expenses decreased by CHF 1,629
million or 20% to CHF 6,522 million, mainly as the net expenses
for provisions for litigation, regulatory and similar matters
decreased to CHF 2 million from CHF 1,855 million, partly offset
by higher expenses for variable compensation, in line with
improved business performance. In US dollar terms, adjusted
operating expenses decreased 23%.
Personnel expenses increased to CHF 3,220 million from CHF
2,964 million. Excluding restructuring expenses of CHF 14 million
compared with CHF 64 million, as well as an CHF 11 million gain
related to changes to retiree benefit plans in the US in 2014, per-
sonnel expenses increased to CHF 3,206 million from CHF 2,911
million, mainly due to higher variable compensation expenses.
101
Financial and operating performance Financial and operating performance
Investment Bank
General and administrative expenses decreased to CHF 841
million from CHF 2,671 million. Excluding restructuring expenses
of CHF 7 million in 2015 compared with CHF 30 million, general
and administrative expenses decreased to CHF 834 million from
CHF 2,641 million, mainly due to the aforementioned reduction in
the net expenses for provisions for litigation, regulatory and simi-
lar matters. The expense for the annual UK bank levy was CHF 98
million compared with CHF 64 million.
Net expenses for services from other business divisions and
Corporate Center increased to CHF 2,817 million from CHF 2,711
million. Excluding restructuring costs of CHF 376 million in 2015,
and CHF 161 million as well as a gain of CHF 9 million related to
changes to retiree benefit plans in the US in 2014, adjusted net
expenses for services from other business divisions and Corporate
Center decreased to CHF 2,441 million from CHF 2,559 million.
Cost / income ratio
The cost / income ratio decreased to 78.0% from 101.0%. On an
adjusted basis, the cost / income ratio decreased to 73.5% from
98.1% and was within our target range of 70% to 80%.
Return on attributed equity
Return on attributed equity (RoAE) for 2015 was 25.9%, and
31.3% on an adjusted basis, above our target of over 15%.
Risk-weighted assets
Fully applied risk-weighted assets (RWA) decreased by CHF 4 bil-
lion to CHF 63 billion as of 31 December 2015, below our limit of
CHF 70 billion for 2015 and our short- to medium-term expecta-
tion of CHF 85 billion. The decrease was mainly due to CHF 3
billion lower market risk RWA, primarily related to a reduction in
stressed value-at-risk and risks-not-in-VaR.
Leverage ratio denominator
The fully applied Swiss systemically relevant bank (SRB) leverage
ratio denominator (LRD) was CHF 268 billion as of 31 December
2015, below our short- to medium-term expectation of CHF 325
billion. From 31 December 2015 onward, the Swiss SRB LRD cal-
culation is fully aligned with the Basel III rules. Prior-period figures
are calculated in accordance with the former Swiss SRB rules and
are therefore not fully comparable.
Personnel
The Investment Bank employed 5,243 personnel as of 31 Decem-
ber 2015, slightly up from 5,194 as of 31 December 2014.
102
Corporate Center
Corporate Center1
CHF million, except where indicated
Results
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from business divisions
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses2
Operating profit / (loss) before tax
Adjusted results3
Total operating income as reported
of which: own credit on financial liabilities designated at fair value
of which: gains on sales of real estate
of which: net gains / (losses) related to the buyback of debt
of which: net foreign currency translation gains / (losses)4
Total operating income (adjusted)
Total operating expenses as reported
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
of which: restructuring expenses allocated from CC – Services
of which: a gain related to a change to retiree benefit plans in the US
Total operating expenses (adjusted)
Operating profit / (loss) before tax as reported
Operating profit / (loss) before tax (adjusted)
Additional information
Average attributed equity (CHF billion)5
Total assets (CHF billion)6
Risk-weighted assets (fully applied, CHF billion)7
Leverage ratio denominator (fully applied, CHF billion)8
Personnel (full-time equivalents)
As of or for the year ended
31.12.16
31.12.15
31.12.14
% change from
31.12.15
(357)
3,899
4,893
(7,933)
944
21
1,824
(2,181)
(357)
120
(122)
(355)
1,824
519
623
(1,064)
1,746
(2,181)
(2,101)
29.1
359.4
57.1
300.7
23,955
315
4,049
5,311
(7,894)
868
21
2,354
(2,040)
315
553
378
(257)
88
(447)
2,354
420
719
(943)
2,158
(2,040)
(2,606)
25.8
354.5
60.2
291.2
23,671
(823)
3,993
4,650
(7,580)
762
6
1,832
(2,655)
(823)
292
44
(1,159)
1,832
223
264
(425)
(3)
1,774
(2,655)
(2,933)
20.5
427.6
65.8
327.2
23,773
(4)
(8)
0
9
0
(23)
7
(21)
(23)
(19)
7
(19)
13
1
(5)
3
1
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this
report for information on restructuring expenses. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 4 Related to the disposal of foreign subsidiaries and branches. 5 Refer to the
“Capital management” section of this report for more information. 6 Based on third-party view, i.e., without intercompany balances. 7 Based on the Basel III framework as applicable for Swiss systemically relevant
banks (SRBs). Refer to the “Capital management” section of this report for more information. 8 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more
information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss
SRB rules and are therefore not fully comparable.
103
Financial and operating performance Financial and operating performance
Corporate Center
Corporate Center – Services
Corporate Center – Services1
CHF million, except where indicated
Results
Total operating income
Personnel expenses
General and administrative expenses
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses before allocations to BDs and other CC units
Services (to) / from business divisions and other CC units
of which: services to Wealth Management
of which: services to Wealth Management Americas
of which: services to Personal & Corporate Banking
of which: services to Asset Management
of which: services to Investment Bank
of which: services to CC – Group ALM
of which: services to CC – Non-core and Legacy Portfolio
Total operating expenses2
Operating profit / (loss) before tax
Adjusted results3
Total operating income as reported
of which: gains on sales of real estate
Total operating income (adjusted)
Total operating expenses as reported before allocations
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
Total operating expenses (adjusted) before allocations
Services (to) / from BDs and other CC units
of which: restructuring expenses allocated to BDs and other CC units
Total operating expenses as reported after allocations
Total operating expenses (adjusted) after allocations
Operating profit / (loss) before tax as reported
Operating profit / (loss) before tax (adjusted)
Additional information
Average attributed equity (CHF billion)4
Total assets (CHF billion)5
Risk-weighted assets (fully applied, CHF billion)6
Leverage ratio denominator (fully applied, CHF billion)7
Personnel (full-time equivalents)
As of or for the year ended
31.12.16
31.12.15
31.12.14
% change from
31.12.15
(102)
3,801
4,145
944
21
8,911
(8,164)
(2,256)
(1,221)
(1,186)
(530)
(2,675)
(110)
(225)
747
(849)
(102)
120
(222)
8,911
518
623
7,770
(8,164)
(1,084)
747
690
(849)
(912)
22.8
23.7
27.6
5.8
241
3,903
4,483
868
21
9,274
(8,215)
(2,209)
(1,193)
(1,180)
(523)
(2,731)
(96)
(313)
1,059
(818)
241
378
(137)
9,274
406
719
8,151
(8,215)
(986)
1,059
919
(818)
(1,056)
19.6
22.6
23.6
4.8
37
3,843
4,123
762
6
8,734
(8,046)
(2,122)
(1,121)
(1,196)
(495)
(2,658)
(88)
(404)
688
(652)
37
44
(7)
8,734
221
263
8,266
(8,046)
(454)
688
658
(652)
(666)
12.3
19.9
23.0
(2.6)
23,750
23,470
23,517
(3)
(8)
9
0
(4)
(1)
2
2
1
1
(2)
15
(28)
(29)
4
62
(4)
(5)
(1)
(29)
(25)
4
(14)
16
5
17
21
1
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this
report for information on restructuring expenses. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 4 Refer to the “Capital management” section of this report for more
information. 5 Based on third-party view, i.e., without intercompany balances. 6 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section
of this report for more information. 7 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio
denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.
104
2016 compared with 2015
Corporate Center – Services recorded a loss before tax of CHF 849
million compared with CHF 818 million, and CHF 912 million on
an adjusted basis compared with CHF 1,056 million.
Operating income
Operating income was negative CHF 102 million compared with
positive CHF 241 million, mainly as gains on sales of real estate
decreased to CHF 120 million from CHF 378 million. On an
adjusted basis, operating income was negative CHF 222 million
compared with negative CHF 137 million, mainly due to lower
income from the investment of the Group’s equity allocated from
Corporate Center – Group Asset and Liability Management
(Group ALM).
Operating expenses
Operating expenses before service allocations to
business divisions and other Corporate Center units
Before service allocations to business divisions and other Corpo-
rate Center units, total operating expenses decreased by CHF 363
million or 4% to CHF 8,911 million. Restructuring expenses were
CHF 1,141 million compared with CHF 1,125 million and mainly
related to our transitioning activities to nearshore and offshore
locations, as well as outsourcing of IT and other services. Adjusted
operating expenses before allocations decreased by CHF 381 mil-
lion or 5% to CHF 7,770 million.
Personnel expenses decreased by CHF 102 million to CHF
3,801 million and by CHF 216 million to CHF 3,283 million on an
adjusted basis. The decrease in adjusted personnel expenses was
mainly a result of nearshoring and offshoring initiatives as well as
lower pension costs for our Swiss pension plan, reflecting the
effect of changes to demographic and financial assumptions.
General and administrative expenses decreased by CHF 338
million to CHF 4,145 million and adjusted general and administra-
tive expenses decreased by CHF 242 million, mainly due to lower
expenses for outsourcing and decreased professional fees.
Depreciation and impairment of property, equipment and soft-
ware increased to CHF 944 million from CHF 868 million, reflect-
ing increased depreciation expenses related to internally gener-
ated capitalized software.
Services to / from business divisions and
other Corporate Center units
Corporate Center – Services allocated expenses of CHF 8,164 mil-
lion to the business divisions and other Corporate Center units
compared with CHF 8,215 million. Adjusted net allocated
expenses for services to business divisions and other Corporate
Center units were CHF 7,080 million compared with CHF 7,231
million.
Operating expenses after service allocations to / from
business divisions and other Corporate Center units
Corporate Center – Services retains costs related to Group gover-
nance functions and other corporate activities, certain strategic
and regulatory projects and certain restructuring expenses. Total
operating expenses remaining in Corporate Center – Services
after allocations decreased to CHF 747 million from CHF 1,059
million and to CHF 690 million from CHF 919 million on an
adjusted basis, mainly reflecting lower retained expenses for regu-
latory projects, a reduction of CHF 13 million in expenses for pro-
visions for litigation, regulatory and similar matters, and lower
pension costs for our Swiss pension plan, reflecting the effect of
changes to demographic and financial assumptions.
105
Financial and operating performance Financial and operating performance
Corporate Center
2015 compared with 2014
Corporate Center – Services recorded a loss before tax of CHF 818
million in 2015 compared with CHF 652 million, and CHF 1,056
million on an adjusted basis compared with CHF 666 million.
Operating income
Total operating income was CHF 241 million compared with CHF
37 million, mainly as gains on sales of real estate increased to CHF
378 million from CHF 44 million, primarily due to the sale of a
property in Geneva, Switzerland. This was partly offset by lower
income from the investment of the Group’s equity allocated from
Group ALM. Furthermore, 2014 included a gain of CHF 58 million
related to the release of a provision for litigation, regulatory and
similar matters, which was recorded within other income.
Operating expenses
Operating expenses before service allocations to business
divisions and other Corporate Center units
Before service allocations to the business divisions and other Cor-
porate Center units, total operating expenses increased by CHF
540 million or 6% to CHF 9,274 million. Restructuring expenses
were CHF 1,125 million compared with CHF 484 million and mainly
related to our transitioning activities to nearshore and offshore
locations. Adjusted operating expenses before service allocations
were CHF 8,151 million compared with CHF 8,266 million. This
decrease of CHF 115 million was mainly due to CHF 139 million
lower personnel expenses as well as decreased occupancy costs
and professional fees. These decreases were partly offset by net
expenses for provisions for litigation, regulatory and similar matters
of CHF 15 million compared with a net release of provisions of CHF
125 million. Moreover, 2015 included higher depreciation expenses
related to internally generated capitalized software.
Personnel expenses increased by CHF 60 million to CHF 3,903
million and included restructuring expenses of CHF 406 million
compared with CHF 221 million. On an adjusted basis, personnel
expenses were CHF 3,499 million compared with CHF 3,638 mil-
lion, mainly as a result of outsourcing, nearshoring and offshoring
initiatives.
General and administrative expenses increased by CHF 360
million to CHF 4,483 million. On an adjusted basis, excluding net
restructuring expenses of CHF 707 million compared with CHF
240 million, general and administrative expenses decreased by
CHF 107 million, mainly due to lower occupancy costs and profes-
sional fees. These decreases were partly offset by the aforemen-
tioned net expenses for provisions for litigation, regulatory and
similar matters compared with a net release.
Depreciation and impairment of property, equipment and soft-
ware increased to CHF 868 million from CHF 762 million, reflect-
ing increased depreciation expenses related to internally gener-
ated capitalized software.
Services to / from business divisions and other Corporate Center
units
Net expenses for services to business divisions and other Corpo-
rate Center units were CHF 8,215 million compared with CHF
8,046 million. Adjusted net allocated expenses for services were
CHF 7,231 million compared with CHF 7,608 million and mainly
related to lower personnel expenses and occupancy costs, partly
offset by increased depreciation expenses.
Operating expenses after service allocations to / from business
divisions and other Corporate Center units
Operating expenses remaining in Corporate Center – Services
after allocations relate mainly to Group governance functions and
other corporate activities, as well as to certain strategic and regu-
latory projects and certain restructuring expenses.
Total operating expenses remaining in Corporate Center – Ser-
vices after allocations increased to CHF 1,059 million compared
with CHF 688 million. This increase of CHF 371 million was mainly
due to the aforementioned net expenses for provisions for litiga-
tion, regulatory and similar matters compared with a net release,
as well as restructuring expenses of CHF 140 million compared
with CHF 30 million. Furthermore, the full-year costs incurred by
Corporate Center – Services exceeded the cost allocations to the
business divisions and Non-core and Legacy Portfolio that were
agreed as part of the annual business planning cycle.
106
Corporate Center – Group Asset and Liability Management
Corporate Center – Group ALM1
CHF million, except where indicated
Results
Business division-aligned risk management net income
Capital investment and issuance net income
Group structural risk management net income
Total risk management net income before allocations
Allocations to business divisions and other CC units
of which: Wealth Management
of which: Wealth Management Americas
of which: Personal & Corporate Banking
of which: Asset Management
of which: Investment Bank
of which: CC – Services
of which: CC – Non-core and Legacy Portfolio
Total risk management net income after allocations
Accounting asymmetries related to economic hedges
Hedge accounting ineffectiveness2
Net foreign currency translation gains / (losses)3
Net gains / (losses) related to the buyback of debt
Own credit on financial liabilities designated at fair value
Other
Total operating income as reported
Total operating income (adjusted)4, 5
Personnel expenses
General and administrative expenses
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Services (to) / from business divisions and other CC units
Total operating expenses6
Operating profit / (loss) before tax as reported
Operating profit / (loss) before tax (adjusted)4
Additional information
Average attributed equity (CHF billion)7
Total assets (CHF billion)8
Risk-weighted assets (fully applied, CHF billion)9
Leverage ratio denominator (fully applied, CHF billion)10
Personnel (full-time equivalents)
As of or for the year ended
31.12.16
31.12.15
31.12.14
% change from
31.12.15
847
45
(547)
345
(512)
(389)
(118)
(332)
(7)
260
(36)
110
(167)
27
7
(122)
37
(219)
(97)
31
17
0
0
(49)
(1)
(218)
(96)
4.3
267.2
10.6
272.4
142
878
272
(647)
503
(832)
(471)
(104)
(421)
(15)
211
(145)
114
(329)
(66)
156
88
(257)
553
133
277
(107)
30
22
0
0
(57)
(5)
282
(102)
3.3
237.5
6.0
247.9
125
564
566
(824)
307
(831)
(481)
(116)
(461)
(27)
100
(217)
371
(524)
(16)
89
292
162
2
(290)
26
22
0
0
(48)
0
2
(290)
3.2
237.9
7.1
236.3
120
(4)
(83)
(15)
(31)
(38)
(17)
13
(21)
(53)
23
(75)
(4)
(49)
(96)
(72)
(9)
3
(23)
(14)
(80)
(6)
30
13
77
10
14
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Does not include ineffectiveness of hedges of net investments in foreign operations. 3 Related to the disposal of foreign
subsidiaries and branches. 4 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 5 Adjusted total operating income excludes foreign currency translation gains or losses, net gains or
losses related to the buyback of debt and own credit on financial liabilities designated at fair value. 6 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of
this report for information on restructuring expenses. 7 Refer to the “Capital management” section of this report for more information. 8 Based on third-party view, i.e., without intercompany balances. 9 Based on
the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 10 Calculated in accordance with Swiss SRB rules.
Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio denominator calculation is aligned with the Basel III rules. Figures for periods prior to
31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.
107
Financial and operating performance Financial and operating performance
Corporate Center
2016 compared with 2015
Corporate Center – Group Asset and Liability Management
(Group ALM) recorded a loss before tax of CHF 218 million com-
pared with a profit before tax of CHF 282 million. On an adjusted
basis, the loss before tax was CHF 96 million compared with a loss
of CHF 102 million, driven by lower negative net income after
allocations, largely offset by lower gains on hedge accounting
ineffectiveness.
Transfer of Risk Exposure Management function
Consistent with changes in the manner in which operating seg-
ment performance is assessed, we transferred in 2016 the Risk
Exposure Management (REM) function from Corporate Center –
Non-core and Legacy Portfolio to Corporate Center – Group ALM
to further harmonize REM risk management responsibility with
the reporting structure and align it more closely with other activi-
ties performed by Group ALM. REM primarily performs risk man-
agement over credit, debit and funding valuation adjustments for
our over-the-counter (OTC) derivatives portfolio.
Prior-period profit and loss information has been restated to
reflect this transfer. Net income from REM before allocations is
now presented within the line “Business division-aligned risk
management net income” and is fully allocated to the business
divisions and other Corporate Center units. There was no effect
on operating profit before tax for any segment for any period
from this restatement.
Prior-period information for balance sheet assets and risk-
weighted assets has not been restated as the effect would not
have been material.
The leverage ratio denominator (LRD) of Group ALM has been
restated for 31 December 2015 and as a result increased by CHF
7.7 billion, with an equal and opposite decrease in Corporate
Center – Non-core and Legacy Portfolio.
Operating income
Total operating income was negative CHF 219 million compared
with positive CHF 277 million. Adjusted total operating income
retained by Group ALM was negative CHF 97 million compared
with negative CHF 107 million.
Business division-aligned risk management net income
Net income from business division-aligned risk management
activities was CHF 847 million compared with CHF 878 million,
mainly reflecting reduced interest rate risk management revenues
in the banking book for Wealth Management and Personal & Cor-
porate Banking. This decrease was mainly due to lower penalty
fees received from clients from the early termination of loans and
lower interest income from managing euro-denominated depos-
its in the current negative interest rate environment.
108
Capital investment and issuance net income
Net income from capital investment and issuance activities was
CHF 45 million compared with CHF 272 million. This decrease was
due to CHF 168 million in higher net interest expenses as a result
of an increase in total outstanding long-term debt that is eligible
for total loss-absorbing capital, fees paid related to the issuance
of additional tier 1 capital and senior unsecured debt during the
year, and CHF 58 million lower interest income from the invest-
ment of the Group’s equity due to maturing positions being
replaced at lower long-term interest rates.
Group structural risk management net income
Net income from Group structural risk management activities was
negative CHF 547 million compared with negative CHF 647 mil-
lion. An increase in income of CHF 481 million from the manage-
ment of the Group’s high-quality liquid assets (HQLA), mainly due
to wider spreads between certain HQLA and internal funding lia-
bilities, was largely offset by an increase in net interest expense of
CHF 382 million due to issuances of long-term debt during 2016.
Allocations to business divisions and other Corporate Center
units
Combined allocations from risk management activities to business
divisions and other Corporate Center units were CHF 512 million
compared with CHF 832 million. This decrease primarily reflects
the aforementioned lower net income from capital investment
and issuance activities, which is fully allocated to the business divi-
sions and other Corporate Center units in proportion to their
attributed equity. In addition, cost allocations from Group struc-
tural risk management activities increased by CHF 62 million. This
allocation is based on consumption of funding and liquidity risk
by the business divisions and other Corporate Center units.
Total risk management net income after allocations
Group ALM retained negative CHF 167 million from its risk man-
agement activities after allocations compared with negative CHF
329 million.
Retained income from risk management activities is entirely
related to Group structural risk management and is mainly the net
result of costs from buffers that are maintained by Group ALM at
levels above the total consumption of the business divisions and
the revenues generated by Group ALM from the management of
the Group’s HQLA portfolio relative to the benchmark rates used
to allocate the costs.
Accounting asymmetries related to economic hedges
Net income retained by Group ALM due to accounting asymme-
tries related to economic hedges was CHF 27 million compared
with negative CHF 66 million, primarily due to a fair value gain of
CHF 174 million on certain internal funding transactions due to
the tightening of own credit funding spreads compared with a
loss of CHF 19 million. This was partly offset by a loss of CHF 43
million related to HQLA classified as available for sale compared
with a gain of CHF 102 million. The lower magnitude of this
asymmetrical result reflects the change applied since the first
quarter of 2016 to classify the majority of newly purchased HQLA
debt securities as financial assets designated at fair value through
profit or loss, instead of classifying them as financial assets avail-
able for sale.
➔ Refer to the “Significant accounting and financial reporting
changes” section of this report for more information on the
Balance sheet assets
Balance sheet assets increased by CHF 30 billion to CHF 267 bil-
lion, mainly due to a CHF 23 billion net increase in financial assets
designated at fair value, available for sale and held to maturity, as
well as an CHF 18 billion increase in cash and balances with cen-
tral banks that primarily occurred toward the end of the year.
These increases mainly reflected liquidity requirements applicable
to our US intermediate holding company and UBS Europe SE and
also resulted from an increase in net funds transferred to Group
ALM by the business divisions.
Group ALM is responsible for investing any funding generated
that is surplus to the requirements of the business divisions. As a
result, Group ALM’s balance sheet is mainly driven by the volume
of liabilities created across the Group rather than centrally man-
aged asset requirements.
➔ Refer to the “Treasury management” section of this report for
balance sheet classification of newly purchased high-quality
more information
liquid debt securities
Hedge accounting ineffectiveness
Net income related to hedge accounting ineffectiveness was CHF
7 million compared with CHF 156 million. The higher revenue in
the prior year mainly related to our cash flow hedges following
the Swiss National Bank’s actions in January 2015. This ineffec-
tiveness primarily arises from changes in the spread between
LIBOR and the overnight index swap rate due to differences in the
way these impact the valuation of the hedged items and hedging
instruments through either the benchmark rate determining cash
flows or the discount rate.
Other
Other net income was CHF 37 million compared with CHF 133
million, reflecting negative income related to own-bond market-
making activity in the Investment Bank and lower interest income
retained by Group ALM on behalf of non-controlling interests.
Additionally, 2016 included a loss of CHF 12 million from the
Group ALM-managed monthly conversion of non-Swiss franc
profits compared with a gain of CHF 56 million in 2015.
Risk-weighted assets
Fully applied risk-weighted assets (RWA) increased by CHF 5 bil-
lion to CHF 11 billion as of 31 December 2016, largely as a result
of a revised methodology for the allocation of operational risk
RWA to business divisions and Corporate Center units and an
increase in credit risk in Group ALM’s HQLA portfolios.
➔ Refer to the “Capital management” section of this report for
more information
Leverage ratio denominator
The LRD increased to CHF 272 billion from CHF 248 billion, con-
sistent with the increase in balance sheet assets.
➔ Refer to the “Capital management” section of this report for
more information
109
Financial and operating performance Financial and operating performance
Corporate Center
2015 compared with 2014
Corporate Center – Group Asset and Liability Management
(Group ALM) recorded a profit before tax of CHF 282 million com-
pared with CHF 2 million, and an adjusted loss before tax of CHF
102 million compared with CHF 290 million, driven by lower neg-
ative net income after allocations.
Operating income
Total operating income was CHF 277 million compared with CHF
2 million. Adjusted total operating income retained by Group
ALM was negative CHF 107 million compared with negative CHF
290 million.
Business division-aligned risk management net income
Net income from business division-aligned risk management
activities was CHF 878 million compared with CHF 564 million,
mainly reflecting a loss in REM of CHF 43 million compared with
CHF 290 million following the incorporation of funding valuation
adjustments (FVA) into the valuation estimates for certain OTC
derivatives in 2014.
Capital investment and issuance net income
Net income from capital investment and issuance activities was
CHF 272 million compared with CHF 566 million. This decrease
was due to CHF 201 million higher net interest expenses as a result
of an increase in total outstanding long-term debt that is eligible
for total loss-absorbing capital and CHF 93 million lower interest
income from the investment of the Group’s equity due to maturing
positions being replaced at lower long-term interest rates.
Group structural risk management net income
Net income from Group structural risk management activities was
negative CHF 647 million compared with negative CHF 824 mil-
lion, mainly due to lower net interest expenses on the long-term
debt portfolio as debt matured.
Allocations to business divisions and other
Corporate Center units
Combined allocations from risk management activities to business
divisions and other Corporate Center units were largely unchanged
at CHF 832 million compared with CHF 831 million. The afore-
mentioned lower net income from capital investment and issu-
ance activities, which is fully allocated to the business divisions
and other Corporate Center units, was largely offset by the afore-
mentioned higher net income from business division-aligned risk
management activities, reflecting the incorporation of FVA for
certain OTC derivatives in the prior year, which was allocated to
Corporate Center – Non-core and Legacy Portfolio.
Total risk management net income after allocations
Group ALM retained negative CHF 329 million from its risk man-
agement activities after allocations compared with negative CHF
524 million. Retained income from risk management activities is
entirely related to Group structural risk management.
Accounting asymmetries related to economic hedges
Net income retained by Group ALM due to accounting asymme-
tries related to economic hedges was negative CHF 66 million
compared with negative CHF 16 million, primarily due to a fair
value loss of CHF 19 million on certain internal funding transac-
tions due to the tightening of own credit funding spreads com-
pared with a gain of CHF 82 million.
Hedge accounting ineffectiveness
Net income related to hedge accounting ineffectiveness was CHF
156 million compared with CHF 89 million. The higher revenue in
2015 mainly related to our cash flow hedges following the Swiss
National Bank’s actions in January 2015.
Other
Other net income was CHF 133 million compared with CHF 162
million, mainly due to lower interest income retained by Group
ALM on behalf of non-controlling interests.
Balance sheet assets
Balance sheet assets were stable at CHF 238 billion as of
31 December 2015.
Risk-weighted assets
RWA decreased by CHF 1 billion to CHF 6 billion as of 31 Decem-
ber 2015.
Leverage ratio denominator
Adjusted for the aforementioned REM transfer, the LRD was CHF
248 billion as of 31 December 2015.
110
Corporate Center – Non-core and Legacy Portfolio
Corporate Center – Non-core and Legacy Portfolio1
CHF million, except where indicated
Results
Income
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from business divisions and other CC units
of which: services from CC – Services
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses2
Operating profit / (loss) before tax
Adjusted results3
Total operating income as reported
Total operating income (adjusted)
Total operating expenses as reported
of which: personnel-related restructuring expenses
of which: non-personnel-related restructuring expenses
of which: restructuring expenses allocated from CC – Services
of which: a gain related to a change to retiree benefit plans in the US
Total operating expenses (adjusted)
Operating profit / (loss) before tax as reported
Operating profit / (loss) before tax (adjusted)
Additional information
Average attributed equity (CHF billion)4
Total assets (CHF billion)5
Risk-weighted assets (fully applied, CHF billion)6
Leverage ratio denominator (fully applied, CHF billion)7
Personnel (full-time equivalents)
As of or for the year ended
31.12.16
31.12.15
31.12.14
% change from
31.12.15
(23)
(13)
(36)
66
732
280
225
0
0
1,078
(1,114)
(36)
(36)
1,078
1
0
21
1,057
(1,114)
(1,093)
2.1
68.5
18.9
22.4
63
(195)
(8)
(203)
116
806
379
313
0
0
1,301
(1,503)
(203)
(203)
1,301
14
0
43
1,245
(1,503)
(1,447)
2.9
94.4
30.7
38.5
77
(863)
2
(862)
124
505
514
404
0
0
1,144
(2,005)
(862)
(862)
1,144
1
0
29
(3)
1,116
(2,005)
(1,977)
4.9
169.8
35.7
93.4
137
(88)
63
(82)
(43)
(9)
(26)
(28)
(17)
(26)
(82)
(82)
(17)
(15)
(26)
(24)
(28)
(27)
(38)
(42)
(18)
1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to retrospective adoption of new
accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements” section of this
report for information on restructuring expenses. 3 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 4 Refer to the “Capital management” section of this report for more
information. 5 Based on third-party view, i.e., without intercompany balances. 6 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section
of this report for more information. 7 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more information. From 31 December 2015 onward, the leverage ratio
denominator calculation is aligned with the Basel III rules. Figures for periods prior to 31 December 2015 are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable.
111
Financial and operating performance Financial and operating performance
Corporate Center
2016 compared with 2015
Corporate Center – Non-core and Legacy Portfolio recorded a loss
before tax of CHF 1,114 million compared with CHF 1,503 mil-
lion.
Operating income
Operating income was negative CHF 36 million compared with
negative CHF 203 million. The improved result was mainly due to
lower losses from novation and unwind activities. Furthermore,
2016 included a gain related to the settlement of a litigation claim
and valuation gains on financial assets designated at fair value
compared with valuation losses in 2015.
➔ Refer to the “Risk management and control” section of this
report for more information
Operating expenses
Total operating expenses decreased by CHF 223 million or 17% to
CHF 1,078 million. Net expenses for services from business divi-
sions and other Corporate Center units decreased by CHF 99 mil-
lion as a result of reduced consumption of shared services. Per-
sonnel expenses decreased by CHF 50 million, driven by a decrease
in staff levels. Net expenses for provisions for litigation, regulatory
and similar matters declined by CHF 36 million to CHF 584 mil-
lion. Moreover, 2016 included an expense of CHF 33 million for
the annual UK bank levy compared with CHF 50 million in 2015.
Balance sheet assets
During 2016, balance sheet assets decreased to CHF 68 billion
from CHF 94 billion. Positive replacement values (PRVs) decreased
by CHF 22 billion, primarily reflecting ongoing reduction activity
including negotiated bilateral settlements, third-party novations,
including transfers to central clearing houses, and agreements to
net down trades with other dealer counterparties, partly offset by
fair value increases resulting from increases in interest rates. Total
assets excluding PRVs decreased by CHF 4 billion to CHF 12 billion,
mainly due to a reduction in cash collateral receivables on deriva-
tive instruments.
Assets classified as Level 3 in the fair value hierarchy totaled
CHF 2.0 billion as of 31 December 2016.
Risk-weighted assets
Fully applied risk-weighted assets (RWA) decreased by CHF 12 bil-
lion to CHF 19 billion, largely as a result of a revised methodology
for the allocation of operational risk RWA to business divisions
and Corporate Center units.
➔ Refer to the “Capital management” section of this report for
more information
Leverage ratio denominator
The fully applied leverage ratio denominator (LRD) decreased to
CHF 22 billion from CHF 38 billion, consistent with the reduction
in balance sheet assets.
➔ Refer to the “Capital management” and “Treasury management”
sections of this report for more information
➔ Refer to “Corporate Center – Group Asset and Liability Manage-
ment” in this section for more information on the transfer of the
Risk Exposure Management function
112
Composition of Non-core and Legacy Portfolio
An overview of the composition of Non-core and Legacy Portfolio
is presented in the table below.
The groupings of positions by category and the order in which
these are listed are not necessarily representative of the magni-
tude of the risks associated with them, nor do the metrics shown
in the table necessarily represent the risk measures used to man-
age and control these positions.
CHF billion
Exposure category
Description
RWA
Total assets1
LRD2
Rates (linear)
Rates (non-linear)
Credit
Securitizations
Auction preferred stock (APS)
and auction rate securities (ARSs)
Muni swaps and options
Other
Operational risk
Total
Consists of linear OTC products (primarily vanilla interest
rate, inflation, basis and cross-currency swaps for all
major currencies and some emerging markets) and
non-linear OTC products (vanilla and structured options).
More than 95% of gross PRVs are collateralized.
Uncollateralized exposures are well diversified across
counterparties, of which the majority is rated investment
grade. Approximately 40% of gross PRVs are due to
mature by end-2021.
Consists primarily of a residual structured credit book
that is largely hedged against market risk. The remaining
counterparty risk is fully collateralized and diversified
across multiple names. The residual structured credit
book is expected to materially run off by end-2018. Also
includes corporate lending and residual distressed credit
positions, with a similar expected run-off profile.
Consists primarily of a portfolio of CDS positions
referencing ABS assets with related cash and synthetic
hedges to mitigate the impact of directional movements.
The majority of the remaining positions are expected to
run off by end-2018.
Portfolio of long-dated APS and municipal ARSs. All APS
were rated A or above and all ARS exposures were rated
Ba1 or above as of 31 December 2016.
Swaps and options with US state and local governments.
More than 95% of the PRVs are with counterparties that
were rated investment grade as of 31 December 2016.
Diverse portfolio of smaller positions.
Operational risk RWA allocated to Non-core and Legacy
Portfolio.
31.12.16
31.12.15
31.12.16
31.12.15
31.12.16
31.12.15
2.5
3.6
42.6
55.9
9.4
17.8
0.8
0.7
14.5
22.3
2.0
2.8
0.5
0.5
1.0
2.0
2.2
7.0
2.4
1.5
1.4
1.8
1.4
1.9
0.7
0.9
2.5
2.8
2.5
2.8
0.4
1.5
10.1
18.9
0.5
1.8
21.1
30.7
2.3
4.2
–
3.4
6.3
–
1.7
3.2
–
2.5
3.53
–
68.5
94.4
22.4
38.5
1 Total assets of CHF 68.5 billion as of 31 December 2016 (CHF 94.4 billion as of 31 December 2015) include positive replacement values (gross exposure excluding the impact of any counterparty netting) of CHF 56.5
billion (CHF 78.5 billion as of 31 December 2015). 2 Swiss SRB leverage ratio denominator. 3 Comparative figure as of 31 December 2015 has been restated to reflect the transfer of the Risk Exposure Management
(REM) function from Corporate Center – Non-core and Legacy Portfolio to Corporate Center – Group ALM in 2016. Refer to the “Corporate Center – Group Asset and Liability Management” section of this report for
more information.
113
Financial and operating performance Financial and operating performance
Corporate Center
2015 compared with 2014
Corporate Center – Non-core and Legacy Portfolio recorded a loss
before tax of CHF 1,503 million compared with CHF 2,005 mil-
lion.
Operating income
Operating income was negative CHF 203 million in 2015 and
mainly related to losses from novation and unwind activities, and
to valuation losses on financial assets designated at fair value.
In the prior year, revenues were negative CHF 862 million,
mainly due to a net loss of CHF 345 million related to funding and
debit valuation adjustments (FVA / DVA) on derivatives, of which
CHF 252 million was recorded upon the implementation of FVA.
In addition, 2014 included negative revenues of CHF 197 million
due to novation und unwind activity in Rates, a loss of CHF 108
million resulting from the termination of certain credit default
swap contracts and a loss of CHF 97 million in structured credit as
a result of exiting the majority of the correlation trading portfolio.
Operating expenses
Total operating expenses increased by CHF 157 million or 14% to
CHF 1,301 million, largely as net expenses for provisions for litiga-
tion, regulatory and similar matters increased by CHF 427 million
to CHF 620 million. This increase was partly offset by CHF 135
million lower net expenses for services from business divisions and
other Corporate Center units as a result of reduced consumption
of shared services. Moreover, 2014 included CHF 120 million in
net expenses related to certain disputed receivables. 2015
included an expense of CHF 50 million for the annual UK bank
levy compared with CHF 52 million in 2014.
Balance sheet assets
During 2015, balance sheet assets decreased to CHF 94 billion
from CHF 170 billion, mainly reflecting CHF 62 billion lower PRVs.
Within our rates portfolio, PRVs decreased by CHF 57 billion,
driven by fair value decreases following interest rate movements,
as well as by our ongoing reduction activity including negotiated
bilateral settlements (unwinds), third-party novations, including
transfers to central clearing houses (trade migrations), and agree-
ments to net down trades with other dealer counterparties (trade
compressions). Collateral delivered against over-the-counter
(OTC) derivatives decreased by CHF 9 billion.
Assets classified as Level 3 in the fair value hierarchy totaled
CHF 2.2 billion as of 31 December 2015.
Risk-weighted assets
Fully applied RWA decreased by CHF 5 billion to CHF 31 billion,
mainly as a result of reductions of outstanding OTC derivative
transactions, reflecting negotiated bilateral settlements with spe-
cific counterparties, third-party novations and trade compres-
sions.
Leverage ratio denominator
Adjusted for the REM transfer, the LRD was CHF 38 billion as of
31 December 2015.
114
Risk, treasury
and capital
management
Management report
Audited information according to IFRS 7 and IAS 1
Risk and capital disclosures provided in line with the requirements of International Financial Reporting Standard 7 (IFRS 7) Financial
Instruments: Disclosures, and International Accounting Standard 1 (IAS 1) Financial Statements: Presentation form part of the finan-
cial statements included in the ”Consolidated financial statements” section of this report and audited by the independent registered
public accounting firm, Ernst & Young Ltd, Basel. This information is marked as “Audited” within this section of the report. Audited
information provided in this section applies to both UBS Group AG (consolidated) and UBS AG (consolidated). Differences between
these two scopes of consolidation are provided where applicable.
Table of contents
117 Risk management and control
117 Overview of risks arising from our business activities
119 Risk categories
120 Top and emerging risks
121 Risk governance
122 Risk appetite framework
125
125 Risk measurement
129 Credit risk
148 Market risk
159 Country risk
164 Operational risk
Internal risk reporting
168 Treasury management
168 Balance sheet, liquidity and funding management
179 Off-balance sheet
182 Currency management
183 Cash flows
184 Capital management
184 Capital management objectives
184 Capital planning
184 Capital management activities
185 Swiss SRB capital framework
188 Swiss SRB loss-absorbing capacity
194 Risk-weighted assets
198
200 Equity attribution framework
Leverage ratio denominator
202 UBS shares
116
Risk management and control
Overview of risks arising from our business activities
The scale of our business activities is dependent on the capital we
have available to cover the risks in our business, the size of our
on- and off-balance sheet assets through their contribution to our
capital, leverage and liquidity ratios, and our risk appetite.
The table on the next page shows risk-weighted assets (RWA),
the leverage ratio denominator (LRD) and risk-based-capital (RBC),
as well as attributed tangible equity, total assets and operating
profit before tax on both a reported and adjusted basis for our
business divisions and Corporate Center units. This illustrates how
the activities in our business divisions and Corporate Center units
are captured in the risk measures mentioned above, and it illus-
trates their financial performance in the context of these measures.
➔ Refer to the “Capital management” section of this report for
more information on risk-weighted assets, leverage ratio
denominator and our current and revised equity attribution
framework
➔ Refer to “Statistical measures” in this section for more informa-
tion on risk-based capital
➔ Refer to the “Performance by business division and Corporate
Center unit – reported and adjusted” table in the “Group
performance” section of this report for more information
117
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Key risks, risk measures and performance by business division and Corporate Center unit
Business
divisions and
Corporate
Center units
Key risks
arising from
business
activities
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
CC – Services
CC – Group
ALM
CC – Non-core
and Legacy
Portfolio
Credit risk from
lending against
securities
collateral and
mortgages, and a
small amount of
derivatives
trading activity.
Minimal
contribution to
market risk
Credit risk from
lending against
securities collat-
eral and
mortgages
Market risk
from municipal
securities and
taxable fixed
income securities
Credit risk from
retail business,
mortgages,
secured and
unsecured
corporate
lending, and a
small amount of
derivatives
trading activity.
Minimal
contribution to
market risk
Small amounts
of credit and
market risk
Credit risk from
lending,
derivatives
trading and
securities
financing
Market risk
from primary
underwriting
activities and
secondary trading
No material
risk exposures
Credit risk from
remaining
lending and
derivatives
exposures
Market risk is
materially
hedged
Credit and
market risks
arising from
management of
the Group’s
balance sheet,
capital, profit or
loss and liquidity
portfolios
Central manage-
ment of
liquidity,
funding, coun-
terparty credit
and structural
FX risk
Operational risk is an inevitable consequence of being in business, as losses can result from inadequate or failed internal processes, people and systems, or from external events.
It can arise as a result of our past and current business activities across all business divisions and Corporate Center units.
Risk measures and performance
CHF billion, as of or for the year ended
Risk-weighted assets (fully applied)1
of which: credit risk
of which: market risk
of which: operational risk
Leverage ratio denominator (fully applied)3
Risk-based capital4
Average attributed tangible equity5
Total assets
Operating profit / (loss) before tax (as reported)
Operating profit / (loss) before tax (adjusted)6
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
CC –
Services
31.12.16
25.8
12.5
0.0
13.2
115.5
1.5
2.8
115.5
1.9
2.4
23.8
9.1
1.4
13.2
68.1
1.3
1.9
65.9
1.1
1.2
41.6
37.7
0.0
3.9
152.2
2.7
4.1
139.9
1.8
1.8
3.9
1.6
0.0
2.3
2.7
0.3
0.2
12.0
0.5
0.6
31.12.15
CC –
Group
ALM
10.6
7.3
0.7
2.5
CC –
Non-core
and Legacy
Portfolio
18.9
6.2
2.6
10.1
22.4
2.4
2.1
Group
222.7
112.8
15.5
77.8
870.5
33.9
42.2
70.4
37.0
14.0
19.5
27.6
1.4
(3.2)2
13.1
231.2
5.8
272.4
7.8
7.6
12.7
19.2
5.2
4.3
242.3
23.7
267.2
68.5
935.0
1.0
1.5
(0.8)
(0.9)
(0.2)
(0.1)
(1.1)
(1.1)
4.1
5.3
CHF billion, as of or for the year ended
Risk-weighted assets (fully applied)1
of which: credit risk
of which: market risk
of which: operational risk
Leverage ratio denominator (fully applied)3
Risk-based capital4
Average attributed tangible equity5
Total assets
Operating profit / (loss) before tax (as reported)
Operating profit / (loss) before tax (adjusted)6
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
CC –
Services
25.3
12.6
0.0
12.6
119.0
1.0
2.8
119.9
2.7
2.8
21.9
8.5
1.0
12.4
62.9
1.3
1.9
61.0
0.7
0.8
34.6
32.9
0.0
1.6
153.8
2.9
3.9
141.2
1.6
1.7
2.6
1.7
0.0
0.9
2.7
0.3
0.4
12.9
0.6
0.6
62.9
35.5
10.5
16.8
268.0
6.1
7.2
253.5
1.9
2.3
23.6
1.3
(2.9)2
9.5
4.8
12.6
15.9
22.6
(0.8)
(1.1)
CC –
Group
ALM7
6.0
5.0
0.9
0.1
240.2
3.6
3.2
237.5
0.3
(0.1)
CC –
Non-core
and Legacy
Portfolio7
30.7
6.9
2.6
21.1
46.2
2.7
2.9
94.4
(1.5)
(1.4)
Group
207.5
104.4
12.1
75.1
897.6
30.3
38.2
942.8
5.5
5.6
1 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 2 Corporate Center – Services market risk
RWA were negative, as they included the effect of portfolio diversification across businesses. 3 Calculated in accordance with Swiss SRB rules. Refer to the “Capital management” section of this report for more
information. 4 Refer to “Statistical measures” in this section for more information on risk-based capital. 5 Refer to the “Capital management” section of this report for more information on our equity attribution
framework. 6 Adjusted results are non-GAAP financial measures as defined by SEC regulations. Refer to the “Performance by business division and Corporate Center unit – reported and adjusted” table in the “Group
performance” section of this report for more information. 7 Comparative figures as of 31 December 2015 in this table have been restated to reflect the transfer of the Risk Exposure Management (REM) function from
Corporate Center – Non-core and Legacy Portfolio to Corporate Center – Group ALM in 2016. Refer to “Corporate Center – Group Asset and Liability Management” in the “Corporate Center” sections in “Operating
environment and strategy” and “Financial and operating performance” of this report for more information.
118
Risk definitions
Primary risks: the risks that our businesses may take to generate a return
Audited | Credit risk: the risk of loss resulting from the failure of a client or counterparty to meet its
Business management
Risk Control
Risk managed by
Independent
oversight by
Captured in our risk
appetite framework
Audited | Market risk (traded and non-traded): the risk of loss resulting from adverse movements in
Business management
Risk Control
contractual obligations toward UBS. This includes settlement risk and loan underwriting risk:
Settlement risk: the risk of loss resulting from transactions that involve exchange of value
(e.g., security versus cash) where we must deliver without first being able to determine with certainty
that we will receive the countervalue
Loan underwriting risk: the risk of loss arising during the holding period of financing transactions
which are intended for further distribution
market variables. Market variables include observable variables such as interest rates, foreign exchange
rates, equity prices, credit spreads and commodity (including precious metal) prices, and variables which
may be unobservable or only indirectly observable, such as volatilities and correlations. Market risk
includes issuer risk and investment risk:
Issuer risk: the risk of loss from changes in fair value resulting from credit-related events affecting an
issuer to which we are exposed through tradable securities or derivatives referencing the issuer
Investment risk: issuer risk associated with positions held as financial investments
Country risk: the risk of losses resulting from country-specific events. It includes transfer risk, whereby
Business management
Risk Control
a country’s authorities prevent or restrict the payment of an obligation, as well as systemic risk events
arising from country-specific political or macroeconomic developments
Consequential risks: the risks to which our businesses are exposed as a consequence of being in business
Audited | Liquidity risk: the risk of being unable to generate sufficient funds from assets to meet
Group ALM
Risk Control
payment obligations when they fall due, including in times of stress
Audited | Funding risk: the risk of higher-than-expected funding costs due to wider-than-expected UBS
credit spreads when existing funding positions mature and need to be rolled over or replaced by other,
more expensive funding sources. If a shortage of available funding sources is expected in a stress event,
funding risk also covers potential additional losses from forced asset sales
Structural foreign exchange risk: the risk of decreases in our capital due to changes in foreign
Group ALM
Risk Control
exchange rates with an adverse translation effect on capital held in currencies other than Swiss francs
Operational risk: the risk of loss resulting from inadequate or failed internal processes, people and
Business management
Risk Control
systems, or from external events, including cyber risk. Operational risk includes, among other things,
legal risk, conduct risk and compliance risk:
Legal risk: (i) the financial risk resulting from the non-enforceability of a contract or the failure to
assert non-contractual rights, or (ii) the financial or reputational risk resulting from UBS being held
liable for a contractual or legal claim, or otherwise being subject to a penalty or liability in a legal
action, based on a contractual or other legal claim, violation of law, or regulation, or infringement of
intellectual property rights, or failing to manage litigation or other actions appropriately or effectively
Conduct risk: the risk that the conduct of the firm or its individuals unfairly impacts
clients or counterparties, undermines the integrity of the financial system or impairs effective competition
to the detriment of consumers.
own internal standards
Compliance risk: the financial or reputational risk incurred by us by not adhering to the applicable
laws, rules and regulations, local and international best practice (including ethical standards) and our
Cyber risk: the risk of a material impact from an external or internal attack on our information systems
with the purpose of data theft, fraud or denial of service. Cyberattacks are manifestations of a cyber threat
into an act of aggression or criminal activity causing financial, regulatory or reputational harm or loss
Money laundering risk: the risk that UBS fails to detect money laundering activities to prevent the
financing of illegal activities (including terrorism) and fails to report suspicious activities or respond
to anti-money laundering requests from relevant authorities
Legal
Risk Control
Risk Control
Pension risk: the risk of a negative impact on our capital as a result of deteriorating funded status from
Human Resources
Risk Control and
decreases in the fair value of assets held in the defined benefit pension funds and / or changes in the
value of defined benefit pension obligations due to changes in actuarial assumptions (e.g., discount rate,
life expectancy, rate of pension increase) and / or changes to plan designs
Finance
Environmental and social risk: the possibility of us suffering reputational or financial harm from
Business management
Risk Control
transactions, products, services or activities that involve a party associated with environmentally or
socially sensitive activities.
➔ Refer to the “UBS and Society” section of this report for more information
Business risks: the risks arising from the commercial, strategic and economic environment in which our businesses operate
Business risks: the potential negative impact on earnings from lower-than-expected business volumes
Business management
Finance
and / or margins, to the extent they are not offset by a decrease in expenses
Reputational risks
Reputational risk: the risk of a decline in our reputation from the point of view of our stakeholders,
All businesses and
All control functions
such as clients, shareholders, staff and the general public
functions
Risk categories
We categorize the risk exposures of our business divisions and Corporate Center units as outlined in the table below.
Risk definitions
Primary risks: the risks that our businesses may take to generate a return
Audited | Credit risk: the risk of loss resulting from the failure of a client or counterparty to meet its
contractual obligations toward UBS. This includes settlement risk and loan underwriting risk:
Settlement risk: the risk of loss resulting from transactions that involve exchange of value
(e.g., security versus cash) where we must deliver without first being able to determine with certainty
that we will receive the countervalue
Loan underwriting risk: the risk of loss arising during the holding period of financing transactions
which are intended for further distribution
Audited | Market risk (traded and non-traded): the risk of loss resulting from adverse movements in
market variables. Market variables include observable variables such as interest rates, foreign exchange
rates, equity prices, credit spreads and commodity (including precious metal) prices, and variables which
may be unobservable or only indirectly observable, such as volatilities and correlations. Market risk
includes issuer risk and investment risk:
Issuer risk: the risk of loss from changes in fair value resulting from credit-related events affecting an
issuer to which we are exposed through tradable securities or derivatives referencing the issuer
Investment risk: issuer risk associated with positions held as financial investments
Country risk: the risk of losses resulting from country-specific events. It includes transfer risk, whereby
a country’s authorities prevent or restrict the payment of an obligation, as well as systemic risk events
arising from country-specific political or macroeconomic developments
Risk managed by
Independent
oversight by
Captured in our risk
appetite framework
Business management
Risk Control
Business management
Risk Control
Business management
Risk Control
Consequential risks: the risks to which our businesses are exposed as a consequence of being in business
Audited | Liquidity risk: the risk of being unable to generate sufficient funds from assets to meet
payment obligations when they fall due, including in times of stress
Audited | Funding risk: the risk of higher-than-expected funding costs due to wider-than-expected UBS
credit spreads when existing funding positions mature and need to be rolled over or replaced by other,
more expensive funding sources. If a shortage of available funding sources is expected in a stress event,
funding risk also covers potential additional losses from forced asset sales
Structural foreign exchange risk: the risk of decreases in our capital due to changes in foreign
exchange rates with an adverse translation effect on capital held in currencies other than Swiss francs
Operational risk: the risk of loss resulting from inadequate or failed internal processes, people and
systems, or from external events, including cyber risk. Operational risk includes, among other things,
legal risk, conduct risk and compliance risk:
Legal risk: (i) the financial risk resulting from the non-enforceability of a contract or the failure to
assert non-contractual rights, or (ii) the financial or reputational risk resulting from UBS being held
liable for a contractual or legal claim, or otherwise being subject to a penalty or liability in a legal
action, based on a contractual or other legal claim, violation of law, or regulation, or infringement of
intellectual property rights, or failing to manage litigation or other actions appropriately or effectively
Conduct risk: the risk that the conduct of the firm or its individuals unfairly impacts
clients or counterparties, undermines the integrity of the financial system or impairs effective competition
to the detriment of consumers.
Compliance risk: the financial or reputational risk incurred by us by not adhering to the applicable
laws, rules and regulations, local and international best practice (including ethical standards) and our
own internal standards
Cyber risk: the risk of a material impact from an external or internal attack on our information systems
with the purpose of data theft, fraud or denial of service. Cyberattacks are manifestations of a cyber threat
into an act of aggression or criminal activity causing financial, regulatory or reputational harm or loss
Money laundering risk: the risk that UBS fails to detect money laundering activities to prevent the
financing of illegal activities (including terrorism) and fails to report suspicious activities or respond
to anti-money laundering requests from relevant authorities
Pension risk: the risk of a negative impact on our capital as a result of deteriorating funded status from
decreases in the fair value of assets held in the defined benefit pension funds and / or changes in the
value of defined benefit pension obligations due to changes in actuarial assumptions (e.g., discount rate,
life expectancy, rate of pension increase) and / or changes to plan designs
Environmental and social risk: the possibility of us suffering reputational or financial harm from
transactions, products, services or activities that involve a party associated with environmentally or
socially sensitive activities.
➔ Refer to the “UBS and Society” section of this report for more information
Group ALM
Risk Control
Group ALM
Risk Control
Business management
Risk Control
Legal
Risk Control
Risk Control
Human Resources
Risk Control and
Finance
Business management
Risk Control
Business risks: the risks arising from the commercial, strategic and economic environment in which our businesses operate
Business risks: the potential negative impact on earnings from lower-than-expected business volumes
and / or margins, to the extent they are not offset by a decrease in expenses
Business management
Finance
Reputational risks
Reputational risk: the risk of a decline in our reputation from the point of view of our stakeholders,
such as clients, shareholders, staff and the general public
All businesses and
functions
All control functions
119
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Top and emerging risks
The top and emerging risks disclosed below reflect those that we
currently think have the potential to materialize within one year
and which could significantly affect the Group. Investors should
also carefully consider all information set out in the “Risk factors”
section of this report, where we discuss these and other material
risks we currently consider could impact our ability to execute our
strategy and may affect our business activities, financial condition,
results of operations and prospects.
– We continue to be exposed to a number of regulatory and
legislative changes which could have a material adverse effect
on our business, as discussed in the “Regulatory and legal
developments” section of this report, and “Regulatory and
legal changes may adversely affect our business and our ability
to execute our strategic plans” in the “Risk factors” section of
this report.
– We are subject to various claims, disputes, legal proceedings
and government investigations and we anticipate that our
ongoing business activities will continue to give rise to such
matters in the future, as noted under the item “Material legal
and regulatory risks arise in the conduct of our business” in the
“Risk factors” section of this report. Information on litigation,
regulatory and similar matters we currently consider significant
is disclosed in “Note 20 Provisions and contingent liabilities” in
the “Consolidated financial statements” section of this report.
– We are exposed to a number of macroeconomic issues as well
as general market conditions. As noted under the items “Con-
tinuing low or negative interest rates may have a detrimental
effect on our capital strength, liquidity and funding position,
and profitability,” “Our global presence subjects us to risk from
currency fluctuations,” and “Performance in the financial ser-
vices industry is affected by market conditions and the macro-
economic climate” in the “Risk factors” section of this report,
these external pressures may have a significant adverse effect
on our business activities and related financial results, primarily
through reduced margins and revenues, asset impairments and
other valuation adjustments. Accordingly, these macroeco-
nomic factors are considered in the development of stress test-
ing scenarios for our ongoing risk management activities.
– Our reputation is critical to achieving our strategic goals and
financial targets, and damage to it can have fundamental neg-
ative effects on our business and prospects, as described in
“Our reputation is critical to the success of our business” in the
“Risk factors” section of this report.
– Due to the operational complexity of all our businesses, we are
continually exposed to operational risks such as process error,
failed execution, system failures and fraud. Conduct risks are
inherent in our businesses. Moreover, financial crime, including
money laundering, terrorist financing, sanctions violation,
fraud, bribery and corruption, continues to present risks, as
emerging technologies and changing geopolitical risks increase
complexity, and continued heightened regulatory attention
and expectations result in increased overall risk. In addition,
one of the most critical risks facing the broader industry is the
threat of cyberattacks, which continue to evolve and become
more powerful. Along with the rest of the industry we face
ongoing threats, such as data theft, disruption of service and
cyber fraud, all of which have the potential to significantly
impact our business. Refer to “Operational risk” in this section
and “Operational risks affect our business” in the “Risk fac-
tors” section of this report for more information.
120
Risk governance
Our risk governance framework operates along three lines of
defense. Our first line of defense, business management, owns its
risk exposures and is required to maintain effective processes and
systems to manage its risks, including robust and comprehensive
internal controls and documented procedures. Business manage-
ment has appropriate supervisory controls and review processes in
place designed to identify control weaknesses and inadequate
processes. Our second line of defense, the control functions, are
independent from the business and report directly into the Group
CEO. Control functions provide independent oversight of risks,
including setting risk limits and protecting against non-compli-
ance with applicable laws and regulations. Our third line of
defense, Group Internal Audit (GIA), reports to the Audit Commit-
tee of the Board of Directors and evaluates the overall effective-
ness of governance, risk management and the control environ-
ment, including the assessment of how the first and second lines
of defense meet their objectives.
These key roles and responsibilities for risk management and
control are illustrated in the following chart and described on the
next pages.
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Risk, treasury and capital management
Risk management and control
Audited | The Board of Directors (BoD) is responsible for deter-
mining the risk principles, risk appetite and major portfolio limits
of the Group, including their allocation to the business divisions
and Corporate Center units. The BoD is supported by the BoD
Risk Committee, which monitors and oversees the Group’s risk
profile and the implementation of the risk framework as approved
by the BoD, as well as assessing the Group’s key risk measurement
methodologies. The Corporate Culture and Responsibility Com-
mittee supports the BoD in fulfilling its duty to safeguard and
advance the Group’s reputation for responsible and sustainable
conduct. It reviews and assesses stakeholder concerns and expec-
tations pertaining to UBS’s societal performance and corporate
culture and recommends appropriate actions to the BoD.
The Group Executive Board (GEB) implements the risk frame-
work, controls the Group’s risk profile and approves key risk
policies.
The Group Chief Executive Officer (Group CEO) is responsible
for the Group’s results, has risk authority over transactions, posi-
tions and exposures, and allocates portfolio limits approved by the
BoD within the business divisions and Corporate Center units.
The business division Presidents are accountable for the results
of their business divisions. This includes actively managing their
risk exposures, and ensuring profit potential, risk, balance sheet
and capital usage are balanced. The regional Presidents coordi-
nate and implement UBS’s strategy in their regions in conjunction
with the business division Presidents and heads of the control and
support functions. They have a veto power over decisions with
respect to all business activities that may have a negative regula-
tory or reputational effect in their respective regions.
The Group Chief Risk Officer (Group CRO) is responsible for
Risk Control. Risk Control independently oversees all primary risks
and most consequential risks as outlined in the “Risk categories”
section above. This includes establishing methodologies to mea-
sure and assess risk, setting risk limits, and developing and operat-
ing an appropriate risk control infrastructure. Risk Control is also
the central function for model risk management, which includes
the validation of models used in the firm. The risk control process
is supported by a framework of policies and authorities. Business
division and regional Chief Risk Officers have delegated authority
for their respective divisions and, regions. Moreover, authorities
are delegated to risk officers according to their expertise, experi-
ence and responsibilities.
The Group Chief Financial Officer (Group CFO) is responsible
for assessing and ensuring transparency in the financial perfor-
mance of the Group and business divisions, and for ensuring that
disclosure of our financial performance meets regulatory require-
ments and corporate governance standards. The Group CFO
manages the Group’s and divisional financial control functions,
including financial accounting, controlling, forecasting, planning
and reporting processes. The Group CFO also provides external
certifications under sections 302 and 404 of the Sarbanes-Oxley
Act of 2002. Further responsibilities include managing UBS’s tax
affairs, as well as treasury and capital management, including the
management of funding and liquidity risk and UBS’s regulatory
capital ratios.
The Group General Counsel (Group GC) is responsible for
implementing the Group’s risk management and control princi-
ples for legal matters, and for managing our legal function.
Group Internal Audit (GIA) independently assesses the adher-
ence to our strategy, the effectiveness of governance, risk man-
agement and control processes at Group, business division and
regional levels, including compliance with legal, regulatory and
statutory requirements, as well as with internal policies and con-
tracts. GIA has a functional reporting line to the Audit Committee.
The above roles and responsibilities are replicated for certain
significant legal entities of the Group through the appointment of
entity level Presidents, Chief Risk Officers, Chief Financial Officers
and General Counsels.
Risk appetite framework
Our risk appetite is defined at the aggregate level and reflects the
types of risk that we are willing to accept or intend to avoid. It is
established via a complementary set of qualitative and quantita-
tive risk appetite statements defined on a Group-wide level and is
embedded throughout our business divisions and legal entities
through Group, business division and legal entity policies, limits
and authorities. These statements are a critical foundation to
maintaining a robust risk culture throughout our organization.
The “Risk appetite framework” chart on the next page shows the
key elements of this framework, which are described in more
detail below.
Qualitative statements aim to ensure we maintain the desired
risk culture. Quantitative risk appetite objectives are designed to
enhance the Group’s resilience against the impact of potential
severe adverse economic or geopolitical events. These objectives
cover areas such as the Group’s capital buffer, solvency, earnings,
leverage, liquidity and funding, and are subject to periodic review,
including as part of the annual business planning process.
These objectives are complemented by operational risk appe-
tite objectives, which are established for each of our operational
risk categories, such as market conduct, theft, fraud, data confi-
dentiality and technology risks. Operational risk events that
exceed predetermined risk tolerances, expressed as percentages
of the Group’s operating income, must be escalated to the respec-
tive business division President or higher, as appropriate.
The quantitative risk appetite objectives are supported by a
comprehensive suite of risk limits set at the portfolio level. These
may apply across the Group, within a business division or busi-
ness unit, at legal entity level, or to an asset class. These addi-
tional quantitative controls are typically bottom-up and are
designed to monitor specific portfolios and to identify potential
risk concentrations.
122
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Risk reports aggregating measures of risk across products and
businesses provide insight into the amounts, types, and sensitivi-
ties of the various risks in our portfolios and ensure compliance
with defined limits. Risk officers, senior management and the BoD
use this information to understand our risk profile and the perfor-
mance of the portfolios.
The status of risk appetite objectives is evaluated each month
and reported to the BoD and the GEB. Our risk appetite may
change over time. Therefore, portfolio limits and associated
approval authorities are subject to periodic reviews and changes,
particularly in the context of our annual business planning process.
In addition, recovery risk indicators embedded in the firm’s
recovery plan are drawn from the set of risk limits that manage-
ment monitors on a routine basis.
Our risk appetite framework is encompassed in a single over-
arching policy and conforms to the Financial Stability Board’s
“Principles for An Effective Risk Appetite Framework” published
in 2013.
Risk principles and risk culture
A strong risk culture is a prerequisite for success in today’s highly
complex operating environment. We are focused on further
strengthening our culture as a source of sustainable competitive
advantage. By placing prudent and disciplined risk-taking at the
center of every decision, we want to achieve our goals of deliver-
ing unrivaled client satisfaction, creating long-term value for
stakeholders, and making UBS one of the most attractive compa-
nies to work for in the world.
Our risk appetite framework combines all the important ele-
ments of our risk culture, expressed in our Pillars, Principles and
Behaviors, our Risk Management and Control Principles, our Code
of Conduct and Ethics, and our Total Reward Principles. Together,
these aim to align the decisions we make with the Group’s strat-
egy, principles and risk appetite. They help provide a solid founda-
tion for promoting risk awareness, leading to appropriate risk-
taking and the establishment of robust risk management and
control processes. These principles are supported by a range of
initiatives covering employees at all levels. This includes the UBS
House View on Leadership, which is a set of explicit expectations
for leaders that establishes consistent leadership standards across
UBS. These initiatives also include our principles of good supervi-
sion, which establish clear expectations of managers and employ-
ees with respect to supervisory responsibilities, specifically: to take
responsibility, to organize their business, to know their employees
and what they do, to know their business, to create a good com-
pliance culture and to respond to and resolve issues.
Risk management and control principles
Protection of
financial strength
Protection of reputation
Protecting UBS’s financial strength
by controlling our risk exposure
and avoiding potential risk con-
centrations at individual exposure
levels, at specific portfolio levels
and at an aggregate firm-wide
level across all risk types
Protecting our reputation through
a sound risk culture characterized
by a holistic and integrated view
of risk, performance and reward,
and through full compliance with
our standards and principles, par-
ticularly our Code of Conduct and
Ethics
Business management
accountability
Ensuring management account-
ability, whereby business manage-
ment, as opposed to Risk Control,
owns all risks assumed through-
out the Group and is responsible
for the continuous and active
management of all risk exposures
to ensure that risk and return are
balanced
Independent controls
Risk disclosure
Independent control functions
that monitor the effectiveness of
the businesses’ risk management
and oversee risk-taking activities
Disclosure of risks to senior
management, the BoD, investors,
regulators, credit rating agencies
and other stakeholders with an
appropriate level of comprehen-
siveness and transparency
123
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
To maintain an environment where staff are comfortable rais-
ing concerns, we have whistle-blowing policies and procedures in
place. These offer multiple channels through which individuals
may, either openly or anonymously, escalate suspected breaches
of laws, regulations, rules and other legal requirements, our Code
of Conduct and Ethics, policies, or relevant professional stan-
dards. Our program is designed to ensure that whistle-blowing
concerns are investigated and that appropriate and consistent
action is taken. We are committed to ongoing awareness training
and communication to all staff.
We also have a mandatory training program in place for all
employees. The program covers a range of compliance and risk-
related topics, including anti-money laundering and operational
risk. In addition, specialized training is provided for employees
depending on their specific roles and responsibilities, such as
credit risk and market risk training for those working in trading
areas. Failure to satisfactorily complete mandatory training ses-
sions within the given deadline results in consequences, including
disciplinary action.
Quantitative risk appetite objectives
Through a set of quantitative risk appetite objectives, we aim to
ensure that our aggregate risk exposure remains within our
desired risk capacity, based on our capital and business plans. The
specific definition of risk capacity for each objective seeks to
ensure that we have sufficient capital, earnings, funding and
liquidity to protect our business franchises and exceed minimum
regulatory requirements under a severe stress event. The risk
appetite objectives are evaluated as part of the annual business
planning process, and are approved by the BoD. The comparison
of risk exposure with risk capacity is a key consideration in man-
agement decisions on potential adjustments to the business strat-
egy and the risk profile of the Group.
We make use of both scenario-based stress tests and statistical
risk measurement techniques to assess the impact of a severe
stress event at a Group-wide level. These complementary frame-
works capture exposures to all material primary and consequen-
tial risks across our business divisions and Corporate Center units.
➔ Refer to “Risk measurement” in this section for more informa-
tion on our stress testing and statistical frameworks
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(cid:10)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:84)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:11)
(cid:37)(cid:81)(cid:87)(cid:80)(cid:86)(cid:84)(cid:91)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(cid:49)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(cid:53)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:67)(cid:78)(cid:2)(cid:40)(cid:58)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(cid:50)(cid:84)(cid:75)(cid:79)(cid:67)(cid:84)(cid:91)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:85)
(cid:41)(cid:84)(cid:67)(cid:80)(cid:87)(cid:78)(cid:67)(cid:84)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)
(cid:46)(cid:75)(cid:83)(cid:87)(cid:75)(cid:70)(cid:75)(cid:86)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:72)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(cid:50)(cid:71)(cid:80)(cid:85)(cid:75)(cid:81)(cid:80)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)
(cid:37)(cid:81)(cid:80)(cid:85)(cid:71)(cid:83)(cid:87)(cid:71)(cid:80)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:85)
(cid:54)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:15)(cid:89)(cid:75)(cid:70)(cid:71)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:86)(cid:67)(cid:86)(cid:75)(cid:85)(cid:86)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:79)(cid:71)(cid:86)(cid:84)(cid:75)(cid:69)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:78)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:71)(cid:70)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:67)(cid:2)(cid:73)(cid:84)(cid:67)(cid:80)(cid:87)(cid:78)(cid:67)(cid:84)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:71)(cid:85)(cid:86)(cid:67)(cid:68)(cid:78)(cid:75)(cid:85)(cid:74)(cid:71)(cid:85)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:84)(cid:71)(cid:85)(cid:74)(cid:81)(cid:78)(cid:70)(cid:85)(cid:2)(cid:67)(cid:86)(cid:2)(cid:67)(cid:2)(cid:82)(cid:81)(cid:84)(cid:86)(cid:72)(cid:81)(cid:78)(cid:75)(cid:81)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:78)(cid:71)(cid:88)(cid:71)(cid:78)
124
In determining our risk capacity, we adjust projected earnings
from the strategic plan for business risk to reflect lower expected
earnings and lower expenses, such as the reversal of variable
compensation accruals in a severe stress event. We also adjust our
capital to take into account the impact of stress on deferred tax
assets, pension plan assets and liabilities, and accruals for capital
returns to shareholders.
The chart on the previous page provides an overview of our
quantitative risk appetite objectives during 2016. For 2016, we
adjusted the minimum leverage ratio objectives to align with the
new capital rules for systemically relevant banks in Switzerland,
updating the post-stress minimum ratio from 2.4% to 2.5% for
the CET1 leverage ratio and from 3.12% total leverage ratio to
4.0% going-concern leverage ratio.
Risk appetite objectives at the business division level are derived
from the Group-wide objectives. They may also comprise objec-
tives specific to the division, related to the specific activities and
risks in that division. Risk appetite objectives are also set for cer-
tain legal entities. These must be consistent with the Group-wide
Risk Appetite Framework and approved in accordance with the
regulations of the legal entity and the Group’s regulations. Differ-
ences may exist that reflect the specific nature, size, complexity
and regulations applicable to the relevant legal entity.
Internal risk reporting
Comprehensive and transparent reporting of risks is central to the
control and oversight responsibilities set out in our risk gover-
nance framework and is a requirement of our Risk Management
and Control Principles. Accordingly, risks are reported at a fre-
quency and to a level of detail commensurate with the extent and
variability of the risk and the needs of the various governance
bodies, regulators and risk authority holders.
On a monthly basis, the Group Risk Report provides a detailed
qualitative and quantitative overview of developments in primary
and consequential risks for the business divisions and Corporate
Center units, along with aggregate views of risks at the Group-
wide level, including the status of our risk appetite objectives and
results of Group-wide stress testing. The Group Risk Report is dis-
tributed internally to the BoD Risk Committee and GEB, and to
senior members of Group Risk Control, Group Internal Audit,
Finance and Legal. Key extracts from the Group Risk Report, along
with extracts from the monthly Group Finance Report and Group
Treasury Report, are included in the Monthly Performance Update
provided to the GEB and BoD. Granular divisional risk reports are
provided to the respective business division Chief Risk Officers
and the business division Presidents. This monthly reporting is
supplemented with a suite of daily and weekly reports at various
levels of granularity, covering market and credit risks for the busi-
ness divisions and Corporate Center units, to enable risk officers
and senior management to monitor and control the Group’s risk
profile.
reporting. Dedicated units within Risk Control assume responsibil-
ity for measurement, analysis and reporting of risk and for over-
seeing the quality and integrity of risk-related data. Our risk data
and measurement systems are subject to periodic review by Group
Internal Audit following a risk-based audit approach.
Risk measurement
Audited | We apply a variety of methodologies and measurements
to quantify the risks of our portfolios and potential risk concen-
trations. Risks that are not fully reflected within standard mea-
sures are subject to additional controls, which may include preap-
proval of specific transactions and the application of specific
restrictions. Models to quantify risk are generally developed by
dedicated units within control functions and are subject to inde-
pendent verification.
Models and methodologies must be approved and are regu-
larly reviewed in accordance with regulatory requirements as well
as internal policies to test that models perform as expected, pro-
duce results comparable with actual events and values, and reflect
best-in-practice approaches and recent academic developments.
Our reviews assess whether models are performing satisfactorily,
whether additional analysis is required, and whether models need
to be recalibrated or redeveloped. Results and conclusions are
presented to the relevant governance body and, as required, to
regulators.
The ongoing process of assessing model quality and perfor-
mance in the production environment comprises two compo-
nents: model verification, in which Model Risk Management &
Control (MRMC) independently assesses a model’s conceptual
soundness, and model confirmation, the regular process of con-
firming the accuracy and appropriateness of the model output
and its application, carried out by the model developers and
reviewed by MRMC.
➔ Refer to “Credit risk,” “Market risk” and “Operational risk”
in this section for more information on model confirmation
procedures
Stress testing
We perform stress testing to estimate the loss that could result
from extreme, yet plausible macroeconomic and geopolitical
stress events. This enables us to identify, better understand and
manage our potential vulnerabilities and risk concentrations.
Stress testing plays a key role in our limits framework at Group-
wide, business division, legal entity and portfolio levels. Stress test
results are regularly reported to the BoD, the Risk Committee and
the GEB. We also provide detailed stress loss analyses to FINMA
and regulators of our legal entities in accordance with their
requirements. As described in the “Risk appetite framework”
section above, stress testing, along with statistical loss measures,
plays a central role in our risk appetite and business planning
processes.
Our internal risk reporting, which covers primary and conse-
quential risks, is supported by risk data and measurement sys-
tems, which are also used for external disclosure and regulatory
Our stress testing framework incorporates three pillars:
(i) combined stress tests, (ii) a comprehensive range of portfolio
and risk-type-specific stress tests and (iii) reverse stress testing.
125
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Our combined stress test (CST) framework is scenario based
and aims to quantify overall Group-wide losses which could result
from a number of potential global systemic events. The frame-
work captures all material primary and consequential risks, as well
as business risks, as indicated in the “Risk categories” section
above. Scenarios are forward looking and encompass macroeco-
nomic and geopolitical stress events calibrated to different levels
of potential severity. We implement each scenario through the
expected evolution of market indicators and economic variables
under that scenario. We then assess the resulting effect on our
primary, consequential and business risks to estimate the overall
loss and capital implications were the scenario to occur. At least
once a year, the Risk Committee approves the most relevant sce-
nario, known as the binding scenario, to be used as the main
scenario for regular CST reporting and for monitoring risk expo-
sure against our minimum capital, earnings and leverage ratio
objectives in our risk appetite framework. Results are reported to
the Risk Committee, GEB, BoD and FINMA on a monthly basis.
The Enterprise-wide Stress Committee (ESC) is responsible for
ensuring the consistency and adequacy of the assumptions and
scenarios used for our Group-wide stress measures. As part of
these responsibilities, the ESC ensures that the suite of stress sce-
narios adequately reflects current and potential developments in
the macroeconomic and geopolitical environment, our current
and planned business activities, and actual or potential risk con-
centrations and vulnerabilities in our portfolios. The ESC meets at
least quarterly and is comprised of Group, business division and
legal entity representatives of Risk Control. In executing its respon-
sibilities, the ESC considers input from the Think Tank, a panel of
senior representatives from the business divisions, Risk Control
and economic research, which meets quarterly to review the cur-
rent and possible future market environment in order to identify
potential stress scenarios that could materially affect the Group’s
profitability. This results in a range of internal stress scenarios that
are developed and evolve over time, separate from the scenarios
mandated by FINMA.
Each scenario captures a wide range of macroeconomic vari-
ables. These include gross domestic product (GDP), equity prices,
interest rates, foreign exchange rates, commodity prices, property
prices and unemployment. We use assumed changes in these
macroeconomic and market variables in each scenario to stress
the key risk drivers of our portfolios. For example, lower GDP
growth and rising interest rates may reduce the income of clients
to whom we have lent money, which leads to changes in the
credit risk parameters for probability of default, loss given default
and exposure at default, and results in higher predicted credit
losses within the stress scenario. We also capture the business risk
resulting from lower fee, interest and trading income, and lower
expenses. These effects are measured across all material risk types
and all businesses to calculate the aggregate estimated effect of
the scenario on profit or loss, other comprehensive income, RWA,
LRD and, ultimately, our capital and leverage ratios. The assumed
changes in macroeconomic variables are updated periodically to
take account of changes in the current and possible future market
environment.
Through 2016, the binding scenario for CST was the internal
Global Recession scenario, which combines elements of the Euro-
zone Crisis scenario, the binding scenario during 2015, and the
China Hard Landing scenario. The Global Recession scenario
assumes that a hard landing in China would lead to severe conta-
gion of Asian and emerging markets economies, while multiple
debt restructurings in Europe, related direct losses for European
banks and fear of a eurozone breakup would severely affect
developed markets such as Switzerland, the UK and the US. The
Eurozone Crisis and China Hard Landing scenarios were discontin-
ued as stand-alone CST scenarios.
The CST risk exposure was broadly stable over the year with
most of the month-on-month variability arising from temporary
loan underwriting exposure in the Investment Bank.
As part of the CST framework, we routinely monitored four
additional stress scenarios throughout 2016.
– Failure of a Major Financial Institution scenario represents
renewed financial market turmoil due to the failure of a major
global financial institution, leading to prolonged financial dele-
veraging and dramatically plunging activity around the globe.
– US Monetary Crisis scenario represents a loss of confidence in
the US, which leads to international portfolio repositioning out
of US dollar-denominated assets, sparking an abrupt and sub-
stantial US dollar sell-off. The US is pushed back into recession,
other industrialized countries replicate this pattern and infla-
tionary concerns lead to an overall higher interest rate level.
– Global Depression scenario represents a severe and prolonged
eurozone crisis in which several peripheral countries default
and exit the eurozone, and advanced economies are pulled
into a prolonged period of economic stagnation.
– Global Deflation scenario is a variation of the Global Recession
scenario in which central banks in major developed economies
reduce interest rates further into negative territory in an
attempt to stimulate growth and restore market confidence.
126
Statistical measures
In addition to our scenario-based CST measure, we employ a sta-
tistical stress framework that allows us to calculate and aggregate
risks using statistical techniques to derive stress events at chosen
confidence levels.
We use this framework to derive a distribution of potential
earnings based on historically observed market changes in com-
bination with the firm’s actual risk exposures, considering effects
on both income and expenses. From this, we determine earn-
ings-at-risk (EaR), which measures the potential shortfall in earn-
ings (i.e., the deviation from forecasted earnings) at a 95% con-
fidence level and is evaluated over a one-year horizon. EaR is
used for the assessment of the earnings objectives in our risk
appetite framework.
We extend the EaR measure by incorporating the effects of
gains and losses recognized through other comprehensive income,
to derive a distribution of potential effects of stress events on CET1
capital. From this distribution, we derive our capital-at-risk (CaR)
buffer measure at a 95% confidence level for the assessment of
our capital and leverage ratio risk appetite objectives, and we
derive our CaR solvency measure at a 99.9% confidence level for
the assessment of our solvency risk appetite objective.
We also use the CaR solvency measure as the basis to derive
the contributions of business divisions and Corporate Center units
to risk-based capital (RBC), which is a component of our equity
attribution framework. RBC measures the potential capital impair-
ment from an extreme stress event at a 99.9% confidence level to
estimate the capital required to absorb unexpected loss while
remaining able to fully repay creditors. We revised several elements
of the RBC model during 2016. The net effect of these model
changes was a moderate increase in the overall level of RBC.
➔ Refer to the “Capital management” section of this report for
more information on the equity attribution framework
As a result of the growing perception that negative interest
rates may become a conventional policy tool, the Global Deflation
scenario was adopted as the binding scenario at the end of 2016,
with the aim of capturing potential effects of significant interest
rates cuts further into negative territory in the calculation of our
post-stress earnings, capital and leverage ratios.
Portfolio-specific stress tests are measures that are tailored to
the risks of specific portfolios. Our portfolio stress loss measures
are derived from data on past events, but also include forward-
looking elements. For example, we derive the expected market
movements within our liquidity-adjusted stress metric using a
combination of historical market behavior, based on an analysis of
historical events, and forward-looking analysis including consider-
ation of defined scenarios that have never occurred in the past.
Results of portfolio-specific stress tests may be subject to limits to
explicitly control risk-taking, or may be monitored without limits
to identify vulnerabilities.
Reverse stress testing starts from a defined stress outcome
(e.g., a specified loss amount, reputational damage, a liquidity
shortfall or a breach of regulatory capital ratios) and works back-
ward to identify the economic or financial scenarios that could
result in such an outcome. As such, reverse stress testing is
intended to complement scenario-based stress tests by assuming
“what if” outcomes that could extend beyond the range normally
considered, and thereby potentially challenge assumptions
regarding severity and plausibility. The results of reverse stress
testing are reported to relevant governance bodies according to
the materiality and scope of the exercise.
Additionally, we routinely analyze the effect of increases or
decreases in interest rates and changes in the structure of yield
curves.
Moreover, Group Treasury performs stress testing to determine
the optimum asset and liability structure that allows us to main-
tain an appropriately balanced liquidity and funding position
under various scenarios. These scenarios differ from those out-
lined above, because they are focused on specific situations which
could generate liquidity and funding stress, as opposed to the
scenarios used in the CST framework, which focus on the impact
on profit or loss and capital.
➔ Refer to “Credit risk,” and “Market risk” in this section for more
information on stress loss measures
➔ Refer to the “Treasury management” section for more informa-
tion on stress testing
➔ Refer to “Our stated capital returns objective is based, in part,
on capital ratios that are subject to regulatory change and may
fluctuate significantly” in the “Risk factors” section of this report
for more information
127
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Portfolio and position limits
The Group-wide stress and statistical metrics are complemented
by more granular portfolio and position limits, triggers and tar-
gets. The combination of these measures provides a comprehen-
sive, granular control framework which is applied to our business
divisions and Corporate Center units, as well as the significant
legal entities, as relevant to the key risks arising from their busi-
ness models.
We apply limits to a variety of exposures at the portfolio level,
using statistical and stress-based measures, such as value-at-risk,
liquidity adjusted stress, notional loan underwriting limits, eco-
nomic value sensitivity and portfolio default simulations for our
loan books. These are complemented with a set of controls for
net interest income sensitivity, mark-to-market losses on available-
for-sale portfolios, and the effect of foreign exchange movements
on capital and capital ratios.
Portfolio measures are supplemented with position-level con-
trols. Risk measures for position controls are based on market risk
sensitivities and counterparty-level credit risk exposures. Market
risk sensitivities include sensitivities to changes in general market
risk factors, such as equity indices, foreign exchange rates and
interest rates, and sensitivities to issuer-specific factors, such as
changes in an issuer’s credit spread or default risk. We monitor a
significant number of market risk controls for the Investment Bank
and Corporate Center – Group Asset and Liability Management
and Corporate Center – Non-core and Legacy Portfolio on a daily
basis. Counterparty measures capture the current and potential
future exposure to an individual counterparty, taking into account
collateral and legally enforceable netting agreements.
➔ Refer to “Credit risk” in this section for more information on
counterparty limits
Risk concentrations
Audited | A risk concentration exists where (i) a position is affected
by changes in a group of correlated factors, or a group of posi-
tions are affected by changes in the same risk factor or a group of
correlated factors, and (ii) the exposure could, in the event of
large but plausible adverse developments, result in significant
losses. The categories in which risk concentrations may occur
include counterparties, industries, legal entities, countries or geo-
graphical regions, products and businesses.
The identification of risk concentrations requires judgment, as
potential future developments cannot be accurately predicted
and may vary from period to period. In determining whether we
have a risk concentration, we consider a number of elements,
both individually and collectively. These elements include the
shared characteristics of the positions and our counterparties, the
size of the position or group of positions, the sensitivity of the
position or group of positions to changes in risk factors and the
volatility and correlations of those factors. Also important in our
assessment is the liquidity of the markets where the positions are
traded, and the availability and effectiveness of hedges or other
potential risk-mitigating factors. The value of a hedging instru-
ment may not always move in line with the position being hedged,
and this mismatch is referred to as basis risk.
Risk concentrations are subject to increased oversight by Risk
Control and are assessed to determine whether they should be
reduced or mitigated, depending on the available means to do so.
It is possible that material losses could occur on asset classes,
positions and hedges, particularly if the correlations that emerge
in a stressed environment differ markedly from those envisaged
by our risk models.
➔ Refer to “Credit risk” and “Market risk” in this section for more
information on the compositions of our portfolios
➔ Refer to the “Risk factors” section of this report for more
information
128
Credit risk
Key developments
Audited | Main sources of credit risk
Overall credit risk exposures were broadly stable over the year
with a gross loan portfolio of slightly more than CHF 300 billion.
Our Swiss lending portfolios, which account for approximately
half of our loan exposure, continued to perform well, although
we remain watchful for any signs of deterioration in the Swiss
economy that could impact some of our counterparties and lead
to an increase in credit loss expenses from the low levels recently
observed.
There were some distinct periods of increased market volatility
during 2016, notably in the first quarter, reflecting uncertainties
with regard to macroeconomic developments in China and
emerging markets more broadly, and weak commodity prices,
and in the second quarter following the outcome of the UK refer-
endum on EU membership. At times, this led to increases in the
level of margin calls within our security-backed lending busi-
nesses, but margin calls were largely resolved within the normal
process and did not result in any material losses.
Oil prices dropped to very low levels at the start of 2016 and
recovered relatively slowly thereafter, leading several counterpar-
ties in the oil and gas sector to file for bankruptcy during the year.
Prices eventually stabilized at around USD 50, offering some relief
to oil producers through improved cash flows toward the end of
the year. Our total net banking products exposure to the oil and
gas sector, predominantly recorded within the Investment Bank,
was CHF 6.1 billion at the start of the year, and reduced to CHF
5.1 billion at the end of 2016. We recognized CHF 16 million of
credit loss expense against these exposures during the year, and
as of 31 December 2016, total specific and collective allowances
and provisions against these oil and gas exposures were CHF 24
million.
Exposures for certain large loan underwriting transactions
committed during 2015 were reduced during the first half of
2016, while new activity was muted. Market conditions and activ-
ity picked up toward the end of the year, and total temporary
underwriting exposure was slightly lower at the end of 2016 than
at the previous year-end. Overall, distribution of the temporary
portfolio remained satisfactory from a credit risk perspective,
although delayed regulatory approvals for some investment grade
merger and acquisition transactions continued to delay distribu-
tion of the associated financings beyond original targeted dates.
While these delays result in a longer risk period than originally
anticipated, we remain comfortable with our exposures, consider-
ing the investment grade quality.
– A substantial portion of our lending exposure arises from our
Swiss domestic business, which offers corporate loans and
mortgage loans secured against residential properties and
income-producing real estate, and therefore depends on the
performance of the Swiss economy.
– Within the Investment Bank, our credit exposure is predomi-
nantly investment grade. Loan underwriting activity can be
lower rated and gives rise to concentrated exposure of a tem-
porary nature.
– Our wealth management businesses conduct securities-based
lending and mortgage lending.
– Credit risk within Non-core and Legacy Portfolio relates to
derivatives transactions, predominantly carried out on a cash-
collateralized basis, and securitized positions.
Audited | Overview of measurement, monitoring and
management techniques
– Credit risk arising from transactions with individual counter-
parties is measured according to our estimates of probability of
default, exposure at default and loss given default. Limits are
established for individual counterparties and groups of related
counterparties covering banking and traded products as well
as settlement amounts. Risk control authorities are approved
by the Board of Directors and are delegated to the Group Chief
Executive Officer, Group Chief Risk Officer and divisional Chief
Risk Officers based on risk exposure amounts and internal
credit rating.
– Limits apply not only to the current outstanding amount, but
also to contingent commitments and the potential future
exposure of traded products.
– For the Investment Bank, our monitoring, measurement and
limit framework distinguishes between exposures intended to
be held to maturity (take-and-hold exposures) and those which
are intended to be held for a short term, pending distribution
or risk transfer (temporary exposures).
– We also use models to derive portfolio credit risk measures of
expected loss, statistical loss and stress loss at the Group-wide
and business division levels and establish portfolio level limits
at these levels.
– Credit risk concentrations can arise if clients are engaged in
similar activities, are located in the same geographical region
or have comparable economic characteristics, for example, if
their ability to meet contractual obligations would be similarly
affected by changes in economic, political or other conditions.
To avoid credit risk concentrations, we establish limits and / or
operational controls that constrain risk concentrations at port-
folio and sub-portfolio levels with regard to sector exposure,
country risk and specific product exposures.
129
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Credit risk profile of the Group
Banking products
The exposures detailed in this section are based on our internal
management view of credit risk which differs in certain respects
from the measurement requirements of IFRS.
Internally, we categorize credit risk exposures into two broad
categories: banking products and traded products. Banking prod-
ucts comprise drawn loans, undrawn guarantees and loan com-
mitments, amounts due from banks and balances with central
banks. Traded products comprise over-the-counter (OTC) deriva-
tives, exchange-traded derivatives (ETD) and securities financing
transactions (SFTs), comprised of securities borrowing and lending
and repurchase and reverse repurchase agreements.
The breakdowns of our banking product exposures are shown
before and after allowances and provisions for credit losses and
related single-name credit hedges. The effect of portfolio hedges,
such as index credit default swaps (CDSs), is not reflected. Guar-
antees and loan commitments are shown on a notional basis,
without applying credit conversion factors.
Total gross banking products exposure increased to CHF 497
billion as of 31 December 2016 compared with CHF 485 billion at
the end of 2015, mainly due to increases in balances with central
banks in Corporate Center – Group Asset and Liability Manage-
ment (Group ALM), partly offset by lower lending balances in the
Investment Bank and Wealth Management.
Banking and traded products exposure by business division and Corporate Center unit
CHF million
Balances with central banks
Due from banks
Loans1
Guarantees
Loan commitments
Banking products exposure2
Banking products exposure, net4
Over-the-counter derivatives5
Securities financing transactions5
Exchange-traded derivatives5
Traded products exposure5
Traded products exposure, net5
Credit exposure5
Credit exposure, net5
Wealth
Management
901
915
101,876
2,187
1,730
107,608
107,546
5,359
0
926
6,285
6,285
113,894
113,832
Wealth
Management
Americas
0
2,635
52,486
558
375
56,054
56,025
35
255
1,371
1,661
1,661
57,716
57,686
Personal &
Corporate
Banking
0
2,156
133,861
9,023
8,861
153,900
153,414
1,420
0
125
1,544
1,544
155,445
154,958
Asset
Management
0
544
1
0
0
545
545
0
0
0
0
0
545
545
CHF million
Balances with central banks
Due from banks
Loans1
Guarantees
Loan commitments
Banking products exposure2
Banking products exposure, net4
Over-the-counter derivatives5
Securities financing transactions5
Exchange-traded derivatives5
Traded products exposure5
Traded products exposure, net5
Credit exposure5
Credit exposure, net5
Wealth
Management
1,344
1,107
105,167
2,267
1,270
111,155
111,065
5,224
0
801
6,025
6,025
117,179
117,089
Wealth
Management
Americas
0
1,899
48,754
747
279
51,678
51,650
14
208
1,123
1,345
1,345
53,023
52,995
Personal &
Corporate
Banking
0
1,493
135,616
7,900
8,463
153,473
152,943
1,421
0
118
1,539
1,539
155,012
154,482
Asset
Management
0
433
11
0
0
443
443
0
0
0
0
0
443
443
31.12.16
Investment
Bank
37
9,662
12,022
5,336
36,496
63,553
57,682
CC –
Services
0
455
43
111
0
610
610
CC –
Group ALM
106,162
2,176
5,962
1
0
114,301
114,301
CC –
Non-core
and Legacy
Portfolio
0
0
129
4
481
614
418
17,540
17,414
7,031
41,985
40,833
221,063
213,843
31.12.15
Investment
Bank
345
9,544
15,464
5,607
37,867
68,828
61,207
CC –
Services
0
576
36
11
0
623
623
CC –
Group ALM
88,087
2,210
6,788
0
0
97,086
97,086
CC –
Non-core
and Legacy
Portfolio
0
35
100
84
1,472
1,692
1,180
15,821
13,689
6,099
35,610
34,063
203,838
194,158
Group
107,100
18,543
306,379
17,220
47,943
497,1863
490,541
24,353
17,669
9,454
51,476
50,324
548,662
540,865
Group
89,776
17,297
311,937
16,616
49,352
484,9783
476,196
22,480
13,897
8,141
44,518
42,971
529,495
519,168
1 Does not include reclassified securities and similar acquired securities in our CC – Non-core and Legacy Portfolio. 2 Does not include loans designated at fair value. 3 As of 31 December 2016, total banking products
exposure of UBS AG (consolidated) was CHF 0.6 billion higher than the exposure of UBS Group AG (consolidated), related to receivables of UBS AG and UBS Switzerland AG against UBS Group AG (31 December 2015:
CHF 0.7 billion). 4 Net of allowances, provisions, and hedges. 5 As counterparty risk for traded products is managed at counterparty level, no further split between exposures in the Investment Bank, CC – Non-core
and Legacy Portfolio and CC – Group ALM is provided.
130
Wealth Management
Gross banking products exposure within Wealth Management
decreased to CHF 108 billion compared with CHF 111 billion as a
result of client deleveraging. Our Wealth Management loan port-
folio is mainly secured by securities and residential property. Most
of the loans secured by securities (Lombard loans) were of high
quality, with 96% rated investment grade based on our internal
ratings compared with 95%, and are typically short term in nature
with an average duration of three to six months. Moreover,
Lombard loans can be canceled immediately if the collateral quality
deteriorates or margin calls are not met.
The portfolio of mortgage loans secured by properties outside
Switzerland decreased to CHF 5.5 billion from CHF 6.0 billion,
driven by the depreciation of the British pound versus the Swiss
franc. The overall quality of this portfolio remained high, with an
average loan-to-value (LTV) ratio of 55% in Europe and 42% in
Asia Pacific.
Wealth Management Americas
Gross banking products exposure within Wealth Management
Americas increased to CHF 56 billion from CHF 52 billion, driven
by increased loan origination. This exposure largely relates to
loans secured by securities and residential mortgage loans. Out of
the loans secured by securities, 96% were rated investment grade
based on our internal ratings, unchanged year on year.
The mortgage loan portfolio consists primarily of residential
mortgages offered in the US. Gross exposure increased to CHF
10.2 billion from CHF 8.4 billion. The overall quality of this portfo-
lio remained high with an average LTV of 58%, unchanged from
2015, and we have experienced negligible credit losses since the
inception of the mortgage program in 2009. The five largest geo-
graphic concentrations in the portfolio were in California (31%),
New York (15%), Florida (10%), Texas (5%) and New Jersey (4%).
The amount of impaired loans decreased to CHF 27 million
from CHF 29 million, with most of the impairment relating to
securities-backed loan facilities collateralized by Puerto Rico
municipal securities and related funds.
Wealth Management, Wealth Management Americas and Personal & Corporate Banking loan portfolios, gross1
CHF million
Secured by residential property
Secured by commercial / industrial property
Secured by cash
Secured by securities
Secured by guarantees and other collateral
Unsecured loans
Total loans, gross
Total loans, net of allowances
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
31.12.16
31.12.15
32,208
1,974
14,436
46,194
6,697
366
101,876
101,814
34,004
1,998
11,859
50,123
6,851
333
105,167
105,078
31.12.16
10,239
0
1,042
40,182
716
307
52,486
52,455
31.12.15
31.12.16
8,378
0
1,020
37,092
1,959
305
48,754
48,726
95,966
17,819
1,884
1,990
6,707
9,496
133,861
133,419
31.12.15
100,181
19,641
242
693
6,607
8,252
135,616
135,120
1 Collateral arrangements generally incorporate a range of collateral, including cash, securities, property and other collateral. In 2016, we aligned our collateral allocation processes across business divisions with a risk-
based approach which prioritizes collateral mainly according to its liquidity profile. This resulted in increases in loans secured by cash of CHF 3.3 billion (Wealth Management CHF 1.7 billion, Personal & Corporate
Banking CHF 1.7 billion) and increases in loans secured by securities of CHF 3.1 billion (Wealth Management CHF 0.8 billion, Wealth Management Americas CHF 1.2 billion and Personal & Corporate Banking CHF 1.0
billion), while loans secured by residential property decreased by CHF 4.9 billion (Wealth Management CHF 2.4 billion and Personal & Corporate Banking CHF 2.6 billion), loans secured by guarantees decreased by
CHF 1.2 billion (all related to Wealth Management Americas) and loans secured by commercial / industrial property decreased by CHF 0.3 billion (Wealth Management CHF 0.2 billion, Personal & Corporate Banking
CHF 0.1 billion).
131
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Personal & Corporate Banking
Gross banking products exposure within Personal & Corporate
Banking was broadly unchanged at CHF 154 billion. Net banking
products exposure was CHF 153 billion, of which approximately
61% was classified as investment grade compared with 64% in
the prior year. More than 80% of the exposure is categorized in
the lowest loss given default (LGD) bucket of 0% to 25%.
The size of Personal & Corporate Banking’s gross loan portfolio
decreased by CHF 2 billion to CHF 134 billion. As of 31 December
2016, 93% of this portfolio was secured by collateral, mainly
residential and commercial property. Of the total unsecured
amount, 73% related to cash flow-based lending to corporate
counterparties and 13% related to lending to public authorities.
Based on our internal ratings, 50% of the unsecured loan portfo-
lio was rated investment grade compared with 52% in 2015.
Our Swiss corporate banking products portfolio, which totaled
CHF 25.5 billion compared with CHF 24.4 billion, consists of
loans, guarantees and loan commitments to multinational and
domestic counterparties. Although this portfolio is well diversified
across industries, these Swiss counterparties are, in general, highly
reliant on the domestic economy and the economies to which
they export, in particular the EU and the US. In addition, the
EUR / CHF exchange rate is an important risk factor for Swiss cor-
porates. While credit loss expense for this portfolio remained low
in 2016, given the reliance of the Swiss economy on exports, the
continuing strength of the Swiss franc may have a negative effect
on the Swiss economy, which could affect some of the counter-
parties within our domestic lending portfolio and lead to an
increase in the level of credit loss expenses from the low levels
recently observed.
The delinquency ratio, being the ratio of past due but not
impaired loans to total loans, was 0.7% for the corporate loan
portfolio, unchanged year on year.
➔ Refer to “Credit risk models” in this section for more information
on loss given default, rating grades and rating agency mappings
Our Swiss mortgage loan portfolio secured by residential and
commercial real estate in Switzerland continues to be our largest
loan portfolio. These mortgage loans, which were broadly
unchanged at CHF 137 billion as of 31 December 2016, mainly
originate from Personal & Corporate Banking, but also from
Wealth Management. Of these mortgage loans, CHF 124 billion
related to residential properties that the borrower was either
occupying or renting out, and where there was full recourse to
the borrower. Of this CHF 124 billion, approximately CHF 89 bil-
lion related to properties occupied by the borrower, with an aver-
age LTV ratio of 53% compared with 51% as of 31 December
2015. The average LTV for newly originated loans for this portion
was 62%, unchanged year on year. The remaining CHF 35 billion
of the Swiss residential mortgage loan portfolio relates to proper-
ties rented out by the borrower and the average LTV of this port-
folio was 56% as of 31 December 2016, unchanged from
31 December 2015. The average LTV for newly originated Swiss
residential mortgage loans for properties rented out by the bor-
rower was 54% in 2016 compared with 57% in 2015.
As illustrated in the “Swiss mortgages: distribution of net
exposure at default (EAD) across exposure segments and loan-to-
value (LTV) buckets,” table on the next page, over 99% of the
aggregate amount of Swiss residential mortgage loans would
continue to be covered by the real estate collateral even if the
value assigned to that collateral were to decrease by 20%, and
more than 98% would remain covered by the real estate collateral
even if the value assigned to that collateral were to decrease by
30%. In this table, the amount of each mortgage loan is allocated
across the LTV buckets to indicate the portion at risk at the various
value levels shown. For example, a loan of 75 with an LTV ratio of
75% (collateral value of 100) would result in allocations of 30 in
the less-than-30% LTV bucket, 20 in the 31–50% bucket, 10 in
the 51–60% bucket, 10 in the 61–70% bucket and 5 in the
71–80% bucket.
132
Personal & Corporate Banking: distribution of banking products exposure across internal UBS ratings
and loss given default (LGD) buckets
CHF million, except where indicated
Internal UBS rating1
Investment grade
Sub-investment grade
of which: 6−9
of which: 10−12
of which: 13 and defaulted
Exposure
94,083
59,817
52,878
5,053
1,886
0–25%
76,343
47,618
42,983
4,480
155
31.12.16
LGD buckets
26–50% 51–75% 76–100%
16,145
10,548
8,461
522
1,565
1,585
1,629
1,413
50
166
Total exposure before deduction of allowances and provisions
153,900
123,960
26,693
3,214
Less: allowances and provisions
Net banking products exposure
(486)
153,414
Weighted
average
LGD (%)
17
18
18
14
38
17
31.12.15
Weighted
average
LGD (%)
16
18
17
14
38
17
Exposure
98,283
55,190
48,543
4,628
2,019
153,473
(530)
152,943
10
22
22
0
33
1 The ratings of the major credit rating agencies, and their mapping to our internal rating scale, are shown in the “Internal UBS rating scale and mapping of external ratings” table in the “Credit risk models” section of
this report.
Personal & Corporate Banking: unsecured loans by industry sector
CHF million
Construction
Financial institutions
Hotels and restaurants
Manufacturing
Private households
Public authorities
Real estate and rentals
Retail and wholesale
Services
Other
Net exposure
31.12.16
CHF million
140
1,675
96
1,188
1,334
1,221
143
1,694
1,748
258
9,496
%
1.5
17.6
1.0
12.5
14.0
12.9
1.5
17.8
18.4
2.7
100.0
31.12.15
CHF million
113
1,203
69
1,204
1,313
1,461
120
1,181
1,405
183
8,252
Swiss mortgages: distribution of net exposure at default (EAD) across exposure segments
and loan-to-value (LTV) buckets
CHF billion, except where indicated
Exposure segment
Residential mortgages
Net EAD
as a % of row total
Net EAD
Income-producing real estate (IPRE)
as a % of row total
Corporates
Other segments
Mortgage-covered exposure
Net EAD
as a % of row total
Net EAD
as a % of row total
Net EAD
as a % of total
Net EAD
Mortgage-covered exposure 31.12.15
as a % of total
31.12.16
LTV buckets
≤30% 31–50% 51–60% 61–70% 71–80% 81–100% >100% Total
69.4
61
11.4
60
5.2
60
0.7
66
86.7
60
86.8
61
31.1
27
5.2
27
2.3
26
0.2
23
38.8
27
37.9
27
8.5
7
1.5
8
0.6
7
0.1
6
10.7
7
10.1
7
4.2
4
0.7
4
0.3
4
0.0
4
5.3
4
4.8
3
1.4
1
0.2
1
0.1
2
0.0
1
1.7
1
1.6
1
0.2
0
0.1
0
0.1
1
0.0
0
0.3
0
0.3
0
0.0
114.6
0
0.0
0
0.1
1
0.0
0
0.1
0
0.1
0
100
19.1
100
8.7
100
1.0
100
143.5
100
141.6
100
%
1.4
14.6
0.8
14.6
15.9
17.7
1.5
14.3
17.0
2.2
100.0
31.12.15
Total
113.8
19.0
7.9
1.0
141.6
133
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Asset Management
Gross banking products exposure within Asset Management was
less than CHF 1 billion as of 31 December 2016 and 31 December
2015.
The Investment Bank actively manages the credit risk of this
portfolio and, as of 31 December 2016, held CHF 5.8 billion of
single-name CDSs hedges against its exposures to corporates and
other non-banks, a decrease of CHF 1.7 billion year on year.
Investment Bank
The Investment Bank’s lending activities are largely associated
with corporate and non-bank financial institutions. The business
is broadly diversified across industry sectors, but concentrated in
North America.
During 2016, the gross banking products exposure of the
Investment Bank decreased to CHF 64 billion from CHF 69 billion.
The decrease was due to lower corporate lending exposure, which
also includes temporary loan underwriting activity. Within the
loan underwriting business, exposures for some large transactions
committed during 2015 were reduced during the first half of
2016. Leveraged loan markets remained cautious at the start of
the year, but market conditions and fundamentals improved
alongside a recovery in the energy markets, and total temporary
underwriting exposure ended 2016 slightly lower than the previ-
ous year. Overall, distribution of the temporary portfolio remained
satisfactory from a credit risk perspective, although delayed regu-
latory approvals for some investment grade merger and acquisi-
tion transactions continued to delay distribution of the associated
financings beyond original targeted dates. While these delays
result in a longer risk period than originally anticipated, we remain
comfortable with our exposures, considering the investment
grade quality. Loan underwriting exposures are classified as held
for trading, with fair values reflecting market conditions at the
end of 2016.
Investment Bank: banking products1
CHF million
Total exposure, before deduction of allowances, provisions and hedges
Less: allowances, provisions
Less: credit protection bought (credit default swaps, notional)2
Net exposure after allowances, provisions and hedges
Net banking products exposure, excluding balances with cen-
tral banks and the vast majority of amounts due from banks, and
after allowances, provisions and hedges, decreased to CHF 49.9
billion from CHF 53.0 billion, driven by the aforementioned lower
level of corporate lending at the end of 2016. Based on our inter-
nal ratings, 63% of the Investment Bank’s net banking products
exposure was classified as investment grade as of 31 December
2016, unchanged from the end of the prior year. The majority of
the Investment Bank’s net banking products exposure had an esti-
mated LGD of between 0% and 50%.
The low price environment in commodities began improving
during the second half of 2016, which provided some relief to the
energy sector. However we remain cautious with respect to the oil
and gas sector as borrowers emerge from the period of significant
stress. Our total net banking products exposure to the oil and gas
sector, which is mainly in North America and within the Invest-
ment Bank, was CHF 5.1 billion, including both funded and
unfunded exposures, compared with CHF 5.9 billion the previous
year. Total specific and collective allowances for these energy-
related exposures totaled CHF 24 million compared with CHF 40
million.
➔ Refer to “Credit risk models” in this section for more information
on loss given default, rating grades and rating agency mappings
31.12.16
55,709
(41)
(5,810)
49,859
31.12.15
60,628
(59)
(7,555)
53,014
1 Internal risk view, excludes balances with central banks, internal risk adjustments and the vast majority of due from banks exposures. 2 The effects of portfolio hedges, such as index credit default swaps (CDSs), and
of loss protection from the subordinated tranches of structured credit protection are not reflected in this table.
134
Investment Bank: distribution of net banking products exposure, across internal UBS ratings and loss given default
(LGD) buckets
CHF million, except where indicated
Internal UBS rating1
Investment grade
Sub-investment grade
of which: 6−9
of which: 10−12
of which: 13 and defaulted
Net banking products exposure, after application
of credit hedges
31.12.16
LGD buckets
Exposure
0–25% 26–50% 51–75% 76–100%
31,398
18,461
12,444
5,391
625
7,033
11,684
8,940
2,181
564
14,215
4,676
1,885
2,734
57
5,667
1,599
1,594
5
0
4,483
501
25
471
5
49,859
18,717
18,891
7,266
4,984
Weighted
average
LGD (%)
50
23
21
29
11
40
31.12.15
Weighted
average
LGD (%)
49
22
20
27
14
39
Exposure
33,465
19,548
13,365
5,949
234
53,014
1 The ratings of the major credit rating agencies, and their mapping to our internal rating scale, are shown in the “Internal UBS rating scale and mapping of external ratings“ table in the “Credit risk models“ section of
this report.
Investment Bank: net banking products exposure by geographical region
Asia Pacific
Latin America
Middle East and Africa
North America
Switzerland
Rest of Europe
Net exposure
31.12.16
CHF million
1,978
212
32
37,691
3,128
6,818
49,859
Investment Bank: net banking products exposure by industry sector
Banks
Chemicals
Electricity, gas, water supply
Financial institutions, excluding banks
Manufacturing1
Mining1
Public authorities
Real estate and construction
Retail and wholesale
Technology and communications
Transport and storage1
Other
Net exposure1
of which: oil and gas1
31.12.16
CHF million
3,101
4,112
2,515
19,990
4,195
2,838
1,573
3,588
870
3,153
3,166
756
49,859
5,069
%
4.0
0.4
0.1
75.6
6.3
13.7
100.0
%
6.2
8.2
5.0
40.1
8.4
5.7
3.2
7.2
1.7
6.3
6.3
1.5
100.0
10.2
31.12.15
CHF million
2,168
132
27
44,419
163
6,103
53,014
31.12.15
CHF million
2,468
636
3,173
19,990
6,794
3,331
2,451
4,487
681
3,847
4,005
1,150
53,014
5,930
%
4.1
0.2
0.1
83.8
0.3
11.5
100.0
%
4.7
1.2
6.0
37.7
12.8
6.3
4.6
8.5
1.3
7.3
7.6
2.2
100.0
11.2
1 As of 31 December 2016, the CHF 5.1 billion Investment Bank net banking product exposure to the oil and gas sector comprised CHF 2.2 billion related to mining, CHF 2.0 billion related to transport and storage and
CHF 0.9 billion related to manufacturing. As of 31 December 2015, the CHF 5.9 billion Investment Bank net banking products exposure to the oil and gas sector comprised CHF 2.6 billion related to mining, CHF 2.5
billion related to transport and storage and CHF 0.8 billion related to manufacturing.
135
Risk, treasury and capital management
Risk, treasury and capital management
Risk management and control
Corporate Center – Group Asset and Liability Management
Gross banking products exposure within Corporate Center –
Group Asset and Liability Management (Group ALM), which arises
primarily in connection with treasury activities, increased by CHF
17 billion to CHF 114 billion. This was driven by an increase in
balances with central banks of CHF 18 billion, mainly reflecting an
increase in net funds transferred to Group ALM by the business
divisions.
➔ Refer to the “Balance sheet” section of this report for more
information
Corporate Center – Non-core and Legacy Portfolio
➔ Refer to the “Corporate Center – Non-core and Legacy Portfolio”
section under “Financial and operating performance” of this
report for more information
Traded products
Traded products include OTC derivatives exposures, as well as SFT
and ETD exposures. Credit risk arising from traded products, after
the effects of master netting agreements but excluding credit valu-
ation adjustments and hedges, increased by CHF 7 billion to CHF
51 billion as of 31 December 2016. OTC derivatives accounted for
CHF 24 billion, exposures from SFTs were CHF 18 billion, and ETD
exposures amounted to CHF 9 billion. OTC derivatives exposures
are generally measured as net positive replacement values after
the application of legally enforceable netting agreements and the
deduction of cash and marketable securities held as collateral. SFT
exposures are reported taking into account collateral received, and
ETD exposures take into account collateral margin calls.
The majority of the traded products exposures were within the
Investment Bank, Non-core and Legacy Portfolio and Group ALM,
totaling CHF 42 billion as of 31 December 2016. As counterparty
risk for traded products is managed at counterparty level, no fur-
ther split between exposures in the Investment Bank and those in
Non-core and Legacy Portfolio and Group ALM is provided. The
traded products exposure includes OTC derivative exposures of
CHF 18 billion in the Investment Bank and Non-core and Legacy
Portfolio, an increase of CHF 2 billion from the prior year. During
2016, SFT exposures increased by CHF 4 billion to CHF 17 billion
and ETD exposures increased by CHF 1 billion to CHF 7 billion. The
tables below and on the following pages provide more informa-
tion on the OTC derivatives, SFT and ETD exposures of the Invest-
ment Bank, Non-core and Legacy Portfolio and Group ALM.
Investment Bank, Non-core and Legacy Portfolio and Group ALM: traded products exposure
CHF million
OTC derivatives
SFTs
31.12.16
ETD
Total
Total exposure, before deduction of credit valuation adjustments and hedges
17,528
17,381
7,031
41,941
Less: credit valuation adjustments and allowances
Less: credit protection bought (credit default swaps, notional)
(376)
(757)
(376)
(757)
Net exposure after credit valuation adjustments, allowances and hedges
16,395
17,381
7,031
40,808
Total
31.12.15
35,258
(470)
(1,076)
33,712
Investment Bank, Non-core and Legacy Portfolio, and Group ALM: distribution of net OTC derivatives and SFT exposure
across internal UBS ratings and loss given default (LGD) buckets
CHF million, except where indicated
Internal UBS rating1
Net OTC derivatives exposure
Investment grade
Sub-investment grade
of which: 6−9
of which: 10−12
of which: 13 and defaulted
Total net OTC exposure, after credit valuation adjustments
and hedges
Net SFT exposure
Investment grade
Sub-investment grade
Total net SFT exposure
31.12.16
LGD buckets
Exposure
0–25% 26–50% 51–75% 76–100%
15,672
4,885
10,041
281
723
294
85
344
415
79
2
334
237
144
84
9
6
6
0
0
466
65
65
1
16,395
5,299
10,277
287
531
16,877
504
17,381
7,375
135
7,510
8,782
155
8,937
218
32
250
503
182
684
Weighted
average
LGD (%)
30
34
46
34
24
30
28
58
28
31.12.15
Weighted
average
LGD (%)
30
36
48
30
26
31
27
89
28
Exposure
13,176
779
343
92
344
13,955
13,531
126
13,657
1 The ratings of the major credit rating agencies, and their mapping to our internal rating scale, are shown in the “Internal UBS rating scale and mapping of external ratings“ table in the “Credit risk models“ section of
this report.
136
Investment Bank, Non-core and Legacy Portfolio, and Group ALM: net OTC derivatives and SFT exposure
by geographical region
Asia Pacific
Latin America
Middle East and Africa
North America
Switzerland
Rest of Europe
Net exposure
Net OTC derivatives
Net SFTs
31.12.16
CHF million
2,904
83
149
4,931
453
7,876
31.12.15
CHF million
1,194
51
132
4,878
512
7,189
%
17.7
0.5
0.9
30.1
2.8
48.0
16,395
100.0
13,955
31.12.16
CHF million
3,410
114
1,126
4,548
825
7,358
31.12.15
CHF million
1,661
117
740
2,929
1,275
6,935
%
12.2
0.9
5.4
21.5
9.3
50.8
%
19.6
0.7
6.5
26.2
4.7
42.3
17,381
100.0
13,657
100.0
%
8.6
0.4
0.9
35.0
3.7
51.5
100.0
Investment Bank, Non-core and Legacy Portfolio, and Group ALM: net OTC derivatives and SFT exposure by industry
Net OTC derivatives
Net SFTs
31.12.16
31.12.15
31.12.16
31.12.15
CHF million
%
CHF million
4,095
%
23.6
CHF million
4,995
%
36.6
CHF million
6,242
17
231
6,778
428
108
1,834
19
265
473
%
38.1
0.1
1.4
41.3
2.6
0.7
11.2
0.1
1.6
2.9
4,621
28
306
5,336
564
178
2,085
15
285
537
33.1
0.2
2.2
38.2
4.0
1.3
14.9
0.1
2.0
3.8
16,395
100.0
13,955
100.0
17,381
11,932
68.6
8,151
59.7
1,350
2
2
7.8
0.0
0.0
100.0
509
2
1
3.7
0.0
0.0
13,657
100.0
Banks
Chemicals
Electricity, gas, water supply
Financial institutions, excluding banks
Manufacturing
Mining
Public authorities
Retail and wholesale
Transport, storage and communication
Other
Net exposure
Credit risk mitigation
Audited | We actively manage the credit risk in our portfolios by tak-
ing collateral against exposures and by utilizing credit hedging.
Lending secured by real estate
Audited | We use a scoring model as part of a standardized front-to-
back process to support credit decisions for the origination or
modification of Swiss mortgage loans. The two key factors within
this model are an affordability calculation relative to gross income
and the loan-to-value (LTV) ratio.
The calculation of affordability takes into account interest pay-
ments, minimum amortization requirements, potential property
maintenance costs and, in the case of properties expected to be
rented out, the level of rental income. Interest payments are esti-
mated using a predefined framework, which takes into account
the potential for significant increases in interest rates during the
lifetime of the loan.
For properties occupied by the borrower, the maximum LTV
allowed within the standard approval process is 80%. This is
reduced to 60% in the case of vacation properties and luxury real
estate. For properties rented out by the borrower, the maximum
LTV allowed within the standard approval process ranges from
60% to 80%, depending on the type of property, the age of the
property and the amount of any renovation work required.
Audited | The value assigned by UBS to each property is based on
the lowest value determined from internally calculated valuations,
the purchase price and, in some cases, an additional external
valuation.
We use two separate models provided by a market-leading
external vendor to derive property valuations for owner-occupied
residential properties (ORP) and income-producing real estate. For
ORP, we estimate the current value of properties by using a regres-
sion model (hedonic model) to compare detailed characteristics
for each property against a database of property transactions. In
addition to the model-derived values, valuations for ORP are
updated quarterly throughout the lifetime of the loan by using
region-specific real estate price indices. The price indices are
sourced from an external vendor and are subject to internal vali-
dation and benchmarking against two other external vendors. On
a quarterly basis, we use these valuations to compute indexed LTV
for all ORP and consider these together with other risk measures
(e.g., rating migration and behavioral information) to identify
higher-risk loans, which are then reviewed individually by client
advisors and credit officers, with actions taken where they are
considered necessary.
137
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
For income-producing real estate, a capitalization model is
used to determine the property valuation by discounting esti-
mated sustainable future income using a capitalization rate based
on various attributes. These attributes consider regional as well as
specific property characteristics such as market and location data
(e.g., vacancy rates), benchmarks (e.g., for running costs) and cer-
tain other standardized input parameters (e.g., property condi-
tion). Rental income from properties is reviewed at a minimum
once every three years, but indications of significant changes in
the amount of rental income or in the vacancy rate can trigger an
interim reappraisal.
To take market developments into account for these models,
the external vendor regularly updates the parameters and / or
refines the architecture for each model. Model changes and
parameter updates are subject to the same validation procedures
as for our internally developed models.
Audited | We similarly apply underwriting guidelines for our
Wealth Management Americas mortgage loan portfolio to ensure
affordability of the loans and sufficiency of collateral. The maxi-
mum LTV within the standard approval process for any type of
mortgage is 80%. A stratification of LTVs exists for the various
mortgage types, such as residential mortgage or investment prop-
erty, based on associated risk factors such as property types, loan
size and loan purpose. Maximum LTVs go as low as 45%. Addi-
tionally, other credit risk metrics are applied, based upon property
and borrower characteristics, such as debt-to-income ratios, FICO
credit scores and required client reserves.
A risk limit framework is applied to the Wealth Management
Americas mortgage portfolio. Limits have been established to
govern exposures within LTV categories, geographic concentra-
tions, portfolio growth, and high-risk mortgage segments such as
interest-only loans. These limits are monitored by a specialized
credit risk monitoring team and reported to senior management.
Supplementing this limit framework is a robust real estate lending
policy and procedures framework, established to govern the real
estate lending activities. Quality assurance and quality control
programs are in place to ensure compliance with mortgage under-
writing and documentation requirements.
➔ Refer to “Personal & Corporate Banking” in “Banking products”
in this section for more information on loan-to-value in our
Swiss mortgage portfolio
➔ Refer to “Wealth Management Americas” in “Banking products”
in this section for more information on loan-to-value in our
Wealth Management Americas mortgage portfolio
138
Lombard lending
Audited | Lombard loans are secured by a pledge of marketable
securities, guarantees and other forms of collateral. Eligible finan-
cial securities primarily include transferable securities (such as
bonds and equities), which are liquid and actively traded, and
other transferable securities such as approved structured products
for which regular prices are available and for which the issuer of
the security provides a market. To a lesser degree, less liquid col-
lateral is also financed.
We apply discounts (haircuts) to reflect the collateral’s risk and
to derive the lending value. Haircuts for marketable securities are
calculated to cover the possible change in the market value over
a given close-out period and confidence level; the haircut applied
will vary depending on the view of the counterparty’s creditwor-
thiness. Less liquid or more volatile collateral will typically attract
larger haircuts. For less liquid instruments such as structured prod-
ucts, some bonds, and products with long redemption periods,
the close-out period may be much longer than that for highly
liquid instruments, or an assessment is made as to the expected
recovery on the asset in the event of the counterparty’s default,
resulting in a larger haircut. For cash, life insurance policies, guar-
antees and letters of credit, haircuts are determined on a product-
or client-specific basis.
We also consider concentration and correlation risks across col-
lateral posted on a counterparty level as well as at a divisional
level across counterparties. Additionally, we perform targeted
Group-wide reviews of concentrations. A concentration of collat-
eral in single securities, issuers or issuer groups, industry sectors,
countries, regions or currencies may result in higher risk and
reduced liquidity. In such cases, the lending value of the collateral,
margin call and close-out levels are adjusted accordingly.
Exposures and collateral values are monitored on a daily basis
to ensure that the credit exposure continues to be within the
established risk appetite. A shortfall occurs when the lending
value drops below the exposure. If a shortfall exceeds a defined
trigger level, a margin call is initiated, requiring the client to pro-
vide additional collateral, reduce the exposure or take other action
to bring the exposure in line with the agreed lending value of the
collateral. If the shortfall increases, or is not corrected within the
required period, a close-out is initiated, through which collateral
is liquidated, open derivative positions are closed and guarantees
or letters of credit are called.
We also conduct stress testing of collateralized exposures to
simulate market events which increase the risk of collateral short-
falls and unsecured exposures by significantly reducing the value
of the collateral, increasing the exposure of traded products, or
both. For certain classes of counterparties limits on such calcu-
lated stress exposures are applied and controlled on a counter-
party level. In addition, there are portfolio limits applied across
certain businesses or collateral types.
➔ Refer to “Stress loss” in “Credit risk models” in this section for
more information on our stress testing
Counterparty credit risk
Audited | Counterparty credit risk arising from traded products,
which includes OTC derivatives and SFTs originating in the Invest-
ment Bank, Non-core and Legacy Portfolio and Group ALM, is
generally managed on a close-out basis, which takes into account
the effect of market movements on the exposure and any associ-
ated collateral over the potential time it would take to close out
our positions. In the Investment Bank, limits are applied to the
potential future exposure per counterparty, with the size of the
limit driven by the view of the creditworthiness of the counter-
party as determined by Credit Risk Control. Limit frameworks are
also applied to control overall exposure to specific classes or cat-
egories of collateral on a portfolio level. Such portfolio limits are
monitored and reported to senior management.
Trading in OTC derivatives is conducted through central coun-
terparties (CCPs) where practicable. Where CCPs are not used, we
have clearly defined policies and processes for trading on a bilat-
eral basis. Trading is generally conducted under bilateral Interna-
tional Swaps and Derivatives Association (ISDA) or ISDA-equiva-
lent master netting agreements, which allow for the close-out
and netting of transactions in the event of default. For most major
market participant counterparties, we may additionally use two-
way collateral agreements under which either party can be
required to provide collateral in the form of cash or marketable
securities, typically limited to well-rated government debt, when
the exposure exceeds specified levels. For certain counterparty
types “initial margin” is taken to cover some or all of the calcu-
lated close-out exposure for the derivative product. This is in addi-
tion to the “variation margin” taken to cover changes in the mar-
ket value of the transaction.
➔ Refer to “Note 12 Derivative instruments and hedge accounting”
in the “Consolidated financial statements” section of this report
for more information on our over-the-counter derivatives settled
through central counterparties
➔ Refer to “Note 24 Offsetting financial assets and financial
liabilities” in the “Consolidated financial statements” section of
this report for more information on the effect of netting and
collateral arrangements on our derivative exposures
Credit hedging
Audited | We utilize single-name CDSs, credit index CDSs, bespoke
protection, and other instruments to actively manage credit risk in
the Investment Bank and Non-core and Legacy Portfolio. This is
aimed at reducing concentrations of risk from specific counterpar-
ties, sectors or portfolios and, in the case of counterparty credit
risk, the profit or loss impact arising from changes in credit valua-
tion adjustments (CVA).
We maintain strict guidelines for taking credit hedges into
account for credit risk mitigation purposes. For example, when
monitoring exposures against counterparty limits, we do not usu-
ally recognize credit risk mitigants such as proxy hedges (credit
protection on a correlated but different name) or credit index
CDSs. Buying credit protection also creates credit exposure against
the protection provider. We monitor and limit our exposures to
credit protection providers and the effectiveness of credit hedges
as part of our overall credit exposures to the relevant counterpar-
ties. Trading with such counterparties is typically collateralized.
For credit protection purchased to hedge the lending portfolio,
this includes monitoring mismatches between the maturity of the
credit protection purchased and the maturity of the associated
loan. Such mismatches result in basis risk and may reduce the
effectiveness of the credit protection. Mismatches are routinely
reported to credit officers and mitigating actions are taken when
deemed necessary.
➔ Refer to “Note 12 Derivative instruments and hedge accounting”
in the “Consolidated financial statements” section of this report
for more information
Mitigation of settlement risk
To mitigate settlement risk, we reduce our actual settlement vol-
umes through the use of multilateral and bilateral agreements
with counterparties, including payment netting.
Our most significant source of settlement risk is foreign
exchange transactions. We are a member of Continuous Linked
Settlement (CLS), an industry utility that provides a multilateral
framework to settle transactions on a delivery-versus-payment
basis, thereby significantly reducing foreign exchange-related
settlement risk relative to the volume of business. However, the
mitigation of settlement risk through CLS and other means does
not fully eliminate our credit risk in foreign exchange transactions
resulting from changes in exchange rates prior to settlement,
which is managed as part of our overall credit risk management
of OTC derivatives.
139
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Credit risk models
Audited | We have developed tools and models in order to estimate
future credit losses that may be implicit in our current portfolio.
Exposures to individual counterparties are measured on the
basis of three generally accepted parameters: probability of
default (PD), loss given default (LGD) and exposure at default
(EAD). For a given credit facility, the product of these three param-
eters results in the expected loss. These parameters are the basis
for the majority of our internal measures of credit risk, and are key
inputs for the regulatory capital calculation under the advanced
internal ratings-based approach of the Basel III framework gov-
erning international convergence of capital. We also use models
to derive the portfolio credit risk measures of expected loss, statis-
tical loss and stress loss.
The “Key features of our main credit risk models” table below
summarizes the key features of the models that we use to derive
PD, LGD and EAD for our main portfolios and is followed by more
detailed explanations of these parameters.
➔ Refer to the “Basel III Pillar 3 UBS Group AG 2016” report under
“Pillar 3, SEC filings & other disclosures” at www.ubs.com/
investors for more information on the regulatory capital
calculation under the advanced internal ratings-based approach
Key features of our main credit risk models
Portfolio in scope
Model approach
Main drivers
Probability of default
Swiss owner-occupied mortgages
Score card
Behavioral data, affordability relative to income,
property type, loan-to-value
Income-producing real estate mortgages
Transaction rating
Loan-to-value, debt-service-coverage
Lombard lending
Merton type
Loan-to-value, portfolio volatility
Personal & Corporate Banking – Corporates
Score card
Investment Bank – Banks
Score card
Investment Bank – Corporates
Score card / market data
Financial data including balance sheet ratios and
profit or loss, and behavioral data
Financial data including balance sheet ratios and
profit or loss
Financial data including balance sheet ratios and
profit or loss, and market data
Loss given default
Swiss owner-occupied mortgages
Actuarial model
Historical observed loss rates, loan-to-value, property type
Income-producing real estate mortgages
Actuarial model
Historical observed loss rates
Lombard lending
Actuarial model
Historical observed loss rates
Personal & Corporate Banking – Corporates
Actuarial model
Historical observed loss rates
Investment Bank – all counterparties
Actuarial model
Exposure at default
Banking products
Traded products
Statistical model
Statistical model
Counterparty- and facility-specific, including industry
segment, collateral, seniority, legal environment and
bankruptcy procedures
Exposure type (committed credit lines, revocable credit
lines, contingent products)
Product-specific market drivers, e.g., interest rates
Audited |
Internal UBS rating scale and mapping of external ratings
Internal UBS rating
0 and 1
2
3
4
5
6
7
8
9
10
11
12
13
Counterparty is in default
140
1-year PD range in %
0.00–0.02
0.02–0.05
0.05–0.12
0.12–0.25
0.25–0.50
0.50–0.80
0.80–1.30
1.30–2.10
2.10–3.50
3.50–6.00
6.00–10.00
10.00–17.00
>17
Default
Description
Investment grade
Sub-investment grade
Defaulted
Moody’s Investors
Service mapping
Standard & Poor’s
mapping
Aaa
Aa1 to Aa3
A1 to A3
Baa1 to Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa
Ca to C
AAA
AA+ to AA–
A+ to A–
BBB+ to BBB
BBB+ to BBB
BBB–
BB+
BB
BB–
B+
B
B–
CCC
CC to C
D
BBB–
BB+
BB
BB–
B+
B
B–
CCC
CC to C
D
Number of
years loss data
22
22
10–15
22
5–10
5–10
22
22
10–15
18
5–10
>10
n / a
Fitch mapping
AAA
AA+ to AA–
A+ to A–
Probability of default
The probability of default (PD) is an estimate of the likelihood of a
counterparty defaulting on its contractual obligations over the
next 12 months. PD ratings are used for credit risk measurement
and are an important input for determining credit risk approval
authorities. For the calculation of RWA, a 3 basis points PD floor
is applied to Banks, Corporates and Retail exposures as required
under the Basel III Framework.
PD is assessed using rating tools tailored to the various catego-
ries of counterparties. Statistically developed score cards, based
on key attributes of the obligor, are used to determine PD for
many of our corporate clients and for loans secured by real estate.
Where available, market data may also be used to derive the PD
for large corporate counterparties. For low default portfolios,
where available, we take into account relevant external default
data in the rating tool development. For Lombard loans, Merton-
type model simulations taking into account potential changes in
the value of securities collateral are used in our rating approach.
These categories are also calibrated to our internal credit rating
scale (masterscale), which is designed to ensure a consistent
assessment of default probabilities across counterparties. Our
masterscale expresses one-year default probabilities that we
determine through our various rating tools by means of distinct
classes, whereby each class incorporates a range of default prob-
abilities. Counterparties migrate between rating classes as our
assessment of their PD changes.
The ratings of the major credit rating agencies, and their map-
ping to our internal rating masterscale and internal PD bands, are
shown in the “Internal UBS rating scale and mapping of external
ratings” table on the previous page. The mapping is based on the
long-term average of one-year default rates available from the
rating agencies. For each external rating category, the average
default rate is compared with our internal PD bands to derive a
mapping to our internal rating scale. Our internal rating of a
counterparty may therefore diverge from one or more of the cor-
related external ratings shown in the table. Observed defaults by
rating agencies may vary through economic cycles, and we do not
necessarily expect the actual number of defaults in our equivalent
rating band to equal the rating agencies’ average in any given
period. We periodically assess the long-term average default rates
of credit rating agencies’ grades, and we adjust their mapping to
our masterscale as necessary to reflect any material changes.
Loss given default
Loss given default (LGD) is the magnitude of the likely loss if there
is a default. Our LGD estimates, which consider downturn condi-
tions, include loss of principal, interest and other amounts (such
as work-out costs, including the cost of carrying an impaired posi-
tion during the work-out process) less recovered amounts. We
determine LGD based on the likely recovery rate of claims against
defaulted counterparties, which depends on the type of counter-
party and any credit mitigation by way of collateral or guarantees.
Our estimates are supported by our internal loss data and external
information where available. Where we hold collateral, such as
marketable securities or a mortgage on a property, loan-to-value
ratios are a key parameter in determining LGD. For low default
portfolios, where available, we take into account relevant external
default data in the rating tool development.
Exposure at default
Exposure at default (EAD) represents the amount we expect to be
owed by a counterparty at the time of a possible default. We
derive EAD from our current exposure to the counterparty and the
possible future development of that exposure.
The EAD of a loan is the drawn or face value of the loan. For
loan commitments and guarantees, the EAD includes the amount
drawn as well as potential future amounts that may be drawn,
which are estimated using credit conversion factors based on his-
torical observations.
For traded products, we derive the EAD by modeling the range
of possible exposure outcomes at various points in time using sce-
nario and statistical techniques. We assess the net amount that
may be owed to us or that we may owe to others, taking into
account the effect of market moves over the potential time it
would take to close out our positions. For exchange-traded deriv-
atives, our calculation of EAD takes into account collateral margin
calls. When measuring individual counterparty exposure against
credit limits, we consider the maximum likely exposure measured
to a high level of confidence. However, when aggregating expo-
sures to different counterparties for portfolio risk measurement
purposes, we use the expected exposure to each counterparty at
a given time period (usually one year) generated by the same
model.
We assess our exposures where there is a material correlation
between the factors driving the credit quality of the counterparty
and those driving the potential future value of our traded product
exposure (wrong-way risk), and we have established specific con-
trols to mitigate these risks.
Expected loss
Credit losses are an inherent cost of doing business and the occur-
rence and amount of credit losses can be erratic. In order to quan-
tify future credit losses that may be implicit in our current portfo-
lio, we use the concept of expected loss.
Expected loss is a statistical measure used to estimate the aver-
age annual costs we expect to experience from positions that
become impaired. The expected loss for a given credit facility is a
product of the three components described above: PD, EAD and
LGD. We aggregate the expected loss for individual counterpar-
ties to derive our expected portfolio credit losses.
Expected loss is the basis for quantifying credit risk in all our
portfolios. It is also the starting point for the measurement of our
portfolio statistical loss and stress loss.
141
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
We use a statistical modeling approach to estimate the loss pro-
file of each of our credit portfolios over a one-year period to a
specified level of confidence. The mean value of this loss distribu-
tion is the expected loss. The loss estimates deviate from the mean
value due to statistical uncertainty on the defaulting counterpar-
ties and to systematic default relationships among counterparties
within and between segments. The statistical measure is sensitive
to concentration risks on individual counterparties and groups of
counterparties. The outcome provides an indication of the level of
risk in our portfolio and the way it may develop over time.
➔ Refer to “Implementation of IFRS 9, Financial Instruments” in the
“Significant accounting and financial reporting changes” section
for more information on future requirements of the expected
credit loss methodology under IFRS 9
Stress loss
We complement our statistical modeling approach with scenario-
based stress loss measures. Stress tests are run on a regular basis
to monitor the potential impact of extreme, but nevertheless
plausible, events on our portfolios, under which key credit risk
parameters are assumed to deteriorate substantially. Where we
consider it appropriate, we apply limits on this basis.
Stress scenarios and methodologies are tailored to the nature
of the portfolios, ranging from regionally focused to global sys-
temic events, and varying in time horizon. For example, for our
loan underwriting portfolio, we apply a global market event
under which, simultaneously, the market for loan syndication
freezes, market conditions significantly worsen, and credit quality
deteriorates. Similarly, for Lombard lending, we apply a range of
scenarios representing instantaneous market shocks to all collat-
eral and exposure positions, taking into consideration their liquid-
ity and potential concentrations. The portfolio-specific stress test
for our mortgage lending business in Switzerland reflects a multi-
year event, and the overarching stress test for global wholesale
and counterparty credit risk to corporates uses a one-year global
stress event and takes into account exposure concentrations to
single counterparties.
➔ Refer to “Stress testing” in this section for more information on
our stress testing framework
Credit risk model confirmation
Our approach to model confirmation involves both quantitative
methods, including monitoring compositional changes in the
portfolios and the results of backtesting, and qualitative assess-
ments, including feedback from users on the model output as a
practical indicator of the performance and reliability of the model.
Material changes in a portfolio composition may invalidate the
conceptual soundness of the model. We therefore perform regu-
lar analysis of the evolution of portfolios to identify such changes
in the structure and credit quality of portfolios. This includes anal-
ysis of changes in key attributes, changes in portfolio concentra-
tion measures, as well as changes in RWA.
➔ Refer to “Risk measurement” in this section for more informa-
tion on our approach to model confirmation procedures
Main credit models backtesting by regulatory exposure segment
Length of time series
used for the calibration
(in years)
Actual rates in %
Average of last
5 years1
Min. of last
5 years2
Max. of last
5 years2
Estimated average rates
at the start of
2016 in %
Probability of default
Sovereigns
Banks3
Corporates4
Retail
Residential mortgages
Lombard lending
Other retail
Loss given default
Sovereigns
Banks3
Corporates
Retail
Residential mortgages
Lombard lending
Other retail
Credit conversion factor
Corporates
>10
>10
>10
>20
>10
>10
>10
>10
>10
>20
>10
>10
>10
0.00
0.05
0.22
0.15
0.01
0.24
10.99
22.56
1.73
16.08
7.50
20.26
0.00
0.00
0.19
0.12
0.00
0.16
10.99
9.81
0.00
8.48
0.11
6.87
0.00
0.13
0.28
0.19
0.02
0.29
10.99
28.88
2.76
65.26
21.32
44.32
0.20
0.62
0.55
0.51
0.14
1.03
41.80
37.74
20.07
6.60
13.23
44.54
22.88
1 Average of all observations over the last five years. 2 Minimum / maximum annual average of observations in any single year from the last five years. Yearly averages are only calculated where five or more observations
occurred during that year. 3 Includes central counterparties. 4 Includes managed funds, which have relatively low default rates.
142
Backtesting
We monitor the performance of our models by backtesting and
benchmarking them, whereby model outcomes are compared
with actual results, based on our internal experience as well as
externally observed results. To assess the predictive power of our
credit exposure models for traded products such as OTC deriva-
tives and ETD products, we statistically compare the predicted
future exposure distributions at different forecast horizons with
the realized values.
For PD, we use statistical modeling to derive a predicted distri-
bution of the number of defaults. The observed number of
defaults is then compared with this distribution, allowing us to
derive a statistical level of confidence in the model conservative-
ness. In addition, we derive a lower and upper bound for the
average default rate. If the portfolio average PD lies outside the
derived interval, the rating tool is, as a general rule, recalibrated.
For LGD, the backtesting statistically tests whether the mean
difference between the observed and predicted LGD is zero. If the
test fails, then there is evidence that our predicted LGD is too low.
In such cases, models are recalibrated where these differences are
outside expectations.
Credit conversion factors (CCFs), used for the calculation of
EAD for undrawn facilities with corporate counterparties, are
dependent on several contractual dimensions of the credit facility.
We compare the predicted amount drawn with observed histori-
cal utilization of such facilities for defaulted counterparties. If any
statistically significant deviation is observed, the relevant CCFs are
redefined.
The “Main credit models backtesting by regulatory exposure
segment” table on the previous page compares the current model
calibration for PD, LGD and CCFs with historical observed values
over the last five years.
Changes to models and model parameters during the period
As part of our continuous efforts to enhance models to reflect
market developments and new available data, in the course of
2016 we modified models in the Investment Bank, Personal &
Corporate Banking and Wealth Management by incorporating
revised credit conversion factors for off-balance sheet exposures.
Where required, changes to models and model parameters
were approved by the Swiss Financial Market Supervisory Author-
ity (FINMA) prior to implementation.
Policies for past due, non-performing and impaired claims
The diagram “Exposure categorization” illustrates how we cate-
gorize banking products and SFTs as performing, non-performing
and / or impaired.
Audited | For products accounted for on a fair value basis, such as
OTC derivatives, credit deterioration is recognized through a
credit valuation adjustment (CVA), and these products are there-
fore not subject to the impairment framework.
We consider a claim held at amortized cost (loans and SFTs)
and certain off-balance-sheet commitments to be past due when
a contractual payment has not been received by its contractual
due date, or in case of account overdrafts, i.e., where the credit
limit is exceeded. Past due claims are not considered impaired
where we otherwise expect to collect all amounts due under the
contractual terms of the claims.
A past due claim is considered non-performing when the pay-
ment of interest, principal or fees is overdue by more than 90 days,
or more than 180 days for certain specified retail portfolios. Claims
are also classified as non-performing when bankruptcy, insolvency
proceedings or enforced liquidation have commenced, or obliga-
tions have been restructured on preferential terms, such as prefer-
ential interest rates, extension of maturity or subordination.
Individual claims are classified as impaired if following an indi-
vidual impairment assessment, an allowance or provision for
credit losses is established. Accordingly, both performing and
non-performing loans may be classified as impaired.
Restructured claims
Audited | We do not operate a general policy for restructuring claims
in order to avoid counterparty default. Where restructuring does
take place, we assess each case individually. Typical features of
terms and conditions granted through restructuring to avoid
default may include concessions of special interest rates, post-
ponement of interest or principal payments, debt / equity swaps,
modification of the schedule of repayments, subordination or
amendment of loan maturity.
If a loan is restructured with preferential conditions (i.e., new
terms and conditions are agreed upon which do not meet the nor-
mal current market criteria for the quality of the obligor and the
type of loan), the claim is still classified as non-performing. It will
remain so until the loan is collected, written off or non-preferential
conditions are granted that supersede the preferential conditions,
and will be assessed for impairment on an individual basis.
Concessions granted where there is no evidence of financial
difficulty, or where any changes to terms and conditions are
within our usual risk appetite, are not considered restructured.
Individual and collective impairment assessments
Audited | Claims are assessed individually for impairment where
there are indicators that an impairment may exist. Otherwise,
portfolios of claims with similar credit risk characteristics are
included in a collective impairment assessment.
Individual impairment assessment
Audited | Non-performing status is considered an indicator that a
loan may be impaired and therefore non-performing claims are
assessed individually for impairment. However, an impairment
analysis would be carried out irrespective of non-performing
status if other objective evidence indicates that a loan may be
impaired. Any event that impacts current and future cash flows
may be an indication of impairment and trigger an assessment by
the risk officer. Such events may be (i) significant collateral short-
falls due to a fall in lending values (securities and real estate),
(ii) increase in loan exposure, (iii) significant financial difficulties of
a client and (iv) high probability of the client’s bankruptcy, debt
moratorium or financial reorganization.
143
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Individual claims are assessed for impairment based on the
borrower’s overall financial condition, resources and payment
record, the prospects of support from contractual guarantors and,
where applicable, the realizable value of any collateral. The recov-
erable amount is determined from all relevant cash flows and,
where this is lower than the carrying amount of the claim, the
claim is considered impaired.
We have established processes to determine the carrying val-
ues of impaired claims in compliance with IFRS requirements. Our
credit controls applied to valuation processes and workout agree-
ments are the same for credit products measured at amortized
cost and fair value. Our workout strategy and estimation of recov-
erable amounts are independently approved in accordance with
our credit authorities.
Collective impairment assessment
Audited | We assess our portfolios of claims carried at amortized
cost with similar credit risk characteristics for collective impair-
ment in order to consider if these portfolios contain impaired
claims that cannot yet be individually identified. To cover the time
lag between the occurrence of an impairment event and its iden-
tification based on the policies above, we establish collective loan
loss allowances based on the estimated loss for the portfolio over
the average period between trigger events and the identification
of any individual impairment. These portfolios are not considered
impaired loans in the tables shown in this section.
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Additionally, for all of our portfolios we assess whether there
have been any developments which might result in event-driven
impairments that are not immediately observable. These events
could be stress situations, such as a natural disaster or a country
crisis, or they could result from significant changes in the legal or
regulatory environment. To determine whether a collective impair-
ment exists, we regularly use a set of global economic drivers to
assess the most vulnerable countries and review the impact of any
potential impairment event.
Recognition of impairment
Audited | The recognition of impairment in our financial statements
depends on the accounting treatment of the claim. For claims car-
ried at amortized cost, impairment is recognized through the cre-
ation of an allowance, or in the case of off-balance sheet items
such as financial guarantees and certain loan commitments
through a provision, both charged to the income statement as a
credit loss expense.
For claims measured at fair value, a deterioration of the credit
quality is recognized as a CVA in the income statement in Net
trading income.
➔ Refer to “Note 1 Summary of significant accounting policies,”
“Note 11 Allowances and provisions for credit losses” and
“Note 22d Valuation adjustments” in the “Consolidated financial
statements” section of this report for more information
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(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:71)(cid:70)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:87)(cid:67)(cid:78)(cid:78)(cid:91)(cid:2)
(cid:72)(cid:81)(cid:84)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:71)(cid:70)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:87)(cid:67)(cid:78)(cid:78)(cid:91)(cid:2)
(cid:72)(cid:81)(cid:84)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:43)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:71)(cid:70) (cid:19)
(cid:50)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:80)(cid:81)(cid:80)(cid:15)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:71)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:69)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:71)(cid:90)(cid:75)(cid:85)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:86)(cid:74)(cid:71)(cid:2)(cid:69)(cid:67)(cid:84)(cid:84)(cid:91)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:79)(cid:81)(cid:87)(cid:80)(cid:86)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:71)(cid:70)(cid:85)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:84)(cid:71)(cid:69)(cid:81)(cid:88)(cid:71)(cid:84)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:67)(cid:79)(cid:81)(cid:87)(cid:80)(cid:86)
(cid:19)(cid:2)(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:84)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:70)(cid:71)(cid:72)(cid:67)(cid:87)(cid:78)(cid:86)(cid:16)(cid:2)(cid:35)(cid:78)(cid:78)(cid:2)(cid:85)(cid:87)(cid:69)(cid:74)(cid:2)(cid:69)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:70)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:79)(cid:71)(cid:80)(cid:86)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:20)(cid:2)(cid:19)(cid:26)(cid:18)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:69)(cid:71)(cid:84)(cid:86)(cid:67)(cid:75)(cid:80)(cid:2)(cid:85)(cid:82)(cid:71)(cid:69)(cid:75)(cid:386)(cid:71)(cid:70)(cid:2)(cid:84)(cid:71)(cid:86)(cid:67)(cid:75)(cid:78)(cid:2)(cid:82)(cid:81)(cid:84)(cid:86)(cid:72)(cid:81)(cid:78)(cid:75)(cid:81)(cid:85)(cid:16)
144
Impaired financial instruments
Audited | The following tables show impaired financial instruments,
comprising loans, guarantees and loan commitments, and SFTs.
As of 31 December 2016, gross impaired financial instruments
stood at CHF 1.2 billion compared with CHF 1.5 billion as of
31 December 2015. After deducting the estimated liquidation
proceeds of collateral and specific allowances and provisions, net
impaired financial instruments were CHF 0.4 billion compared
with CHF 0.6 billion.
➔ Refer to the “Investment Bank, Non-core and Legacy Portfolio,
and Group ALM: distribution of net OTC derivatives and SFT
exposure across internal UBS ratings and loss given default
(LGD) buckets” table in this section for OTC derivative exposures
in the Investment Bank and Corporate Center – Non-core and
Legacy Portfolio that are rated at level 13 or in default according
to our internal rating scale
➔ Refer to “Note 11 Allowances and provisions for credit losses” in
the “Consolidated financial statements” section of this report for
more information on movements in allowances and provisions
Impaired loans
During 2016, gross impaired loans (including amounts due from
banks) decreased to CHF 975 million from CHF 1,226 million. The
majority of this exposure relates to loans in our Swiss domestic
business. The ratio of impaired loans to total loans decreased
slightly to 0.3%.
Audited | Collateral held against our impaired loan exposure
mainly consisted of real estate and securities. It is our policy to
dispose of foreclosed real estate as soon as practicable. The carry-
ing amount of foreclosed property recorded in our balance sheet
at the end of 2016 and 2015 amounted to CHF 51 million and
CHF 44 million, respectively. We seek to liquidate collateral held in
the form of financial assets expeditiously and at prices considered
fair. This may require us to purchase assets for our own account,
where permitted by law, pending orderly liquidation.
Specific and collective allowances and provisions for credit
losses decreased by CHF 74 million to CHF 653 million as of
31 December 2016. This includes collective loan loss allowances
of CHF 12 million, which increased by CHF 6 million in 2016,
mainly due to collective loan loss allowances established against
oil and gas exposures.
The “Loss history statistics” table below provides a five-year
history of our credit loss experience for loans (including due from
banks) relative to our impaired and non-performing loans.
➔ Refer to “Policies for past due, non-performing and impaired
claims” in this section, and to “Note 10 Due from banks and
loans (held at amortized cost)” and “Note 11 Allowances and
provisions for credit losses” in the “Consolidated financial
statements” section of this report for more information
Audited |
Impaired financial instruments by type
CHF million
Loans (including amounts due from banks)
Guarantees and loan commitments
Defaulted securities financing transactions
Total impaired financial instruments
(cid:39)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:2)(cid:69)(cid:67)(cid:86)(cid:71)(cid:73)(cid:81)(cid:84)(cid:75)(cid:92)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:50)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)
(cid:48)(cid:81)(cid:80)(cid:15)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73) (cid:19)
(cid:40)(cid:87)(cid:78)(cid:78)(cid:91)(cid:2)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)
(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:80)(cid:81)(cid:86)(cid:2)(cid:82)(cid:67)(cid:85)(cid:86)(cid:2)(cid:70)(cid:87)(cid:71)(cid:16)(cid:2)(cid:54)(cid:74)(cid:75)(cid:85)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:28)
(cid:115)(cid:2) (cid:69)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:82)(cid:84)(cid:71)(cid:88)(cid:75)(cid:81)(cid:87)(cid:85)(cid:78)(cid:91)(cid:2)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:75)(cid:386)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:2)(cid:80)(cid:81)(cid:80)(cid:15)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:84)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:71)(cid:70)(cid:14)(cid:2)(cid:68)(cid:87)(cid:86)
(cid:2) (cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:84)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(cid:71)(cid:70)(cid:2)(cid:86)(cid:81)(cid:124)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:2)(cid:67)(cid:69)(cid:69)(cid:81)(cid:84)(cid:70)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:71)(cid:90)(cid:75)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)
(cid:2)
(cid:86)(cid:71)(cid:84)(cid:79)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:67)(cid:84)(cid:84)(cid:67)(cid:80)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)
(cid:115)(cid:2) (cid:69)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:68)(cid:71)(cid:71)(cid:80)(cid:2)(cid:84)(cid:71)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:67)(cid:2)(cid:80)(cid:81)(cid:80)(cid:15)(cid:82)(cid:84)(cid:71)(cid:72)(cid:71)(cid:84)(cid:71)(cid:80)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:68)(cid:67)(cid:85)(cid:75)(cid:85)(cid:14)
(cid:2) (cid:71)(cid:16)(cid:73)(cid:16)(cid:14)(cid:2)(cid:67)(cid:70)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:124)(cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:74)(cid:67)(cid:85)(cid:2)(cid:68)(cid:71)(cid:71)(cid:80)(cid:2)(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:70)(cid:2)(cid:68)(cid:91)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:68)(cid:81)(cid:84)(cid:84)(cid:81)(cid:89)(cid:71)(cid:84)
(cid:50)(cid:67)(cid:85)(cid:86)(cid:2)(cid:70)(cid:87)(cid:71)(cid:2)(cid:87)(cid:82)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:27)(cid:18)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)(cid:20)
(cid:115)(cid:2) (cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:85)(cid:87)(cid:72)(cid:72)(cid:71)(cid:84)(cid:71)(cid:70)(cid:2)(cid:79)(cid:75)(cid:85)(cid:85)(cid:71)(cid:70)(cid:2)(cid:82)(cid:67)(cid:91)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:81)(cid:84)(cid:2)(cid:81)(cid:88)(cid:71)(cid:84)(cid:70)(cid:84)(cid:67)(cid:72)(cid:86)(cid:85)(cid:2)(cid:75)(cid:80)
(cid:2) (cid:71)(cid:90)(cid:69)(cid:71)(cid:85)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:2)(cid:87)(cid:82)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:2)(cid:82)(cid:71)(cid:84)(cid:75)(cid:81)(cid:70)(cid:2)(cid:81)(cid:72)(cid:2)(cid:27)(cid:18)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)(cid:2)(cid:85)(cid:75)(cid:80)(cid:69)(cid:71)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:82)(cid:67)(cid:91)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)
(cid:2) (cid:70)(cid:67)(cid:86)(cid:71)(cid:2)(cid:81)(cid:84)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:2)(cid:68)(cid:84)(cid:71)(cid:67)(cid:69)(cid:74)
(cid:50)(cid:67)(cid:85)(cid:86)(cid:2)(cid:70)(cid:87)(cid:71)(cid:2)(cid:79)(cid:81)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(cid:2)(cid:27)(cid:18)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)(cid:20)
(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:85)(cid:87)(cid:72)(cid:72)(cid:71)(cid:84)(cid:71)(cid:70)(cid:2)(cid:79)(cid:75)(cid:85)(cid:85)(cid:71)(cid:70)(cid:2)(cid:82)(cid:67)(cid:91)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:81)(cid:84)(cid:2)(cid:81)(cid:88)(cid:71)(cid:84)(cid:70)(cid:84)(cid:67)(cid:72)(cid:86)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:85)(cid:85)(cid:2)
(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:79)(cid:81)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(cid:2)(cid:27)(cid:18)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)
(cid:52)(cid:71)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:71)(cid:70)(cid:2)(cid:10)(cid:82)(cid:84)(cid:71)(cid:72)(cid:71)(cid:84)(cid:71)(cid:80)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:86)(cid:71)(cid:84)(cid:79)(cid:85)(cid:11)
(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:80)(cid:71)(cid:89)(cid:2)(cid:86)(cid:71)(cid:84)(cid:79)(cid:85)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:68)(cid:71)(cid:71)(cid:80)(cid:2)(cid:73)(cid:84)(cid:67)(cid:80)(cid:86)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:67)(cid:2)(cid:82)(cid:84)(cid:71)(cid:72)(cid:71)(cid:84)(cid:71)(cid:80)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:68)(cid:67)(cid:85)(cid:75)(cid:85)(cid:2)
(cid:75)(cid:80)(cid:2)(cid:81)(cid:84)(cid:70)(cid:71)(cid:84)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:88)(cid:81)(cid:75)(cid:70)(cid:124)(cid:70)(cid:71)(cid:72)(cid:67)(cid:87)(cid:78)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:71)(cid:84)(cid:82)(cid:67)(cid:84)(cid:86)(cid:91)(cid:14)(cid:2)(cid:71)(cid:16)(cid:73)(cid:16)(cid:14)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:84)(cid:71)(cid:85)(cid:86)(cid:2)(cid:69)(cid:81)(cid:80)(cid:69)(cid:71)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:14)(cid:2)
(cid:71)(cid:90)(cid:86)(cid:71)(cid:80)(cid:70)(cid:71)(cid:70)(cid:2)(cid:79)(cid:67)(cid:86)(cid:87)(cid:84)(cid:75)(cid:86)(cid:91)(cid:14)(cid:2)(cid:85)(cid:87)(cid:68)(cid:81)(cid:84)(cid:70)(cid:75)(cid:80)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:14)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86) (cid:17)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:2)(cid:85)(cid:89)(cid:67)(cid:82)(cid:85)
(cid:36)(cid:67)(cid:80)(cid:77)(cid:84)(cid:87)(cid:82)(cid:86)(cid:69)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:85)(cid:81)(cid:78)(cid:88)(cid:71)(cid:80)(cid:69)(cid:91)(cid:2)(cid:82)(cid:84)(cid:81)(cid:69)(cid:71)(cid:71)(cid:70)(cid:75)(cid:80)(cid:73)(cid:85)
(cid:36)(cid:67)(cid:80)(cid:77)(cid:84)(cid:87)(cid:82)(cid:86)(cid:69)(cid:91)(cid:14)(cid:2)(cid:75)(cid:80)(cid:85)(cid:81)(cid:78)(cid:88)(cid:71)(cid:80)(cid:69)(cid:91)(cid:2)(cid:82)(cid:84)(cid:81)(cid:69)(cid:71)(cid:71)(cid:70)(cid:75)(cid:80)(cid:73)(cid:85)(cid:2)(cid:81)(cid:84)(cid:2)(cid:71)(cid:80)(cid:72)(cid:81)(cid:84)(cid:69)(cid:71)(cid:70)(cid:2)(cid:78)(cid:75)(cid:83)(cid:87)(cid:75)(cid:70)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:69)(cid:81)(cid:79)(cid:79)(cid:71)(cid:80)(cid:69)(cid:71)(cid:70)(cid:2)
(cid:67)(cid:73)(cid:67)(cid:75)(cid:80)(cid:85)(cid:86)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:81)(cid:68)(cid:78)(cid:75)(cid:73)(cid:81)(cid:84)
(cid:48)(cid:81)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)
(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:71)(cid:90)(cid:75)(cid:85)(cid:86)(cid:85)
(cid:43)(cid:72)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)
(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:71)(cid:90)(cid:75)(cid:85)(cid:86)(cid:85)
(cid:43)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:81)(cid:84)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)
(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:71)(cid:70)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:78)(cid:91)(cid:2)
(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:71)(cid:70)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:87)(cid:67)(cid:78)(cid:78)(cid:91)(cid:2)
(cid:72)(cid:81)(cid:84)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:72)(cid:81)(cid:84)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:71)(cid:70)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:87)(cid:67)(cid:78)(cid:78)(cid:91)(cid:2)
(cid:72)(cid:81)(cid:84)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)
(cid:43)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:71)(cid:70) (cid:19)
(cid:50)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:80)(cid:81)(cid:80)(cid:15)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:81)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:71)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:69)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:71)(cid:90)(cid:75)(cid:85)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:86)(cid:74)(cid:71)(cid:2)(cid:69)(cid:67)(cid:84)(cid:84)(cid:91)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:79)(cid:81)(cid:87)(cid:80)(cid:86)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:71)(cid:70)(cid:85)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:84)(cid:71)(cid:69)(cid:81)(cid:88)(cid:71)(cid:84)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:67)(cid:79)(cid:81)(cid:87)(cid:80)(cid:86)
Loss history statistics
CHF million, except where indicated
Due from banks and loans (gross)
Impaired loans (including due from banks)
Non-performing loans (including due from banks)
Allowances and provisions for credit losses1, 2
of which: allowances for due from banks and loans1
Net write-offs3
of which: net write-offs for due from banks and loans
Credit loss (expense) / recovery4
of which: credit loss (expense) / recovery for due from banks and loans
Ratios
Impaired loans as a percentage of due from banks and loans (gross)
Non-performing loans as a percentage of due from banks and loans (gross)
Allowances as a percentage of due from banks and loans (gross)
Net write-offs as a percentage of average due from banks and loans (gross) outstanding during the period
31.12.16
31.12.15
31.12.14
31.12.13
31.12.12
320,080
324,594
329,800
301,601
301,849
975
2,399
653
599
123
123
(37)
(37)
0.3
0.7
0.2
0.0
1,226
1,630
727
692
116
116
(117)
(117)
0.4
0.5
0.2
0.0
1,204
1,602
1,241
1,582
735
708
124
124
(78)
(78)
0.4
0.5
0.2
0.0
750
686
83
83
(50)
(50)
0.4
0.5
0.2
0.0
1,606
1,516
794
728
250
250
(118)
(134)
0.5
0.5
0.2
0.1
(cid:19)(cid:2)(cid:37)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:84)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:70)(cid:71)(cid:72)(cid:67)(cid:87)(cid:78)(cid:86)(cid:16)(cid:2)(cid:35)(cid:78)(cid:78)(cid:2)(cid:85)(cid:87)(cid:69)(cid:74)(cid:2)(cid:69)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:70)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:75)(cid:79)(cid:82)(cid:67)(cid:75)(cid:84)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:85)(cid:79)(cid:71)(cid:80)(cid:86)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:20)(cid:2)(cid:19)(cid:26)(cid:18)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:69)(cid:71)(cid:84)(cid:86)(cid:67)(cid:75)(cid:80)(cid:2)(cid:85)(cid:82)(cid:71)(cid:69)(cid:75)(cid:386)(cid:71)(cid:70)(cid:2)(cid:84)(cid:71)(cid:86)(cid:67)(cid:75)(cid:78)(cid:2)(cid:82)(cid:81)(cid:84)(cid:86)(cid:72)(cid:81)(cid:78)(cid:75)(cid:81)(cid:85)(cid:16)
1 Includes collective loan loss allowances. 2 Includes provisions for loan commitments and allowances for securities financing transactions. 3 Includes net write-offs for loan commitments and securities financing
transactions. 4 Includes credit loss (expense) / recovery for loan commitments and securities financing transactions.
145
Gross impaired
financial instruments
Allowances and provisions1
31.12.16
31.12.15
31.12.16
31.12.15
Estimated liquidation
proceeds of collateral2
31.12.16
31.12.15
Net impaired
financial instruments
31.12.16
31.12.15
975
260
1,226
292
1,235
1,518
(599)
(54)
(653)
(692)
(35)
(161)
(10)
(163)
(4)
(727)
(171)
(168)
215
195
411
371
252
623
1 Includes CHF 12 million in collective loan loss allowances (31 December 2015: CHF 6 million). 2 Does not include oil and gas reserves related to reserve-based lending.
Risk, treasury and capital management
Risk, treasury and capital management
Risk management and control
Allowances and provisions for credit losses
CHF million, except where indicated
IFRS exposure, gross1
31.12.15
31.12.16
Impaired exposure, gross
31.12.16 31.12.15
Estimated liquidation
proceeds of collateral2
31.12.16
31.12.15
Allowances and provisions
for credit losses3
31.12.16
31.12.15
Impairment ratio (%)
31.12.16
31.12.15
Group
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
Total
Wealth Management
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
Total
Wealth Management Americas
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
Total
Personal & Corporate Banking
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
Total
107,100
13,159
306,921
16,711
54,430
498,3224
901
915
101,876
2,187
1,730
107,608
0
2,635
52,486
558
375
56,054
0
2,156
133,861
9,023
8,861
153,900
89,776
11,951
312,643
16,019
56,067
486,456
1,344
1,107
105,167
2,267
1,270
111,155
0
1,899
48,754
747
279
51,678
0
1,493
135,616
7,900
8,463
153,473
3
972
202
58
1,235
1
1,225
256
36
1,518
77
109
77
109
27
27
3
756
202
35
995
29
29
1
870
255
20
1,146
Asset Management
Total
Investment Bank
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
Total
CC – Services
Total
CC – Group ALM
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
Total
545
443
0
0
37
4,234
10,086
4,790
42,937
62,085
345
4,177
13,088
4,958
44,648
67,217
95
0
23
118
202
1
15
219
610
623
0
0
106,162
2,176
5,962
1
0
114,301
88,087
2,210
6,788
0
0
97,086
0
0
0
161
7
3
171
13
13
163
4
168
19
19
0
0
121
7
3
131
0
27
27
0
144
4
149
0
0
0
0
3
596
8
47
653
61
1
62
29
29
3
443
7
34
486
0
48
13
61
0
3
689
32
3
727
89
1
90
28
28
3
496
31
530
0
62
3
65
0
0.0
0.3
1.2
0.1
0.2
0.0
0.4
1.6
0.1
0.3
0.1
0.1
0.1
0.1
0.1
0.1
0.0
0.1
0.1
0.6
2.2
0.4
0.6
0.0
0.9
0.0
0.1
0.2
0.0
0.1
0.6
3.2
0.2
0.7
0.0
1.5
0.0
0.0
0.3
0.0
0
0
0.0
0.0
CC – Non-core and Legacy Portfolio
Balances with central banks
Due from banks
Loans
Guarantees
Loan commitments
Total
1 The measurement requirements of IFRS differ in certain respects from our internal management view of credit risk. 2 Does not include oil and gas reserves related to reserve-based lending. 3 Includes CHF 12 million
(31 December 2015: CHF 6 million) in collective loan loss allowances for credit losses. 4 As of 31 December 2016, total IFRS exposure of UBS AG (consolidated) was CHF 0.6 billion higher than the exposure of UBS
Group AG (consolidated), related to receivables of UBS AG and UBS Switzerland AG against UBS Group AG (31 December 2015: CHF 0.7 billion).
0
43
2,606
41
527
3,218
0
56
3,183
137
1,406
4,782
17
0.5
0.6
0.5
0.3
15
17
15
14
15
14
15
0
0
146
Development of individually impaired loans (including due from banks)
CHF million
Balance at the beginning of the year
New impaired loans
Increase in existing impaired loans
Repayments / sales / upgrades
Write-offs
Foreign currency translations effects
Balance at the end of the year
1 Does not include CHF 2 million in write-offs charged directly to collective loan loss allowances.
Past due but not impaired loans
The table below shows a breakdown of total loan balances where
payments have been missed, but which we do not consider
impaired because we otherwise expect to collect all amounts due
under the contractual terms of the loans or the equivalent value
from liquidation of collateral. The loan balances in the table arise
predominantly within Personal & Corporate Banking and, to a
lesser extent, Wealth Management.
For the year ended
31.12.16
1,226
356
140
(605)
(143)1
1
975
31.12.15
1,204
465
71
(354)
(162)
2
1,226
The amount of past due but not impaired mortgage loans was
not significant compared with the overall size of the mortgage
portfolio.
➔ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report for
more information on our impairment policies
Audited |
Past due but not impaired loans
CHF million
1–10 days
11–30 days
31–60 days
61–90 days
>90 days
of which: mortgage loans
Total
1 Total mortgage loans IFRS carrying value was CHF 153,006 million (31 December 2015: CHF 153,044 million).
31.12.16
54
113
68
10
641
5421
887
31.12.15
141
69
37
16
663
5291
927
147
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Market risk
Key developments
We continued to manage market risk to low levels during 2016.
Average 1-day, 95% confidence level, management value-at-risk
(VaR) reduced to CHF 11 million from CHF 15 million. Maximum
VaR peaked at CHF 18 million during 2016 compared with CHF
25 million in the prior year. With VaR at such low levels, we con-
tinue to see some volatility in the measure driven by positions
arising from client facilitation as well as option expiries. The low
absolute levels of VaR have also contributed to a higher number
of backtesting exceptions, with the number of exceptions within
a 250-business-day window increasing to nine during the year
before reducing to seven at the end of the year. Accordingly, the
FINMA VaR multiplier used to compute regulatory and stressed
VaR RWA increased to 3.85 in the second quarter of 2016 before
reducing to 3.65 at year-end.
Audited | Main sources of market risk
– Market risks arise from both our trading and non-trading busi-
ness activities.
– Trading market risks arise mainly in connection with primary
debt and equity underwriting, securities and derivatives trad-
ing for market-making and client facilitation within our Invest-
ment Bank, as well as the remaining positions within Non-core
and Legacy Portfolio and our municipal securities trading busi-
ness within Wealth Management Americas.
– Non-trading market risk arises predominantly in the form of
interest rate and foreign exchange risks in connection with
personal banking and lending in our wealth management busi-
nesses, our personal and corporate banking business in Swit-
zerland and the Investment Bank’s lending business, in addi-
tion to treasury activities.
– Corporate Center – Asset and Liability Management (Group
ALM) assumes market risks in the process of managing interest
rate risk, structural foreign exchange risk and the liquidity and
funding profile of the Group.
– Equity and debt investments can also give rise to market risks,
as can some aspects of our employee benefits, such as defined
benefit pension schemes.
Audited | Overview of measurement, monitoring and
management techniques
– Market risk limits are set for the Group, the business divisions
and Corporate Center units and at granular levels within the
various business lines, reflecting the nature and magnitude of
the market risks.
– Our primary portfolio measures of market risk are liquidity-
adjusted stress (LAS) loss and value-at-risk (VaR). Both are com-
148
mon to all our business divisions and subject to limits that are
approved by the Board of Directors (BoD).
– These measures are complemented by concentration and
granular limits for general and specific market risk factors. Our
trading businesses are subject to multiple market risk limits.
These limits take into account the extent of market liquidity
and volatility, available operational capacity, valuation uncer-
tainty and, for our single-name exposures, the credit quality of
issuers.
– Trading market risks are managed on an integrated basis at a
portfolio level. As risk factor sensitivities change due to new
transactions, transaction expiries or changes in market levels,
risk factors are dynamically rehedged to remain within limits.
Accordingly, in the trading portfolio, we do not generally seek
to distinguish between specific positions and associated
hedges.
– Issuer risk is controlled by limits applied at the business division
level based on jump-to-zero measures, which estimate our
maximum default exposure (the loss in the case of a default
event assuming zero recovery).
– Non-trading foreign exchange risks are managed under mar-
ket risk limits, with the exception of Corporate Center – Group
ALM’s management of consolidated capital activity.
Our Treasury Risk Control function applies a holistic risk frame-
work, which sets the appetite for treasury-related risk-taking activ-
ities across the Group. A key element of the framework is an over-
arching economic value sensitivity limit, set by the BoD. This limit
is linked to the level of Basel III common equity tier 1 (CET1) capital
and takes into account risks arising from interest rates, foreign
exchange and credit spreads. In addition, the sensitivity of net
interest income to changes in interest rates is monitored against
targets set by the Group Chief Executive Officer, in order to ana-
lyze the outlook and volatility of net interest income based on
market-expected interest rates. Limits are also set by the BoD to
balance the impact of foreign exchange movements on our CET1
capital and CET1 capital ratio. Non-trading interest rate and for-
eign exchange risks are included in our Group-wide statistical and
stress testing metrics, which flow into our risk appetite framework.
Equity and debt investments are subject to a range of risk con-
trols, including preapproval of new investments by business man-
agement and Risk Control and regular monitoring and reporting.
They are also included in our Group-wide statistical and stress
testing metrics, which flow into our risk appetite framework.
➔ Refer to the “Treasury management” section of this report for
more information on Corporate Center – Group ALM’s manage-
ment of foreign exchange risks
➔ Refer to the “Capital management” section of this report for
more information on the sensitivity of our CET1 capital and CET1
capital ratio to currency movements
Market risk stress loss
In addition to VaR, which is discussed below, we measure and
manage our market risks through a comprehensive framework of
non-statistical measures and related limits. This includes an exten-
sive series of stress tests and scenario analyses, which we continu-
ously evaluate in order to ensure that any losses resulting from an
extreme, yet plausible event do not exceed our risk appetite.
Liquidity-adjusted stress
Our primary measure of stress loss for Group-wide market risk is
liquidity-adjusted stress (LAS). The LAS framework is designed to
capture the economic losses that could arise under specified stress
scenarios. This is in part achieved by replacing the standard one-
day and 10-day holding period assumptions used for manage-
ment and regulatory VaR with liquidity-adjusted holding periods,
as explained below. Shocks are then applied to positions based on
the expected market movements over the liquidity-adjusted hold-
ing periods resulting from the specified scenario.
The holding periods used in LAS are calibrated to reflect the
amount of time it would take to reduce or hedge the risk of posi-
tions in each major risk factor in a stressed environment, assum-
ing maximum utilization of the relevant position limits. We also
apply minimum holding periods, regardless of observed liquidity
levels, reflecting the fact that identification of and reaction to a
crisis may not always be immediate.
The expected market movements are derived using a combina-
tion of historical market behavior, based on an analysis of histori-
cal events, and forward-looking analysis that include consider-
ation of defined scenarios that have not occurred historically.
LAS-based limits are applied at a number of levels: Group,
business division and Corporate Center unit, business area and
sub-portfolio. In addition, LAS forms the core market risk compo-
nent of our combined stress test framework and is therefore inte-
gral to our overall risk appetite framework.
➔ Refer to “Risk appetite framework” in this section for more
information
➔ Refer to “Stress testing” in this section for more information on
our stress testing framework
Value-at-risk
VaR definition
Audited | VaR is a statistical measure of market risk, representing the
market risk losses that could potentially be realized over a set time
horizon (holding period) at an established level of confidence. The
measure assumes no change in the Group’s trading positions over
the set time horizon.
We calculate VaR on a daily basis. The profit or loss distribution
from which VaR is derived is constructed by our internally devel-
oped VaR model. The VaR model simulates returns over the hold-
ing period of those risk factors to which our trading positions are
sensitive, and subsequently quantifies the profit or loss impact of
these risk factor returns on the trading positions. Risk factor
returns associated with the risk factor classes of general interest
rates, foreign exchange and commodities are based on a pure
historical simulation approach, taking into account a five-year
look-back window. Risk factor returns for selected issuer based
risk factors, such as equity price and credit spreads, are decom-
posed into systematic and residual, issuer-specific components
using a factor model approach. Systematic returns are based on
historical simulation, and residual returns are based on a Monte
Carlo simulation. The VaR model profit or loss distribution is
derived from the sum of the systematic and the residual returns in
such a way that we consistently capture systematic and residual
risk. Correlations among risk factors are implicitly captured via the
historical simulation approach. In modeling the risk factor returns,
we consider the stationarity properties of the historical time series
of risk factor changes. Depending on the stationarity properties of
the risk factors within a given risk factor class, we choose to
model the risk factor returns using absolute returns or logarithmic
returns. The risk factor return distributions are updated on a
monthly basis.
Although our VaR model does not have full revaluation capa-
bility, we source full revaluation grids and sensitivities from our
front-office systems, enabling us to capture material non-linear
profit or loss effects.
We use a single VaR model for both internal management pur-
poses and determining market risk regulatory capital require-
ments, although we consider different confidence levels and time
horizons. For internal management purposes, we establish risk
limits and measure exposures using VaR at the 95% confidence
level with a one-day holding period, aligned to the way we con-
sider the risks associated with our trading activities. The regula-
tory measure of market risk used to underpin the market risk
capital requirement under Basel III requires a measure equivalent
to a 99% confidence level using a 10-day holding period. In the
calculation of a 10-day holding period VaR, we employ 10-day
risk factor returns, whereby all observations are equally weighted.
Additionally, the population of the portfolio within manage-
ment and regulatory VaR is slightly different. The population
within regulatory VaR meets minimum regulatory requirements
for inclusion in regulatory VaR. Management VaR includes a
broader population of positions. For example, regulatory VaR
excludes the credit spread risks from the securitization portfolio,
which are treated instead under the securitization approach for
regulatory purposes.
149
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
We also use stressed VaR (SVaR) for the calculation of regula-
tory capital. SVaR adopts broadly the same methodology as regu-
latory VaR and is calculated using the same population, holding
period (10-day) and confidence level (99%). However, unlike
regulatory VaR, the historical data set for SVaR is not limited to
five years, but spans the time period from 1 January 2007 to the
present. In deriving SVaR, we search for the largest 10-day hold-
ing period VaR for the current portfolio of the Group across all
one-year look-back windows that fall into the interval from 1 Jan-
uary 2007 to the present. SVaR is computed weekly.
➔ Refer to the “Basel III Pillar 3 UBS Group AG 2016” report under
“Pillar 3, SEC filings & other disclosures” at www.ubs.com/
investors for more information on the regulatory capital
calculation under the advanced internal ratings-based approach
Management VaR for the period
The tables below show minimum, maximum, average and period-
end management VaR by business division and Corporate Center
unit, and by general market risk type. We continued to manage
management VaR at low levels with average VaR decreasing ver-
sus the prior year.
Audited |
Management value-at-risk (1-day, 95% confidence, 5 years of historical data) by business division and Corporate Center
unit and general market risk type1
For the year ended 31.12.16
Equity
Interest
rates
Credit
spreads
Foreign
exchange Commodities
Min.
Max.
Average
1
15
5
4
9
15
11
11
3
6
4
5
1
5
3
2
31.12.16
18
0
1
0
0
18
0
9
5
11
11
Average (per business division and risk type)
0
0
0
0
9
0
7
4
0
1
0
0
8
0
6
4
(10)
(8)
0
0
0
0
5
0
0
0
0
0
1
0
0
8
0
7
4
0
1
0
0
3
0
1
2
0
0
0
0
3
0
1
1
(9)
(3)
(1)
For the year ended 31.12.15
0
2
1
1
0
0
0
0
1
0
0
0
0
CHF million
Total management VaR, Group
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
CC – Services
CC – Group ALM
CC – Non-core and Legacy Portfolio
Diversification effect2, 3
CHF million
Total management VaR, Group
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
CC – Services
CC – Group ALM
CC – Non-core and Legacy Portfolio
Diversification effect2, 3
8
0
0
0
0
5
0
5
3
Min.
10
0
0
0
0
7
0
4
5
1 Statistics at individual levels may not be summed to deduce the corresponding aggregate figures. The minima and maxima for each level may well occur on different days, and likewise, the VaR for each business line
or risk type, being driven by the extreme loss tail of the corresponding distribution of simulated profits and losses for that business line or risk type, may well be driven by different days in the historical time series, rendering
invalid the simple summation of figures to arrive at the aggregate total. 2 Difference between the sum of the standalone VaR for the business divisions and Corporate Center units and the VaR for the Group as a
whole. 3 As the minimum and maximum occur on different days for different business divisions and Corporate Center, it is not meaningful to calculate a portfolio diversification effect.
150
Max.
Average
31.12.15
25
0
1
0
0
22
0
16
9
15
0
0
0
0
12
0
8
6
(12)
13
0
0
0
0
10
0
6
5
(9)
Interest
rates
Credit
spreads
Foreign
exchange
Commodities
7
18
11
9
4
9
6
4
1
11
4
3
Average (per business division and risk type)
0
1
0
0
6
0
8
4
0
1
0
0
3
0
0
5
0
0
0
0
4
0
1
1
(9)
(4)
(1)
0
5
2
1
0
0
0
0
2
0
0
0
0
Equity
5
23
9
7
0
0
0
0
9
0
0
0
0
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(cid:24)(cid:18)
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(cid:44)
(cid:40)
(cid:47)
(cid:35)
(cid:47)
(cid:44)
(cid:44)
(cid:35)
(cid:53)
(cid:49)
(cid:48)
(cid:38)
80
52
24
-4
-32
-60
VaR limitations
Audited | Actual realized market risk losses may differ from those
implied by our VaR for a variety of reasons.
– The VaR measure is calibrated to a specified level of confidence
and may not indicate potential losses beyond this confidence
level.
– The one-day time horizon used for VaR for internal manage-
ment purposes, or 10-day in the case of the regulatory VaR
measure, may not fully capture the market risk of positions
that cannot be closed out or hedged within the specified
period.
– In certain cases, VaR calculations approximate the impact of
changes in risk factors on the values of positions and portfo-
lios. This may happen because the number of risk factors
included in the VaR model is necessarily limited.
– The effect of extreme market movements is subject to estima-
tion errors, which may result from non-linear risk sensitivities,
as well as the potential for actual volatility and correlation lev-
els to differ from assumptions implicit in the VaR calculations.
– The use of a five-year window means that sudden increases in
market volatility will tend not to increase VaR as quickly as the
use of shorter historical observation periods, but the increase
will affect our VaR for a longer period of time. Similarly, follow-
ing a period of increased volatility, as markets stabilize, VaR
predictions will remain more conservative for a period of time
influenced by the length of the historical observation period.
SVaR is subject to the same limitations as noted for VaR above,
but the use of one-year data sets avoids the smoothing effect of
the five-year data set used for VaR, and the absence of the five-
year window provides for a longer history of potential loss events.
Therefore, although the significant period of stress during the
financial crisis of 2007–2009 is no longer contained in the his-
torical five-year period used for management and regulatory VaR,
SVaR will continue to use this data. This approach is intended to
reduce the procyclicality of the regulatory capital requirements for
market risks.
We recognize that no single measure may encompass the
entirety of risks associated with a position or portfolio. Conse-
quently, we employ a suite of various metrics with both overlap-
ping and complementary characteristics in order to create a holis-
tic framework that ensures material completeness of risk
identification and measurement. As a statistical aggregate risk
measure, VaR supplements our liquidity-adjusted stress and com-
prehensive stress testing frameworks.
We have an established framework to identify and quantify
potential risk factors that are not fully captured by our VaR model.
We refer to these risk factors as risks-not-in-VaR (RniV). This
framework is used to underpin these potential risk factors with
regulatory capital, calculated as a multiple of regulatory VaR and
stressed VaR.
Backtesting of VaR
For backtesting purposes, we compute backtesting VaR using a
99% confidence level and one-day holding period for the popula-
tion included within regulatory VaR. The backtesting process com-
pares backtesting VaR calculated on positions at the close of each
business day with the revenues generated by those positions on
the following business day. Backtesting revenues exclude non-
trading revenues, such as fees and commissions and revenues
from intraday trading, to ensure a like-for-like comparison. A
backtesting exception occurs when backtesting revenues are neg-
ative and the absolute value of those revenues is greater than the
previous day’s backtesting VaR.
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(cid:44)
(cid:40)
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(cid:35)
(cid:47)
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(cid:35)
(cid:53)
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(cid:48)
(cid:38)
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(cid:19)(cid:20)(cid:18)
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(cid:18)
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(cid:10)(cid:22)(cid:18)(cid:11)
(cid:10)(cid:24)(cid:18)(cid:11)
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(cid:27)(cid:27)(cid:7)(cid:2)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:86)(cid:67)(cid:75)(cid:78)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:36)(cid:67)(cid:69)(cid:77)(cid:86)(cid:71)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:56)(cid:67)(cid:52)(cid:2)(cid:70)(cid:75)(cid:85)(cid:86)(cid:84)(cid:75)(cid:68)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:36)(cid:67)(cid:69)(cid:77)(cid:86)(cid:71)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:56)(cid:67)(cid:52)(cid:2)(cid:10)(cid:19)(cid:15)(cid:70)(cid:67)(cid:91)(cid:14)(cid:2)(cid:27)(cid:27)(cid:7)(cid:2)(cid:69)(cid:81)(cid:80)(cid:386)(cid:70)(cid:71)(cid:80)(cid:69)(cid:71)(cid:2)(cid:31)(cid:2)(cid:19)(cid:7)(cid:2)(cid:80)(cid:71)(cid:73)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:86)(cid:67)(cid:75)(cid:78)(cid:11)
(cid:19)(cid:2) (cid:39)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:2) (cid:80)(cid:81)(cid:80)(cid:15)(cid:86)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)(cid:14)(cid:2) (cid:85)(cid:87)(cid:69)(cid:74)(cid:2) (cid:67)(cid:85)(cid:2) (cid:69)(cid:81)(cid:79)(cid:79)(cid:75)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2) (cid:67)(cid:80)(cid:70)(cid:2) (cid:72)(cid:71)(cid:71)(cid:85)(cid:14)(cid:2) (cid:67)(cid:80)(cid:70)(cid:2) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)(cid:2) (cid:72)(cid:84)(cid:81)(cid:79)(cid:2) (cid:75)(cid:80)(cid:86)(cid:84)(cid:67)(cid:70)(cid:67)(cid:91)(cid:2) (cid:86)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)
(cid:20)(cid:2)(cid:36)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2) (cid:81)(cid:80)(cid:2) (cid:36)(cid:67)(cid:85)(cid:71)(cid:78)(cid:2) (cid:43)(cid:43)(cid:43)(cid:2) (cid:84)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:81)(cid:84)(cid:91)(cid:2)(cid:56)(cid:67)(cid:52)(cid:14)(cid:2) (cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:2) (cid:37)(cid:56)(cid:35)(cid:2) (cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2) (cid:67)(cid:80)(cid:70)(cid:2) (cid:86)(cid:74)(cid:71)(cid:75)(cid:84)(cid:2) (cid:71)(cid:78)(cid:75)(cid:73)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2) (cid:74)(cid:71)(cid:70)(cid:73)(cid:71)(cid:85)(cid:2) (cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2) (cid:67)(cid:84)(cid:71)(cid:2) (cid:85)(cid:87)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:2)
(cid:86)(cid:81)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:80)(cid:71)(cid:89)(cid:2)(cid:85)(cid:86)(cid:67)(cid:80)(cid:70)(cid:67)(cid:78)(cid:81)(cid:80)(cid:71)(cid:2)(cid:37)(cid:56)(cid:35)(cid:2)(cid:69)(cid:74)(cid:67)(cid:84)(cid:73)(cid:71)(cid:16)
(cid:11)
(cid:18)
(cid:18)
(cid:19)
(cid:10)
(cid:30)
(cid:11)
(cid:23)
(cid:25)
(cid:10)
(cid:115)
(cid:11)
(cid:18)
(cid:18)
(cid:19)
(cid:10)
(cid:11)
(cid:18)
(cid:23)
(cid:10)
(cid:115)
(cid:11)
(cid:23)
(cid:25)
(cid:10)
(cid:11)
(cid:23)
(cid:20)
(cid:10)
(cid:115)
(cid:11)
(cid:18)
(cid:23)
(cid:10)
(cid:18)
(cid:115)
(cid:11)
(cid:23)
(cid:20)
(cid:10)
(cid:23)
(cid:20)
(cid:115)
(cid:18)
(cid:18)
(cid:23)
(cid:115)
(cid:23)
(cid:20)
(cid:23)
(cid:25)
(cid:115)
(cid:18)
(cid:23)
(cid:18)
(cid:18)
(cid:19)
(cid:115)
(cid:23)
(cid:25)
(cid:18)
(cid:18)
(cid:19)
(cid:32)
(cid:52)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)
(cid:19)(cid:2) (cid:43)(cid:80)(cid:2) (cid:67)(cid:70)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2) (cid:86)(cid:81)(cid:2) (cid:68)(cid:67)(cid:69)(cid:77)(cid:86)(cid:71)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)(cid:14)(cid:2) (cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:2) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)(cid:2) (cid:85)(cid:87)(cid:69)(cid:74)(cid:2) (cid:67)(cid:85)(cid:2) (cid:69)(cid:81)(cid:79)(cid:79)(cid:75)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2) (cid:67)(cid:80)(cid:70)(cid:2) (cid:72)(cid:71)(cid:71)(cid:85)(cid:14)(cid:2) (cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)(cid:2) (cid:72)(cid:81)(cid:84)(cid:2)
(cid:75)(cid:80)(cid:86)(cid:84)(cid:67)(cid:70)(cid:67)(cid:91)(cid:2)(cid:86)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:14)(cid:2)(cid:84)(cid:71)(cid:85)(cid:71)(cid:84)(cid:88)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:89)(cid:80)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:16)
151
(cid:19)(cid:21)(cid:21)(cid:16)(cid:21)(cid:21)(cid:21)(cid:23)
(cid:19)(cid:18)(cid:24)(cid:16)(cid:24)(cid:24)(cid:24)(cid:26)
(cid:26)(cid:18)(cid:16)(cid:18)(cid:18)(cid:18)(cid:19)
(cid:23)(cid:21)(cid:16)(cid:21)(cid:21)(cid:21)(cid:22)
(cid:20)(cid:24)(cid:16)(cid:24)(cid:24)(cid:24)(cid:25)
80
52
24
-4
-32
-60
(cid:18)(cid:16)(cid:18)(cid:18)(cid:18)(cid:18)
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Statistically, given the confidence level of 99%, two or three
backtesting exceptions per year can be expected. More excep-
tions than this could indicate that the VaR model is not perform-
ing appropriately, as could too few exceptions over a prolonged
period of time. However, as noted in the VaR limitations above, a
sudden increase or decrease in market volatility relative to the
five-year window could lead to a higher or lower number of
exceptions, respectively. Accordingly, Group-level backtesting
exceptions are investigated, as are exceptional positive backtest-
ing revenues, with results being reported to senior business man-
agement, the Group Chief Risk Officer and the divisional Chief
Risk Officers. Backtesting exceptions are also reported to internal
and external auditors and to the relevant regulators.
The “Group: development of backtesting revenues against
backtesting VaR” chart on the previous page shows the 12-month
development of backtesting VaR against the Group’s backtesting
revenues for 2016. The chart shows both the negative and posi-
tive tails of the backtesting VaR distribution at 99% confidence
intervals representing, respectively, the losses and gains that could
potentially be realized over a one-day period at that level of con-
fidence. The asymmetry between the negative and positive tails is
due to the long gamma risk profile that has been run historically
in the Investment Bank. This long gamma position profits from
increases in volatility, which therefore benefits the positive tail of
the VaR simulated profit or loss distribution.
The histogram “Investment Bank and Corporate Center – Non-
core and Legacy Portfolio daily revenue distribution” shows the
daily revenue distribution for the Investment Bank and Non-core
and Legacy Portfolio for 2016. This includes, in addition to back-
testing revenues, revenues such as commissions and fees, reve-
nues for intraday trading, reserves and own credit.
There were seven regulatory Group VaR negative backtesting
exceptions during 2016, primarily in the first six months of the
year. This brought the total number of negative exceptions within
the 250-business-day window to seven, as the four downside
exceptions that occurred in the previous year moved out of this
time window. Correspondingly, the FINMA VaR multiplier for the
market risk RWA calculation increased from 3.0 at the end of
2015 to 3.65 as of 31 December 2016. We have investigated the
cause for each of the backtesting exceptions and identified sev-
eral factors that contributed to the increase. In particular, with
market risk being managed at such low levels of VaR, the impact
of these factors on the backtesting results became relatively more
significant, contributing to the higher frequency of exceptions.
– Periods of increased market volatility relative to the volatility in
the historical five-year time series led to daily profit or loss
exceeding that predicted by the VaR model. Significant market
volatility occurred in the first quarter of 2016, arising from
uncertainties with regard to macroeconomic developments in
China and emerging markets more broadly and to weakening
commodity prices, particularly oil, as well as in the second
quarter of 2016 following the outcome of the UK referendum
on EU membership. In addition, the markets saw large move-
ments coming into year-end, particularly in euro and Swiss
franc interest rate curves.
– Adjustments to trading revenues arising from non-daily mark-
ing or valuation processes can result in the recognition of prof-
its and losses disconnected from the previous day’s backtesting
VaR. We have initiatives to reduce such adjustments.
– Profit or loss on risks accounted for in the capital underpinning
of RniV is captured in the backtesting revenue, even though the
risks are not covered by the VaR model. We continue to focus
on extending the VaR model to better capture these risks.
Given the factors outlined above, the statistical expectation of
two or three exceptions per year, and combined with a review of
the VaR model to confirm that it is performing consistent with its
design and expectations considering the current risk profile and
the market behavior, we do not believe that the increase in the
number of regulatory negative backtesting exceptions during the
year indicates a deficiency in our VaR model.
VaR model confirmation
In addition to model backtesting performed for regulatory pur-
poses as described above, we also conduct extended backtesting
for our internal model confirmation purposes. This includes
observing model performance across the entire profit or loss dis-
tribution, not just the tails, and at multiple levels within the busi-
ness division and Corporate Center unit hierarchies.
➔ Refer to “Risk measurement” in this section for more informa-
tion on our approach to model confirmation procedures
VaR model developments in 2016
Audited | In the first quarter of 2016, we made a structural change
to our VaR model to consistently capture residual risk of equity-
and credit-related risk factors by adopting a hybrid approach of
simulating risk factor returns using historical simulation and
Monte Carlo simulation. This primarily impacted portfolios that
contain non-linear equity derivatives. While the effect on man-
agement VaR was minimal, it led to an overall reduction in the
regulatory VaR and stressed VaR measures. To offset this reduction
for the purpose of calculating RWA, FINMA temporarily intro-
duced a model multiplier of 1.3, pending other improvements to
the VaR model which are expected to increase VaR. The improve-
ment also contained changes to fully align the stressed VaR model
with the VaR model.
In the fourth quarter of 2016, we enhanced the modeling of
credit default swaps and bond spread risk factor returns on the
basis of a statistical factor model. There was no significant change
in our VaR measures as a result of this enhancement.
We also improved the VaR model by integrating selected RniV
items.
152
Interest rate risk in the banking book
Sources of interest rate risk in the banking book
Audited | Interest rate risk in the banking book arises from balance
sheet positions such as Loans, Due from customers and Debt
issued, Financial assets available for sale, Financial assets held to
maturity, certain Financial assets and liabilities designated at fair
value, derivatives measured at fair value, including derivatives
used for cash flow hedge accounting purposes, as well as related
funding transactions. These positions may impact Other compre-
hensive income (OCI) or the income statement, depending on
their accounting treatment.
Our largest banking book interest rate exposures arise from
client deposits and lending products in our wealth management
businesses and Personal & Corporate Banking. For Wealth Man-
agement and Personal & Corporate Banking, the inherent interest
rate risks are transferred either by means of back-to-back transac-
tions or, in the case of products with no contractual maturity date
or direct market-linked rate, by replicating portfolios from the
originating business into Corporate Center – Group ALM, which
manages the risks on an integrated basis, allowing for netting
interest rate risks across different sources. Any residual interest
rate risks in our wealth management businesses and Personal &
Corporate Banking that are not transferred to Corporate Center
– Group ALM are managed locally and are subject to independent
monitoring and control by local risk control units as well as cen-
trally by Market Risk Control. To manage the interest rate risk
centrally, Corporate Center – Group ALM uses derivative instru-
ments, most of which are in designated hedge accounting rela-
tionships. A significant amount of interest rate risk also arises
from Corporate Center – Group ALM financing and investing
activities, such as the investment and refinancing of non-mone-
tary corporate balance sheet items with indefinite maturities,
including equity, goodwill and real estate. For these items, senior
management has defined specific target durations as a basis for
our funding and investment activities, as applicable. These targets
are defined by replication portfolios, which establish rolling
benchmarks to execute against. Corporate Center – Group ALM
also maintains a portfolio of debt investments to meet the Group’s
liquidity needs. As of 31 December 2016, the target replication
portfolios for equity, goodwill and real estate were defined as fol-
lows: in Swiss francs with an average duration of approximately
two years and fair value sensitivity of CHF 4 million per basis
point; in US dollars with an average duration of approximately five
years and a sensitivity of CHF 11 million per basis point.
Interest rate risk within Wealth Management Americas arises
from the business division’s portfolio of available-for-sale assets, in
addition to its lending and deposit products offered to clients.
This interest rate risk is closely measured, monitored and man-
aged within approved risk limits and controls, taking into account
Wealth Management Americas’ balance sheet items that mutually
offset interest rate risk.
Banking book interest rate exposure in the Investment Bank
arises predominantly from the business of Corporate Client Solu-
tions, where transactions are subject to approval on a case-by-
case basis.
Corporate Center – Non-core and Legacy Portfolio assets that
were reclassified to loans and receivables from Held for trading in
the fourth quarter of 2008 and the first quarter of 2009, and
certain other debt securities held as loans and receivables, also
give rise to non-trading interest rate risk.
153
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Effect of interest rate changes on shareholders’ equity and
CET1 capital
The “Accounting and capital effect of changes in interest rates”
table below illustrates the accounting and CET1 capital treatment
of gains and losses resulting from changes in interest rates. For
instruments held at fair value, a change in interest rates results in
an immediate fair value gain or loss recognized either in the
income statement or through OCI. For assets and liabilities held
at amortized cost, including financial assets held to maturity, a
change in interest rates does not result in a change in the carry-
ing amount of the instruments, but could affect the amount of
interest income or expense recognized over time in the income
statement.
Typically, increases in interest rates would lead to an immediate
reduction in the value of our longer-term assets held at fair value,
but we would expect this to be offset over time through higher
net interest income (NII) on our core banking products.
In addition to the differing accounting treatments, our banking
book positions have different sensitivities to different points on
yield curves. For example, our portfolios of debt securities,
whether accounted for as instruments designated at fair value, as
assets held to maturity or available for sale, and interest rate
swaps designated as cash flow hedges, on the whole, are more
sensitive to changes in longer-duration interest rates, whereas our
deposits and a significant portion of our loans contributing to net
interest income are more sensitive to short-term rates. These fac-
tors are important as yield curves may not shift on a parallel basis
and could, for example, exhibit an initial steepening, followed by
a flattening over time.
By virtue of the accounting treatment and yield curve sensitivi-
ties outlined above, in a steepening yield curve scenario we would
expect to recognize an initial decrease in shareholders’ equity as a
result of fair value losses recognized in OCI. This would be com-
pensated over time by increased NII once increases in interest
rates affect the shorter end of the yield curve in particular. The
effect on CET1 capital would be similar, albeit less pronounced, as
gains and losses on interest rate swaps designated as cash flow
hedges are not recognized for regulatory capital purposes.
We subject the interest rate-sensitive banking book exposures
to a suite of interest rate scenarios in order to assess the effect on
expected NII over both a one-year and a three-year time horizon
assuming constant business volumes. We also consider the effect
of the interest rate movements in each scenario on the fair value
recognized in OCI of financial assets available for sale and cash
flow hedges managed by Corporate Center – Group ALM. The
scenario assessment also includes the estimated effect through
OCI on shareholders’ equity and CET1 capital from pension fund
assets and liabilities. While certain standard scenarios, such as a
parallel rise in all yield curves of 100 basis points, are retained and
regularly used, other scenarios are adopted as a function of
changing market conditions.
Accounting and capital effect of changes in interest rates1
Financial assets available for sale
Economic hedges classified as held for trading
Designated cash flow hedges
Loans and deposits at amortized costs
Financial assets designated at fair value
Financial assets held to maturity
Recognition
Shareholders’ equity
CET1 capital
Timing
Immediate
Immediate
Immediate
Gradual
Income
statement / OCI
OCI
Income statement
OCI2
Income statement
Immediate
Income statement
Gradual
Income statement
Gains
l
l
l
l
l
l
Losses
l
l
l
l
l
l
Gains
l
l
l
l
Losses
l
l
l
l
l
1 Refer to the “Reconciliation IFRS equity to Swiss SRB common equity tier 1 capital” table in the “Capital management” section of this report for more information on the differences between shareholders’ equity and
CET1 capital. 2 Excluding hedge ineffectiveness that is recognized in the income statement in accordance with IFRS.
154
At the end of 2016, the following scenarios were analyzed in
detail:
– Negative IR (NIR) then Recovery: Euro and Swiss franc yield
curves drop 50 basis points in parallel during the first three
months with no zero-floor applied and therefore become neg-
ative, or more negative. Yield curves in US dollars and other
currencies, on the other hand, drop 25 basis points in parallel
but remain floored at zero. Thereafter, all rates recover accord-
ing to market-implied forward rates.
– NIR then Constant: Same assumptions as the NIR then Recov-
ery scenario, but after the first three months, rates do not
recover but remain at the then-prevailing levels until the end of
the simulated time horizon.
– Eurozone Deflation and Fed Tapering: US dollar yield curve
rises and steepens; euro and Swiss franc yield curves develop
as in the NIR then Recovery scenario.
– Parallel +100 basis points: All yield curves rise 100 basis points
in parallel.
– 2016 CCAR Adverse: Federal Reserve Board Comprehensive
Capital Analysis and Review (CCAR) – Adverse scenario (inter-
est rate component only).
– 2016 CCAR Severely Adverse: Federal Reserve Board CCAR –
Severely adverse scenario (interest rate component only).
– Quantitative Easing then Recovery: Central banks keep markets
flooded with liquidity, pinning down short-end rates (zero or
negative interest rate policy). Bond markets / investors subse-
quently take fright over inflation fears, resulting in long-end
rates spiking up sharply (resulting in 5-year forward rates reach-
ing pre-2008 levels); short-end rates eventually follow suit.
– Inverted Steepener: Yield curves across all currencies undergo
a sharp rise for short tenors, with only a modest rise in the long
end of the yield curve: +200 basis points for tenors up to 1
year, +100 basis points for 5 years and +20 basis points for
8-year to 10-year tenors.
– Constant Rates: All rates stay at current levels.
The results are compared to a baseline NII, which is calculated
assuming that interest rates in all currencies develop according to
their market-implied forward rates and under the assumption of
constant business volumes. The calculated effects on baseline NII
range between a deterioration of 10% and 18% over a one-year
and three-year horizon, respectively, and an improvement of
approximately 18% and 17% over a one-year and a three-year
horizon, respectively. The most adverse scenario is the CCAR
Severely Adverse over both a one-year horizon and three-year
horizon. The most beneficial scenario over both time horizons is
the Inverted Steepener.
In addition to the above scenario analysis, we also monitor the
sensitivity of the NII to immediate parallel shocks of –200 and
+200 basis points compared with baseline NII, under the assump-
tion of a constant balance sheet volume and structure. Any result-
ing reduction in first-year NII relative to the baseline NII is subject
to predefined threshold levels to monitor the extent to which the
NII is exposed to an adverse movement in market rates. As of
31 December 2016, the baseline NII would have been approxi-
mately 14% less under a parallel shock of –200 basis points,
whereas under a parallel +200-basis-point shock, the baseline NII
would have been approximately 28% higher.
To shelter the level of our NII from the persistently low and
negative interest rate environment in Swiss francs in particular, we
rely on self-funding of our lending businesses through our deposit
base in Wealth Management and Personal & Corporate Banking,
along with appropriate additional adjustments to our interest
rate-linked product pricing. Should we lose this equilibrium on the
balance sheet, for example, due to unattractive pricing relative to
our peers for either our mortgages or deposits, this could lead to
a decrease in our NII in a persistently low and negative interest
rate environment. As we assume constant business volumes,
these risks do not appear in the aforementioned interest rate sce-
narios.
Moreover, should the low and negative interest rate environ-
ment persist or worsen, this could lead to additional pressure on
our NII and we could face additional costs for holding our Swiss
franc high-quality liquid asset portfolio. A reduction of the Swiss
National Bank’s deposit exemption threshold for banks would also
lead to increased costs that we might not be able to offset, for
example, by passing on some of the costs to our depositors.
Should euro interest rates also decline significantly further into
negative territory, this could likewise increase our liquidity costs
and put our NII generated from euro-denominated loans and
deposits at risk of volume imbalances. Depending on the overall
economic and market environment, sustained and significant
negative rates could also lead to our Wealth Management and
Personal & Corporate Banking clients paying down their loans
together with reducing any excess cash they hold with us as
deposits. This would reduce the underlying business volume and
lower our NII accordingly.
A net decrease in deposits would require replacement funding
at a potential relative cost increase that would depend on various
factors, including the term and nature of the replacement fund-
ing, whether such funding is raised in the wholesale markets or
from swapping with available funding denominated in another
currency. On the other hand, imbalances leading to an excess
deposit position could require investments at negative yields,
which we might not be able to compensate for sufficiently as a
result of our excess deposit balance charging mechanisms.
155
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Interest rate risk sensitivity to parallel shifts in yield curves
Audited | Interest rate risk in the banking book is not underpinned
for capital purposes, but is subject to a regulatory threshold. As of
31 December 2016, the economic-value effect of an adverse par-
allel shift in interest rates of ±200 basis points on our banking
book interest rate risk exposures is significantly below the thresh-
old of 20% of eligible capital recommended by regulators.
The interest rate risk sensitivity figures presented in the “Inter-
est rate sensitivity – banking book” table on the next page repre-
sent the effect of +1, ±100 and ±200-basis-point parallel moves
in yield curves on present values of future cash flows, irrespective
of accounting treatment. For some portfolios, the +1-basis-point
sensitivity has been estimated by dividing the +100-basis-point
sensitivity by 100. In the prevailing negative interest rate environ-
ment for the Swiss franc in particular, and to a lesser extent for
the euro and the Japanese yen, interest rates for Wealth Manage-
ment and Personal & Corporate Banking client transactions are
generally being floored at non-negative levels. Accordingly, for
the purposes of this disclosure table, downward moves of
100 / 200 basis points are floored to ensure that the resulting
shocked interest rates do not turn negative. The flooring results in
non-linear sensitivity behavior.
The sensitivity of the banking book to rising rates decreased to
negative CHF 3.1 million per basis point from negative CHF 4.1
million per basis point. This was mainly due to a decreased nega-
tive sensitivity in Wealth Management Americas and was mainly
driven by a revised client rate model for the non-maturity deposits
in Wealth Management Americas, which was enhanced to repre-
sent more accurately the relationship between historical market
rates and the client rates. The change in Swiss franc interest rate
sensitivity, from negative CHF 0.2 million per basis point to posi-
tive CHF 0.5 million per basis point, is predominantly attributable
to the residual adjustment of the banking book exposure by
Corporate Center – Group ALM to the new target duration of our
Swiss franc-denominated equity, which we had shortened during
2015, primarily in response to the prevailing negative interest-rate
environment in Swiss francs.
The sensitivity of the banking book to rising rates includes the
interest rate sensitivities arising from debt investments classified
as Financial assets available for sale and their associated hedges.
The sensitivity of these positions (excluding hedges and excluding
investments in funds accounted for as available for sale) to a
1-basis-point parallel increase in the yields of the respective instru-
ments is approximately negative CHF 3 million, which would be
recorded in OCI if such a change occurred. This sensitivity is
around CHF 6 million per basis point less than as of 31 December
2015, mainly due to a reduction in available-for-sale debt securi-
ties held in Corporate Center – Group ALM with an associated
buildup of debt securities designated at fair value.
The sensitivity of the banking book to rising interest rates also
includes interest rate sensitivities arising from interest rate swaps
designated in cash flow hedges. Fair value gains or losses associ-
ated with the effective portion of these hedges are recognized
initially in Equity. When the hedged forecast cash flows affect
profit or loss, the associated gains or losses on the hedging deriv-
atives are reclassified from Equity to profit or loss. These swaps are
predominantly denominated in US dollars, euros, Swiss francs and
British pounds. A 1-basis-point increase of underlying LIBOR
curves would have decreased equity by approximately CHF 20 mil-
lion, excluding adjustments for tax.
➔ Refer to “Note 13 Financial assets available for sale and held to
maturity” in the “Consolidated financial statements” section of
this report for more information
➔ Refer to the “Group performance” section of this report for more
information on sensitivity to interest rate movements
156
Audited |
Interest rate sensitivity – banking book1
CHF million
CHF
EUR
GBP
USD
Other
Total effect on fair value of interest rate-sensitive banking book positions
of which: Wealth Management Americas
of which: Investment Bank
of which: CC – Group ALM
of which: CC – Non-core and Legacy Portfolio
CHF million
CHF
EUR
GBP
USD
Other
Total effect on fair value of interest rate-sensitive banking book positions
of which: Wealth Management Americas
of which: Investment Bank
of which: CC – Group ALM
of which: CC – Non-core and Legacy Portfolio
–200 bps
–100 bps
+1 bp
+100 bps
+200 bps
31.12.16
(13.0)
(109.0)
(184.5)
823.2
0.5
517.1
730.5
26.3
(238.8)
(1.2)
(13.0)
(91.9)
(103.0)
358.9
(1.7)
149.4
325.8
14.3
(192.3)
1.2
0.5
0.0
(0.1)
(3.4)
0.0
(3.1)
(2.9)
(0.1)
0.0
(0.1)
44.8
(2.5)
(9.9)
(347.2)
(3.3)
(318.1)
(286.4)
(12.7)
(10.6)
(7.3)
89.3
(2.6)
(27.7)
(704.3)
(6.3)
(651.6)
(583.8)
(25.9)
(24.2)
(15.6)
–200 bps
–100 bps
+1 bp
+100 bps
+200 bps
31.12.15
(33.9)
27.0
(165.5)
838.7
(1.2)
665.0
806.5
28.9
(168.6)
(2.8)
(33.9)
26.2
(42.4)
438.8
(2.1)
386.5
440.1
18.0
(73.6)
1.2
(0.2)
(0.3)
0.1
(3.8)
0.1
(4.1)
(3.7)
(0.2)
(0.2)
(0.1)
(15.5)
(29.7)
(0.8)
(380.4)
8.2
(418.3)
(365.3)
(18.9)
(19.2)
(9.6)
(29.1)
(55.5)
(15.6)
(763.4)
16.5
(847.0)
(732.5)
(39.7)
(43.7)
(20.5)
1 Does not include interest rate sensitivities for credit valuation adjustments on monoline credit protection, US and non-US reference-linked notes.
Other market risk exposures
Own credit
We are exposed to changes in UBS’s own credit that are reflected
in the valuation of financial liabilities designated at fair value
when UBS’s own credit risk would be considered by market par-
ticipants. We also estimate debit valuation adjustments (DVA) to
incorporate own credit in the valuation of derivatives.
We adopted the own credit presentation requirements of
International Financial Reporting Standard (IFRS) 9 on 1 January
2016. From this date onward, changes in the fair value of finan-
cial liabilities designated at fair value through profit or loss related
to own credit are recognized in OCI.
Structural foreign exchange risk
On consolidation, assets and liabilities held in foreign operations
are translated into Swiss francs at the closing foreign exchange
rate on the balance sheet date. Foreign exchange differences of
non-Swiss franc assets or liabilities against the Swiss franc are rec-
ognized in OCI and therefore affect shareholders’ equity and
CET1 capital.
Corporate Center – Group ALM employs strategies to manage
this foreign currency exposure, including matched funding of
assets and liabilities and net investment hedging.
➔ Refer to the “Treasury management” section of this report for
more information on our exposure to and management of
structural foreign exchange risk
➔ Refer to “Note 22 Fair value measurement” in the “Consolidated
financial statements” section of this report for more information
➔ Refer to “Note 12 Derivative instruments and hedge accounting”
in the “Consolidated financial statements” section of this report
on own credit
for more information on our hedges of net investments in
foreign operations
157
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Equity investments
Audited | Under IFRS, equity investments not in the trading book
may be classified as Financial assets available for sale, Financial
assets designated at fair value or Investments in associates.
We make direct investments in a variety of entities and buy
equity holdings in both listed and unlisted companies for a variety
of purposes. This includes investments such as exchange and
clearing house memberships held to support our business activi-
ties. We may also make investments in funds that we manage in
order to fund or seed them at inception or to demonstrate that
our interests concur with those of investors. We also buy, and are
sometimes required by agreement to buy, securities and units
from funds that we have sold to clients.
The fair value of equity investments tends to be influenced by
factors specific to the individual investments. Equity investments
are generally intended to be held for the medium or long term
and may be subject to lockup agreements. For these reasons, we
generally do not control these exposures by using the market risk
measures applied to trading activities. However, such equity
investments are subject to a different range of controls, including
preapproval of new investments by business management and
Risk Control, portfolio and concentration limits, and regular mon-
itoring and reporting to senior management. They are also
included in our Group-wide statistical and stress testing metrics
which flow into our risk appetite framework.
As of 31 December 2016, we held equity investments totaling
CHF 1.6 billion, of which CHF 0.6 billion were classified as Finan-
cial assets available for sale and CHF 1.0 billion as Investments in
associates. This was broadly unchanged from the prior year.
➔ Refer to “Note 13 Financial assets available for sale and held to
maturity” and “Note 28 Interests in subsidiaries and other
entities” in the “Consolidated financial statements” section of
this report for more information
Debt investments
Audited | Debt investments classified as Financial assets available for
sale are measured at fair value with changes in fair value recorded
through Equity, and can broadly be categorized as money market
instruments and debt securities primarily held for statutory, regu-
latory or liquidity reasons.
The risk control framework applied to debt instruments classi-
fied as Financial assets available for sale depends on the nature of
the instruments and the purpose for which we hold them. Our
exposures may be included in market risk limits or be subject to
specific monitoring and interest rate sensitivity analysis. They are
also included in our Group-wide statistical and stress testing met-
rics, which flow into our risk appetite framework.
Debt instruments classified as Financial assets available for sale
had a fair value of CHF 15.0 billion as of 31 December 2016 com-
pared with CHF 61.9 billion as of 31 December 2015. The decrease
during 2016 was largely attributable to a shift in on-balance sheet
securities held as high-quality liquid assets from Financial assets
available for sale to Financial assets designated at fair value and
Financial assets held to maturity.
➔ Refer to “Note 13 Financial assets available for sale and held to
maturity” in the “Consolidated financial statements” section of
this report for more information
➔ Refer to “Interest rate risk sensitivity to parallel shifts in yield
curves” in this section for more information
➔ Refer to the “Treasury management” section of this report for
more information
Pension risk
We provide a number of pension plans for past and current
employees, some of which are classified as defined benefit pen-
sion plans under IFRS. These defined benefit plans can have a
material effect on our IFRS equity and CET1 capital.
In order to meet the expected future benefit payments, the
plans invest employee and employer contributions in various asset
classes. The funded status of the plan is the difference between
the fair value of these assets and the present value of the expected
future benefit payments to plan members, i.e., the defined ben-
efit obligation.
Pension risk is the risk that the funded status of defined benefit
plans might decrease, negatively affecting our IFRS equity and / or
our CET1 capital. This can arise either from a fall in the plan assets’
value or in the investment returns, an increase in defined benefit
obligations, or a combination of these.
Important risk factors affecting the fair value of the plan assets
are, among other things, equity market returns, interest rates,
bond yields and real estate prices. Important risk factors affecting
the present value of the expected future benefit payments include
high-grade bonds yields, interest rates, inflation rates and life
expectancy.
Pension risk is included in our Group-wide statistical and stress
testing metrics that flow into our risk appetite framework. The
potential effects are thus captured in the calculation of our post-
stress fully applied CET1 capital ratio.
➔ Refer to “Note 1a item 7 Pension and other post-employment
benefit plans” and “Note 26 Pension and other post-employment
benefit plans” in the “Consolidated financial statements” section
of this report for more information on defined benefit plans
UBS own share exposure
Group Treasury holds UBS Group AG shares exclusively to hedge
future share delivery obligations related to employee share-based
compensation awards. In addition, the Investment Bank holds a
very limited number of UBS Group AG shares, primarily in its capac-
ity as a market-maker in UBS Group AG shares and related deriva-
tives and to hedge certain issued structured debt instruments.
➔ Refer to the “UBS shares” section of this report for more
information
158
Country risk
Country risk framework
Country risk includes all country-specific events that occur within
a sovereign’s jurisdiction and may lead to an impairment of UBS’s
exposures. Country risk may take the form of sovereign risk,
which refers to the ability and willingness of a government to
honor its financial commitments; transfer risk, which would arise
if an issuer or counterparty could not acquire foreign currencies
following a moratorium of a central bank on foreign exchange
transfers; or “other” country risk. “Other” country risk may man-
ifest itself through increased and multiple counterparty and issuer
default risk (systemic risk) on the one hand, and on the other
hand by events that may affect the standing of a country, such as
political stability, institutional and legal framework. We maintain
a well-established risk control framework, through which we
assess the risk profile of all countries where we have exposure.
We attribute to each foreign country a sovereign rating, which
expresses the probability of the sovereign defaulting on its own
financial obligations in foreign currency. Our ratings are expressed
by statistically derived default probabilities as described in the
“Probability of default” section. Based on this internal analysis we
also define the probability of a transfer event occurring and estab-
lish rules as to how the aspects of “other” country risk should be
incorporated into the analysis of the counterparty rating of enti-
ties that are domiciled in the respective country.
Our risk exposure to foreign countries considers the credit rat-
ings assigned to those countries. A country risk ceiling (i.e., maxi-
mum aggregate exposure) applies to our exposures to counter-
parties or issuers of securities and financial investments in the
respective foreign country. We may limit the extension of credit,
transactions in traded products or positions in securities based on
a country ceiling, even if our exposure to a counterparty is other-
wise acceptable.
For internal measurement and control of country risk, we also
consider the financial impact of market disruptions arising prior
to, during and after a country crisis. These may take the form of a
severe deterioration in a country’s debt, equity or other asset mar-
kets, or a sharp depreciation of the currency. We use stress testing
to assess the potential financial impact of a severe country or
sovereign crisis. This involves the development of plausible stress
scenarios for combined stress testing and the identification of
countries that may potentially be subject to a crisis event, deter-
mining potential losses and making assumptions about recovery
rates depending on the types of credit transactions involved and
their economic importance to the affected countries.
Our exposures to market risks are also subject to regular stress
tests that cover major global scenarios, which are used for com-
bined stress testing as well, whereby we apply market shock fac-
tors to equity indices, interest and currency rates in all relevant
countries and consider the potential liquidity of the instruments.
Country risk exposure
Country risk exposure measure
The presentation of country risk follows our internal risk view,
whereby the basis for measurement of exposures depends on the
product category into which we have classified our exposures. In
addition to the classification of exposures into banking products
and traded products as defined in the “Credit risk profile of the
Group” section, within trading inventory we classify issuer risk on
securities such as bonds and equities, as well as the risk relating to
the underlying reference assets for derivative positions, including
those linked to credit protection we buy or sell, loan or security
underwriting commitments pending distribution and single-stock
margin loans for syndication.
As we manage the trading inventory on a net basis, we net the
value of long positions against short positions with the same
underlying issuer. Net exposures are, however, floored at zero per
issuer in the figures presented in the following tables. We there-
fore do not recognize the potentially offsetting benefit of certain
hedges and short positions across issuers.
We do not recognize any expected recovery values when
reporting country exposures as Exposure before hedges, except
for the risk-reducing effects of master netting agreements and
collateral held in the form of either cash or portfolios of diversified
marketable securities, which we deduct from the basic positive
exposure values. Within banking products and traded products,
the risk-reducing effect of any credit protection is taken into
account on a notional basis when determining the Net of hedges
exposures.
159
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Country risk exposure allocation
In general, exposures are shown against the country of domicile
of the contractual counterparty or the issuer of the security. For
some counterparties whose economic substance in terms of
assets or source of revenues is primarily located in a different
country, the exposure is allocated to the risk domicile of that
issuer.
This is the case, for example, with legal entities incorporated in
financial offshore centers, which have their main assets and rev-
enue streams outside the country of domicile. The same principle
applies to exposures for which we hold third-party guarantees or
collateral, where we report the exposure against the country of
domicile of either the guarantor or the issuer of the underlying
security, or against the country where pledged physical assets are
located.
We apply a specific approach for banking products exposures
to branches of financial institutions that are located in a country
other than the legal entity’s domicile. In such cases, exposures are
recorded in full against the country of domicile of the counter-
party and additionally in full against the country in which the
branch is located.
In the case of derivatives, we show the counterparty risk asso-
ciated with the positive replacement value against the country of
domicile of the counterparty (presented within traded products).
In addition, the risk associated with the instantaneous fall in value
of the underlying reference asset to zero (assuming no recovery) is
shown against the country of domicile of the issuer of the refer-
ence asset (presented within trading inventory). This approach
ensures that we capture both the counterparty and, where appli-
cable, issuer elements of risk arising from derivatives and applies
comprehensively for all derivatives, including single-name credit
default swaps (CDSs) and other credit derivatives.
As a basic example: if CDS protection for a notional value of
100 bought from a counterparty domiciled in country X referenc-
ing debt of an issuer domiciled in country Y has a positive replace-
ment value of 20, we record (i) the fair value of the CDS (20)
against country X (within traded products) and (ii) the hedge ben-
efit (notional minus fair value) of the CDS (100 – 20 = 80) against
country Y (within trading inventory). In the example of protection
bought, the 80 hedge benefit would offset any exposure arising
from securities held and issued by the same entity as the reference
asset, floored at zero per issuer. In the case of protection sold, this
would be reflected as a risk exposure of 80 in addition to any
exposure arising from securities held and issued by the same
entity as the reference asset. In the case of derivatives referencing
a basket of assets, the issuer risk against each reference entity is
calculated as the expected change in fair value of the derivative
given an instantaneous fall in value to zero of the corresponding
reference asset (or assets) issued by that entity. Exposures are then
aggregated by country across issuers, floored at zero per issuer.
Exposures to selected eurozone countries
Our exposure to peripheral European countries remains limited,
but we nevertheless remain watchful regarding the potential
broader implications of adverse developments in the eurozone. As
noted in the “Stress testing” section, a eurozone crisis remains a
core part of the new binding Global Deflation scenario for com-
bined stress test purposes, making it central to the regular moni-
toring of risk exposure against the minimum capital, earnings and
leverage ratio objectives in our risk appetite framework.
The “Exposures to eurozone countries rated lower than
AAA / Aaa by at least one major rating agency” table on the next
page provides an overview of our exposures to eurozone coun-
tries rated lower than AAA / Aaa by at least one of the major rat-
ing agencies as of 31 December 2016. The table shows an inter-
nal risk view of gross and net exposures split by sovereign,
agencies and central banks, local governments, banks and other
counterparties (including corporates, insurance companies and
funds). Exposures to Andorra, Cyprus, Estonia, Latvia, Lithuania,
Malta, Monaco, Montenegro, San Marino, Slovakia and Slovenia
are grouped in Other.
CDSs are primarily bought and sold in relation to our trading
businesses, but are also used to hedge parts of our risk exposure,
including that related to certain eurozone countries. As of
31 December 2016, and not taking into account the risk-reducing
effect of master netting agreements, we had purchased approxi-
mately CHF 14 billion gross notional of single name CDS protec-
tion on issuers domiciled in Greece, Italy, Ireland, Portugal or
Spain (GIIPS) and had sold CHF 13 billion gross notional of single-
name CDS protection for these same countries. On a net basis,
taking into account the risk-reducing effect of master netting
agreements, this equates to approximately CHF 4 billion notional
purchased and CHF 3 billion notional sold. More than 99% of
gross protection purchased was from investment grade counter-
parties (based on our internal ratings) and on a collateralized
basis. The vast majority of this was from financial institutions
domiciled outside the eurozone. Approximately CHF 0.1 billion of
the gross protection purchased was from counterparties domi-
ciled in a GIIPS country with only CHF 19 million from counterpar-
ties domiciled in the same country as the reference entity.
160
Exposures to eurozone countries rated lower than AAA / Aaa by at least one major rating agency
Total
Banking products
(loans, guarantees, loan commitments)
Traded products
(counterparty risk from derivatives and
securities financing)
after master netting agreements
and net of collateral
Trading inventory
(securities and potential
benefits / remaining
exposure from derivatives)
CHF million
31.12.16
Austria
Sovereign, agencies and central bank
Local governments
Banks
Other2
Belgium
Sovereign, agencies and central bank
Local governments
Banks
Other2
Finland
Sovereign, agencies and central bank
Local governments
Banks
Other2
France
Sovereign, agencies and central bank
Local governments
Banks
Other2
Greece
Sovereign, agencies and central bank
Local governments
Banks
Other2
Ireland3
Sovereign, agencies and central bank
Local governments
Banks
Other2
Italy
Sovereign, agencies and central bank
Local governments
Banks
Other2
Portugal
Sovereign, agencies and central bank
Local governments
Banks
Other2
Spain
Sovereign, agencies and central bank
Local governments
Banks
Other2
Other4
Net of
hedges1
28
of which:
unfunded
11
Net of
hedges1
1,694
1,612
62
21
149
2
85
62
854
530
232
92
6,320
3,641
1
960
1,796
1,714
62
21
149
2
85
62
887
530
232
124
6,620
3,773
1
960
1,887
1,718
18
0
3
15
18
0
3
15
1,120
1,120
1
55
1,064
3,104
180
80
1,733
1,110
39
1
18
20
1,069
118
197
755
454
1
55
1,064
2,589
87
80
1,733
689
39
1
18
20
820
118
197
505
454
Exposure
before
hedges
28
3
14
11
84
71
13
74
5
68
1,533
4
450
1,079
16
3
14
89
33
55
1,242
56
338
848
14
14
0
694
21
104
569
441
3
14
11
84
71
13
42
5
36
1,364
4
450
910
16
3
14
89
33
55
821
56
338
427
14
14
0
444
21
104
319
441
Exposure
before hedges
Net of
hedges
189
155
26
7
54
2
8
43
23
5
18
87
53
26
7
54
2
8
43
23
5
18
8
3
597
1,377
1,245
180
1
493
702
0
0
977
21
957
435
124
79
48
185
18
4
14
86
51
36
2
49
1
493
702
0
0
977
21
957
342
31
79
48
184
18
4
14
86
51
36
2
2
27
641
13
354
13
Net long
per issuer
1,579
1,555
22
2
11
5
6
790
530
221
38
3,711
3,588
0
17
106
1
0
1
53
1
1
52
1,426
2
1,347
78
6
1
0
5
289
97
42
150
11
1 Not deducted from the “Net of hedges” exposures are total allowances and provisions for credit losses of CHF 50 million (of which: Malta CHF 37 million, Ireland CHF 6 million and France CHF 5 million). 2 Includes
corporates, insurance companies and funds. 3 The majority of the Ireland exposure relates to funds and foreign bank subsidiaries. 4 Represents aggregate exposures to Andorra, Cyprus, Estonia, Latvia, Lithuania,
Malta, Monaco, Montenegro, San Marino, Slovakia and Slovenia.
161
Risk, treasury and capital management Risk, treasury and capital management
Risk management and control
Exposure from single-name credit default swaps referencing Greece, Italy, Ireland, Portugal or Spain (GIIPS)
Protection bought
Protection sold
of which: counterparty
domiciled in GIIPS
country
of which: counterparty
domicile is the same as the
reference entity domicile
Net position
(after application of counterparty master
netting agreements)
Notional
39
10,765
777
579
1,980
14,140
RV
(1)
232
(14)
2
(40)
180
Notional
0
30
11
0
51
92
RV
0
0
0
0
(1)
(1)
Notional
RV
Notional
0
19
0
0
0
19
0
0
0
0
0
0
Buy
notional
Sell
notional
0
(44)
RV
2
(83)
(10,265)
(320)
1,999
(1,499)
(790)
(553)
(1,553)
18
(3)
37
382
203
952
(395)
(177)
(525)
(13,243)
(266)
3,536
(2,640)
PRV
1
76
7
8
16
109
NRV
0
(164)
(3)
(9)
(19)
(195)
CHF million
31.12.16
Greece
Italy
Ireland
Portugal
Spain
Total
Holding CDSs for credit default protection does not necessarily
protect the buyer of protection against losses, as the contracts will
only pay out under certain scenarios. The effectiveness of our CDS
protection as a hedge of default risk is influenced by a number of
factors, including the contractual terms under which the CDS was
written. Generally, only the occurrence of a credit event as defined
by the CDS terms (which may include, among other events, failure
to pay, restructuring or bankruptcy) results in a payment under
the purchased credit protection contracts. For CDS contracts on
sovereign obligations, repudiation can also be deemed as a
default event. The determination as to whether a credit event has
occurred is made by the relevant International Swaps and Deriva-
tives Association (ISDA) determination committees (comprised of
various ISDA member firms) based on the terms of the CDS and
the facts and circumstances surrounding the event.
Exposure to emerging market countries
The “Emerging markets net exposure by major geographical
region and product type” table on the following page shows the
five largest emerging market country exposures in each major
geographical area by product type as of 31 December 2016 com-
pared with 31 December 2015. Based on the sovereign rating
categories, as of 31 December 2016, 83% of our emerging mar-
ket country exposure was rated investment grade, unchanged
from 31 December 2015.
Our direct net exposure to China was CHF 5.1 billion, down
CHF 1.5 billion from the prior year due mainly to reduced trading
inventory associated with our Qualified Foreign Institutional Inves-
tor business. Trading inventory, which is measured at fair value,
continues to account for the majority of our exposure to China.
Emerging markets net exposure1 by internal UBS country rating category
CHF million
Investment grade
Sub-investment grade
Total
31.12.16
31.12.15
13,833
2,787
16,620
14,274
2,906
17,180
1 Net of credit hedges (for banking products and for traded products); net long per issuer (for trading inventory). Total allowances and provisions of CHF 79 million are not deducted (31 December 2015: CHF 91 million).
162
Emerging market net exposures by major geographical region and product type
Banking products
(loans, guarantees, loan
commitments)
Net of hedges1
Traded products
(counterparty risk from derivatives and
securities financing)
after master netting agreements
and net of collateral
Net of hedges
Trading inventory
(securities and potential
benefits / remaining
exposure from derivatives)
Net long per issuer
Total
Net of hedges1
31.12.16
31.12.15
31.12.16
31.12.15
31.12.16
31.12.15
31.12.16
31.12.15
CHF million
Emerging America
Brazil
Mexico
Colombia
El Salvador
Panama
Other
Emerging Asia
China
Hong Kong
South Korea
India
Taiwan
Other
Emerging Europe
Russia
Turkey
Azerbaijan
Croatia
Poland
Other
Middle East and Africa
South Africa
Saudi Arabia
United Arab Emirates
Kuwait
Israel
Other
Total
1,426
968
247
62
31
30
88
1,304
953
168
59
8
117
10,799
12,023
5,141
1,715
1,058
1,047
726
1,111
1,467
532
467
145
77
61
185
2,929
681
577
556
490
225
401
6,603
1,224
1,223
1,223
712
1,038
1,611
697
472
135
66
36
205
2,242
678
399
243
382
172
369
16,620
17,180
493
199
147
49
31
20
48
3,838
868
1,113
348
661
215
632
1,007
181
438
117
67
50
154
1,029
34
124
391
31
61
388
6,367
437
213
111
46
3
63
4,202
1,020
864
554
988
184
593
962
217
409
122
66
28
120
861
79
169
176
16
87
334
6,461
321
263
49
4
0
5
396
363
21
9
1
2
1,676
1,134
394
282
469
251
244
37
106
41
25
28
7
5
1,373
239
453
163
459
49
10
160
163
405
180
199
27
64
29
15
13
2
6
914
240
231
61
365
5
11
3,475
2,508
612
506
52
9
0
10
35
5,285
3,880
320
241
135
267
443
353
311
4
9
4
25
527
408
2
115
3
6,778
1 Not deducted are total allowances and provisions for credit losses of CHF 79 million (31 December 2015: CHF 91 million).
472
377
35
3
4
52
6,687
5,423
196
264
56
330
418
585
451
48
0
6
80
467
359
5
80
24
8,211
163
Risk, treasury and capital management
Risk, treasury and capital management
Risk management and control
Operational risk
Key developments
We and the industry are experiencing elevated levels of opera-
tional risk in a number of areas, most notably operational resil-
ience, conduct, cyber security and financial crime.
Operational resilience remains critical, especially in cyber secu-
rity, as threats continue to evolve and attacks become more pow-
erful. In 2016, the industry observed an increase in fraudulent
payments by means of business e-mail compromise scams, attacks
targeting the global SWIFT payments infrastructure and more
powerful denial-of-service attacks. We therefore continue to
focus on preventive measures and on improving our ability to
recover quickly should a successful attack occur. We implemented
cyber recovery playbooks for the most serious cyberattacks, as
well as conducted regular cyber crisis exercises up to Group Exec-
utive Board and Board of Directors level. We also continued to
extend our third-party vendor controls and develop our overall
business continuity framework, including vendor dependencies.
Achieving fair outcomes for our clients, safeguarding market
integrity and maintaining the highest standards of employee con-
duct are of critical importance to the firm. Management of con-
duct risks is an integral part of our operational risk framework.
Conduct-related management information is reviewed at busi-
ness and regional governance level, providing metrics on employee
conduct, clients and markets, with employee conduct being a
central consideration in the annual compensation process.
Suitability risk, product selection, cross-divisional service offer-
ings, quality of advice and price transparency also remain areas of
heightened focus for UBS and for the industry as a whole, as low
interest rates and major legislative change programs, such as the
Markets in Financial Instruments Directive II (MiFID II) in the EU,
continue. Our suitability, product and conflicts of interest control
frameworks are continuously monitored to ensure adherence to
applicable laws and regulatory expectations.
Financial crime, including money laundering, terrorist financ-
ing, sanctions violations, fraud, bribery and corruption, continues
to present risks, as technological innovation and geopolitical
developments increase complexity and heightened regulatory
attention persists. An effective financial crime prevention pro-
gram remains essential for the firm. Money laundering and finan-
cial fraud techniques are becoming increasingly sophisticated,
while geopolitical volatility makes the sanctions landscape more
complex. We continue to invest heavily in our detection capabili-
ties and core systems as part of our financial crime prevention
program. Cross-border risk remains an area of regulatory atten-
tion for global financial institutions, with a strong focus on fiscal
transparency and increased legislation, such as the automatic
exchange of information and, potentially, MiFID II in the EU. We
continue to adapt our cross-border control framework to adhere
to the regulatory expectations and facilitate compliant client-
driven cross-border business.
We have completed the program of remediation work to
strengthen our front-office processes and controls within the FX
business. This is designed to meet the specific commitments made
to the US, UK and Swiss authorities and regulators, as part of the
resolution of the FX matter. As the overall regulatory environment
continues to undergo major change with the introduction of new
regulation, international collaboration among regulators, and
increased focus on individual liability and industry operating mod-
els, it is important that we maintain strong relationships with our
industry’s regulatory bodies and demonstrate observable progress
in achieving and sustaining corrective actions.
➔ Refer to the “Risk factors” section of this report for more
information
➔ Refer to “Note 20 Provisions and contingent liabilities” in the
“Consolidated financial statements” section of this report for
more information on litigation, regulatory and similar matters
164
Operational risk framework
Operational risk is an inherent part of our business. Losses can
result from inadequate or flawed internal processes, decisions and
systems, or from external events. We provide a Group-wide
framework that supports identifying, assessing and mitigating
material operational risks and their potential concentrations, to
achieve a suitable balance between risk and return. The divisional
Presidents and the Corporate Center function heads are ulti-
mately accountable for the effectiveness of operational risk man-
agement and for implementing the operational risk framework.
Management in all functions is responsible for ensuring a robust
operational risk management environment, including establishing
and maintaining robust internal controls, effective supervision
and a strong risk culture. In 2016, we initiated work to simplify
our operational risk framework, reduce the administrative burden
and better embed it as a key tool used by the business to manage
its risks day-to-day. Through these efforts, we are making a
greater use of operating limits to confirm that risks remain within
the appetite.
Compliance and Operational Risk Control (C&ORC) provides
an independent and objective view of the adequacy of opera-
tional risk management across the Group, and is responsible for
ensuring that all our operational risks, including compliance and
conduct risk, are understood, owned and managed to the firm’s
risk appetite. C&ORC is governed by the C&ORC Management
Committee, which is chaired by the Global Head of Compliance &
Operational Risk Control, who reports to the Group Chief Risk
Officer and is a member of the Risk Executive Committee.
The operational risk framework establishes general require-
ments for managing and controlling operational risks, including
compliance and conduct risk at UBS. It is built on the following
pillars:
– classifying inherent risks through the operational risk taxon-
omy
– assessing the design and operating effectiveness of controls
through the internal control assessment process
– assessing residual risk through the operational and business
risk assessment processes with remediation to address identi-
fied deficiencies that are outside accepted levels of residual risk
– identifying excessive levels of operational risk through the
operational risk appetite framework, with actions initiated to
return to accepted levels of risk
The operational risk taxonomy provides a clear and logical clas-
sification of our inherent operational risks, across all divisions.
Throughout the organizational hierarchy, a level of risk tolerance
must be agreed for each of the taxonomy categories, together
with a minimum set of internal controls and associated perfor-
mance thresholds considered necessary to keep risk exposure
within acceptable levels.
All functions within our firm are required to periodically assess
internal controls whereby they evaluate and evidence the design
and operating effectiveness of their key controls. This also forms
the basis for the assessment and testing of the controls which
oversee financial reporting as required by the Sarbanes-Oxley Act,
section 404 (SOX 404). The framework facilitates the identifica-
tion of SOX 404-relevant controls for independent testing, func-
tional assessments, management affirmation and, where neces-
sary, remediation tracking. We employ a consistent global
framework to assess the aggregated impact of control deficien-
cies and the adequacy of remediation efforts.
The UBS risk assessment approach covers all business activities
and internal as well as external factors posing a threat to UBS
Group. Aggregated with any weaknesses in the control environ-
ment, the risk assessment articulates the current operational risk
exposure against agreed risk tolerance levels.
Significant control deficiencies that surface during the internal
control and risk assessment processes must be reported in the
operational risk inventory, and sustainable remediation must be
defined and executed. All significant issues are assigned to own-
ers at the senior management level and must be reflected in the
respective manager’s annual performance measurement and
management objectives. To assist with prioritizing all known oper-
ational risk issues, irrespective of origin, a common rating meth-
odology is adopted by all internal control functions and both
internal and external audit. Group Internal Audit conducts an
issue assurance process after a risk issue has been closed to main-
tain rigorous management discipline in the sustainable mitigation
and control of operational risk issues.
Operational risk appetite is measured against agreed appetite
statements so that the firm knows whether it is operating within
acceptable levels of operational risk exposure.
Responsibility for the front-to-back control environment and
risk management is held by the Chief Operating Officers and sup-
ported by our transparent reporting. Risk and behaviors remain
embedded in our performance and compensation considerations,
and as a firm we continue to deliver behavioral initiatives such as
the “Principles of Good Supervision,” and mandatory compliance
and risk training.
165
Risk, treasury and capital management
Risk, treasury and capital management
Risk management and control
Advanced measurement approach model
The operational risk framework detailed above is aligned with and
underpins the calculation of regulatory capital, which in turn
allows us to quantify operational risk and to define effective man-
agement incentives.
We measure operational risk exposure and calculate opera-
tional risk regulatory capital by using the advanced measurement
approach (AMA) in accordance with FINMA requirements.
For regulated subsidiaries, the basic indicator or standardized
approaches are adopted in agreement with local regulators. For
certain UBS entities, the Group AMA methodology is leveraged to
meet local regulatory requirements. An entity-specific AMA model
has been implemented for UBS Switzerland AG, while the Group
AMA model is leveraged for UBS Limited, supporting the local
Internal Capital Adequacy Assessment Process, and for UBS Bank
USA’s Dodd-Frank Act stress tests submissions. In 2015, we sig-
nificantly redeveloped the Group AMA model design, methodol-
ogy and calibration. The revised AMA has been used for opera-
tional risk regulatory capital reporting starting in the first quarter
of 2016. AMA changes covered the overall model design, estab-
lishing a robust data-driven (i.e., base) model calibration, the use
and structuring of qualitative information, and the inclusion of
hypothetical stress litigation assessments as a direct feed into the
model.
Currently, the model includes 15 AMA Units of Measures
(UoMs), all aligned with our operational risk taxonomy. For each
of the model’s UoMs, a frequency and severity parameter is cali-
brated. The modeled distribution functions for both frequency
and severity are then leveraged to generate the annual loss distri-
bution. The resulting 99.9% quantile of the overall annual opera-
tional risk loss distribution across all UoMs determines the required
regulatory capital. Currently, we do not reflect mitigation through
insurance or any other risk transfer mechanism in our AMA
model.
A key assumption when calibrating the base or data-driven fre-
quency and severity distributions is that historical loss patterns
and exposures form a reasonable proxy for future events. How-
ever, it is important to note that our approach not only models
historical internal losses, but also includes external industry losses.
A statistical mechanism, introduced as part of the revised AMA
model, ensures that only those industry losses which are fairly
consistent with the internal UBS loss profile are leveraged for the
modeling to obtain plausible model-driven estimates.
To account for fast changing external developments encom-
passing new regulations, geopolitical change, volatile market and
economic conditions, as well as internal factors like our evolving
business strategy and internal control framework enhancements,
the modeling of historical internal and external losses, the base
calibration, is further enriched to more effectively forecast poten-
tial future losses. To refine the loss forecast, qualitative informa-
tion on both the external business environment and the internal
control framework, is summarized and an overall rating is deter-
mined to structure and facilitate the Subject Matter Expert (SME)
inputs. The purpose of the SME reviews is to account for impor-
tant qualitative elements in calibrating the AMA model, but also
to consider expert knowledge and insights which the SMEs can
provide into the calibration process.
To ensure risk-sensitivity, our model has to be regularly recali-
brated. Therefore, the SME reviews are annual processes occur-
ring in the third and fourth quarter of each year, and encompass
all UoMs. Change recommendations are presented to FINMA for
approval and implemented for the first quarter disclosures of the
subsequent year. In addition, a high-level semiannual review
accounts for any material developments between annual calibra-
tions to be reflected in the model outputs. Following regulatory
approval, these changes become effective for the third quarter
disclosures.
In the third quarter of 2016, we revised our methodology for
the operational risk RWA allocation to business divisions and Cor-
porate Center units. In addition to considering historical opera-
tional risk loss contributions, the revised methodology takes into
account the relative size of the business divisions and Corporate
Center units and other operational risk indicators.
166
AMA model confirmation
The Group AMA model is subject to an annual quantitative and
qualitative review so that model parameters are plausible and
reflect the developing operational risk profile of the firm. This
review is independently verified by Model Risk Management and
Control and supplemented with additional sensitivity and bench-
marking analysis.
AMA future developments
In March 2016, the Basel Committee on Banking Supervision
issued a consultation document that proposed replacing the AMA
with a standardized measurement approach. UBS participated in
the respective consultation process and continues to closely mon-
itor the developments.
➔ Refer to the “Capital management” section of this report for
more information on the development of risk-weighted assets
for operational risk
➔ Refer to “Risk measurement” in this section for more informa-
tion on our approach to model confirmation procedures
➔ Refer to the “Regulatory and legal developments” and “Risk
factors” sections of this report for more information
(cid:35)(cid:47)(cid:35)(cid:2)(cid:79)(cid:81)(cid:70)(cid:71)(cid:78)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:81)(cid:80)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:82)(cid:87)(cid:86)(cid:85)
(cid:36)(cid:81)(cid:70)(cid:91)(cid:2)(cid:81)(cid:72)(cid:2)
(cid:70)(cid:75)(cid:85)(cid:86)(cid:84)(cid:75)(cid:68)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:78)(cid:81)(cid:85)(cid:85)(cid:71)(cid:85)
(cid:52)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:81)(cid:84)(cid:91)
(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)
(cid:53)(cid:69)(cid:71)(cid:80)(cid:67)(cid:84)(cid:75)(cid:81)
(cid:67)(cid:80)(cid:67)(cid:78)(cid:91)(cid:85)(cid:75)(cid:85)
(cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)
(cid:71)(cid:90)(cid:86)(cid:84)(cid:71)(cid:79)(cid:71)(cid:2)
(cid:78)(cid:81)(cid:85)(cid:85)(cid:71)(cid:85)
(cid:36)(cid:39)(cid:43)(cid:37)(cid:40)(cid:19)
(cid:39)(cid:90)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)
(cid:75)(cid:80)(cid:70)(cid:87)(cid:85)(cid:86)(cid:84)(cid:91)(cid:2)
(cid:78)(cid:81)(cid:85)(cid:85)(cid:71)(cid:85)
(cid:54)(cid:67)(cid:75)(cid:78)(cid:2)(cid:81)(cid:72)(cid:2)
(cid:70)(cid:75)(cid:85)(cid:86)(cid:84)(cid:75)(cid:68)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)
(cid:19)(cid:2)(cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:71)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:2)(cid:72)(cid:67)(cid:69)(cid:86)(cid:81)(cid:84)(cid:85)(cid:16)
167
Risk, treasury and capital management Risk, treasury and capital management
Treasury management
Treasury management
Balance sheet, liquidity and funding management
Strategy, objectives and governance
Audited | We manage our balance sheet, liquidity and funding posi-
tions with the overall objective of optimizing the value of our
business franchise across a broad range of market conditions and
in consideration of current and future regulatory constraints. We
employ a number of measures to monitor these positions under
normal and stressed conditions. In particular, we use stress sce-
narios to apply behavioral adjustments to our balance sheet and
calibrate the results from these internal stress models with exter-
nal measures, primarily the liquidity coverage ratio (LCR) and the
net stable funding ratio (NSFR). Our liquidity and funding strategy
is proposed by Group Treasury, approved by the Group Asset and
Liability Management Committee (Group ALCO), which is a com-
mittee of the Group Executive Board, and is overseen by the Risk
Committee of the Board of Directors (BoD).
This section provides more detailed information on regulatory
requirements, our governance structure, our balance sheet,
liquidity and funding management, including our sources of
liquidity and funding, and our contingency planning and stress
testing. The balances disclosed in this section represent year-end
positions, unless indicated otherwise. Intra-period balances fluc-
tuate in the ordinary course of business and may differ from year-
end positions.
Group Treasury monitors and oversees the implementation and
execution of our liquidity and funding strategy and is responsible
for adherence to policies, limits and targets. Group Treasury
reports on the Group’s overall liquidity and funding position,
including funding status and concentration risks, at least monthly
to the Group ALCO and the Risk Committee of the BoD. This
enables close control of both our cash and collateral, including
our high-quality liquid assets (HQLA), and centralizes the Group’s
general access to wholesale cash markets in Corporate Center –
Group Asset and Liability Management (Group ALM). In addition,
should a crisis require contingency funding measures to be
invoked, Group Treasury is responsible for coordinating liquidity
generation with representatives of the relevant business areas.
Audited | Liquidity and funding limits and targets are set at a
Group and business division level, and are reviewed and recon-
firmed at least once a year by the BoD, the Group ALCO, the
Group Chief Financial Officer, the Group Treasurer and the busi-
ness divisions, taking into consideration current and projected
business strategy and risk tolerance. The principles underlying our
limit and target framework are designed to maximize and sustain
the value of our business franchise and maintain an appropriate
balance in the asset and liability structure. Structural limits and
targets focus on the structure and composition of the balance
sheet, while supplementary limits and targets are designed to
drive the utilization, diversification and allocation of funding
resources. To complement and support this framework, Group
Treasury monitors the markets with a dashboard of early warning
indicators reflecting the current liquidity situation. The liquidity
status indicators are used at Group level to assess both the overall
global and regional situations for potential threats. Treasury Risk
Control provides independent oversight over liquidity and funding
risks.
➔ Refer to the “Corporate governance” section of this report for
more information
➔ Refer to the “Risk management and control” section of this
report for more information
168
Assets and liquidity management
Lending assets decreased by CHF 4 billion, mainly reflecting
lower Lombard lending balances in Wealth Management.
Audited | Our liquidity risk management aims to maintain a sound
liquidity position to meet all our liabilities when due and to pro-
vide adequate time and financial flexibility to respond to a firm-
specific liquidity crisis in a generally stressed market environment,
without incurring unacceptable losses or risking sustained dam-
age to our various businesses.
These decreases were offset by a CHF 22 billion increase in
financial assets designated at fair value, available for sale and held
to maturity and a CHF 16 billion increase in cash and balances
with central banks, largely in Group ALM. Other assets increased
by CHF 7 billion, mainly due to the aforementioned reclassifica-
tion of trading portfolio assets.
Balance sheet assets – Group
As of 31 December 2016, balance sheet assets totaled CHF 935
billion, a decrease of CHF 8 billion from 31 December 2015,
mainly due to reductions in trading portfolio and collateral trading
assets, mostly offset by a net increase in financial assets desig-
nated at fair value, available for sale and held to maturity and an
increase in cash and balances with central banks. Total assets
excluding positive replacement values (PRVs) totaled CHF 777 bil-
lion as of 31 December 2016, an increase of CHF 6 billion when
excluding currency effects.
Trading portfolio assets decreased by CHF 27 billion, primarily
in our Equities business within the Investment Bank, mainly
reflecting effective resource management and a reduction in cli-
ent activity. In addition, CHF 5 billion of trading portfolio assets
were reclassified to other assets upon agreement to sell a certain
business in Wealth Management. This sale is currently expected to
close in the first half of 2017. Collateral trading assets decreased
by CHF 12 billion, primarily in Group ALM.
PRVs decreased by CHF 9 billion, primarily resulting from a CHF
22 billion decrease in Corporate Center – Non-core and Legacy
Portfolio, mainly in interest rate contracts, partly offset by a CHF
13 billion increase in the Investment Bank, largely reflecting fair
value changes resulting from currency movements.
➔ Refer to the “Consolidated financial statements” section of this
report for more information
Balance sheet assets – Investment Bank
Investment Bank total assets decreased by CHF 11 billion to CHF
242 billion, and total assets excluding PRVs decreased by CHF 24
billion, primarily due to a CHF 17 billion reduction in trading port-
folio assets, primarily in our Equities business, reflecting effective
resource management and a reduction in client activity.
Balance sheet assets – Non-core and Legacy Portfolio
Non-core and Legacy Portfolio total assets decreased by CHF 26
billion to CHF 68 billion, mainly due to a CHF 22 billion reduction
in PRVs, primarily reflecting ongoing reduction activity including
negotiated bilateral settlements, third-party novations, including
transfers to central clearing houses, and agreements to net down
trades with other dealer counterparties, partly offset by fair value
increases resulting from increases in interest rates.
Total assets excluding PRVs decreased by CHF 4 billion to CHF
12 billion, mainly due to a reduction in cash collateral receivables
on derivative instruments.
IFRS balance sheet assets
CHF billion
Cash and balances with central banks
Lending1
Collateral trading2
Trading portfolio
Positive replacement values
Financial assets at FV / AFS / HTM3
Other assets4
Total IFRS assets
As of
% change from
31.12.16
31.12.15
31.12.15
107.8
319.5
81.4
96.6
158.4
90.3
81.1
935.0
91.3
323.9
93.5
124.0
167.4
68.7
74.0
942.8
18
(1)
(13)
(22)
(5)
31
10
(1)
1 Consists of amounts due from banks and loans. 2 Consists of reverse repurchase agreements and cash collateral on securities borrowed. 3 Consists of financial assets designated at fair value, financial assets
available for sale and financial assets held to maturity. 4 Includes cash collateral receivables on derivative instruments and prime brokerage receivables.
169
Risk, treasury and capital management Risk, treasury and capital management
Treasury management
Balance sheet assets – Group ALM
Group ALM total assets increased by CHF 30 billion to CHF 267
billion, reflecting a CHF 23 billion net increase in financial assets
designated at fair value, available for sale and held to maturity, as
well as an CHF 18 billion increase in cash and balances with cen-
tral banks that primarily occurred toward the end of the year.
These increases mainly reflected liquidity requirements applicable
to our US intermediate holding company and UBS Europe SE and
also resulted from an increase in net funds transferred to Group
ALM by the business divisions.
Balance sheet assets – Other business divisions
Wealth Management and Personal & Corporate Banking total
assets decreased by CHF 4 billion and CHF 1 billion to CHF 116
billion and CHF 140 billion, respectively, mainly reflecting lower
lending balances. Wealth Management Americas total assets
increased by CHF 5 billion to CHF 66 billion, primarily due to
increased lending balances and currency effects. Asset Manage-
ment balance sheets were broadly unchanged at CHF 12 billion.
Corporate Center – Services total assets were broadly unchanged
at CHF 24 billion.
High-quality liquid assets
HQLA are low-risk unencumbered assets under the control of
Group Treasury, that are easily and immediately convertible into
cash at little or no loss of value in order to meet liquidity needs in
a thirty-calendar-day liquidity stress scenario. Our HQLA primarily
consist of assets that qualify as Level 1 in the LCR framework,
including cash, central bank reserves and government bonds.
Group HQLA are held by UBS AG and its subsidiaries and may
include amounts that are available to meet funding and collateral
needs in certain jurisdictions, but are not readily available for use
by the Group as a whole. These limitations are typically the result
of local regulatory requirements, including local LCR and large
exposure requirements. Funds that are effectively restricted are
excluded from the calculation of Group HQLA to the extent they
exceed the outflow assumptions for the subsidiary that holds the
relevant HQLA. On this basis, CHF 29 billion of assets were
excluded from our 3-month average Group HQLA for the fourth
quarter of 2016. Amounts held in excess of local liquidity require-
ments which are not subject to other restrictions are generally
available for transfer within the Group.
➔ Refer to the “Capital management” section of this report for
more information on regulatory capital and capital ratios of our
significant regulated subsidiaries
The total weighted liquidity value of HQLA decreased by CHF
12 billion to CHF 196 billion. This decline was primarily due to
additional liquidity requirements applicable to our US intermedi-
ate holding company and, to a lesser extent, UBS Europe SE,
which resulted in an increase in assets that are not freely available
to other entities within the Group and are therefore not fully
HQLA-eligible at a Group level, as well as due to a reduction in
off-balance sheet securities. These reductions were partly offset
by the aforementioned on-balance sheet increases in financial
assets designated at fair value, available for sale and held to
maturity, and higher cash and balances with central banks toward
the end of the year.
Liquidity coverage ratio
The LCR measures the short-term resilience of a bank’s liquidity
profile by comparing whether sufficient HQLA are available to sur-
vive expected net cash outflows from a significant liquidity stress
scenario, as defined by the relevant regulator.
The Basel Committee on Banking Supervision (BCBS) standards
require an LCR of at least 100% by 2019, with a phase-in period
that started in 2015. UBS is required to maintain a minimum total
Group LCR of 110% as communicated by the Swiss Financial
Market Supervisory Authority (FINMA), as well as a Swiss franc
LCR of 100%. In addition, both UBS AG and UBS Switzerland AG
are subject to minimum LCR requirements on a standalone basis.
In a period of financial stress, FINMA may allow banks to use their
HQLA and let their LCR temporarily fall below the minimum
threshold.
We monitor the LCR in Swiss francs and in all other significant
currencies in order to manage any currency mismatches between
HQLA and the net expected cash outflows in times of stress.
Our 3-month average LCR for the fourth quarter of 2016 was
132% compared with 124% in the fourth quarter of 2015, mainly
due to a CHF 19 billion reduction in net cash outflows, partly
offset by the aforementioned reduction in HQLA. During 2016,
we aligned the presentation of securities financing transactions
across our business areas and we also enhanced the presentation
of cash flows related to derivative transactions. On a gross basis,
these changes increased cash outflows from secured wholesale
funding and cash inflows from secured lending, and reduced
other cash outflows and other cash inflows. These changes did
not affect net cash outflows or the LCR.
The aforementioned CHF 19 billion reduction in net cash out-
flows was primarily driven by reduced net outflows related to
prime brokerage activity, reflecting effective resource manage-
ment, as well as decreased net outflows related to securities
financing transactions and committed credit and liquidity facili-
ties.
➔ Refer to the Basel III Pillar 3 UBS Group AG 2016 report under
“Pillar 3, SEC filings & other disclosures” at www.ubs.com/
investors for more information on the liquidity coverage ratio
➔ Refer to “Disclosure for legal entities” at www.ubs.com/
investors for more information on the LCR of UBS AG and
UBS Switzerland AG
170
Liquidity coverage ratio
CHF billion, except where indicated
High-quality liquid assets1
Cash balances2
Securities
of which: on-balance sheet3
of which: off-balance sheet
Total high-quality liquid assets4
Cash outflows5
Retail deposits and deposits from small business customers
Unsecured wholesale funding
Secured wholesale funding
Other cash outflows
Total cash outflows
Cash inflows5
Secured lending
Inflows from fully performing exposures
Other cash inflows
Total cash inflows
Liquidity coverage ratio
High-quality liquid assets
Net cash outflows
Liquidity coverage ratio (%)
Average 4Q16
Average 4Q15
102
94
76
18
196
26
109
73
58
266
71
32
15
117
196
148
132
117
91
55
36
208
24
124
39
88
275
53
31
23
107
208
167
124
1 Calculated after the application of haircuts. 2 Includes cash and balances with central banks and other eligible balances as prescribed by FINMA. 3 Includes financial assets designated at fair value, available for
sale and held to maturity and trading portfolio assets. 4 Calculated in accordance with FINMA requirements. 5 Calculated after the application of inflow and outflow rates.
Asset encumbrance
The table on the next page provides a breakdown of on- and off-
balance sheet assets between encumbered assets, unencumbered
assets and assets that cannot be pledged as collateral.
Assets are presented as Encumbered if they have been pledged
as collateral against an existing liability or if they are otherwise not
available for the purpose of securing additional funding. Included
within the latter category are assets protected under client asset
segregation rules, assets held by the Group’s insurance entities to
back related liabilities to policy holders, assets held in certain juris-
dictions to comply with explicit minimum local asset maintenance
requirements and assets held in consolidated bankruptcy remote
entities, such as certain investment funds and other structured
entities.
➔ Refer to “Note 23 Restricted and transferred financial assets” in
the “Consolidated financial statements” section of this report for
more information
Assets that cannot be pledged as collateral represent those
assets that are not encumbered, but by their nature, are not con-
sidered available to secure funding or to meet collateral needs.
These mainly include collateral trading assets, positive replace-
ment values, cash collateral receivables on derivative instruments,
deferred tax assets, goodwill and intangible assets and other
assets.
All other assets are presented as Unencumbered. Assets that
are considered to be readily available to secure funding on a
Group and / or legal entity level are shown separately and consist
of cash and securities readily realizable in the normal course of
business. These include our HQLA and unencumbered positions in
our trading portfolio. Unencumbered assets that are considered
to be available to secure funding on a legal entity level may be
subject to restrictions that limit the total amount of assets that is
available to the Group as a whole. Other unencumbered assets,
which are not considered readily available to secure funding on a
Group and / or legal entity level primarily consist of loans and
amounts due from banks.
171
Risk, treasury and capital management
Risk, treasury and capital management
Treasury management
Asset encumbrance
CHF million
On-balance sheet assets
Cash and balances with central banks
Due from banks
Financial assets designated at fair value
Loans
of which: mortgage loans
Lending
Cash collateral on securities borrowed
Reverse repurchase agreements
Collateral trading
Trading portfolio assets excluding financial assets for
unit-linked investment contracts
of which: government bills / bonds
of which: corporate and municipal bonds
of which: loans
of which: investment fund units
of which: asset-backed securities
of which: mortgage-backed securities
of which: equity instruments
of which: precious metals and other physical commodities
Financial assets for unit-linked investment contracts
Positive replacement values
Financial assets available for sale
Financial assets held to maturity
Cash collateral receivables on derivative instruments
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other assets
Other
776
19,887
19,887
20,663
36,5491
3,965
906
3,191
128
6
28,360
Encumbered
Unencumbered
Assets pledged
as collateral
Assets otherwise
restricted and
not available to
secure funding
Cash and securities
available to secure
funding on a Group
and / or legal entity level
Other realizable
assets
Assets that
cannot be
pledged as
collateral
Total Group
assets (IFRS)
2,625
328
958
3,912
658
658
3,006
804
860
1,343
9,123
247
4,329
5,195
9,525
26,470
37,196
107,765
59,978
59,978
45,859
7,051
5,521
5,164
557
255
23,016
4,550
15,430
9,289
238,321
192,755
10,530
3,349
279,733
142,051
293,612
2,037
2,037
963
8,331
9,295
304,944
303,216
2
1
921
5,747
6,669
15,111
65,588
80,700
107,767
13,156
65,353
306,325
161,938
384,833
15,111
66,246
81,358
87,452
11,820
7,287
2,037
9,698
685
261
51,375
4,550
9,123
158,411
158,411
15,676
9,289
26,664
963
8,331
6,556
13,155
25,436
81,107
935,016
942,819
22,335
6,556
13,155
20,241
62,287
308,069
327,017
Total on-balance sheet assets as of
31 December 2016
Total on-balance sheet assets as of 31 December 2015
57,213
82,635
CHF million
Off-balance sheet assets
Encumbered
Unencumbered
Assets that have
been sold or
repledged as
collateral
Assets otherwise
restricted and
not available to
secure funding
Assets available to
secure funding
on a Group and / or
legal entity level
Other realizable
assets
Assets that
cannot be
pledged as
collateral
Total assets
received which
can be sold or
repledged
Total off-balance sheet assets as of
31 December 2016
Total off-balance sheet assets as of 31 December 2015
316,323
286,757
12,632
10,432
Total on- and off-balance sheet assets as of
31 December 2016
of which: high-quality liquid assets
373,536
39,102
1 Includes CHF 30,260 million of assets pledged as collateral that may be sold or repledged by counterparties.
96,833
99,300
335,153
200,226
3,540
5,022
429,327
401,511
308,484
308,069
172
Assets available to secure funding on a Group and / or legal entity level by currency
CHF million
Swiss franc
US dollar
Euro
Other
Total
31.12.16
71,915
132,379
54,867
75,993
335,153
31.12.15
53,458
122,488
42,743
73,367
292,056
Stress testing
Audited | We perform stress testing to determine the optimal asset
and liability structure that allows us to maintain an appropriately
balanced liquidity and funding position under various scenarios.
Liquidity crisis scenario analysis and contingency funding planning
support the liquidity management process and ensure that imme-
diate corrective measures to absorb potential sudden liquidity
shortfalls can be put into effect.
We model our liquidity exposures under two main potential
scenarios that encompass stressed and acute market conditions,
including considering the possible impact on our access to mar-
kets from stress events affecting all parts of our business. These
models and their assumptions are reviewed regularly to incorpo-
rate the latest business and market developments. We continu-
ously refine the assumptions used to maintain a robust, action-
able and tested contingency plan.
➔ Refer to “Risk measurement” in the “Risk management
and control” section of this report for more information on
stress testing
Stressed scenario
As a liquidity crisis could have a myriad of causes, the stressed
scenario encompasses potential stress effects across all markets,
currencies and products but it is typically not firm-specific. In addi-
tion to the loss of the ability to replace maturing wholesale fund-
ing, it assumes a gradual decline of otherwise stable client depos-
its and liquidity outflows corresponding to a two-notch downgrade
in our long-term credit rating and a corresponding downgrade in
our short-term rating.
We use a cash capital model that incorporates the stress sce-
nario and measures the amount of long-term funding available to
fund illiquid assets. The illiquid portion of an asset is the differ-
ence, i.e., the haircut, between the carrying value of the asset and
its effective cash value when used as collateral in a secured fund-
ing transaction. Long-term funding used as cash capital to sup-
port illiquid assets is comprised of unsecured funding with a
remaining time to maturity of at least one year, shareholders’
equity and core deposits, which are the portion of our customer
deposits that are deemed to have a behavioral maturity of at least
one year.
Acute scenario
The acute scenario represents an extreme stress event that com-
bines a firm-specific crisis with market disruption. This scenario
assumes substantial outflows on otherwise stable client deposits,
mainly due on demand, inability to renew or replace maturing
unsecured wholesale funding, unusually large drawdowns on
loan commitments, reduced capacity to generate liquidity from
trading assets, liquidity outflows corresponding to a three-notch
downgrade in our long-term credit rating and a corresponding
downgrade in our short-term rating, triggering contractual obli-
gations to unwind derivative positions or to deliver additional col-
lateral, and additional collateral requirements due to adverse
movements in the market values of derivatives. It is run both daily
and monthly, with the former used to project potential cash out-
flows over a one-month time horizon for day-to-day risk manage-
ment, while the latter involves a more detailed assessment of
asset and liability cash flows.
Contingency funding
Audited | Our Group contingency funding plan is an integral part of
our global crisis management concept, which covers various types
of crisis events. This contingency funding plan contains an assess-
ment of contingent funding sources in a stressed environment,
liquidity status indicators and metrics, and contingency proce-
dures. Our funding diversification and global scope help protect
our liquidity position in the event of a crisis. We regularly assess
and test all material, known and expected cash flows, as well as
the level and availability of high-grade collateral that could be
used to raise additional funding if required. Our contingent fund-
ing sources include our HQLA portfolio, available and unutilized
liquidity facilities at several major central banks, and contingent
reductions of liquid trading portfolio assets.
173
Risk, treasury and capital management Risk, treasury and capital management
Treasury management
Liabilities and funding management
Audited | Group Treasury regularly monitors our funding status,
including concentration risks, to ensure we maintain a well-bal-
anced and diversified liability structure. Our funding risk manage-
ment aims for the optimal asset and liability structure to finance
our businesses reliably and cost-efficiently, and our funding activi-
ties are planned by analyzing the overall liquidity and funding pro-
file of our balance sheet, taking into account the amount of stable
funding that would be needed to support ongoing business activ-
ities through periods of difficult market conditions.
Our business activities generate asset and liability portfolios
that are highly diversified with respect to market, product, tenor
and currency. This reduces our exposure to individual funding
sources, provides a broad range of investment opportunities and
reduces liquidity risk.
Our wealth management businesses and Personal & Corporate
Banking provide significant, cost-efficient and reliable sources of
funding. These include core deposits and our portfolio of Swiss
residential mortgages, a portion of which is pledged as collateral to
generate long-term funding through Swiss Pfandbriefe. In addition,
we have several short-, medium- and long-term funding programs
under which we issue senior unsecured debt and structured notes,
as well as short-term secured debt. These programs allow institu-
tional and private investors in Europe, the US and Asia Pacific to
customize their investments in UBS’s debt. Collectively, these broad
product offerings and funding sources, together with the global
scope of our business activities, support our funding stability.
Balance sheet liabilities
Total liabilities decreased by CHF 5 billion to CHF 881 billion as of
31 December 2016. Other liabilities decreased by CHF 16 billion,
mainly due to a reduction in prime brokerage payables in our
Equities business within the Investment Bank. Negative replace-
ment values decreased by CHF 9 billion, in line with the aforemen-
tioned decreases in PRVs. Collateral trading and trading portfolio
liabilities decreased by CHF 8 billion and CHF 6 billion, respec-
tively, primarily reflecting client-driven decreases in our Equities
business.
Customer deposits increased by CHF 33 billion, primarily in our
wealth management businesses. As of 31 December 2016, cus-
tomer deposits represented 63% of our funding sources and our
ratio of customer deposits to outstanding loan balances was
138% (31 December 2015: 125%). Short-term borrowings,
which represented 5% of our funding sources, increased by CHF
4 billion, mainly reflecting net issuances of certificates of deposit.
IFRS balance sheet liabilities and equity
CHF billion
Short-term borrowings1
Collateral trading2
Trading portfolio
Negative replacement values
Due to customers
Long-term debt issued3
Other liabilities4
Total IFRS liabilities
Share capital
Share premium
Treasury shares
Retained earnings
Other comprehensive income5
Total IFRS equity attributable to shareholders
IFRS equity attributable to non-controlling interests
Total IFRS equity
Total IFRS liabilities and equity
As of
% change from
31.12.16
31.12.15
31.12.15
36.8
9.4
22.8
153.8
423.7
132.5
101.7
880.7
0.4
28.3
(2.2)
31.7
(4.5)
53.6
0.7
54.3
33.1
17.7
29.1
162.4
390.2
134.9
118.1
885.5
0.4
31.2
(1.7)
29.5
(4.0)
55.3
2.0
57.3
935.0
942.8
11
(47)
(22)
(5)
9
(2)
(14)
(1)
0
(9)
33
8
11
(3)
(66)
(5)
(1)
1 Consists of short-term debt issued and amounts due to banks. 2 Consists of repurchase agreements and cash collateral on securities lent. 3 Consists of long-term debt issued held at amortized cost and financial
liabilities designated at fair value. The classification of debt issued into short-term and long-term does not consider any early redemption features. 4 Includes cash collateral payables on derivative instruments and prime
brokerage payables. 5 Excludes defined benefit plans and own credit that are recorded directly in Retained earnings.
174
Long-term debt issued, which represented 20% of our funding
sources as of 31 December 2016, decreased by CHF 2 billion,
mainly due to an CHF 8 billion reduction in financial liabilities des-
ignated at fair value, primarily reflecting trade terminations and
maturities in our Foreign Exchange, Rates and Credit businesses
within the Investment Bank. Long-term debt held at amortized
cost increased by CHF 6 billion, mainly driven by the issuance of
CHF 12 billion equivalent of US dollar-, euro- and Swiss franc-
denominated senior unsecured debt that contributes to our total
loss-absorbing capacity (TLAC) and CHF 3 billion equivalent of
high-trigger loss-absorbing additional tier 1 capital instruments,
partly offset by the maturity or early redemption of senior unse-
cured debt, subordinated debt instruments and covered bonds
totaling CHF 7 billion.
➔ Refer to the document “UBS Group AG (consolidated) capital
instruments and TLAC-eligible senior unsecured debt” under
“Bondholder information” at www.ubs.com/investors for more
information
➔ Refer to the “Consolidated financial statements” section of this
report for more information
(cid:37)(cid:81)(cid:80)(cid:86)(cid:84)(cid:67)(cid:69)(cid:86)(cid:87)(cid:67)(cid:78)(cid:2)(cid:79)(cid:67)(cid:86)(cid:87)(cid:84)(cid:75)(cid:86)(cid:91)(cid:2)(cid:82)(cid:84)(cid:81)(cid:386)(cid:78)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:81)(cid:87)(cid:86)(cid:85)(cid:86)(cid:67)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:78)(cid:81)(cid:80)(cid:73)(cid:15)(cid:86)(cid:71)(cid:84)(cid:79)(cid:2)
(cid:70)(cid:71)(cid:68)(cid:86)(cid:2)(cid:74)(cid:71)(cid:78)(cid:70)(cid:2)(cid:67)(cid:86)(cid:2)(cid:67)(cid:79)(cid:81)(cid:84)(cid:86)(cid:75)(cid:92)(cid:71)(cid:70)(cid:2)(cid:69)(cid:81)(cid:85)(cid:86)
(cid:37)(cid:42)(cid:40)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:14)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70)
(cid:35)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:24)
(cid:21)(cid:20)
(cid:20)(cid:22)
(cid:19)(cid:24)
(cid:2)(cid:2)(cid:26)
(cid:2)(cid:2)(cid:18)
(cid:20)(cid:18)(cid:19)(cid:25)
(cid:20)(cid:18)(cid:19)(cid:26)
(cid:20)(cid:18)(cid:19)(cid:27)
(cid:20)(cid:18)(cid:20)(cid:18)(cid:115)(cid:20)(cid:18)(cid:20)(cid:19) (cid:20)(cid:18)(cid:20)(cid:20)(cid:115)(cid:20)(cid:18)(cid:20)(cid:24) (cid:20)(cid:18)(cid:20)(cid:25)(cid:115)(cid:20)(cid:18)(cid:21)(cid:24)
(cid:67)(cid:72)(cid:86)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:21)(cid:24)
(cid:53)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)
(cid:53)(cid:87)(cid:68)(cid:81)(cid:84)(cid:70)(cid:75)(cid:80)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)
(cid:59)(cid:71)(cid:67)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:79)(cid:67)(cid:86)(cid:87)(cid:84)(cid:75)(cid:86)(cid:91)
(cid:19)(cid:2)(cid:39)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:71)(cid:70)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)(cid:16)
Funding by product and currency
CHF billion
As a percentage of total funding sources (%)
All currencies
All currencies
CHF
EUR
USD
Other
31.12.16 31.12.15
31.12.16 31.12.15
31.12.16 31.12.15
31.12.16 31.12.15
31.12.16 31.12.15
31.12.16
31.12.15
Short-term borrowings
of which: due to banks
of which: short-term debt issued1
Collateral trading
of which: securities lending
of which: repurchase agreements
Cash collateral payables on
derivative instruments
Due to customers
of which: demand deposits
of which: retail savings / deposits
of which: time deposits
of which: fiduciary deposits
Long-term debt issued2
Prime brokerage payables
Total
36.8
10.6
26.2
9.4
2.8
6.6
35.5
423.7
194.0
170.7
52.7
6.2
132.5
32.0
669.9
33.1
11.8
21.2
17.7
8.0
9.7
38.3
390.2
172.8
161.8
49.4
6.1
134.9
45.3
659.4
5.5
1.6
3.9
1.4
0.4
1.0
5.3
63.2
29.0
25.5
7.9
0.9
19.8
4.8
5.0
1.8
3.2
2.7
1.2
1.5
5.8
59.2
26.2
24.5
7.5
0.9
20.5
6.9
0.6
0.5
0.1
0.0
0.0
0.0
0.2
24.4
8.9
14.1
1.4
0.1
1.9
0.1
0.5
0.4
0.1
0.0
0.0
0.0
0.2
23.5
7.8
13.8
1.8
0.1
2.3
0.1
0.9
0.1
0.8
0.3
0.0
0.3
1.8
7.7
6.6
0.8
0.2
0.1
4.9
0.6
0.5
0.1
0.4
0.8
0.2
0.6
2.1
6.2
5.2
0.8
0.1
0.1
5.7
1.0
100.0
100.0
27.2
26.6
16.2
16.3
2.9
0.7
2.2
1.0
0.4
0.6
2.3
25.7
9.6
10.6
4.9
0.6
11.6
2.8
46.2
3.1
0.7
2.4
1.4
0.7
0.7
2.7
24.0
9.7
9.9
3.8
0.6
10.8
4.4
46.5
1.1
0.3
0.8
0.1
0.0
0.1
1.0
5.4
3.9
0.0
1.4
0.1
1.3
1.3
0.8
0.5
0.4
0.4
0.2
0.2
0.8
5.5
3.5
0.0
1.8
0.1
1.7
1.3
10.3
10.6
1 Short-term debt issued is comprised of certificates of deposit, commercial paper, acceptances and promissory notes, and other money market paper. 2 Long-term debt issued also includes debt with a remaining time
to maturity of less than one year. The classification of debt issued into short-term and long-term does not consider any early redemption features.
175
(cid:21)(cid:20)
(cid:20)(cid:22)
(cid:19)(cid:24)
(cid:26)
(cid:18)
Risk, treasury and capital management Risk, treasury and capital management
Treasury management
(cid:35)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:72)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)
(cid:37)(cid:42)(cid:40)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:14)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70)
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(cid:19)(cid:27)(cid:22)
(cid:22)(cid:20)(cid:22)
(cid:19)(cid:25)(cid:19)
(cid:23)(cid:21)
(cid:24)
(cid:23)(cid:23)
(cid:25)(cid:25)
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(cid:124)
Equity
Equity attributable to shareholders decreased by CHF 1,692 mil-
lion to CHF 53,621 million as of 31 December 2016.
Total comprehensive income attributable to shareholders was
CHF 1,817 million, reflecting net profit of CHF 3,204 million and
negative other comprehensive income (OCI) of CHF 1,386 million.
Negative OCI included net losses on defined benefit plans of CHF
824 million, net losses on cash flow hedges of CHF 666 million,
own credit losses of CHF 115 million and negative OCI related to
financial assets available for sale of CHF 73 million, partly offset by
foreign currency translation gains of CHF 292 million.
Share premium decreased by CHF 2,910 million, primarily due
to the distribution of CHF 3,164 million out of the capital contri-
bution reserve and a negative effect of CHF 682 million from the
delivery of treasury shares under share-based compensation plans,
partly offset by an increase of CHF 861 million due to the amorti-
zation of deferred equity compensation awards in the income
statement.
Net treasury share activity decreased equity attributable to
shareholders by CHF 556 million, mainly reflecting the net acquisi-
tion of treasury shares related to employee share-based compen-
sation awards.
➔ Refer to the “Group performance” and “Consolidated financial
statements” sections of this report for more information
Pro forma net stable funding ratio
CHF billion, except where indicated
Available stable funding
Required stable funding
Pro forma net stable funding ratio (%)
176
Net stable funding ratio
The NSFR framework is intended to limit over-reliance on short-
term wholesale funding, to encourage a better assessment of
funding risk across all on- and off-balance sheet items and to
promote funding stability. The NSFR consists of two components:
available stable funding (ASF) and required stable funding (RSF).
ASF is the portion of capital and liabilities expected to be available
over the period of one year. RSF is a measure of the stable funding
requirement of an asset based on its maturity, encumbrance and
other characteristics, as well as the potential for contingent calls
on funding liquidity from off-balance sheet exposures. The BCBS
NSFR regulatory framework requires a ratio of at least 100% from
2018.
We report our estimated pro forma NSFR based on current
guidance from FINMA and will adjust our NSFR reporting accord-
ing to the final implementation of the BCBS NSFR disclosure stan-
dards in Switzerland. The reported NSFR does not consider the
consultation of NSFR regulation in Switzerland that started in
January 2017 and is open for comment until April 2017.
As of 31 December 2016, our estimated pro forma NSFR was
116%, an increase of 11 percentage points from 31 December
2015, primarily reflecting a CHF 16 billion increase in available
stable funding, mainly driven by an increase in unsecured fund-
ing, and a CHF 22 billion reduction in required stable funding,
primarily resulting from decreases in the trading portfolio. The
calculation of our pro forma NSFR includes interpretation and esti-
mates of the effect of the rules, and will be refined as regulatory
interpretations evolve and as new models and associated systems
are enhanced.
31.12.16
31.12.15
442
381
116
426
403
105
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(cid:25)(cid:23)(cid:18)
(cid:23)(cid:18)(cid:18)
(cid:20)(cid:23)(cid:18)
1000
(cid:19)(cid:18)(cid:18)(cid:18)
750
(cid:25)(cid:23)(cid:18)
500
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250
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(cid:18)
0
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(cid:19)(cid:25)(cid:19)
(cid:23)(cid:21)
(cid:24)
(cid:23)(cid:23)
(cid:25)(cid:25)
(cid:19)(cid:18)(cid:20)
(cid:23)(cid:22)
(cid:19)(cid:21)(cid:26)(cid:7)(cid:2)(cid:69)(cid:81)(cid:88)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)
(cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:19)(cid:25)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:85)(cid:87)(cid:84)(cid:82)(cid:78)(cid:87)(cid:85)
(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:78)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:70)(cid:71)(cid:85)(cid:75)(cid:73)(cid:80)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:86)(cid:2)(cid:72)(cid:67)(cid:75)(cid:84)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:142)
(cid:19)(cid:21)(cid:20)
(cid:26)(cid:24)
(cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:10)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:80)(cid:71)(cid:86)(cid:2)(cid:84)(cid:71)(cid:82)(cid:78)(cid:67)(cid:69)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:85)(cid:11)
(cid:19)(cid:2)(cid:46)(cid:81)(cid:80)(cid:73)(cid:15)(cid:86)(cid:71)(cid:84)(cid:79)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:70)(cid:2)(cid:67)(cid:78)(cid:85)(cid:81)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:67)(cid:2)(cid:84)(cid:71)(cid:79)(cid:67)(cid:75)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:75)(cid:79)(cid:71)(cid:2)(cid:86)(cid:81)(cid:2)(cid:79)(cid:67)(cid:86)(cid:87)(cid:84)(cid:75)(cid:86)(cid:91)(cid:2)(cid:81)(cid:72)(cid:2)(cid:78)(cid:71)(cid:85)(cid:85)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(cid:2)(cid:81)(cid:80)(cid:71)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:124)(cid:20)(cid:2)(cid:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:88)(cid:71)(cid:84)(cid:15)(cid:86)(cid:74)(cid:71)(cid:15)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:71)(cid:84)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)(cid:2)(cid:75)(cid:80)(cid:85)(cid:86)(cid:84)(cid:87)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:16)
(cid:35)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)
(cid:46)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)
(cid:124)
Internal funding and funds transfer pricing
We employ an integrated liquidity and funding framework to gov-
ern the liquidity management of all our branches and subsidiaries,
and our major sources of liquidity are channeled through entities
that are fully consolidated. Group ALM meets internal demands
for funding by channeling funds from entities generating surplus
cash to those in need of financing.
Funding costs and benefits are allocated to our business divi-
sions and Non-core and Legacy Portfolio according to our liquidity
and funding risk management framework. Our internal funds
transfer pricing system, which is governed by Group Treasury, is
designed to provide the proper liability structure to support the
assets and planned activities of each business division while mini-
mizing cross-divisional subsidies. The funds transfer pricing mech-
anism aims to allocate funding and liquidity costs to the activities
generating the liquidity and funding risks, and deals with the
movement of funds from those businesses in surplus to those that
have a shortfall. Funding is internally transferred or allocated
among businesses at rates and tenors that reflect each business’s
asset composition, liquidity and reliable external funding. We
regularly review our internal funds transfer pricing mechanisms,
and make enhancements where appropriate to help better
accomplish our liquidity and funding management objectives.
(cid:19)(cid:18)(cid:18)(cid:18)
(cid:25)(cid:23)(cid:18)
Credit ratings
Credit ratings can affect the cost and availability of funding, espe-
cially funding from wholesale unsecured sources. Our credit rat-
ings can also influence the performance of some of our businesses
and the levels of client and counterparty confidence. Rating agen-
cies take into account a range of factors when assessing credit-
worthiness and setting credit ratings. These include the company’s
strategy, its business position and franchise value, stability and
quality of earnings, capital adequacy, risk profile and manage-
ment, liquidity management, diversification of funding sources,
asset quality and corporate governance. Credit ratings reflect the
opinions of the rating agencies and can change at any time.
(cid:20)(cid:23)(cid:18)
(cid:23)(cid:18)(cid:18)
In evaluating our liquidity and funding requirements, we con-
sider the potential impact of a reduction in UBS’s long-term credit
ratings and a corresponding reduction in short-term ratings.
If our credit ratings were to be downgraded, rating trigger
clauses could result in an immediate cash settlement or the need
to deliver additional collateral to counterparties from contractual
obligations related to covered bonds, over-the-counter (OTC)
derivative positions and other obligations. Based on our credit rat-
ings as of 31 December 2016, CHF 1.8 billion, CHF 2.2 billion and
CHF 3.0 billion would have been required for such contractual
obligations in the event of a one-notch, two-notch and three-
notch reduction in long-term credit ratings, respectively. Of these,
the portion related to additional collateral is CHF 1.8 billion, CHF
2.0 billion and CHF 2.7 billion, respectively.
There were a number of rating actions on UBS AG’s and UBS
Group AG’s solicited credit ratings in 2016.
On 11 January 2016, Moody’s Investors Service (Moody’s)
upgraded UBS AG’s long-term senior debt rating to A1 (stable
outlook) from A2. Moody’s rates the TLAC-eligible senior unse-
cured debt guaranteed by UBS Group AG on an unsolicited basis
(issuance out of UBS Group Funding (Jersey) Limited). Moody’s
upgraded its rating for this debt to Baa2 (stable outlook) from
Baa3 on 11 January 2016, and to Baa1 (stable outlook) from Baa2
on 13 December 2016.
On 6 June 2016, Standard & Poor’s upgraded the long-term
counterparty credit rating of UBS AG to A+ (stable outlook) from
A and of UBS Group AG to A– (stable outlook) from BBB+.
On 14 June 2016, Fitch Ratings upgraded UBS AG’s long-term
issuer default rating to A+ (stable outlook) from A, maintaining its
A rating (positive outlook) on UBS Group AG.
On 1 June 2016, Scope Ratings AG upgraded UBS AG’s issuer
credit strength rating to A+ (stable outlook) from A, maintaining
UBS Group AG’s rating at A (stable outlook). On 20 June 2016,
both entities’ ratings were revised to a positive outlook.
➔ Refer to “Liquidity and funding management are critical to our
ongoing performance” in the “Risk factors” section of this report
for more information
Maturity analysis of assets and liabilities
The table on the following page provides an analysis of on- and
off-balance sheet assets and liabilities by residual contractual
maturity as of the balance sheet date. The contractual maturity of
liabilities is based on carrying amounts and the earliest date on
which we could be required to pay. The contractual maturity of
assets is based on carrying amounts and the latest date the asset
will mature. This basis of presentation differs from “Note 25d
Maturity analysis of financial liabilities” in the “Consolidated
financial statements” section of this report, which is presented on
an undiscounted basis, as required by IFRS.
Derivative replacement values and trading portfolio assets and
liabilities are assigned to the column Due within 1 month,
although the respective contractual maturities may extend over
significantly longer periods.
Other financial assets and liabilities with no contractual matu-
rity, such as equity securities, are included in the Perpetual / Not
applicable time bucket. Undated or perpetual instruments are
classified based on the contractual notice period that the counter-
party of the instrument is entitled to give. Where there is no con-
tractual notice period, undated or perpetual contracts are included
in the Perpetual / Not applicable time bucket.
Non-financial assets and liabilities with no contractual maturity
are generally included in the Perpetual / Not applicable time bucket.
Loan commitments are classified on the basis of the earliest
date they can be drawn down.
177
1000
(cid:19)(cid:18)(cid:18)(cid:18)
750
(cid:25)(cid:23)(cid:18)
500
(cid:23)(cid:18)(cid:18)
250
(cid:20)(cid:23)(cid:18)
(cid:18)
0
(cid:18)
Risk, treasury and capital management Risk, treasury and capital management
Treasury management
Maturity analysis of assets and liabilities
CHF billion
Assets
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
Positive replacement values
Cash collateral receivables on derivative instruments
Loans
of which: residential mortgages
of which: commercial mortgages
of which: Lombard loans
of which: other loans
of which: securities
Financial assets designated at fair value
Financial assets available for sale
Financial assets held to maturity
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other assets
Total assets as of 31 December 2016
Total assets as of 31 December 2015
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Cash collateral payables on derivative instruments
Due to customers
Financial liabilities designated at fair value
Debt issued
Provisions
Other liabilities
Total liabilities as of 31 December 2016
Total liabilities as of 31 December 2015
Due
within
1 month
Due
between
1 and 3
months
Due
between
3 and 6
months
Due
between
6 and 9
months
Due
between
9 and 12
months
Due
between
1 and 2
years
Due
between
2 and 5
years
Due over
5 years
Perpetual/
Not
applicable
107.8
11.5
15.1
36.8
96.6
158.4
26.7
109.4
12.0
2.9
83.0
11.6
7.8
0.8
0.0
20.7
591.6
614.3
7.4
2.2
4.7
22.8
153.8
35.5
406.8
17.0
7.7
4.2
58.0
720.2
720.4
0.9
0.0
18.0
42.6
25.3
6.9
8.5
1.9
10.2
1.2
0.4
0.0
73.4
72.4
1.3
0.6
1.0
13.3
14.6
7.3
2.2
40.4
46.0
0.3
5.3
12.5
5.6
1.2
4.1
1.6
3.6
0.7
0.1
0.0
22.5
25.4
1.0
0.6
2.3
4.6
11.0
0.2
3.2
6.6
3.2
0.4
2.3
0.6
6.4
0.9
0.9
0.1
2.3
8.9
3.8
0.4
2.7
2.0
7.8
1.4
0.2
0.0
0.7
22.1
13.8
1.6
2.2
4.5
0.0
14.7
3.3
1.9
0.0
0.0
54.2
36.1
3.8
2.0
12.3
0.0
13.2
3.0
2.6
50.0
42.4
2.5
0.2
2.4
2.4
1.2
3.5
3.1
0.0
18.2
23.5
0.1
20.8
15.4
0.4
43.2
31.8
2.3
75.4
75.8
1.9
59.7
54.9
0.5
0.1
0.3
3.4
8.6
0.3
0.0
0.3
2.7
2.7
6.0
3.6
0.0
0.1
0.1
2.4
9.5
0.5
12.6
17.7
0.0
0.0
0.6
5.0
19.7
0.5
25.7
28.8
0.1
5.2
29.4
0.1
34.8
32.3
19.5
22.6
12.9
8.6
0.5
0.8
1.0
8.3
6.6
13.2
30.3
29.4
7.8
0.7
8.5
5.4
Guarantees, commitments and forward starting transactions
Loan commitments
Guarantees
Reverse repurchase agreements
Securities borrowing agreements
Total as of 31 December 2016
Total as of 31 December 2015
54.0
16.7
10.2
0.0
81.0
78.1
0.2
0.1
0.0
0.0
0.0
0.2
0.2
0.1
0.2
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.1
0.0
0.0
178
Total
107.8
13.2
15.1
66.2
96.6
158.4
26.7
306.3
142.2
19.7
105.0
36.9
2.5
65.4
15.7
9.3
1.0
8.3
6.6
13.2
25.4
935.0
942.8
10.6
2.8
6.6
22.8
153.8
35.5
423.7
55.0
103.6
4.2
62.0
880.7
885.5
54.4
16.7
10.2
0.0
81.4
78.7
Off-balance sheet
Off-balance sheet arrangements
In the normal course of business, we enter into transactions that
may not be recognized in whole or in part on our balance sheet in
accordance with International Financial Reporting Standards
(IFRS). These transactions include derivative instruments, guaran-
tees and similar arrangements, as well as some purchased and
retained interests in non-consolidated structured entities (SEs),
which are transacted for a number of reasons, including hedging
and market-making activities, to meet specific needs of our clients
or to offer investment opportunities to clients through entities
that are not controlled by us.
When we incur an obligation or become entitled to an asset
through these arrangements, we recognize them on the balance
sheet. It should be noted that in certain instances the amount
recognized on the balance sheet does not represent the full gain
or loss potential inherent in such arrangements.
➔ Refer to “Note 1a Significant accounting policies, items 1, 3a and
3d” and “Note 28 Interests in subsidiaries and other entities” in
the “Consolidated financial statements” section of this report for
more information
The following paragraphs provide more information on several
distinct off-balance sheet arrangements. Additional off-balance
sheet information is primarily provided in Notes 12, 20, 23, 28
and 31 in the “Consolidated financial statements” section of this
report, as well as in the Basel III Pillar 3 UBS Group AG 2016 report
under “Pillar 3, SEC filings & other disclosures” at www.ubs.com/
investors.
Risk disclosures, including our involvement with off-balance
sheet vehicles
Refer to the “Risk management and control” section of this report
for comprehensive credit, market and liquidity risk information
related to our exposures, which includes exposures to off-balance
sheet vehicles.
Support provided to non-consolidated investment funds
In 2016, the Group did not provide material support, financial or
otherwise, to unconsolidated investment funds when the Group
was not contractually obligated to do so, nor does the Group
have an intention to do so.
Guarantees and similar arrangements
In the normal course of business, we issue various forms of guar-
antees, commitments to extend credit, standby and other letters
of credit to support our clients, commitments to enter into for-
ward starting transactions, note issuance facilities and revolving
underwriting facilities. With the exception of related premiums,
generally these guarantees and similar obligations are kept as off-
balance sheet items unless a provision to cover probable losses is
required.
As of 31 December 2016, the net exposure (gross values less
sub-participations) from guarantees and similar instruments was
CHF 13.8 billion compared with CHF 13.3 billion as of 31 Decem-
ber 2015. Fee income from issuing guarantees was not significant
to total revenues in 2016 and 2015.
Guarantees represent irrevocable assurances that, subject to
the satisfaction of certain conditions, we will make payments in
the event that our clients fail to fulfill their obligations to third
parties. We also enter into commitments to extend credit in the
form of credit lines that are available to secure the liquidity needs
of our clients. The majority of these unutilized credit lines range in
maturity from one month to five years. If customers fail to meet
their obligations, our maximum exposure to credit risk is the con-
tractual amount of these instruments. The risk is similar to the risk
involved in extending loan facilities and is subject to the same risk
management and control framework. In 2016, we recognized a
net credit loss expense of CHF 9 million related to loan commit-
ments and guarantees compared with CHF 2 million in 2015. Pro-
visions recognized for guarantees and loan commitments were
CHF 54 million as of 31 December 2016 and CHF 35 million as of
31 December 2015.
➔ Refer to “Note 11 Allowances and provisions for credit losses” in
the “Consolidated financial statements” section of this report for
more information on provisions for loan commitments and
guarantees
For certain obligations, we enter into partial sub-participations
to mitigate various risks from guarantees and loan commitments.
A sub-participation is an agreement by another party to take a
share of the loss in the event that the obligation is not fulfilled by
the obligor and, where applicable, to fund a part of the credit
facility. We retain the contractual relationship with the obligor,
and the sub-participant has only an indirect relationship. We only
enter into sub-participation agreements with banks to which we
ascribe a credit rating equal to or better than that of the obligor.
Furthermore, we provide representations, warranties and
indemnifications to third parties in the normal course of business.
179
Risk, treasury and capital management Risk, treasury and capital management
Treasury management
Guarantees, commitments and forward starting transactions
The table below shows the maximum irrevocable amount of guarantees, commitments and forward starting transactions.
CHF million
Guarantees
Credit guarantees and similar instruments
Performance guarantees and similar instruments
Documentary credits
Total guarantees
Loan commitments
Forward starting transactions1
Reverse repurchase agreements
Securities borrowing agreements
Repurchase agreements
1 Cash to be paid in the future by either UBS or the counterparty.
31.12.16
31.12.15
Gross
Sub-participations
Net
Gross
Sub-participations
Net
6,447
3,190
7,074
16,711
54,430
10,178
36
5,984
(424)
(696)
(1,761)
(2,881)
(1,513)
6,023
2,494
5,313
13,830
52,917
6,708
3,035
6,276
16,019
56,067
6,577
6
6,323
(315)
(699)
(1,707)
(2,721)
(1,559)
6,393
2,336
4,569
13,298
54,508
Clearing house and exchange memberships
We are a member of numerous securities and derivative exchanges
and clearing houses. In connection with some of those member-
ships, we may be required to pay a share of the financial obliga-
tions of another member who defaults or we may be otherwise
exposed to additional financial obligations. While the member-
ship rules vary, obligations generally would arise only if the
exchange or clearing house had exhausted its resources. We con-
sider the probability of a material loss due to such obligations to
be remote.
Swiss deposit insurance
Swiss banking law and the deposit insurance system require Swiss
banks and securities dealers to jointly guarantee an amount of up
to CHF 6 billion for privileged client deposits in the event that a
Swiss bank or securities dealer becomes insolvent. FINMA esti-
mates our share in the deposit insurance system to be CHF 0.9
billion. The deposit insurance is a contingent payment obligation
and exposes us to additional risk. This is not reflected in the table
above due to its unique characteristics. As of 31 December 2016,
we considered the probability of a material loss from our obliga-
tion to be remote.
180
Contractual obligations
The table below summarizes payments due by period under con-
tractual obligations as of 31 December 2016.
All contractual obligations included in this table, with the
exception of purchase obligations (i.e., those in which we are
committed to purchasing determined volumes of goods and ser-
vices), are either recognized as liabilities on our balance sheet or,
in the case of operating leases, disclosed in “Note 31 Operating
leases and finance leases” in the “Consolidated financial state-
ments” section of this report.
Contractual obligations
CHF million
Long-term debt obligations
Finance lease obligations
Operating lease obligations
Purchase obligations
Total as of 31 December 2016
Within 1 year
56,401
15
715
2,005
59,136
1–3 years
24,854
6
1,123
1,160
Payment due by period
3–5 years
Over 5 years
20,879
2
837
302
45,906
0
2,360
28
48,293
27,143
22,020
Total
148,040
23
5,034
3,495
156,592
Long-term debt obligations as of 31 December 2016 were CHF
148 billion. They consisted of financial liabilities designated at fair
value (CHF 57 billion) and long-term debt issued (CHF 91 billion)
and represent estimated future interest and principal payments on
an undiscounted basis.
notes and are generally economically hedged, but it would not be
practicable to estimate the amount and / or timing of the pay-
ments on interest swaps used to hedge these instruments as inter-
est rate risk inherent in respective liabilities is generally risk man-
aged on a portfolio level.
➔ Refer to “Note 25d Maturity analysis of financial liabilities” in
the “Consolidated financial statements” section of this report for
more information
Approximately half of total long-term debt obligations had a
variable rate of interest. Amounts due on interest rate swaps used
to hedge interest rate risk inherent in fixed-rate debt issued, and
designated in fair value hedge accounting relationships, are not
included in the table above. The notional amount of these interest
rate swaps was CHF 57 billion as of 31 December 2016. Financial
liabilities designated at fair value mostly consist of structured
Within purchase obligations, the obligation to employees
under mandatory notice periods is excluded (i.e., the period in
which we must pay contractually agreed salaries to employees
leaving the firm).
Our liabilities recognized on the balance sheet as Due to
banks, Cash collateral on securities lent, Repurchase agreements,
Trading portfolio liabilities, Negative replacement values, Cash
collateral payables on derivative instruments, Due to customers,
Provisions and Other liabilities are excluded from the table above.
➔ Refer to the respective Notes in the “Consolidated financial
statements” section of this report for more information
181
Risk, treasury and capital management Risk, treasury and capital management
Treasury management
Currency management
Strategy, objectives and governance
Our Group currency management activities are designed to
reduce adverse currency effects on our reported financial results
in Swiss francs, within limits set by the BoD. Group ALM focuses
on three principal areas of currency risk management: (i) currency-
matched funding of investments in non-Swiss franc assets and
liabilities, (ii) sell-down of non-Swiss franc profits and losses and
(iii) selective hedging of anticipated non-Swiss franc profits and
losses. Non-trading foreign exchange risks are managed under
market risk limits, with the exception of consolidated capital activ-
ity managed by Group ALM.
Currency-matched funding and investment of non-Swiss franc
assets and liabilities
For monetary balance sheet items and non-core investments, as
far as it is practical and efficient, we follow the principle of match-
ing the currencies of our assets and liabilities for funding pur-
poses. This avoids profits and losses arising from the translation of
non-Swiss franc assets and liabilities.
Net investment hedge accounting is applied to non-Swiss franc
core investments to balance the effect of foreign exchange move-
ments on both common equity tier 1 (CET1) capital and the CET1
capital ratio on a fully applied basis.
➔ Refer to “Note 1a Significant accounting policies” and
“Note 12 Derivative instruments and hedge accounting” in the
“Consolidated financial statements” section of this report for
more information
Sell-down of non-Swiss franc reported profits and losses
Income statement items of foreign subsidiaries and branches with
a functional currency other than the Swiss franc are translated
into Swiss francs on a monthly basis using the relevant month-end
rate. To reduce earnings volatility on the translation of previously
recognized earnings in foreign currencies, Group ALM centralizes
the profits and losses arising in UBS AG and its branches and sells
or buys the profit or loss for Swiss francs. Our foreign subsidiaries
follow a similar monthly sell-down process into their own report-
ing currencies. Retained earnings in foreign subsidiaries with a
reporting currency other than the Swiss franc are integrated and
managed as part of net investment hedge accounting program.
Hedging of anticipated non-Swiss franc profits and losses
The Group ALCO may at any time instruct Group ALM to execute
hedges to protect anticipated future profits and losses in foreign
currencies against possible adverse trends of foreign exchange
rates. Although intended to hedge future earnings, these transac-
tions are accounted for as open currency positions and are subject
to internal market risk limits for value-at-risk and stress loss limits.
➔ Refer to the “Capital management” section of this report for
more information on our active management of sensitivity to
currency movements and its effect on our key ratios
182
Cash flows
As a global financial institution, our cash flows are complex and
often may bear little relation to our net earnings and net assets.
Consequently, we believe that a traditional cash flow analysis is
less meaningful in evaluating our liquidity position than the liquid-
ity, funding and capital management frameworks and measures
described elsewhere in the “Risk, treasury and capital manage-
ment” section of this report.
Cash and cash equivalents
As of 31 December 2016, cash and cash equivalents totaled CHF
121.1 billion, an increase of CHF 18.1 billion from 31 December
2015, driven by net cash inflows from investing activities, partly
offset by net cash outflows from operating activities.
Operating activities
In 2016, net cash outflows from operating activities were CHF
16.5 billion. Net operating cash flow, before changes in operating
assets and liabilities and income taxes paid, was an inflow of
CHF 12.5 billion. Changes in operating assets and liabilities mainly
reflected an increase of financial assets designated at fair value of
CHF 60.7 billion, substantially due to cash proceeds from reduc-
tions of debt securities classified as financial assets available for
sale, which triggered cash inflows from investing activities. These
proceeds were used for purchases of similar debt instruments
classified under the fair value option, which are presented in oper-
ating activities. This effect was partly offset by inflows related to
an increase in customer deposits of CHF 33.6 billion.
In 2015, net cash inflows from operating activities were CHF
3.1 billion, mainly reflecting net profit of CHF 6.4 billion, partly
offset by net cash outflows of CHF 3.4 billion resulting from net
changes in operating assets and liabilities.
Statement of cash flows (condensed)
CHF million
Net cash flow from / (used in) operating activities
Net cash flow from / (used in) investing activities
Net cash flow from / (used in) financing activities
Effects of exchange rate differences on cash and cash equivalents
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents at the end of the year
Investing activities
Investing activities resulted in a net cash inflow of CHF 36.3 billion
in 2016, primarily related to a gross cash inflow of CHF 54.1 bil-
lion from disposals and redemptions of financial assets available
for sale, partly offset by gross cash outflows of CHF 7.3 billion and
CHF 9.0 billion related to the purchase of financial assets available
for sale and financial assets held to maturity, respectively.
In 2015, investing activities generated a net outflow of CHF
8.4 billion as purchases of financial assets available for sale
exceeded disposals and redemptions.
Financing activities
Financing activities resulted in a net cash outflow of CHF 1.0 bil-
lion in 2016, due to the dividend distribution to shareholders of
CHF 3.2 billion, payments of CHF 1.4 billion made to holders of
preferred notes and net cash of CHF 1.2 billion used to acquire
treasury shares, largely offset by the net issuance of short-term
debt of CHF 5.4 billion.
In 2015, net cash flow from financing activities was an outflow
of CHF 6.6 billion, primarily consisting of dividend distributions of
CHF 2.8 billion and net redemption of debt including financial
liabilities designated at fair value of CHF 2.8 billion.
For the year ended
31.12.16
31.12.15
(16,457)
36,328
(972)
(806)
18,094
121,138
3,109
(8,441)
(6,595)
(1,742)
(13,670)
103,044
183
Risk, treasury and capital management
Risk, treasury and capital management
Capital management
Capital management
Capital management objectives
Audited | An adequate level of capital in accordance with both our
internal assessment and regulatory requirements is a prerequisite
to conducting our business activities. We are therefore com-
mitted to maintaining a strong capital position and sound capital
ratios at all times in order to meet regulatory capital requirements
and target capital ratios, and to support the growth of our busi-
nesses.
We expect to meet known future increases in capital require-
ments mainly through a combination of retaining earnings and
issuing high-trigger loss-absorbing additional tier 1 (AT1) capital
instruments, including Deferred Contingent Capital Plan (DCCP)
awards, as well as issuing senior unsecured debt which contrib-
utes to our total loss-absorbing capacity (TLAC).
As of 31 December 2016, our fully applied common equity tier
1 capital ratio was 13.8%, above our target of at least 13% and
above the requirements for Swiss SRBs, which are stricter than the
Bank for International Settlements requirements. We believe that
our capital strength is a source of confidence for our stakeholders,
contributes to our strong credit ratings and is the foundation of
our success.
➔ Refer to “Our strategy” section of this report for more
information on our performance targets and expectations
➔ Refer to the “Our stated capital returns objective is based,
The annual strategic planning process includes a capital plan-
ning component that is key in defining medium- and longer-term
capital targets. It is based on an attribution of Group RWA and
LRD internal limits to the business divisions.
Limits and targets are established at both Group and business
division levels, and submitted to the BoD for approval at least
annually. In the target-setting process, we take into account the
current and potential future capital requirements, our aggregate
risk exposure in terms of capital-at-risk, the assessment by rating
agencies, comparisons with peers and the effect of expected
accounting policy changes. Our monitoring is based on these
internal limits and targets and provides indications if changes are
required. Any breach of the limits in place triggers the imposition
of a series of required remediating actions.
Group Treasury plans for, and monitors, consolidated capital
information on an ongoing basis, also considering developments
in capital regulations. In addition, capital planning and monitoring
are done at the legal entity level for our significant subsidiaries
subject to prudential supervision, in order to ensure that capital
and other supervisory requirements applicable to these entities
are met.
➔ Refer to the “Equity attribution framework” in this section for
more information on how equity is attributed to our business
divisions
➔ Refer to “Capital and capital ratios of our significant regulated
in part, on capital ratios that are subject to regulatory change
subsidiaries” in this section for more information
and may fluctuate significantly” in the “Risk factors” section
of this report for more information on the risks related to our
Capital management activities
capital ratios
Capital planning
Audited | We manage our balance sheet, risk-weighted assets (RWA),
leverage ratio denominator (LRD) and capital ratio levels within our
internal limits and targets and on the basis of our regulatory capi-
tal requirements. Our strategic focus is set on achieving an optimal
attribution and use of financial resources between our business
divisions and Corporate Center, as well as between our legal enti-
ties, while remaining within the limits defined for the Group and
allocated to the business divisions by the Board of Directors (BoD).
These resource allocations in turn affect business plans and earn-
ings projections, which are reflected in our capital plans.
Audited | In 2016, we focused on meeting the revised Swiss SRB
fully applied capital requirements. To meet these new require-
ments, we executed a series of transactions, including:
– the issuance of TLAC-eligible senior unsecured notes in the
equivalent of CHF 11.4 billion;
– the issuance of high-trigger loss-absorbing AT1 capital instru-
ments in the equivalent of CHF 2.5 billion; and
– an increase of CHF 0.4 billion in high-trigger loss-absorbing
AT1 capital instruments related to DCCP awards granted for
the performance year 2016.
These transactions contributed to our fully applied TLAC ratio
amounting to 31.1% as of 31 December 2016, exceeding the
minimum requirement of 28.6%, excluding countercyclical buffer
requirements and without considering any rebate due to improved
resolvability, applicable as of 1 January 2020.
184
Swiss SRB capital framework
UBS is considered a systemically relevant bank (SRB) under Swiss
banking law and both UBS Group and UBS AG are, on a consoli-
dated basis, required to comply with regulations based on the
Basel III framework. Disclosures in this section focus on informa-
tion in accordance with the Basel III framework as applicable to
Swiss SRBs.
Information in accordance with the Bank for International Set-
tlements framework, including requirements for global systemi-
cally important banks, is provided in the Basel III Pillar 3 UBS
Group AG 2016 report provided under “Pillar 3, SEC filings &
other disclosures” at www.ubs.com/investors.
UBS AG (consolidated) capital and leverage ratio information is
provided in the UBS Group AG and UBS AG Annual Report 2016
under “Annual reporting” at www.ubs.com/investors. Standalone
legal entity financial and regulatory information for UBS AG, UBS
Switzerland AG and UBS Limited, and consolidated financial and
regulatory information for UBS Americas Holding LLC, is provided
under “Disclosure for legal entities” at www.ubs.com/investors.
Regulatory framework
The Basel III framework came into effect in Switzerland on 1 Janu-
ary 2013.
In May 2016, the Swiss Federal Council adopted amendments
to the too big to fail (TBTF) provisions, based on the cornerstones
announced by the Swiss Federal Council in October 2015. The
revised Capital Adequacy Ordinance forms the basis of the revised
Swiss SRB framework, which became effective on 1 July 2016 and
will be transitioned in until 1 January 2020.
The Basel Committee on Banking Supervision and other finan-
cial regulators are considering changes to the Basel III capital
framework. If the proposed changes to the capital framework are
adopted in their current form in Switzerland, we expect our over-
all risk-weighted assets (RWA) to significantly increase without
considering the effect of mitigating measures.
Going and gone concern requirements
The revised Swiss SRB framework amends the capital requirements
introduced under the former Swiss SRB framework and establishes
additional gone concern requirements, which, together with the
going concern requirements, represent the total loss-absorbing
capacity (TLAC) requirement of the Group. TLAC encompasses
regulatory capital, such as common equity tier 1 (CET1), loss-
absorbing additional tier 1 (AT1) and tier 2 capital instruments, as
well as liabilities that can be written down or converted into equity
in case of resolution or for the purpose of recovery measures.
Eligible capital
The Basel III framework includes prudential filters for the calcula-
tion of capital. These prudential filters consist mainly of capital
deductions for deferred tax assets (DTAs) recognized for tax loss
carry-forwards, DTAs on temporary differences that exceed a
certain threshold and effects related to defined benefit plans. As
these filters are being phased in between 2014 and 2018, their
effects are gradually factored into our calculations of capital, RWA
and capital ratios on a phase-in basis and are entirely reflected in
our capital, RWA and capital ratios on a fully applied basis.
In 2016, we deducted from our phase-in CET1 capital 60%
(in 2015: 40%) of: (i) DTAs recognized for tax loss carry-forwards,
(ii) DTAs on temporary differences that exceed the threshold of
10% of CET1 capital before deductions for DTAs on temporary
differences and (iii) net defined benefit pension plan assets.
In addition, since 1 July 2016 we are no longer using non-
Basel III-compliant tier 1 capital as an offset for goodwill deduc-
tions. As of 31 December 2016, we deducted 60% (in 2015:
40%) of our goodwill from phase-in CET1 capital and 40%
(in 2015: 60%) of our goodwill from loss-absorbing AT1 capital.
Eligible capital and other instruments contributing to our
loss-absorbing capacity
In addition to CET1 capital, the following instruments contribute
to our loss-absorbing capacity:
– Loss-absorbing AT1 capital instruments (high- and low-trigger)
– Loss-absorbing tier 2 capital instruments (high- and low-trigger)
– Non-Basel III-compliant tier 1 capital instruments
– Non-Basel III-compliant tier 2 capital instruments
– TLAC-eligible senior unsecured debt
Under the revised Swiss SRB rules, going concern capital
includes CET1 and high-trigger loss-absorbing AT1 capital instru-
ments. Under the transitional rules for the revised Swiss SRB
framework, existing low-trigger loss-absorbing AT1 capital instru-
ments will remain available to meet the going concern capital
requirements until their first call date, even if the first call date is
after 31 December 2019. From their first call date, existing low-
trigger loss-absorbing AT1 capital instruments may only be used
to meet the gone concern requirements.
Outstanding low- and high-trigger tier 2 capital instruments
will remain available to meet the going concern capital require-
ments until the earlier of (i) their maturity or first call date or
(ii) 31 December 2019. From 1 January 2020 onward, these
instruments may be used to meet the gone concern requirements
until one year prior to maturity, with a haircut of 50% applied in
the last year of eligibility.
Non-Basel III-compliant tier 1 and tier 2 capital instruments are
no longer subject to phase-out under the revised Swiss SRB frame-
work. Together with TLAC-eligible senior unsecured debt they are
eligible to meet the gone concern requirements until one year
prior to maturity, with a haircut of 50% applied in the last year of
eligibility.
185
Risk, treasury and capital management Risk, treasury and capital management
Capital management
The eligibility of our capital instruments and TLAC-eligible
senior unsecured debt to meet the requirements under the revised
Swiss SRB framework, both with and without transitional arrange-
ments, is illustrated in the table on the next page.
➔ Refer to “Bondholder information” at www.ubs.com/investors
for more information on the eligibility of capital and senior debt
instruments and on key features, and terms and conditions of
capital instruments
Revised capital and leverage ratio requirements
Once the revised Swiss SRB requirements are fully implemented by
1 January 2020, total going concern minimum requirements for
all Swiss SRBs consist of a capital ratio requirement of 12.86% of
RWA and a leverage ratio requirement of 4.5%. In addition to
these minimum requirements, an add-on reflecting the degree of
systemic importance is applied based on market share and the
LRD. The add-on for UBS is expected to be 1.44% of RWA and
0.5% of our LRD, resulting in total going concern capital require-
ments applicable starting as of 1 January 2020 of 14.3% of RWA
(excluding countercyclical buffer requirements) and 5.0% of LRD.
Furthermore, of the total going concern capital requirement of
14.3% of RWA, at least 10% must be met with CET1 capital,
while a maximum of 4.3% can be met with high-trigger loss-
absorbing AT1 capital instruments. Similarly, of the total going
concern leverage ratio requirement of 5.0%, 3.5% must be met
with CET1 capital, while a maximum of 1.5% can be met with
high-trigger loss-absorbing AT1 capital instruments.
National authorities can put in place a countercyclical buffer
requirement of up to 2.5% of RWA for credit exposures in their
jurisdictions. These requirements must also be met with CET1
capital. The Swiss Federal Council has activated a countercyclical
buffer requirement of 2% of RWA for mortgage loans on residen-
tial property in Switzerland, applicable since 30 June 2014. Fur-
thermore, since 1 July 2016, we are required to apply additional
countercyclical buffer requirements implemented in other Basel
Committee member jurisdictions. The requirements will be phased
in by and become fully effective on 1 January 2019. The effect as
of 31 December 2016 was immaterial.
As an internationally active Swiss SRB, UBS is also subject to
gone concern loss-absorbing capacity requirements, which are
14.3% of RWA and 5.0% of LRD, resulting in TLAC requirements
of 28.6% of RWA and 10.0% of LRD as of 1 January 2020. The
gone concern requirements also include add-ons for market share
and the LRD, and may be met with senior unsecured debt that is
TLAC-eligible. However, in the event that low-trigger loss-absorb-
ing AT1 or tier 2 capital instruments are used to meet the gone
concern requirements, such requirements may be reduced by up
to 2.86% for the RWA-based requirement and up to 1% for the
LRD-based requirement. In this report, we refer to the RWA-based
gone concern requirements as gone concern loss-absorbing
capacity requirements, and the RWA-based gone concern ratio is
referred to as the gone concern loss-absorbing capacity ratio.
Under the revised Swiss SRB framework, banks are eligible for
a rebate of up to 2% on the gone concern requirement if they
take actions that facilitate recovery and resolvability beyond the
minimum requirements to ensure the integrity of systemically
important functions in the case of an impending insolvency.
FINMA has determined that the measures we have completed
support a rebate on the gone concern requirement. As we com-
plete additional measures to improve the resolvability of the
Group we expect to qualify for a larger rebate and therefore aim
to operate with a gone concern ratio of less than 4% of LRD
when the revised Swiss SRB framework becomes fully effective as
of 1 January 2020. The amount of the rebate will be assessed
annually by FINMA based on its assessment of completed mea-
sures to improve resolvability. The combined reduction applied for
resolvability measures and the aforementioned gone concern
requirement reduction for use of low-trigger loss-absorbing AT1
and tier 2 capital instruments may not exceed 5.7% for the RWA-
based requirement and 2% for the LRD-based requirement.
Swiss SRB going and gone concern requirements – time series1
Risk-weighted assets (%)
Requirements2
1.1.18
1.1.17
1.1.19
31.12.16
1.1.20
31.12.16
Leverage ratio (%)
Requirements2
1.1.18
1.1.17
1.1.19
Going concern
Minimum capital
Buffer capital including applicable add-ons3
Total going concern
of which: common equity tier 1 capital3
of which: max. high-trigger additional tier 1 capital
Gone concern
Base requirement including applicable add-ons
Total gone concern
Total loss-absorbing capacity
8.00
2.94
8.00
4.00
8.00
4.86
8.00
5.58
10.94
12.00
12.86
13.58
8.31
2.63
3.50
3.50
9.00
3.00
6.20
6.20
9.46
3.40
8.90
8.90
14.44
18.20
21.76
9.68
3.90
11.60
11.60
25.18
8.00
6.30
14.30
10.00
4.30
14.30
14.30
28.60
3.00
0.00
3.00
2.30
0.70
1.00
1.00
4.00
3.00
0.50
3.50
2.60
0.90
2.00
2.00
5.50
3.00
1.00
4.00
2.90
1.10
3.00
3.00
7.00
3.00
1.50
4.50
3.20
1.30
4.00
4.00
8.50
1.1.20
3.00
2.00
5.00
3.50
1.50
5.00
5.00
10.00
1 This table does not include the effect of any potential gone concern requirement rebate. 2 Prior to the implementation of the Swiss SRB framework, FINMA also defined a total capital ratio target of 14.4% and a
total leverage ratio target of 3.5% for the UBS Group, which will be effective until they are exceeded by the Swiss SRB phase-in requirements. The Swiss SRB requirements effective since 1 July 2016 exceed the defined
FINMA targets. 3 Going concern capital ratio requirements as of 31 December 2016 include a countercyclical buffer requirement of 0.19%. Requirements for subsequent periods exclude the effect of the countercyclical
buffer requirement, as potential future countercyclical buffer requirements are not yet known.
186
Swiss SRB going and gone concern requirements and information1
As of 31.12.16
Risk-weighted assets
Leverage ratio denominator
Swiss SRB including transitional arrangements (phase-in)
CHF million, except where indicated
Common equity tier 1 capital
Maximum high-trigger loss-absorbing additional
tier 1 capital2, 3
of which: high-trigger loss-absorbing additional
tier 1 capital
of which: high-trigger loss-absorbing tier 2 capital
of which: low-trigger loss-absorbing tier 2 capital
Total going concern
Base gone concern requirement
Total gone concern
Total loss-absorbing capacity
Requirement
Requirement
(%) Actual (%) Requirement
Eligible
(%) Actual (%) Requirement
Eligible
8.31
2.63
10.944
3.50
3.50
14.44
16.76
18,732
37,788
7.90
2.89
0.40
4.61
24.66
8.09
8.09
32.75
5,917
17,805
6,512
891
10,402
55,593
18,229
18,229
73,822
24,649
7,889
7,889
32,539
2.30
0.70
3.005
1.00
1.00
4.00
4.32
2.04
0.74
0.10
1.19
6.35
2.08
2.08
8.44
20,123
37,788
6,124
17,805
6,512
891
10,402
55,593
18,229
18,229
73,822
26,248
8,749
8,749
34,997
As of 31.12.16
Risk-weighted assets
Leverage ratio denominator
Swiss SRB as of 1.1.20 (fully applied)
CHF million, except where indicated
Common equity tier 1 capital
Maximum high-trigger loss-absorbing additional
tier 1 capital2
of which: high-trigger loss-absorbing additional
tier 1 capital
of which: low-trigger loss-absorbing additional
tier 1 capital
Total going concern
Base gone concern requirement including applicable
add-ons
Total gone concern
Total loss-absorbing capacity
Requirement
Requirement
(%) Actual (%) Requirement
Eligible
(%) Actual (%) Requirement
Eligible
10.19
13.78
22,680
30,693
4.30
14.496
14.30
14.30
28.79
4.11
3.06
1.05
17.89
13.16
13.16
31.06
9,575
9,151
6,809
2,342
32,255
39,844
31,843
31,843
64,098
29,311
29,311
69,154
3.50
1.50
5.007
5.00
5.00
10.00
3.53
1.05
0.78
0.27
4.58
3.37
3.37
7.94
30,466
30,693
13,057
9,151
6,809
2,342
43,523
39,844
43,523
43,523
87,047
29,311
29,311
69,154
1 This table does not include the effect of any potential gone concern requirement rebate. 2 Includes outstanding low-trigger loss-absorbing additional tier 1 capital instruments, which under the transitional rules of
the Swiss SRB framework will remain available to meet the going concern requirements until their first call date, even if the first call date is after 31 December 2019. From their first call date, they may be used to meet
the gone concern requirements. Low-trigger loss-absorbing additional tier 1 capital was fully offset by required deductions for goodwill on a phase-in basis. 3 Includes outstanding high- and low-trigger loss-absorbing
tier 2 capital instruments, which under the transitional rules of the Swiss SRB framework will remain available to meet the going concern requirements until the earlier of (i) their maturity or first call date or
(ii) 31 December 2019. From 1 January 2020, these instruments may be used to meet the gone concern requirements until one year before maturity, with a haircut of 50% applied in the last year of eligibility. 4 Consists
of a minimum capital requirement of 8% and a buffer capital requirement of 2.94%, including the effect of countercyclical buffers of 0.19%. 5 Consists only of a minimum leverage ratio requirement. 6 Consists of
a minimum capital requirement of 8% and a buffer capital requirement of 6.49%, including the effect of countercyclical buffers of 0.19% and applicable add-ons of 1.44%. 7 Consists of a minimum leverage ratio
requirement of 3% and a buffer leverage ratio requirement of 2%, including applicable add-ons of 0.5%.
187
Risk, treasury and capital management Risk, treasury and capital management
Capital management
Swiss SRB loss-absorbing capacity
As of 31 December 2016, our total loss-absorbing capacity ratio was 31.1% on a fully applied basis. On a phase-in basis, the total
loss-absorbing capacity ratio stood at 32.7%. Our total loss-absorbing capacity was CHF 69.2 billion on a fully applied basis and CHF
73.8 billion on a phase-in basis.
Current and former Swiss SRB going and gone concern information1
CHF million, except where indicated
Going concern capital
Common equity tier 1 capital
High-trigger loss-absorbing additional tier 1 capital
Low-trigger loss-absorbing additional tier 1 capital
Total loss-absorbing additional tier 1 capital
Total tier 1 capital
High-trigger loss-absorbing tier 2 capital
Low-trigger loss-absorbing tier 2 capital
Non-Basel III-compliant tier 2 capital
Total tier 2 capital
Total going concern capital
Total capital
Gone concern loss-absorbing capacity
Non-Basel III-compliant tier 1 capital5
Total tier 1 capital
High-trigger loss-absorbing tier 2 capital
Low-trigger loss-absorbing tier 2 capital
Non-Basel III-compliant tier 2 capital5
Total tier 2 capital
TLAC-eligible senior unsecured debt
Total gone concern loss-absorbing capacity
Total loss-absorbing capacity
Total loss-absorbing capacity
Risk-weighted assets / leverage ratio denominator
Risk-weighted assets
Leverage ratio denominator
Capital and loss-absorbing capacity ratios (%)
Tier 1 capital ratio
Total capital ratio
Going concern capital ratio
of which: common equity tier 1 capital ratio
Gone concern loss-absorbing capacity ratio
Total loss-absorbing capacity ratio
Leverage ratios (%)
Leverage ratio
Going concern leverage ratio
of which: common equity tier 1 leverage ratio
Gone concern leverage ratio
Total loss-absorbing capacity leverage ratio
Swiss SRB including
transitional arrangements
(phase-in)
31.12.16
Swiss SRB
as of 1.1.20
(fully applied)
31.12.16
Former Swiss SRB
(phase-in)
Former Swiss SRB
(fully applied)
31.12.15
31.12.15
40,378
3,828
3533
4,1814
44,559
912
10,325
996
12,233
56,792
30,044
3,828
2,326
6,154
36,198
912
10,325
11,237
47,435
37,788
6,5122
02
6,512
44,299
891
10,402
11,293
55,593
642
642
698
698
16,890
18,229
30,693
6,809
2,342
9,151
39,844
39,844
642
642
679
10,402
698
11,779
16,890
29,311
73,822
69,154
225,412
874,925
222,677
870,470
212,302
904,014
207,530
897,607
24.7
16.8
8.1
32.7
6.4
4.3
2.1
8.4
17.9
13.8
13.2
31.1
4.6
3.5
3.4
7.9
21.0
26.8
19.0
6.26
4.5
17.4
22.9
14.5
5.3
3.3
1 The terms “Going concern capital” and “Gone concern loss-absorbing capacity” are used in this table in reference to the information presented under the current Swiss SRB framework only and do not apply to
the information presented under the former Swiss SRB framework. 2 High-trigger loss-absorbing additional tier 1 (AT1) capital of CHF 6,809 million and low-trigger loss-absorbing AT1 capital of CHF 2,342 million
were partly offset by required deductions for goodwill of CHF 2,639 million. 3 Consists of low-trigger loss-absorbing additional tier 1 capital of CHF 2,326 million, partly offset by required deductions for goodwill of
CHF 1,973 million. 4 Includes non-Basel III-compliant tier 1 capital of CHF 1,954 million, offset by required deductions for goodwill. 5 Non-Basel III-compliant tier 1 and tier 2 capital instruments qualify as gone
concern instruments. Under the Swiss SRB rules, these instruments are no longer subject to phase-out. Instruments with a maturity date are eligible to meet the gone concern requirements until one year prior to maturity,
with a haircut of 50% applied in the last year of eligibility. 6 For the purpose of the former Swiss SRB leverage ratio calculation on a phase-in basis, only common equity tier 1 capital and loss-absorbing capital are
included in the numerator.
188
Audited |
Reconciliation IFRS equity to Swiss SRB common equity tier 1 capital
CHF million
Total IFRS equity
Equity attributable to non-controlling interests
Defined benefit plans1
Deferred tax assets recognized for tax loss carry-forwards1
Deferred tax assets on temporary differences, excess over threshold
Goodwill, net of tax1, 2
Intangible assets, net of tax
Unrealized (gains) / losses from cash flow hedges, net of tax
Compensation- and own shares-related components3
Unrealized own credit related to financial liabilities designated at fair value, net of tax, and replacement values
Unrealized gains related to financial assets available for sale, net of tax
Prudential valuation adjustments
Consolidation scope
Accruals for proposed dividends to shareholders
Other
Total common equity tier 1 capital
Swiss SRB including
transitional arrangements
(phase-in)
Swiss SRB as of 1.1.20
(fully applied)
31.12.16
31.12.15
31.12.16
31.12.15
54,302
(682)
0
(5,042)
(741)
(3,959)
(241)
(972)
(1,589)
(294)
(262)
(68)
(129)
57,308
(1,995)
(20)
(2,988)
(702)
(2,618)
(323)
(1,638)
(2,152)
(442)
(402)
(83)
(130)
54,302
(682)
0
(8,403)
(1,835)
(6,599)
(241)
(972)
(1,589)
(294)
(262)
(68)
(129)
57,308
(1,995)
(50)
(7,468)
(2,598)
(6,545)
(323)
(1,638)
(2,152)
(442)
(402)
(83)
(130)
(2,250)
(286)
(3,188)
(249)
(2,250)
(286)
(3,188)
(249)
37,788
40,378
30,693
30,044
1 As of 31 December 2016, the phase-in deduction applied was 60%; as of 31 December 2015, the phase-in deduction applied was 40%. 2 Includes goodwill related to significant investments in financial institutions
of CHF 342 million (31 December 2015: CHF 360 million). 3 Includes net expenses for compensation-related increases in high-trigger loss-absorbing capital for additional tier 1 and tier 2 capital.
Capital and leverage ratios
CET1 capital ratio
Our fully applied CET1 capital ratio decreased 0.7 percentage
points to 13.8% as of 31 December 2016, resulting from a
CHF 15.2 billion increase in RWA, partly offset by the CHF 0.7 bil-
lion increase in CET1 capital. On a phase-in basis, our CET1 capital
ratio decreased 2.2 percentage points to 16.8%, driven by the
decrease of CHF 2.6 billion in CET1 capital and an increase in
RWA of CHF 13.1 billion.
Going concern capital and gone concern loss-absorbing capacity
ratios
Our fully applied going concern capital ratio stood at 17.9% as of
31 December 2016, and at 24.7% on a phase-in basis. Our fully
applied gone concern loss-absorbing capacity ratio stood at
13.2% as of 31 December 2016 and at 8.1% on a phase-in basis.
The difference between phase-in and fully applied ratios primarily
relates to high- and low-trigger loss-absorbing tier 2 capital instru-
ments that are only eligible as gone concern capital and no longer
as going concern capital under the revised Swiss SRB framework
as of 1 January 2020.
Post-stress CET1 capital ratio
We are committed to total capital returns to shareholders of at
least 50% of net profit attributable to shareholders, provided that
we maintain a fully applied CET1 capital ratio of at least 13% and
consistent with our objective of maintaining a post-stress fully
applied CET1 capital ratio of at least 10%. Our post-stress CET1
capital ratio exceeded the 10% objective as of 31 December 2016.
➔ Refer to the “Risk management and control” section of this
report for more information on our binding stress scenario
➔ Refer to “Our stated capital returns objective is based, in part,
on capital ratios that are subject to regulatory change and may
fluctuate significantly” in the “Risk factors” section of this report
for more information on the risks related to our capital ratios
Going and gone concern leverage ratios
As of 31 December 2016, our fully applied going concern lever-
age ratio was 4.6%, while our phase-in going concern leverage
ratio stood at 6.4%.
Our fully applied gone concern leverage ratio was 3.4% as of
31 December 2016, while our phase-in gone concern leverage
ratio stood at 2.1%.
189
Risk, treasury and capital management
Risk, treasury and capital management
Capital management
Regulatory capital and movement
Going concern capital and movement
Our going concern capital consists of CET1 capital and loss-
absorbing AT1 capital.
Audited | Our CET1 capital mainly consists of share capital, share
premium, which consists primarily of additional paid-in capital
related to shares issued, and retained earnings. A detailed recon-
ciliation of IFRS equity to CET1 capital is provided in the “Recon-
ciliation IFRS equity to Swiss SRB common equity tier 1 capital”
table.
Our fully applied CET1 capital increased by CHF 0.7 billion to
CHF 30.7 billion as of 31 December 2016, mainly reflecting our
operating profit before tax of CHF 4.1 billion, partly offset by CHF
2.3 billion of accruals for proposed dividends to shareholders,
CHF 0.8 billion current tax expenses and CHF 0.7 billion related to
defined benefit plans. Our phase-in CET1 capital decreased by
CHF 2.6 billion to CHF 37.8 billion, as the aforementioned factors
that explained an increase in fully applied CET1 capital were more
than offset by negative phase-in effects of CHF 1.5 billion related
to deferred tax assets recognized for tax loss carry-forwards and
of CHF 1.4 billion related to goodwill.
Our fully applied loss-absorbing AT1 capital increased by
CHF 3.0 billion to CHF 9.2 billion as of 31 December 2016, result-
ing from the issuance of the equivalent of CHF 2.5 billion of high-
trigger loss-absorbing AT1 capital instruments and CHF 0.4 billion
due to Deferred Contingent Capital Plan (DCCP) awards granted
for the performance year 2016. On a phase-in basis, loss-absorb-
ing AT1 capital increased by CHF 2.3 billion, driven by the afore-
mentioned issuance of CHF 2.9 billion high-trigger loss-absorbing
AT1 capital instruments and a CHF 1.4 billion phase-in effect
related to goodwill, partly offset by the call of CHF 1.3 billion non-
Basel III-compliant tier 1 capital instruments and by a CHF 0.6
billion reduction due to the application of the revised Swiss SRB
rules as of 1 July 2016, where we are no longer using the remain-
ing instrument as an offset for goodwill deductions. The non-
Basel III-compliant tier 1 capital instrument remains eligible to
meet the gone concern requirement.
➔ Refer to the “Group performance” section of this report for more
information on other comprehensive income attributable to
shareholders related to defined benefit plans
Gone concern loss-absorbing capacity
Audited | As of 31 December 2016, our gone concern loss-absorb-
ing capacity was CHF 29.3 billion on a fully applied basis and
CHF 18.2 billion on a phase-in basis and included CHF 16.9 billion
of TLAC-eligible senior unsecured debt.
190
Swiss SRB total loss-absorbing capacity movement1
CHF million
Going concern capital
Common equity tier 1 capital as of 31.12.15 (former Swiss SRB)
Operating profit before tax
Net (profit) / loss attributable to non-controlling interests
Current tax (expense) / benefit
Deferred tax assets recognized for tax loss carry-forwards, additional phase-in effect
Deferred tax assets recognized for temporary differences, additional phase-in effect
Goodwill, additional phase-in effect
Defined benefit plans
Compensation- and own shares-related capital components (including share premium)
Foreign currency translation effects
Accruals for proposed dividends to shareholders
Other
Common equity tier 1 capital as of 31.12.16 (revised Swiss SRB)
Loss-absorbing additional tier 1 capital as of 31.12.15 (former Swiss SRB)
Goodwill, additional phase-in effect
Issuance of high-trigger loss-absorbing additional tier 1 capital instruments
Call of non-Basel III-compliant tier 1 capital
Application of revised Swiss SRB rules as of 1.7.162
Foreign currency translation and other effects
Loss-absorbing additional tier 1 capital as of 31.12.16 (revised Swiss SRB)
Tier 2 capital as of 31.12.15 (former Swiss SRB)
Call of non-Basel III-compliant tier 2 capital
Application of revised Swiss SRB rules as of 1.7.162
Foreign currency translation and other effects
Tier 2 capital as of 31.12.16 (revised Swiss SRB)
Total capital as of 31.12.15 (former Swiss SRB)
Total going concern capital as of 31.12.16 (revised Swiss SRB)
Gone concern loss-absorbing capacity
Tier 1 capital as of 31.12.15 (former Swiss SRB)
Application of revised Swiss SRB rules as of 1.7.162
Foreign currency translation and other effects
Tier 1 capital as of 31.12.16 (revised Swiss SRB)
Tier 2 capital as of 31.12.15 (former Swiss SRB)
Application of revised Swiss SRB rules as of 1.7.162
Decrease in eligibility due to shortening residual tenor
Foreign currency translation and other effects
Tier 2 capital as of 31.12.16 (revised Swiss SRB)
TLAC-eligible senior unsecured debt as of 31.12.15 (former Swiss SRB)
Inclusion of senior unsecured debt issued before 1.7.16 that became TLAC-eligible under revised Swiss SRB3
Issuance of TLAC-eligible senior unsecured debt instruments after 1.7.16
Foreign currency translation and other effects
TLAC-eligible senior unsecured debt as of 31.12.16 (revised Swiss SRB)
Total gone concern loss-absorbing capacity as of 31.12.15 (former Swiss SRB)
Total gone concern loss-absorbing capacity as of 31.12.16 (revised Swiss SRB)
Total loss-absorbing capacity
Total capital as of 31.12.15 (former Swiss SRB)
Total loss-absorbing capacity as of 31.12.16 (revised Swiss SRB)
Swiss SRB including
transitional arrangements
(phase-in)
Swiss SRB as of 1.1.20
(fully applied)
40,378
4,090
(82)
(811)
(1,494)
(351)
(1,399)
(779)
285
202
(2,250)
(1)
37,788
4,181
1,399
2,892
(1,261)
(649)
(50)
6,512
12,233
(156)
(741)
(43)
11,293
56,792
55,593
0
649
(7)
642
0
797
(97)
(2)
698
0
11,920
5,115
(145)
16,890
0
18,229
56,792
73,822
30,044
4,090
(82)
(811)
(749)
285
96
(2,250)
69
30,693
6,154
2,892
105
9,151
11,237
(11,331)
94
0
47,435
39,844
0
649
(7)
642
0
11,916
(97)
(40)
11,779
0
11,920
5,115
(145)
16,890
0
29,311
47,435
69,154
1 The terms “Going concern capital” and “Gone concern loss-absorbing capacity” are used in this table in reference to the information presented under the revised Swiss SRB framework only and do not apply to the
information presented under the former Swiss SRB framework. 2 Includes changes to the eligibility and amortization of instruments, as well as the new treatment applied to non-Basel III-compliant tier 1 capital, which
is no longer used as an offset for goodwill deductions. 3 Includes CHF 6,287 million of TLAC instruments issued in the first half year of 2016.
191
Risk, treasury and capital management Risk, treasury and capital management
Capital management
Additional information
Active management of sensitivity to currency movements
Corporate Center – Group Asset and Liability Management
(Group ALM) is mandated to minimize adverse effects from
changes in currency rates on our fully applied CET1 capital and
CET1 capital ratio. A significant portion of our capital and RWA is
denominated in US dollars, euros, British pounds and other for-
eign currencies. In order to hedge the CET1 capital ratio, CET1
capital needs to have foreign currency exposure, leading to cur-
rency sensitivity of CET1 capital. As a consequence, it is not pos-
sible to simultaneously fully hedge the capital and the capital
ratio. As the proportion of RWA denominated in foreign curren-
cies outweighs the capital in these currencies, a significant appre-
ciation of the Swiss franc against these currencies could benefit
our capital ratios, while a significant depreciation of the Swiss
franc against these currencies could adversely affect our capital
ratios. The Group Asset and Liability Management Committee, a
committee of the Group Executive Board, can adjust the currency
mix in capital, within limits set by the Board of Directors, to bal-
ance the effect of foreign exchange movements on the fully
applied CET1 capital and capital ratio. Limits are in place for the
sensitivity of both CET1 capital and the capital ratio to an appre-
ciation or depreciation of 10% in the value of the Swiss franc
against other currencies.
We estimate that a 10% depreciation of the Swiss franc against
other currencies would have increased our fully applied RWA by
CHF 10 billion and our fully applied CET1 capital by CHF 1.2 billion
as of 31 December 2016 (31 December 2015: CHF 9 billion and
CHF 0.9 billion, respectively) and reduced our fully applied CET1
capital ratio by 7 basis points (31 December 2015: 17 basis points).
Conversely, we estimate that a 10% appreciation of the Swiss
franc against other currencies would have reduced our fully
applied RWA by CHF 9 billion and our fully applied CET1 capital by
CHF 1.1 billion (31 December 2015: CHF 8 billion and CHF 0.8 bil-
lion, respectively) and increased our fully applied CET1 capital ratio
by 7 basis points (31 December 2015: 17 basis points).
to
Our leverage ratio is also sensitive to foreign exchange
movements due
the currency mix of our capital
and LRD. When adjusting the currency mix in capital, potential
effects on the leverage ratios are taken into account and the sen-
sitivity of the leverage ratio to an appreciation or depreciation of
10% in the value of the Swiss franc against other currencies is
actively monitored.
We estimate that a 10% depreciation of the Swiss franc
against other currencies would have increased our fully applied
leverage ratio denominator (LRD) by CHF 64 billion (31 December
2015: CHF 70 billion) and reduced our fully applied Swiss SRB
leverage ratio by 9 basis points (31 December 2015: 11 basis
points). Conversely, we estimate that a 10% appreciation of the
Swiss franc against other currencies would have reduced our fully
applied LRD by CHF 58 billion (31 December 2015: CHF 63 billion)
and increased our fully applied Swiss SRB leverage ratio by 10
basis points (31 December 2015: 12 basis points).
These sensitivities do not consider foreign currency translation
effects related to defined benefit plans other than those related to
the currency translation of the net equity of foreign operations.
Estimated effect on capital from litigation, regulatory and similar
matters subject to provisions and contingent liabilities
We have estimated the loss in capital that we could incur as a
result of the risks associated with the matters described in “Note 20
Provisions and contingent liabilities” to our consolidated financial
statements. This is an estimated amount and is not related to and
should not be considered in addition to these provisions and con-
tingent liabilities. We have used for this purpose the advanced
measurement approach (AMA) methodology that we use when
determining the capital requirements associated with operational
risks, based on a 99.9% confidence level over a 12-month hori-
zon. The methodology takes into consideration UBS and industry
experience for the AMA operational risk categories to which those
matters correspond, as well as the external environment affecting
risks of these types, in isolation from other areas. On this stand-
alone basis, we estimate the loss in capital that we could incur
over a 12-month period as a result of our risks associated with
these operational risk categories at CHF 4.8 billion as of 31 Decem-
ber 2016 (31 December 2015: CHF 3.7 billion). This estimate does
not take into account any provisions recognized for any of these
matters and does not constitute a subjective assessment of our
actual exposure in any of these matters.
The increase in the estimated loss of capital of CHF 1.1 billion
compared with the calculation as of 31 December 2015 was pri-
marily due to the implementation of a revised AMA model, which
was approved by FINMA in the first quarter of 2016. Concurrently,
FINMA agreed to remove the incremental operational risk charge
to our AMA-based operational risk-related RWA in relation to
known or unknown litigation, compliance and other operational
risk matters, which were not an element of our previous AMA
model.
➔ Refer to “Operational risk” in the “Risk management and
control” section of this report for more information
➔ Refer to “Note 20 Provisions and contingent liabilities” in the
“Consolidated financial statements” section of this report for
more information
192
Capital and capital ratios of our significant regulated subsidiaries
UBS Group AG is a holding company and conducts substantially all
of its operations through UBS AG and its subsidiaries. UBS Group
AG and UBS AG have contributed a significant portion of their
respective capital and provide substantial liquidity to subsidiaries.
Many of these subsidiaries are subject to regulations requiring
compliance with minimum capital, liquidity and similar require-
ments. The following table summarizes the regulatory capital com-
ponents and capital ratios of our significant regulated subsidiaries
determined under the regulatory framework of each subsidiary’s
home jurisdiction. Supervisory authorities generally have discretion
to impose higher requirements or to otherwise limit the activities
of subsidiaries. Supervisory authorities also may require entities to
measure capital and leverage ratios on a stressed basis and may
limit the ability of the entity to engage in new activities or take
capital actions based on the results of those tests.
Standalone legal entity financial and regulatory information for
UBS AG, UBS Switzerland AG and UBS Limited as well as consoli-
dated financial and regulatory information for UBS Americas
Holding LLC is provided under “Disclosure for legal entities” at
www.ubs.com/investors.
Regulatory capital components and capital ratios of our significant regulated subsidiaries1
CHF million, except where indicated
Capital
Common equity tier 1 capital
Additional tier 1 capital
Tier 1 capital
Total going concern capital
Tier 2 capital
Total gone concern capital
Total capital
Total loss-absorbing capacity
Risk-weighted assets and leverage ratio denominator
Risk-weighted assets
Leverage ratio denominator
Capital and leverage ratios (%)
Common equity tier 1 capital ratio
Tier 1 capital ratio
Going concern capital ratio
Total capital ratio
Total loss-absorbing capacity ratio
Leverage ratio4
Total loss-absorbing capacity leverage ratio
31.12.16
UBS AG
(standalone)
UBS Switzerland AG
(standalone)
UBS Limited
(standalone)2
33,983
0
33,983
0
33,983
10,416
1,2353
11,651
11,651
3,2653
14,916
UBS Americas
Holding LLC
(consolidated)
11,846
0
11,846
734
2,952
295
3,247
862
4,109
12,580
232,422
561,979
93,281
306,586
13,907
44,921
52,318
142,557
14.6
14.6
14.6
6.0
11.2
12.5
16.0
4.9
21.2
23.3
29.5
7.2
22.6
22.6
24.0
8.3
1 For UBS AG and UBS Switzerland AG, based on the applicable phase-in rules for Swiss systemically relevant banks (SRBs). For UBS Limited, based on Directive 2013 / 36 / EU and Regulation 575 / 2013 (together known
as “CRD IV”) and their related technical standards, as implemented within the UK by the Prudential Regulation Authority (PRA). For UBS Americas Holding LLC, based on applicable US Basel III rules. While UBS AG is
considered a systemically relevant bank (SRB) under Swiss banking law, it is, on a standalone basis, not subject to the revised too big to fail provisions of the Swiss SRB framework. 2 UBS Limited capital information
disclosed in this table excludes 2016 net profit carried forward, which will become eligible for inclusion only after completion of the statutory audit. 3 Going concern capital includes CET1 and high-trigger additional
tier 1 capital. Outstanding low-trigger tier 2 capital instruments will also remain available to meet the going concern capital requirements until the earlier of (i) their maturity or first call date or (ii) 31 December 2019.
However, as of 31 December 2016, CHF 765 million of high-trigger loss-absorbing additional tier 1 capital as well as the total low-trigger loss-absorbing tier 2 capital of CHF 2,500 million were used to meet the gone
concern requirement. 4 On the basis of total capital for UBS AG (standalone). On the basis of tier 1 capital for UBS Limited and UBS Americas Holding LLC.
Joint liability of UBS AG and UBS Switzerland AG
In June 2015, upon the transfer of the Personal & Corporate
Banking and Wealth Management businesses booked in Switzer-
land from UBS AG to UBS Switzerland AG, UBS AG and UBS Swit-
zerland AG assumed joint liability for obligations transferred to
UBS Switzerland AG and existing at UBS AG, respectively. Under
certain circumstances, the Swiss Banking Act and FINMA’s Bank-
ing Insolvency Ordinance authorize FINMA to modify, extinguish
or convert to common equity liabilities of a bank in connection
with a resolution or insolvency of such bank. Both joint liability
amounts have declined as obligations matured, terminated or
were novated following the transfer date.
➔ Refer to UBS AG standalone financial statements and UBS
Switzerland AG standalone financial statements as of
31 December 2016 under “Disclosure for legal entities” at
www.ubs.com/investors for more information
193
Risk, treasury and capital management Risk, treasury and capital management
Capital management
Risk-weighted assets
Our risk-weighted assets (RWA) on a fully applied basis are the
same as on a phase-in basis, except for differences related to
defined benefit plans and deferred tax assets (DTAs) on temporary
differences.
As a result of these differences, our phase-in RWA were
CHF 2.7 billion higher than our fully applied RWA as of 31 Decem-
ber 2016 (31 December 2015: CHF 4.8 billion higher), entirely
attributable to non-counterparty-related risk RWA.
On a fully applied basis, any net defined benefit pension asset
recognized in accordance with IAS 19 is fully deducted from com-
mon equity tier 1 (CET1) capital. On a phase-in basis, the deduc-
tion of net defined benefit pension assets from capital is phased
in, and the portion of the net defined benefit pension asset that
is not yet deducted from CET1 capital is risk weighted at 100%.
On a fully applied basis, DTAs on temporary differences below
a deduction threshold are risk weighted at 250%. On a phase-in
basis, the amount that is risk weighted at 250% is higher due to
a higher deduction threshold.
As of 31 December 2016, fully applied RWA increased by CHF
15.2 billion to CHF 222.7 billion, driven by CHF 8.4 billion in credit
risk, CHF 3.4 billion in market risk and CHF 2.7 billion in opera-
tional risk.
On a phase-in basis, RWA increased by CHF 13.1 billion to CHF
225.4 billion as of 31 December 2016.
➔ Refer to the Basel III Pillar 3 UBS Group AG 2016 report under
“Pillar 3, SEC filings & other disclosures” at www.ubs.com/
investors for more information
Movement in fully applied risk-weighted assets by key driver1
CHF billion
Total RWA as of 31.12.15
Credit risk RWA movement during 2016:
Methodology and policy changes
Model updates
Acquisitions and disposals of business operations
Credit quality
Asset size
Foreign exchange movements
Non-counterparty-related risk RWA movement during
2016:
Exposure movements
Foreign exchange movements
Market risk RWA movement during 2016:
Methodology changes
Model updates
Regulatory add-ons
Movement in risk levels
Operational risk RWA movement during 2016:
Model updates and other changes
Total movement
Total RWA as of 31.12.16
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
CC –
Services
CC –
Group ALM
25.3
(0.1)
0.5
0.0
0.0
0.0
(0.4)
(0.2)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.6
0.6
21.9
34.6
0.6
0.0
0.0
0.0
0.0
0.4
0.2
0.0
0.0
0.0
0.4
0.0
0.0
0.1
0.3
0.8
0.8
4.8
4.5
0.0
0.0
0.0
0.2
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2.3
2.3
0.5
25.8
1.9
23.8
7.0
41.6
2.6
(0.1)
0.0
0.0
0.0
0.0
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.4
1.4
1.3
3.9
62.9
23.6
1.5
2.8
0.0
0.0
0.4
(1.7)
0.0
(0.1)
(0.1)
0.0
3.5
(1.2)
(0.4)
0.2
4.9
2.7
2.7
7.5
0.1
0.0
0.0
0.0
0.0
0.1
0.0
0.6
0.6
0.0
(0.3)2
(0.1)
0.0
(0.5)
0.3
3.6
3.6
4.0
6.0
2.3
0.0
0.0
0.0
0.0
2.3
0.0
0.0
0.0
0.0
(0.2)
0.0
0.0
0.1
(0.3)
2.4
2.4
4.6
70.4
27.6
10.6
CC – Non-
core and
Legacy
Portfolio
30.7
(0.7)
0.0
0.0
0.0
(0.2)
(0.4)
(0.1)
0.0
0.0
0.0
0.0
(0.2)
0.0
0.0
0.2
(11.0)
(11.0)
(11.8)
18.9
Group
207.5
8.4
7.9
0.0
0.0
0.1
0.6
(0.2)
0.7
0.7
0.0
3.4
(1.5)
(0.4)
0.0
5.3
2.7
2.7
15.2
222.7
1 Refer to the “Definitions of RWA movement key drivers” table on the next page. 2 Includes the effect of portfolio diversification across businesses.
194
Definitions of RWA movement key drivers
We employ a range of analyses in our RWA monitoring framework to identify the key drivers of movements in the positions. This includes a top-down
identification approach for several sub-components of the RWA movement, leveraging information available from our monthly detailed calculation,
substantiation and control processes.
Key driver
Credit risk RWA
Methodology and
policy changes
Model updates
Key driver description
Movements due to methodological changes in calculations driven by regulatory policy changes, including revisions to
existing regulations, new regulations and add-ons mandated by the regulator. The effect of methodology and policy
changes on RWA is estimated based on the portfolio at the time of the implementation of the change.
Movements arising from the implementation of new models and from parameter changes to existing models. The RWA
effect of model updates is estimated based on the portfolio at the time of the implementation of the change.
Acquisitions and disposals of
business operations
Movements as a result of the disposal or acquisition of business operations, quantified based on the credit risk
exposures as at the end of the month preceding a disposal or following an acquisition. Purchases and sales of exposures
in the ordinary course of business are reflected under asset size.
Credit quality
Asset size
Movements resulting from changes in the underlying credit quality of counterparties. These are caused by changes to
risk parameters, such as counterparty ratings, loss given default estimates or credit hedges.
All movements that are not attributable to the other key drivers. This includes movements arising in the ordinary course
of business, such as new transactions, sales and write-offs. The amounts reported for each business division and
Corporate Center unit may also include the effect of transfers and reallocations of exposures between business divisions
and Corporate Center units.
Foreign exchange movements Movements as a result of changes in exchange rates of the transaction currencies versus the Swiss franc.
Non-counterparty-related risk RWA
Exposure movements
Movements arising from changes in deferred tax assets on temporary differences as well as from the purchase or sale of
property, equipment, software and other non-counterparty-related exposures.
Foreign exchange movements Movements as a result of changes in exchange rates of the transaction currencies versus the Swiss franc.
Market risk RWA
Methodology changes
Model updates
Regulatory add-ons
Movement in risk levels
Operational risk RWA
Model updates and other
Movements due to methodological changes in calculations driven by regulatory and internal policy decisions. In some
cases, the effects of methodology changes are assessed at the time of implementation and may not reflect the effects
for the entire year. Methodology changes may also, on occasion, be implemented at the same time as parameter
updates and changes in regulatory add-ons, the effects of which cannot be fully disaggregated.
Routine updates to model parameters, such as the roll-forward of the five-year historical data used for value-at-risk
(VaR). The effect of each parameter update, assessed at the point of implementation, has been used to approximate the
combined effect over the year.
“Risks-not-in-VaR” add-on described in the “Risk management and control” section of this report. The effects of
recalibrations are calculated by applying the previous and new multiplication factors to the quarter-ends VaR- and
SVaR-based RWA.
All movements that are not attributable to the other key drivers. This includes changes in positions, effects of market
movements on risk levels and foreign currency translation effects. The amounts reported for each business division and
Corporate Center unit may also include the effect of transfers and reallocations of exposures between business divisions
and Corporate Center units.
Movements arising from changes to the advanced measurement approach model from the semiannual parameter
update, as well as from changes to the allocation methodology.
195
Risk, treasury and capital management Risk, treasury and capital management
Capital management
RWA development in 2016
Credit risk
During 2016, credit risk RWA increased by CHF 8.4 billion to
CHF 112.8 billion as of 31 December 2016. This increase was
primarily driven by the effect of methodology and policy changes
of CHF 7.9 billion.
Methodology and policy changes
The increase in credit risk RWA from methodology and policy
changes of CHF 7.9 billion was primarily driven by an increase of
CHF 5.9 billion related to multipliers. This included a CHF 3.0 bil-
lion increase from changes to the internal ratings-based multiplier
on Investment Bank exposures to corporates, and a CHF 2.9 bil-
lion increase in Wealth Management and Personal & Corporate
Banking, mainly resulting from an increase in the multipliers on
Swiss residential mortgages and income-producing real estate,
with an effect of CHF 1.8 billion and CHF 0.9 billion, respectively.
The multipliers that FINMA requires banks that use the IRB
approach to apply will continue to increase over time until imple-
mentation is complete by the end of the first quarter of 2019. We
expect that this will add approximately CHF 6 billion to our RWA
in 2017, CHF 5 billion in 2018 and less than CHF 2 billion in 2019.
This excludes the effect of any methodology changes.
Additional changes to credit risk RWA were mainly driven by
the implementation of revised credit conversion factors for off-
balance sheet exposures as agreed with FINMA. As a result, RWA
for the Group increased by CHF 0.9 billion, with a decrease of
CHF 1.2 billion in the Investment Bank and a CHF 2.0 billion
increase in Personal & Corporate Banking. A further increase of
CHF 1.0 billion relates to a change to the margin period of risk
applied to our derivatives and securities financing transactions.
Asset size
The increase in credit risk RWA due to asset size and other move-
ments of CHF 0.6 billion was due to an increase of CHF 2.3 billion
in Corporate Center – Group ALM, partly offset by a decrease in
the Investment Bank of CHF 1.7 billion.
The increase of CHF 2.3 billion in Corporate Center – Group
ALM was primarily driven by an increase in high-quality liquid
assets-eligible securities. The decrease of CHF 1.7 billion in the
Investment Bank was due to a CHF 2.4 billion reduction in deriva-
tives RWA, largely driven by an update of the stress period used
for the exposure-at-default calculation, implying lower equity
volatility for the stress period to be applied. This decrease was
partly offset by an increase in derivative exposures and securities
financing transactions.
Market risk
Market risk RWA increased by CHF 3.4 billion to CHF 15.5 billion
as of 31 December 2016, driven by a CHF 5.3 billion increase from
changes in risk levels, partly offset by a CHF 1.5 billion decrease
related to methodology changes and other reductions of CHF 0.4
billion.
The CHF 5.3 billion increase in RWA from changes in risk levels
was mainly due to higher average stressed and regulatory value-
at-risk (VaR) levels in the fourth quarter of 2016, resulting in CHF
4.9 billion higher RWA in the Investment Bank. This increase in
VaR levels was driven by various factors across our Equities and
Foreign Exchange, Rates and Credit businesses, including option
expiries and stronger client flows.
The decrease of CHF 1.5 billion related to methodology
changes was primarily due to a structural change made to the VaR
model resulting in a reduction in the VaR and stressed VaR mea-
sures in the Investment Bank amounting to CHF 1.2 billion.
➔ Refer to the “Risk management and control” section of this
report and the Basel III Pillar 3 UBS Group AG 2016 report under
“Pillar 3, SEC filings & other disclosures” at www.ubs.com/
investors for more information on market risk developments
Operational risk
Operational risk RWA increased by CHF 2.7 billion to CHF 77.8
billion as of 31 December 2016. An increase of CHF 1.4 billion
was driven by changes to the advanced measurement approach
(AMA) model used for the calculation of operational risk capital
that were approved by FINMA in the first quarter of 2016. Con-
currently, FINMA agreed to the removal of the incremental opera-
tional risk RWA, such that all operational risk-related regulatory
capital requirements are now calculated in the model.
An additional increase of CHF 1.3 billion occurred as a result of
the semiannual review and update of inputs to our AMA model in
the third quarter of 2016. This review also included revisions to
the methodology for the allocation of operational risk RWA to
business divisions and Corporate Center units. In addition to con-
sidering historical operational risk loss contributions, the revised
methodology takes into account the relative size of the business
divisions and Corporate Center units and other operational risk
indicators. As a result of these changes, operational risk RWA in
Corporate Center – Non-core and Legacy Portfolio decreased by
CHF 11.4 billion, while operational risk RWA in all business divi-
sions and other Corporate Center units increased.
We expect to complete the semiannual calibration of our AMA
model in the first quarter of 2017 and anticipate that our opera-
tional risk RWA may increase as a result.
➔ Refer to “Operational risk” in the “Risk management and control”
section of this report for more information on the AMA model
196
Risk-weighted assets by business division and Corporate Center unit
CHF billion
Credit risk
Advanced IRB approach2
Standardized approach3
Non-counterparty-related risk4
Market risk
Operational risk
Total RWA, phase-in
Phase-out items6
Total RWA, fully applied
Credit risk
Advanced IRB approach2
Standardized approach3
Non-counterparty-related risk4
Market risk
Operational risk
Total RWA, phase-in
Phase-out items6
Total RWA, fully applied
Credit risk
Advanced IRB approach2
Standardized approach3
Non-counterparty-related risk4
Market risk
Operational risk
Total RWA, phase-in
Phase-out items6
Total RWA, fully applied
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Manage-
ment
Investment
Bank
CC –
Services
31.12.16
CC –
Group
ALM
CC – Non-
core and
Legacy
Portfolio
Total
RWA
Total capital
requirement1
16.3
13.5
2.8
2.8
2.2
11.2
32.5
13.2
10.8
2.4
2.6
1.5
9.5
26.8
12.5
9.0
3.5
0.1
0.0
13.2
25.8
0.0
25.8
12.6
8.5
4.1
0.1
0.0
12.6
25.3
0.0
25.3
(0.1)
0.5
(0.6)
0.0
0.0
0.6
0.5
0.0
0.5
9.1
3.7
5.4
0.0
1.4
13.2
23.8
0.0
23.8
8.5
3.4
5.1
0.0
1.0
12.4
21.9
0.0
21.9
0.6
0.3
0.3
0.0
0.4
0.8
1.9
0.0
1.9
37.7
36.1
1.6
0.1
0.0
3.9
41.6
0.0
41.6
32.9
31.2
1.7
0.1
0.0
1.6
34.6
0.0
34.6
4.8
4.9
(0.1)
0.0
0.0
2.3
7.0
0.0
7.0
1.6
0.9
0.6
0.0
0.0
2.3
3.9
0.0
3.9
1.7
1.0
0.7
0.0
0.0
0.9
2.6
0.0
2.6
37.0
33.7
3.3
0.0
14.0
19.5
70.4
0.0
70.4
31.12.15
35.5
32.0
3.6
0.1
10.5
16.8
62.9
0.0
62.9
31.12.16 vs 31.12.15
(0.1)
(0.1)
(0.1)
0.0
0.0
1.4
1.3
0.0
1.3
1.5
1.7
(0.3)
(0.1)
3.5
2.7
7.5
0.0
7.5
1.4
0.2
1.2
19.1
(3.2)5
13.1
30.3
2.7
27.6
1.3
0.2
1.1
20.5
(2.9)5
9.5
28.3
4.7
23.6
0.1
0.0
0.1
(1.4)
(0.3)
3.6
2.0
(2.0)
4.0
7.3
4.8
2.6
0.0
0.7
2.5
10.6
0.0
10.6
5.0
3.9
1.0
0.0
0.9
0.1
6.0
0.0
6.0
2.3
0.9
1.6
0.0
(0.2)
2.4
4.6
0.0
4.6
6.2
5.0
1.2
0.0
2.6
10.1
18.9
0.0
18.9
6.9
5.0
2.0
0.0
2.6
21.1
30.7
0.0
30.7
(0.7)
0.0
(0.8)
0.0
0.0
(11.0)
(11.8)
0.0
(11.8)
112.8
93.4
19.4
19.3
15.5
77.8
225.4
2.7
222.7
104.4
85.2
19.2
20.7
12.1
75.1
212.3
4.8
207.5
8.4
8.2
0.2
(1.4)
3.4
2.7
13.1
(2.1)
15.2
1 Calculated on the basis of our Swiss SRB total going and gone concern capital requirement of 14.4% of RWA on a phase-in basis (31 December 2015: 12.6%, based on the former Swiss SRB requirement on a phase-in
basis). 2 Includes equity exposures in the banking book according to the simple risk weight method. 3 Includes settlement risk and business transfers. 4 Non-counterparty-related risk RWA are comprised of RWA for
deferred tax assets recognized for temporary differences (31 December 2016: CHF 10.9 billion, 31 December 2015: CHF 12.9 billion), property, equipment and software (31 December 2016: CHF 8.3 billion, 31 December 2015:
CHF 7.6 billion) and other items (31 December 2016: CHF 0.2 billion, 31 December 2015: CHF 0.2 billion). 5 Corporate Center – Services market risk RWA were negative, as they included the effect of portfolio diversification
across businesses. 6 Phase-out items are entirely related to non-counterparty-related risk RWA.
197
Risk, treasury and capital management
Risk, treasury and capital management
Capital management
Leverage ratio denominator
During 2016, the fully applied leverage ratio denominator (LRD)
decreased by CHF 27 billion to CHF 870 billion as of 31 December
2016 due to incremental netting and collateral mitigation of CHF
19 billion, mainly in derivative exposures and securities financing
transactions, currency effects of CHF 4 billion, asset size and other
reductions of CHF 2 billion and other methodology changes of
CHF 2 billion.
Movement in fully applied leverage ratio denominator by key driver
CHF billion
On-balance sheet exposures (excluding derivative exposures and SFTs)1
Derivative exposures
Securities financing transactions
Off-balance sheet items
Deduction items
Total
LRD as of
31.12.15
Currency
effects
625.2
128.9
120.1
41.1
(17.7)
897.6
(2.8)
(1.8)
0.4
0.2
(0.2)
(4.2)
Incremental
netting and
collateral
mitigation
(1.0)
(11.9)
(6.3)
0.0
0.0
(19.2)
Other
methodology
changes
Asset size
and
other
LRD as of
31.12.16
0.0
(1.8)
0.0
0.0
0.0
(1.8)
16.7
(5.8)
(9.5)
(3.6)
0.2
(1.9)
638.1
107.6
104.7
37.7
(17.7)
870.5
1 Excludes positive replacement values, cash collateral receivables on derivative instruments, cash collateral on securities borrowed, reverse repurchase agreements, margin loans and prime brokerage receivables related
to securities financing transactions, which are presented separately under Derivative exposures and Securities financing transactions in this table.
The LRD movements described below exclude currency effects.
On-balance sheet exposures, excluding derivative exposures
and securities financing transactions, increased by CHF 16 billion
driven by an increase of CHF 37 billion in Corporate Center –
Group Asset and Liability Management (Group ALM), mainly
related to increased cash and balances with central banks and a
net increase in financial assets designated at fair value, available
for sale and held to maturity of CHF 41 billion on a combined
basis, of which CHF 3 billion was related to a transfer of high-
quality liquid assets from Wealth Management to Corporate Cen-
ter – Group ALM. The increase in on-balance sheet exposure in
Corporate Center – Group ALM mainly reflected liquidity require-
ments applicable to our US intermediate holding company and
UBS Europe SE and also resulted from an increase in net funds
transferred to Corporate Center – Group ALM by the business
divisions. The increase in Corporate Center – Group ALM was
partly offset by a CHF 16 billion reduction in trading portfolio
assets in the Investment Bank, primarily in our Equities business,
mainly reflecting effective resource management and a reduction
in client activity.
Derivative exposures decreased by CHF 20 billion, primarily
related to incremental netting and collateral mitigation benefits in
Corporate Center – Non-core and Legacy Portfolio of CHF 6 bil-
lion, mainly reflecting improved netting of long and short written
credit derivative positions and a reduction of CHF 6 billion in the
Investment Bank due to increased netting of eligible cash variation
margin. In addition, a reduction of CHF 6 billion in the Investment
Bank and Corporate Center – Non-core and Legacy Portfolio due
to asset size and other movements resulted from the application
of the daily settlement option to our interest rate swap transac-
tions primarily with the London Clearing House, which shortened
the maturities relevant for calculating the current exposure
method add-on.
Securities financing transactions decreased by CHF 10 billion,
due to asset size and other movements, primarily in Corporate
Center – Group ALM. Furthermore a reduction of CHF 6 billion,
mainly in the Investment Bank, resulted from incremental netting
and collateral mitigation.
Off-balance sheet items decreased by CHF 4 billion, primarily
due to terminations of committed credit facilities in the Invest-
ment Bank.
➔ Refer to “Balance sheet, liquidity and funding management” in
the “Treasury management” section of this report for more
information on balance sheet movements
➔ Refer to “Note 1b Changes in accounting policies, comparability
and other adjustments” in the “Consolidated financial state-
ments” section of this report for more information on the
application of the daily settlements option
➔ Refer to the “The legal structure of UBS Group” section of this
report for more information on our US intermediate holding
company and UBS Europe SE
198
Leverage ratio denominator by business division and Corporate Center unit
CHF billion
Total IFRS assets
Difference in scope of consolidation1
Less: derivative exposures and SFTs2
On-balance sheet exposures (excluding
derivative exposures and SFTs)
Derivative exposures
Securities financing transactions
Off-balance sheet items
Items deducted from Swiss SRB tier 1 capital
Total exposures (leverage ratio denominator),
phase-in
Additional items deducted from Swiss SRB tier 1 capital
Total exposures (leverage ratio denominator),
fully applied
Total IFRS assets
Difference in scope of consolidation1
Less: derivative exposures and SFTs2
On-balance sheet exposures (excluding
derivative exposures and SFTs)
Derivative exposures
Securities financing transactions
Off-balance sheet items
Items deducted from Swiss SRB tier 1 capital
Total exposures (leverage ratio denominator),
phase-in
Additional items deducted from Swiss SRB tier 1 capital
Total exposures (leverage ratio denominator),
fully applied
Total IFRS assets
Difference in scope of consolidation1
Less: derivative exposures and SFTs2
On-balance sheet exposures (excluding
derivative exposures and SFTs)
Derivative exposures
Securities financing transactions
Off-balance sheet items
Items deducted from Swiss SRB tier 1 capital
Total exposures (leverage ratio denominator),
phase-in
Additional items deducted from Swiss SRB tier 1 capital
Total exposures (leverage ratio denominator),
fully applied
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
CC –
Services
CC –
Group
ALM3
CC – Non-
core and
Legacy
Portfolio3
Total
115.5
(5.1)
(2.0)
65.9
(0.2)
(2.0)
139.9
0.0
(2.2)
108.4
63.7
137.7
3.5
0.0
3.6
2.5
1.0
0.9
2.7
0.0
11.9
31.12.16
12.0
(9.3)
0.0
2.7
0.0
0.0
0.0
242.3
(0.7)
(151.4)
90.2
77.5
42.9
20.6
23.7
(0.2)
0.0
267.2
0.2
(60.6)
23.4
206.7
6.3
59.1
0.3
0.0
0.0
0.1
(13.2)
68.5
0.0
935.0
(15.5)
(63.3)
(281.4)
5.2
15.2
1.8
0.3
638.1
107.6
104.7
37.7
(13.2)
115.5
68.1
152.2
2.7
231.2
10.3
272.4
22.4
874.9
(4.5)
(4.5)
115.5
68.1
152.2
2.7
231.2
5.8
272.4
22.4
870.5
119.9
(6.0)
(2.0)
61.0
(0.2)
(1.8)
141.2
0.0
(2.7)
111.8
59.0
138.5
4.0
0.0
3.2
1.7
1.1
1.0
3.5
0.0
11.9
31.12.15
12.9
(10.2)
0.0
2.7
0.0
0.0
0.0
253.5
(0.7)
(139.4)
22.6
239.3
0.0
0.0
0.3
(68.5)
92.5
0.0
942.8
(16.8)
(86.4)
(300.8)
113.5
22.5
171.1
81.8
48.6
24.1
8.9
67.8
0.0
0.0
0.0
0.0
(11.3)
6.2
28.9
2.5
0.8
625.2
128.9
120.1
41.1
(11.3)
119.0
62.9
153.8
2.7
268.0
11.3
247.9
38.5
904.0
(6.4)
(6.4)
119.0
62.9
153.8
2.7
268.0
4.8
247.9
38.5
897.6
(4.4)
0.9
0.0
(3.4)
(0.5)
0.0
0.4
4.9
0.0
(0.2)
4.7
0.8
(0.1)
(0.1)
(1.3)
0.0
0.5
(0.8)
(0.8)
0.0
0.0
31.12.16 vs 31.12.15
(0.9)
0.9
0.0
0.0
0.0
0.0
0.0
(11.2)
0.0
(12.0)
(23.3)
(4.3)
(5.7)
(3.5)
(3.5)
5.2
(1.6)
0.0
(36.8)
1.1
(0.2)
0.0
0.9
0.0
0.0
0.1
(1.9)
(1.0)
1.9
27.9
(0.1)
7.9
35.6
(2.6)
(8.7)
0.3
(24.0)
0.0
23.1
(1.0)
(13.7)
(0.7)
(0.5)
(7.8)
1.3
19.4
12.9
(21.3)
(15.4)
(3.4)
(1.9)
24.5
(16.1)
(29.1)
1.9
(3.5)
5.2
(1.6)
0.0
(36.8)
1.0
24.5
(16.1)
(27.1)
1 Represents the difference between the IFRS and the regulatory scope of consolidation, which is the applicable scope for the LRD calculation. 2 Consists of positive replacement values, cash collateral receivables on
derivative instruments, cash collateral on securities borrowed, reverse repurchase agreements, margin loans and prime brokerage receivables related to securities financing transactions in accordance with the regulatory
scope of consolidation, which are presented separately under Derivative exposures and Securities financing transactions. 3 Comparative figures as of 31 December 2015 in this table have been restated to reflect the
transfer of the Risk Exposure Management (REM) function from Corporate Center – Non-core and Legacy Portfolio to Corporate Center – Group ALM in 2016. Refer to “Corporate Center – Group Asset and Liability
Management” in the “Corporate Center” sections in “Operating environment and strategy” and ”Financial and operating performance” of this report for more information.
199
Risk, treasury and capital management Risk, treasury and capital management
Capital management
Equity attribution framework
The equity attribution framework reflects our objectives of main-
taining a strong capital base and managing performance by guid-
ing each business toward activities that appropriately balance
profit potential, risk and capital usage. This framework, which
includes some forward-looking elements, enables us to integrate
Group-wide capital management activities with those at a busi-
ness division level and to calculate and assess return on attributed
equity (RoAE) for each of our business divisions.
Equity attribution framework in 2016
During 2016, tangible equity was attributed to our business divi-
sions by applying a weighted-driver approach. Average fully
applied risk-weighted assets (RWA), average fully applied leverage
ratio denominator (LRD) and risk-based capital (RBC) were con-
verted to their CET1 equivalents using capital ratios of 11% for
RWA, 3.75% for LRD, and for RBC a conversion factor, reflecting
the share of exposure covered by CET1 capital. These CET1 equiv-
alents are then given a weighting of one-third each.
In addition to tangible equity, we allocated equity to support
goodwill and intangible assets. Group items within Corporate
Center – Services represented equity not allocated to the busi-
ness divisions. This included equity related to certain Basel III
capital deduction items, mainly deferred tax assets, equity
required to align total attributed equity with Group capital tar-
gets, equity for centrally held RBC items, as well as attributed
equity for goodwill and intangible assets resulting from the
acquisition of PaineWebber.
➔ Refer to the “Risk management and control” section of this
report for more information on risk-based capital
Average total equity attributed to business divisions and Cor-
porate Center increased to CHF 48.2 billion in 2016 compared
with CHF 44.6 billion in 2015.
Average equity attributable to shareholders increased to CHF
53.9 billion in 2016 from CHF 52.4 billion in 2015. The difference
between average equity attributable to shareholders and average
equity attributed to business divisions and Corporate Center
decreased to CHF 5.7 billion in 2016 compared with CHF 7.8 bil-
lion in 2015.
Revised equity attribution framework
In the first quarter of 2017, we revised our equity attribution
framework to reflect the revision of the too big to fail provisions
applicable to Swiss systemically relevant banks.
Effective 1 January 2017, the weighting used for the attribu-
tion of tangible equity has been changed from an equal driver
weighting of one-third each for average fully applied RWA, aver-
age fully applied LRD and RBC to 50% each for RWA and LRD.
Average fully applied RWA and LRD continue to be converted to
their CET1 capital equivalents based on capital ratios of 11% and
3.75%, respectively, which are above future regulatory require-
ments. If the tangible attributed equity calculated under the
weighted-driver approach is less than the CET1 capital equivalent
of RBC for any business division, the CET1 capital equivalent of
RBC will be used as a floor for that business division.
In addition to tangible equity, we continue to allocate equity to
our businesses to support goodwill and intangible assets. How-
ever, we now also attribute to the business divisions equity for
goodwill and intangible assets resulting from the acquisition of
PaineWebber that was held centrally in Group items within Corpo-
rate Center – Services under the previous framework. Also, we
now attribute all Basel III capital deduction items to Group items.
These deduction items include deferred tax assets, which consti-
tute the largest component of Group items, unrealized gains from
cash flow hedges and compensation- and own share-related com-
ponents. Previously, Group items only included an amount of
attributed equity for certain capital deduction items. In addition,
the total amount of attributed equity equals average shareholders’
equity with any residual difference reported within Group items,
whereas such difference was previously reported separately.
Under the revised framework, Corporate Center – Group Asset
and Liability Management (Group ALM) attributes to the business
divisions and other Corporate Center units equity pertaining to
LRD and RWA directly associated with activity that Group ALM
manages centrally on their behalf. This attribution is primarily
based on the level of high-quality liquid assets that is needed to
meet the Group’s minimum liquidity coverage ratio requirement
of 110%. Group ALM continues to retain attributed equity related
to liquidity and funding surpluses, i.e., at levels above regulatory
requirements, together with that related to its own activities.
200
Average attributed equity
CHF billion
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center
of which: Services
of which: Group items
of which: Group ALM
of which: Non-core and Legacy Portfolio
Average equity attributed to business divisions and Corporate Center
Difference
Average equity attributable to shareholders
Return on attributed equity and return on equity1
In %
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
UBS Group
For the year ended
31.12.16
31.12.15
31.12.14
3.5
2.6
4.1
1.4
7.7
29.1
22.8
21.4
4.3
2.1
48.2
5.7
53.9
3.5
2.5
3.9
1.6
7.3
25.8
19.6
18.2
3.3
2.9
44.6
7.8
52.4
3.4
2.7
4.1
1.7
7.6
20.5
12.3
11.3
3.2
4.9
39.9
9.8
49.7
For the year ended
31.12.16
31.12.15
31.12.14
56.1
43.4
43.2
32.3
13.1
5.9
77.4
29.0
41.9
36.5
25.9
11.8
67.9
33.6
36.7
27.5
(1.1)
7.0
1 Return on attributed equity shown for the business divisions and return on equity attributable to shareholders shown for the UBS Group. Return on attributed equity for Corporate Center is not shown, as it is not
meaningful.
Return on attributed equity (adjusted)1, 2
In %
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
For the year ended
31.12.16
31.12.15
31.12.14
69.0
48.5
43.0
39.4
19.6
81.4
33.7
42.8
38.1
31.3
73.3
35.4
38.3
29.9
2.1
1 Return on attributed equity for Corporate Center is not shown, as it is not meaningful. 2 Adjusted results are non-GAAP financial measures as defined by SEC regulations. Refer to the ”Group performance” section
of this report for more information on adjusted results.
201
Risk, treasury and capital management
Risk, treasury and capital management
UBS shares
UBS shares
UBS Group AG shares
Audited | As of 31 December 2016, IFRS equity attributable to
shareholders amounted to CHF 53,621 million, represented by
3,850,766,389 shares
increased by
issued. Shares
1,034,854 shares in 2016 due the issuance of shares out of
conditional share capital upon exercise of employee share options.
issued
UBS Group share information
Shares issued
Treasury shares
Shares outstanding
Basic earnings per share (CHF)1
Diluted earnings per share (CHF)1
Equity attributable to shareholders (CHF million)
Less: goodwill and intangible assets (CHF million)
Tangible equity attributable to shareholders (CHF million)
Total book value per share (CHF)
Tangible book value per share (CHF)
Share price (CHF)
Market capitalization (CHF million)2
Each share has a par value of CHF 0.10 and entitles the holder
to one vote at the UBS Group AG shareholders’ meeting, if
entered into the share register as having the right to vote, and
also a proportionate share of distributed dividends. As the Articles
of Association of UBS Group AG indicate, there are no other
classes of shares and no preferential rights for shareholders.
➔ Refer to the “Corporate governance” section of this report for
more information on UBS shares
As of or for the year ended
31.12.16
3,850,766,389
138,441,772
3,712,324,617
31.12.15
3,849,731,535
98,706,275
3,751,025,260
0.86
0.84
53,621
6,556
47,065
14.44
12.68
15.95
61,420
1.68
1.64
55,313
6,568
48,745
14.75
13.00
19.52
75,147
% change from
31.12.15
0
40
(1)
(49)
(49)
(3)
0
(3)
(2)
(2)
(18)
(18)
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 Market capitalization is calculated based on the total
shares issued multiplied by the share price at period end.
202
Holding of UBS Group AG shares
Group Treasury holds UBS Group AG shares exclusively to hedge
future share delivery obligations related to employee share-based
compensation awards. In addition, the Investment Bank holds a
very limited number of UBS Group AG shares, primarily in its
capacity as a market-maker in UBS Group AG shares and related
derivatives and to hedge certain issued structured debt instru-
ments. As of 31 December 2016, we held a total of 138,441,772
treasury shares (31 December 2015: 98,706,275), or 3.6%
(31 December 2015: 2.6%) of shares issued.
Share delivery obligations related to employee share-based
compensation awards increased to 166 million shares as of
31 December 2016 compared with 138 million shares as of
31 December 2015. Share delivery obligations are calculated on
the basis of unvested notional share awards, options and stock
appreciation rights, taking applicable performance conditions into
account. Treasury shares held are delivered to employees at exer-
cise or vesting. However, share delivery obligations related to cer-
tain options and stock appreciation rights can also be satisfied by
shares issued out of conditional capital. As of 31 December 2016,
the number of UBS Group AG shares that could have been issued
out of conditional capital for this purpose was 130 million
(31 December 2015: 131 million).
The table below outlines the market purchases of UBS Group
AG shares by Group Treasury. It does not include the activities of
the Investment Bank.
Treasury share purchases1
Month of purchase
January 2016
February 2016
March 2016
April 2016
May 2016
June 2016
July 2016
August 2016
September 2016
October 2016
November 2016
December 2016
Treasury shares purchased
Total number of shares
Number of shares
Average price in CHF
Number of shares (cumulative)
Average price in CHF
14,500,000
40,500,000
15,000,000
14.44
16.20
14.28
14,500,000
55,000,000
55,000,000
55,000,000
70,000,000
70,000,000
70,000,000
70,000,000
70,000,000
70,000,000
70,000,000
14.44
15.74
15.74
15.74
15.43
15.43
15.43
15.43
15.43
15.43
15.43
1 This table excludes purchases for the purpose of hedging derivatives linked to UBS Group AG shares and for market-making in UBS Group AG shares. The table also excludes UBS Group AG shares purchased by pension
and retirement benefit funds for UBS employees, which are managed by a board of UBS management and employee representatives in accordance with Swiss law guidelines. UBS’s pension and other post-employment
benefit funds purchased 2,427,400 UBS Group AG shares during the year and held 18,362,533 UBS Group AG shares as of 31 December 2016.
Trading volumes
1,000 shares
SIX Swiss Exchange total
SIX Swiss Exchange daily average
NYSE total
NYSE daily average
Source: Reuters
1 2014 data reflects UBS AG trading volumes up to 27 November 2014 and UBS Group AG trading volumes from 28 November 2014 onward.
For the year ended
31.12.16
3,761,294
14,808
160,887
638
31.12.15
2,870,766
11,437
102,069
405
31.12.141
2,839,304
11,403
88,792
354
203
Risk, treasury and capital management Risk, treasury and capital management
UBS shares
Listing of UBS Group AG shares
UBS Group AG shares are listed on the SIX Swiss Exchange (SIX).
They are also listed on the New York Stock Exchange (NYSE) as
global registered shares. As such, they can be traded and trans-
ferred across applicable borders without the need for conversion,
with identical shares traded on different stock exchanges in differ-
ent currencies.
During 2016, the average daily trading volume of UBS Group
AG shares was 14.8 million shares on the SIX and 0.6 million
shares on the NYSE. The SIX is expected to remain the main venue
for determining the movement in our share price due to the high
volume traded on this exchange.
During the hours in which both the SIX and the NYSE are
simultaneously open for trading (generally 3:30 p.m. to 5:30 p.m.
Central European Time), price differences between these
exchanges are likely to be arbitraged away by professional mar-
ket-makers. Accordingly, the share price will typically be similar
between the two exchanges when considering the prevailing US
dollar / Swiss franc exchange rate. When the SIX is closed for trad-
ing, globally traded volumes will typically be lower. However, the
specialist firm making a market in UBS Group AG shares on the
NYSE is required to facilitate sufficient liquidity and maintain an
orderly market in UBS Group AG shares throughout normal NYSE
trading hours.
(cid:55)(cid:36)(cid:53)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:82)(cid:84)(cid:75)(cid:69)(cid:71)(cid:2)(cid:69)(cid:74)(cid:67)(cid:84)(cid:86)(cid:2)(cid:88)(cid:85)(cid:2)(cid:38)(cid:44)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:85)(cid:2)(cid:54)(cid:75)(cid:86)(cid:67)(cid:80)(cid:85)(cid:2)(cid:43)(cid:80)(cid:70)(cid:71)(cid:90)
(cid:75)(cid:80)(cid:2)(cid:7)(cid:2)
(cid:19)(cid:2)(cid:44)(cid:67)(cid:80)(cid:87)(cid:67)(cid:84)(cid:91)(cid:2)(cid:20)(cid:18)(cid:19)(cid:22)(cid:115) (cid:21)(cid:19)(cid:2)(cid:38)(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:24)
(cid:52)(cid:71)(cid:82)(cid:84)(cid:71)(cid:85)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:82)(cid:84)(cid:75)(cid:69)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:41)(cid:2)(cid:87)(cid:80)(cid:86)(cid:75)(cid:78)(cid:2)(cid:20)(cid:25)(cid:2)(cid:48)(cid:81)(cid:88)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:22)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:72)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:35)(cid:41)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:20)(cid:26)(cid:2)(cid:48)(cid:81)(cid:88)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:22)(cid:2)(cid:81)(cid:80)(cid:89)(cid:67)(cid:84)(cid:70)(cid:85)(cid:16)
(cid:20)(cid:18)(cid:18)
(cid:19)(cid:25)(cid:23)
(cid:19)(cid:23)(cid:18)
(cid:19)(cid:20)(cid:23)
(cid:19)(cid:18)(cid:18)
(cid:2)(cid:2)(cid:25)(cid:23)
(cid:2)(cid:2)(cid:23)(cid:18)
(cid:2)(cid:2)(cid:20)(cid:23)
(cid:2)(cid:2)(cid:2)(cid:2)(cid:18)
(cid:19)(cid:51)(cid:19)(cid:22)
(cid:20)(cid:51)(cid:19)(cid:22)
(cid:21)(cid:51)(cid:19)(cid:22)
(cid:22)(cid:51)(cid:19)(cid:22)
(cid:19)(cid:51)(cid:19)(cid:23)
(cid:20)(cid:51)(cid:19)(cid:23)
(cid:21)(cid:51)(cid:19)(cid:23)
(cid:22)(cid:51)(cid:19)(cid:23)
(cid:19)(cid:51)(cid:19)(cid:24)
(cid:20)(cid:51)(cid:19)(cid:24)
(cid:21)(cid:51)(cid:19)(cid:24)
(cid:22)(cid:51)(cid:19)(cid:24)
(cid:55)(cid:36)(cid:53)(cid:2)(cid:84)(cid:71)(cid:73)(cid:75)(cid:85)(cid:86)(cid:71)(cid:84)(cid:71)(cid:70)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:37)(cid:42)(cid:40)
(cid:38)(cid:44)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:85)(cid:2)(cid:54)(cid:75)(cid:86)(cid:67)(cid:80)(cid:85)(cid:2)(cid:43)(cid:80)(cid:70)(cid:71)(cid:90)(cid:2)(cid:37)(cid:42)(cid:40)
(cid:40)(cid:81)(cid:84)(cid:2)(cid:69)(cid:87)(cid:84)(cid:84)(cid:71)(cid:80)(cid:86)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:82)(cid:84)(cid:75)(cid:69)(cid:71)(cid:2)(cid:84)(cid:71)(cid:72)(cid:71)(cid:84)(cid:2)(cid:86)(cid:81)(cid:28)(cid:2)(cid:89)(cid:89)(cid:89)(cid:16)(cid:87)(cid:68)(cid:85)(cid:16)(cid:69)(cid:81)(cid:79)(cid:17)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:82)(cid:84)(cid:75)(cid:69)(cid:71)
Ticker symbols UBS Group AG
Security identification codes
Trading exchange
SIX Swiss Exchange
New York Stock Exchange
SIX / NYSE
Bloomberg
Reuters
UBSG
UBS
UBSG VX
UBS UN
UBSG.S
UBS.N
ISIN
Valoren
CUSIP
CH0244767585
24 476 758
CINS H42097 10 7
204
(cid:20)(cid:18)(cid:18)(cid:16)(cid:18)
(cid:19)(cid:26)(cid:25)(cid:16)(cid:23)
(cid:19)(cid:25)(cid:23)(cid:16)(cid:18)
(cid:19)(cid:24)(cid:20)(cid:16)(cid:23)
(cid:19)(cid:23)(cid:18)(cid:16)(cid:18)
(cid:19)(cid:21)(cid:25)(cid:16)(cid:23)
(cid:19)(cid:20)(cid:23)(cid:16)(cid:18)
(cid:19)(cid:19)(cid:20)(cid:16)(cid:23)
(cid:19)(cid:18)(cid:18)(cid:16)(cid:18)
(cid:26)(cid:25)(cid:16)(cid:23)
(cid:25)(cid:23)(cid:16)(cid:18)
(cid:24)(cid:20)(cid:16)(cid:23)
(cid:23)(cid:18)(cid:16)(cid:18)
(cid:21)(cid:25)(cid:16)(cid:23)
(cid:20)(cid:23)(cid:16)(cid:18)
(cid:19)(cid:20)(cid:16)(cid:23)
(cid:18)(cid:16)(cid:18)
Stock exchange prices1
SIX Swiss Exchange
New York Stock Exchange
High (CHF)
Low (CHF)
Period end (CHF)
High (USD)
Low (USD)
Period end (USD)
2016
Fourth quarter 2016
December
November
October
Third quarter 2016
September
August
July
Second quarter 2016
June
May
April
First quarter 2016
March
February
January
2015
Fourth quarter 2015
Third quarter 2015
Second quarter 2015
First quarter 2015
2014
Fourth quarter 2014
Third quarter 2014
Second quarter 2014
First quarter 2014
2013
Fourth quarter 2013
Third quarter 2013
Second quarter 2013
First quarter 2013
2012
Fourth quarter 2012
Third quarter 2012
Second quarter 2012
First quarter 2012
2011
Fourth quarter 2011
Third quarter 2011
Second quarter 2011
First quarter 2011
17.73
17.73
16.33
14.36
14.53
14.53
14.33
13.78
16.85
15.41
16.60
16.85
19.32
16.80
17.00
19.32
22.57
20.27
22.57
20.78
18.59
19.10
17.84
16.93
18.74
19.10
19.60
19.30
19.60
18.02
16.39
15.62
15.62
12.60
12.79
13.60
19.13
12.23
15.75
17.60
19.13
12.97
15.65
12.97
13.06
11.58
12.44
12.44
11.58
12.24
12.24
14.01
14.25
13.51
15.21
13.51
16.01
13.58
17.87
17.41
18.22
13.58
13.95
13.95
15.20
16.21
16.76
14.09
16.12
15.62
14.09
14.23
9.69
11.39
9.69
10.55
10.64
9.34
9.80
9.34
14.37
15.43
15.95
15.95
16.17
14.00
13.23
13.23
14.22
13.35
12.57
12.57
15.36
16.60
15.49
15.49
15.34
16.83
19.52
19.52
18.01
19.83
18.32
17.09
17.09
16.66
16.27
18.26
16.92
16.92
18.50
16.08
14.55
14.27
14.27
11.45
11.05
12.65
11.18
11.18
10.54
15.33
16.48
17.44
17.44
16.37
14.47
14.88
14.88
14.55
13.99
17.37
16.10
17.36
17.37
19.14
16.99
16.55
19.14
23.19
20.69
23.19
22.16
19.29
21.50
18.22
18.95
21.15
21.50
21.61
21.61
21.48
18.70
17.65
16.99
16.99
13.57
14.15
14.77
20.08
14.21
18.63
20.03
20.08
13.22
15.48
13.39
13.22
11.94
12.87
12.93
11.94
12.46
12.46
14.34
14.89
14.01
15.49
14.01
16.07
16.02
18.19
17.97
19.01
16.02
15.04
15.04
16.78
18.22
18.49
15.09
17.94
16.54
15.09
15.11
9.78
12.32
9.78
10.96
11.17
10.42
10.47
10.42
17.20
16.11
1 Based on the share price of UBS AG until 27 November 2014 and of UBS Group AG from 28 November 2014 onward.
15.67
15.67
15.85
14.07
13.62
13.62
14.45
13.78
12.96
12.96
15.39
17.27
16.02
16.02
15.22
16.64
19.37
19.37
18.52
21.20
18.77
17.05
17.05
17.37
18.32
20.72
19.25
19.25
20.52
16.95
15.39
15.74
15.74
12.18
11.71
14.02
11.83
11.83
11.43
18.26
18.05
205
Risk, treasury and capital management Corporate
governance,
responsibility and
compensation
Management report
Audited information according to the Swiss law and applicable regulatory
requirements and guidance
Disclosures provided are in line with the requirements of article 663c para. 1 and 3 of the Swiss Code of Obligations (supplementary
disclosures for companies whose shares are listed on a stock exchange: shareholdings) and the Ordinance against Excessive
Compensation in Listed Stock Corporations (tables containing such information are marked as “Audited” throughout this section),
as well as other applicable regulations and guidance.
Information assured according to the Global Reporting Initiative (GRI)
Content of the sections “UBS and Society” and “Our employees” has been reviewed by Ernst & Young Ltd (EY) against the Global
Reporting Initiative (GRI) Sustainability Reporting Guidelines. This content has been prepared in accordance with the comprehensive
option of GRI G4 as evidenced in the EY assurance report at www.ubs.com/gri. The assurance by EY also covered other relevant text
and data on the website of UBS which is referenced in the GRI Content Index.
Corporate governance, responsibility and compensation
Corporate governance
Corporate governance
UBS Group AG is subject to, and compliant with, all relevant Swiss
legal and regulatory requirements regarding corporate gover-
nance, including the SIX Swiss Exchange’s Directive on Informa-
tion Relating to Corporate Governance, as well as the standards
established in the Swiss Code of Best Practice for Corporate Gov-
ernance, including the appendix on executive compensation.
In addition, as a foreign company with shares listed on the
New York Stock Exchange (NYSE), UBS Group AG complies with
all relevant corporate governance standards applicable to foreign
private issuers.
The Organization Regulations of UBS Group AG, adopted by
the Board of Directors (BoD) based on article 716b of the Swiss
Code of Obligations and articles 25 and 27 of the Articles of
Association of UBS Group AG (AoA), constitute our primary cor-
porate governance guidelines. To reflect the evolution of the
firm’s legal structure in its constitutional documents, we have
separated the combined Organization Regulations of UBS Group
AG and UBS AG. The Organization Regulations of the two enti-
ties (Organization Regulations) are standalone documents valid
as of 1 January 2017.
To the extent practicable, the governance structures of UBS
Group AG and UBS AG are aligned. UBS AG complies with all
relevant Swiss legal and regulatory corporate governance require-
ments, as well as with the NYSE standards as a foreign company
with debt securities listed on the NYSE. The discussion in this sec-
tion refers to both UBS Group AG and UBS AG, unless specifically
noted otherwise, or unless the information discussed is relevant
only to companies with listed shares and therefore only applicable
to UBS Group AG. This is in line with US Securities and Exchange
Commission regulations and NYSE listing standards.
➔ Refer to the Articles of Association of UBS Group AG and of UBS
AG, and the Organization Regulations of UBS Group AG at
www.ubs.com/governance for more information
Differences from corporate governance standards relevant
to US-listed companies
According to the NYSE listing standards on corporate governance,
foreign private issuers are required to disclose any significant ways
in which their corporate governance practices differ from those
that have to be followed by domestic companies. These differ-
ences are discussed in the following paragraphs.
Performance evaluation of the BoD committees
All BoD committees perform a self-assessment of their activities
and report back to the full BoD.
Responsibility of the Audit Committee with regard to
independent auditors
The Audit Committee is responsible for the compensation, reten-
tion and oversight of the independent auditors. It assesses the
performance and qualification of the external auditors and sub-
mits its proposal for appointment, reappointment or removal of
the independent auditors to the full BoD. In line with the Swiss
Code of Obligations, the BoD in turn brings its proposal to the
shareholders for their vote at the Annual General Meeting (AGM).
Discussion of risk assessment and risk management policies by
the Risk Committee
In accordance with our Organization Regulations, the Risk Com-
mittee, on behalf of the BoD, oversees our risk principles and risk
capacity. The Risk Committee is responsible for monitoring our
adherence to those risk principles and for monitoring whether
business divisions and control units maintain appropriate systems
of risk management and control.
Supervision of the internal audit function
The Chairman of the BoD (Chairman) and the Audit Committee
share the supervisory responsibility and authority with respect to
the internal audit function.
208
Responsibility of the Compensation Committee for performance
evaluations of senior management of UBS Group AG
The Compensation Committee, together with the BoD, proposes
for shareholder approval at the AGM the maximum aggregate
amount of compensation for the BoD, the maximum aggregate
amount of fixed compensation for the Group Executive Board
(GEB) and the aggregate amount of variable compensation for
the GEB. In line with Swiss law, the shareholders elect the mem-
bers of the Compensation Committee at the AGM.
Responsibility of the Governance and Nominating Committee for
the evaluation of the Board of Directors of UBS Group AG
The BoD has direct responsibility and authority to evaluate its own
performance, based on a pre-evaluation by the Governance and
Nominating Committee.
Proxy statement reports of the Audit Committee and the
Compensation Committee
NYSE listing standards would require the aforementioned com-
mittees to submit their reports directly to shareholders. However,
under Swiss law, all our reports addressed to shareholders, includ-
ing those from the aforementioned committees, are provided and
approved by the BoD, which has ultimate responsibility vis-à-vis
the shareholders.
Shareholders’ votes on equity compensation plans
Swiss law authorizes the BoD to approve compensation plans.
Though Swiss law does not allocate such authority to sharehold-
ers, it requires that Swiss companies determine the nature and
components of capital in their articles of association, and each
increase in capital has to be submitted for shareholder approval.
This means that shareholder approval is mandatory if equity-
based compensation plans require an increase in capital. No
shareholder approval is required if shares for such plans are pur-
chased in the market.
➔ Refer to “Board of Directors” in this section for more information
on the Board of Directors’ committees
➔ Refer to “Capital structure” in this section for more information
on UBS Group AG’s capital
209
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Group structure and shareholders
UBS Group legal entity structure
Operational Group structure
As of 31 December 2016, the operational structure of the Group
comprised Wealth Management, Wealth Management Ameri-
cas, Personal & Corporate Banking, Asset Management, and the
Investment Bank, as well as Corporate Center with its units Cor-
porate Center – Services, Corporate Center – Group Asset and
Liability Management and Corporate Center – Non-core and
Legacy Portfolio.
➔ Refer to the sections under “Financial and operating performance”
and to “Note 2 Segment reporting” in the “Consolidated financial
statements” section of this report for more information
UBS Group AG is organized as an Aktiengesellschaft (AG), a cor-
poration limited by shares, pursuant to article 620ff. of the Swiss
Code of Obligations. UBS Group AG is the ultimate parent com-
pany of the UBS Group (Group). As the holding company of the
Group, UBS Group AG is a non-operating, financial holding com-
pany that has issued or guaranteed debt and provides capital to
its subsidiaries as required.
Since 2014, we have taken a series of measures to improve
the resolvability of the Group in response to too big to fail
requirements in Switzerland and other countries in which the
Group operates.
In December 2014, UBS Group AG was established as the
holding company of the Group. UBS Group AG is the sole share-
holder of UBS AG. In 2015, we transferred our Personal & Corpo-
rate Banking and Wealth Management business booked in Swit-
zerland from UBS AG to UBS Switzerland AG. We also completed
the implementation of a more self-sufficient business and operat-
ing model for UBS Limited, our investment banking subsidiary in
the UK. In 2016, we transferred the ownership of the majority of
our existing service subsidiaries to UBS Business Solutions AG, a
direct subsidiary of UBS Group AG, established to act as the
Group service company. UBS Americas Holding LLC was desig-
nated as our intermediate holding company for our US subsidiar-
ies as of 1 July 2016.
We continue to consider further changes to the Group’s legal
structure in response to regulatory requirements and other external
developments.
➔ Refer to the “The legal structure of UBS Group” section of this
report for more information
210
Listed and non-listed companies belonging to the Group
The Group includes a number of consolidated entities, of which
only UBS Group AG has its shares listed on stock exchanges.
➔ Refer to the “Corporate information” section of this report for
UBS Group AG and UBS AG’s corporate details
➔ Refer to “Note 28 Interests in subsidiaries and other entities” in
the “Consolidated financial statements” section of this report for
more information on the significant subsidiaries of the Group
Significant shareholders
Under the Swiss Federal Act on Financial Market Infrastructures
and Market Conduct in Securities and Derivatives Trading of
19 June 2015 (FMIA), anyone holding shares in a company listed
in Switzerland, or holding derivative rights related to shares of
such a company, must notify the company and the SIX Swiss
Exchange (SIX) if the holding reaches, falls below or exceeds one
of the following thresholds: 3, 5, 10, 15, 20, 25, 331⁄3, 50, or
662⁄3% of voting rights, regardless of whether or not such rights
may be exercised. The detailed disclosure requirements and the
methodology for calculating the thresholds are defined in the
Swiss Financial Market Supervisory Authority Ordinance on Finan-
cial Market Infrastructure (FMIO-FINMA). In particular, the FMIO-
FINMA sets forth that nominee companies that cannot autono-
mously decide how voting rights are exercised are not obligated
to notify the company and SIX if they reach, exceed or fall below
the threshold percentages.
of any shareholder with a holding of more than 5% of the total
share capital of UBS Group AG.
According to disclosure notifications filed with UBS Group AG
and the SIX under the applicable Swiss rules, GIC Private Limited
disclosed on 10 December 2014 a holding of 7.07% of the total
share capital of UBS Group AG. The beneficial owner of this hold-
ing is the Government of Singapore. On 10 December 2014,
Norges Bank, Oslo, the Central Bank of Norway, disclosed a hold-
ing of 3.30%. On 15 January 2015, BlackRock Inc., New York,
disclosed a holding of 4.89%. On 10 February 2016, MFS Invest-
ment Management, Boston, disclosed a holding of 3.05%, and
on 16 November 2016, The Capital Group Companies, Inc., Los
Angeles, disclosed a holding of 3.01%.
In accordance with the FMIA, the aforementioned percentages
were holdings that are not necessarily also registered in the UBS
share register and calculated in relation to the total share capital
of UBS Group AG reflected in the AoA at the time of the respec-
tive disclosure notification. Information on disclosures under the
FMIA is available at www.six-exchange-regulation.com/en/home/
publications/significant-shareholders.html.
According to the share register, the shareholders (acting in
their own name or in their capacity as nominees for other inves-
tors or beneficial owners) listed in the table below were registered
in the UBS share register with 3% or more of the total share cap-
ital of UBS Group AG as of 31 December 2016.
Cross-shareholdings
In addition, pursuant to the Swiss Code of Obligations, we
must disclose in the notes to our financial statements the identity
We have no cross-shareholdings in excess of a reciprocal owner-
ship of 5% of capital or voting rights with any other company.
Audited |
Shareholders registered in the UBS share register with 3% or more of the total share capital
% of share capital
Chase Nominees Ltd., London
DTC (Cede & Co.), New York1
Nortrust Nominees Ltd., London
1 DTC (Cede & Co.), New York, “The Depository Trust Company”, is a US securities clearing organization.
31.12.16
9.43
6.62
3.88
31.12.15
9.14
6.14
3.60
31.12.14
9.05
5.76
3.52
211
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Capital structure
Issued ordinary share capital
Under Swiss company law, shareholders must approve in a share-
holders’ meeting any increase in the total number of shares that
may arise from an ordinary share capital increase or the creation
of conditional or authorized capital. In 2016, our shareholders
were not asked to approve any capital increase.
At year-end 2016, UBS Group AG had 3,850,766,389 issued
shares with a par value of CHF 0.10 each, leading to a share cap-
ital of CHF 385,076,638.90. Share capital increased during the
year, as shares were issued out of existing conditional capital due
to the exercise of employee options.
Issued share capital of UBS Group AG
As of 31 December 2015
Issue of shares out of conditional capital due to employee options exercised in 2016
As of 31 December 2016
Share capital in CHF
Number of shares
Par value in CHF
384,973,154
3,849,731,535
103,485
1,034,854
385,076,639
3,850,766,389
0.10
0.10
0.10
Distribution of UBS shares
As of 31 December 2016
Number of shares registered
1–100
101–1,000
1,001–10,000
10,001–100,000
100,001–1,000,000
1,000,001–5,000,000
5,000,001–38,507,663 (1%)
1–2%
2–3%
3–4%
4–5%
Over 5%
Total registered
Unregistered3
Total shares issued
Shareholders registered
Shares registered
Number
27,529
132,388
79,134
6,852
514
85
25
1
2
1
0
21
246,533
%
11.2
53.7
32.1
2.8
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
100.0
Number
% of shares issued
1,557,792
62,420,611
223,057,081
160,250,921
150,677,235
184,165,420
274,486,712
41,946,308
168,520,641
149,368,883
0
618,262,445
2,034,714,0492
1,816,052,340
3,850,766,389
0.0
1.6
5.8
4.2
3.9
4.8
7.1
1.1
4.4
3.9
0.0
16.1
52.8
47.2
100.0
1 On 31 December 2016, Chase Nominees Ltd., London, entered as a trustee / nominee, was registered with 9.43% of all UBS shares issued. However, according to the provisions of UBS Group AG, voting rights of
trustees / nominees are limited to a maximum of 5% of all UBS shares issued. The US securities clearing organization DTC (Cede & Co.), New York, was registered with 6.62% of all UBS shares issued and is not subject
to this 5% voting limit as a securities clearing organization. 2 Of the total shares registered, 354,346,255 shares did not carry voting rights. 3 Shares not entered in the UBS share register as of 31 December 2016.
212
Conditional share capital
At year-end 2016, the following conditional share capital was
available to UBS Group AG’s BoD:
At the Extraordinary General Meeting (EGM) held on
26 November 2014, the shareholders approved the increase of
conditional capital to be issued through the voluntary or manda-
tory exercise of conversion rights and / or warrants to a maxi-
mum of CHF 38,000,000 represented by up to 380,000,000
fully paid registered shares with a nominal value of CHF 0.10
each. The BoD has not made use of the allowance to issue such
bonds or warrants.
At the same EGM, the shareholders also approved the increase
of the conditional capital to be issued upon exercise of employ-
ees’ options. In 2016, options on 1,034,854 shares were exer-
cised with a total of 129,994,836 conditional capital shares being
available at the end of 2016 to satisfy further exercises of options.
➔ Refer to article 4a of UBS Group AG’s Articles of Association
for more information on the terms and conditions of the issue
of shares out of existing conditional capital. The Articles of
Association are available at www.ubs.com/governance
Authorized share capital
UBS Group AG had no authorized capital available on 31 Decem-
ber 2016.
Conditional capital of UBS Group AG
As of 31 December 2016
Employee equity participation plans
Conversion rights / warrants granted in connection with bonds
Total
Maximum number of
shares to be issued
Year approved by Extraor-
dinary General Meeting
% of shares issued
129,994,836
380,000,000
509,994,836
2014
2014
3.38%
9.87%
13.25%
213
Corporate governance, responsibility and compensation
Corporate governance, responsibility and compensation
Corporate governance
Shareholders, legal entities and nominees: type and geographical distribution
As of 31 December 2016
Individual shareholders
Legal entities
Nominees, fiduciaries
Total registered shares
Unregistered shares
Total
Americas
of which: USA
Asia Pacific
Europe, Middle East and Africa
of which: Germany
of which: UK
of which: Rest of Europe
of which: Middle East and Africa
Switzerland
Total registered shares
Unregistered shares
Total
Changes in capital
Shareholders registered
Number
241,084
5,169
280
%
97.8
2.1
0.1
246,533
100.0
Individual shareholders
Legal entities
Nominees
Total
Individual shareholders
Legal entities
Nominees
Total
Number
6,276
5,524
5,442
12,727
4,391
4,539
3,644
149
216,639
%
2.5
2.2
2.2
5.2
1.8
1.8
1.5
0.1
87.9
Number
191
104
137
240
26
10
201
7
4,601
%
0.1
0.0
0.1
0.1
0.0
0.0
0.1
0.0
1.9
Number
129
122
24
82
5
9
67
1
45
%
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Number
6,596
5,750
5,603
13,049
4,422
4,558
3,912
157
221,285
%
2.7
2.3
2.3
5.3
1.8
1.8
1.6
0.1
89.8
241,084
97.8
5,169
2.1
280
0.1
246,533
100.0
530,217,833
13.8
1,063,732,378
27.6
3,850,766,389
100.0
Number of shares
Number of shares
Number of shares
Number of shares
14,029,489
12,310,084
21,896,060
38,942,947
12,748,718
16,447,868
9,329,857
411,809
365,895,342
440,763,838
0
440,763,838
%
0.4
0.3
0.6
1.0
0.3
0.4
0.2
0.0
9.5
11.4
11.4
60,176,929
46,121,831
72,937,558
23,124,169
290,431
2,709,680
19,883,051
245,702
373,979,177
530,217,833
0
%
1.6
1.2
1.9
0.6
0.0
0.1
0.5
0.0
9.7
13.8
348,802,352
348,577,465
8,829,517
685,769,597
15,957,777
561,031,851
108,769,969
10,000
20,330,912
1,063,732,378
0
%
9.1
9.1
0.2
17.8
0.4
14.6
2.8
0.0
0.5
27.6
Shares registered
Number
440,763,838
530,217,833
1,063,732,378
2,034,714,049
1,816,052,340
3,850,766,389
423,008,770
407,009,380
103,663,135
747,836,713
28,996,926
580,189,399
137,982,877
667,511
760,205,431
2,034,714,049
1,816,052,340
%
11.4
13.8
27.6
52.8
47.2
100.0
%
11.0
10.6
2.7
19.4
0.8
15.1
3.6
0.0
19.7
52.8
47.2
In accordance with International Financial Reporting Standards,
Group equity attributable to shareholders amounted to CHF 53.7
billion as of 31 December 2016 (2015: CHF 55.3 billion; and 2014:
CHF 50.6 billion). UBS Group AG shareholders’ equity was repre-
sented by 3,850,766,389 issued shares as of 31 December 2016
(2015: 3,849,731,535 shares; and 2014: 3,717,128,324 shares).
➔ Refer to the “Statement of changes in equity” in the “Consolidated
financial statements” section of this report for more information
on changes in shareholders’ equity over the last three years
Ownership
Ownership of UBS Group AG shares is widely spread. The tables
in this section provide information about the distribution of UBS
Group AG shareholders by category and geographic location. This
information relates only to registered shareholders and cannot be
assumed to be representative of UBS Group AG’s entire investor
base or the actual beneficial ownership. Only shareholders regis-
tered in the share register as “shareholders with voting rights” are
entitled to exercise voting rights.
➔ Refer to “Shareholders’ participation rights” in this section for
more information
As of 31 December 2016, 1,680,367,794 UBS Group AG
shares carried voting rights, 354,346,255 shares were entered in
the share register without voting rights, and 1,816,052,340
shares were not registered. All shares were fully paid up and eli-
gible for dividends. There are no preferential rights for sharehold-
ers, and no other classes of shares are issued by UBS Group AG.
214
At year-end 2016, we owned 138,441,772 UBS Group AG
registered shares, which corresponded to 3.60% of the total
share capital of UBS Group AG. At the same time, we had acquisi-
tion and disposal positions relating to 154,828,558 and
220,478,987 voting rights of UBS Group AG, corresponding to
4.02% and 5.73% of the total voting rights of UBS Group AG,
respectively. Of the disposal positions, 5.53% consisted of voting
rights on shares deliverable in respect of employee awards. The
calculation methodology for the acquisition and disposal posi-
tions is based on the FMIO-FINMA, which sets forth that all future
potential share delivery obligations, irrespective of the contingent
nature of the delivery, must be taken into account.
Shares and participation certificates
UBS Group AG has a single class of shares, which are registered
shares in the form of uncertificated securities (in the sense of the
Swiss Code of Obligations) and intermediary-held securities (in the
sense of the Swiss Federal Act on Intermediated Securities of
3 October 2008, as amended). Each registered share has a par value
of CHF 0.10 and carries one vote subject to the restrictions set out
under “Transferability, voting rights and nominee registration.”
We have no participation certificates outstanding.
Our shares are listed on the NYSE as global registered shares.
As such, they can be traded and transferred across applicable bor-
ders, without the need for conversion, with identical shares traded
on different stock exchanges in different currencies.
➔ Refer to the “UBS shares” section of this report for more
information
Shareholders, legal entities and nominees: type and geographical distribution
As of 31 December 2016
Individual shareholders
Legal entities
Nominees, fiduciaries
Total registered shares
Unregistered shares
Total
Americas
of which: USA
Asia Pacific
Europe, Middle East and Africa
of which: Germany
of which: UK
of which: Rest of Europe
of which: Middle East and Africa
Switzerland
Total registered shares
Unregistered shares
Total
Shareholders registered
246,533
100.0
Number
241,084
5,169
280
Number
6,596
5,750
5,603
13,049
4,422
4,558
3,912
157
%
97.8
2.1
0.1
%
2.7
2.3
2.3
5.3
1.8
1.8
1.6
0.1
Individual shareholders
Legal entities
Nominees
Total
Individual shareholders
Legal entities
Nominees
Total
Number
6,276
5,524
5,442
12,727
4,391
4,539
3,644
149
%
2.5
2.2
2.2
5.2
1.8
1.8
1.5
0.1
Number
191
104
137
240
26
10
201
7
%
0.1
0.0
0.1
0.1
0.0
0.0
0.1
0.0
1.9
Number
129
122
24
82
5
9
1
67
45
%
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
216,639
87.9
4,601
221,285
89.8
241,084
97.8
5,169
2.1
280
0.1
246,533
100.0
Number of shares
14,029,489
12,310,084
21,896,060
38,942,947
12,748,718
16,447,868
9,329,857
411,809
365,895,342
440,763,838
0
440,763,838
%
0.4
0.3
0.6
1.0
0.3
0.4
0.2
0.0
9.5
11.4
11.4
Number of shares
60,176,929
46,121,831
72,937,558
23,124,169
290,431
2,709,680
19,883,051
245,702
373,979,177
530,217,833
0
530,217,833
%
1.6
1.2
1.9
0.6
0.0
0.1
0.5
0.0
9.7
13.8
13.8
Number of shares
348,802,352
348,577,465
8,829,517
685,769,597
15,957,777
561,031,851
108,769,969
10,000
20,330,912
1,063,732,378
0
1,063,732,378
%
9.1
9.1
0.2
17.8
0.4
14.6
2.8
0.0
0.5
27.6
27.6
Number of shares
423,008,770
407,009,380
103,663,135
747,836,713
28,996,926
580,189,399
137,982,877
667,511
760,205,431
2,034,714,049
1,816,052,340
3,850,766,389
Shares registered
Number
440,763,838
530,217,833
1,063,732,378
2,034,714,049
1,816,052,340
3,850,766,389
%
11.4
13.8
27.6
52.8
47.2
100.0
%
11.0
10.6
2.7
19.4
0.8
15.1
3.6
0.0
19.7
52.8
47.2
100.0
Distributions to shareholders
Convertible bonds and options
The decision to pay a dividend and the amount of any dividend
depend on a variety of factors, including our profits and cash flow
generation and the maintenance of our targeted capital ratios.
As of 31 December 2016, there were no contingent capital securi-
ties or convertible bonds outstanding requiring the issuance of
new shares.
At the AGM 2017, UBS’s BoD intends to propose to sharehold-
ers a dividend of CHF 0.60 per share to be paid out of capital
contribution reserves, subject to shareholder approval.
➔ Refer to the “Capital management” section of this report for
more information on our outstanding capital instruments
Transferability, voting rights and nominee registration
We do not apply any restrictions or limitations on the transfer-
ability of shares. Voting rights may be exercised without any
restrictions by shareholders entered into the share register if they
expressly render a declaration of beneficial ownership according
to the provisions of the Articles of Association.
We have special provisions for the registration of fiduciaries
and nominees. Fiduciaries and nominees are entered in the share
register with voting rights up to a total of 5% of all issued UBS
Group AG shares if they agree to disclose, upon our request, ben-
eficial owners holding 0.3% or more of all issued UBS Group AG
shares. An exception to the 5% voting limit rule is in place for
securities clearing organizations, such as The Depository Trust
Company in New York.
➔ Refer to “Shareholders’ participation rights” in this section for
more information
As of 31 December 2016, there were 66,720,606 employee
options outstanding,
including stock appreciation rights.
Options and stock appreciation rights equivalent to 12,301,093
shares were in the money and exercisable. Option-based com-
pensation plans are sourced by either purchasing UBS Group
AG shares in the market or issuing new shares out of condi-
tional capital. As mentioned above, as of 31 December 2016,
129,994,836 unissued shares in conditional share capital were
available for this purpose.
➔ Refer to “Conditional share capital” in this section for more
information on outstanding options
➔ Refer to “Note 27 Equity participation and other compensation
plans” in the “Consolidated financial statements” section of this
report for more information on outstanding options and stock
appreciation rights
215
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Shareholders’ participation rights
We are committed to shareholder participation in our decision-
making process. Around 250,000 shareholders are directly regis-
tered and some 140,000 US shareholders via nominee compa-
nies. Shareholders are regularly informed about our activities and
performance, and are personally invited to the general meetings
of shareholders.
➔ Refer to “Information policy” in this section for more information
Registered shareholders can access personalized services and
important information related to share register entries and our
general meetings of shareholders at www.ubs.com/shareholder-
portal. They can also enter their voting instructions electronically
through the shareholder portal ahead of our general meetings of
shareholders, and they can verify their voting instructions before
and after the general meetings using cryptography. This method
of encryption ensures that the voting instructions remain secret
through the entire voting process. In addition, shareholders can
order admission cards and register changes to their address
details. The website also allows them to manage their subscrip-
tions to shareholder-related publications and to communicate
directly with UBS Shareholder Services via a secure channel. The
shareholder portal is fully integrated into our website.
Shareholders who decide not to receive an invitation by ordi-
nary mail, are informed of the upcoming AGM by an email notifi-
cation that their personalized AGM invitation and related docu-
mentation is available on the shareholder portal.
Relations with shareholders
We fully subscribe to the principle of equal treatment of all share-
holders, who range from large institutions to individual investors,
and regularly inform them about Group developments.
The AGM offers shareholders the opportunity to raise any
questions to the Board of Directors (BoD) and Group Executive
Board (GEB), as well as to our internal and external auditors.
Voting rights, restrictions and representation
We place no restrictions on share ownership and voting rights.
However, pursuant to general principles formulated by the BoD,
nominee companies and trustees, who normally represent a large
number of individual shareholders and may hold an unlimited
number of shares, have voting rights limited to a maximum of 5%
of all issued UBS Group AG shares in order to avoid the risk of
unknown shareholders with large stakes being entered in the
share register. Securities clearing organizations, such as The
Depository Trust Company in New York, are not subject to this
5% voting limit.
In order to be recorded in the share register with voting rights,
shareholders must confirm that they acquired UBS Group AG
shares in their own name and for their own account. Nominee
companies and trustees are required to sign an agreement con-
firming their willingness to disclose, upon our request, individual
beneficial owners holding more than 0.3% of all issued UBS
Group AG shares.
All shareholders registered with voting rights are entitled to
participate in general meetings of shareholders. If they do not
wish to attend in person, they can issue instructions to accept,
reject or abstain on each individual item on the meeting agenda,
either by giving instructions to an independent proxy elected by
the UBS Group AG shareholders or by appointing another regis-
tered shareholder of their choice to vote on their behalf. Alterna-
tively, registered shareholders can issue their voting instructions to
the independent proxy electronically through our shareholder
portal. Nominee companies normally submit the proxy material to
the beneficial owners and transmit the collected votes to the
independent proxy.
Statutory quorums
Motions, including the election and re-election of BoD members
and the appointment of the auditors, are decided at a general
meeting of shareholders by an absolute majority of the votes cast,
excluding blank and invalid ballots. For the approval of certain
specific issues, the Swiss Code of Obligations requires a positive
vote from a two-thirds majority of the votes represented at a gen-
eral meeting of shareholders, and from the absolute majority of
the par value of shares represented at the meeting. Such issues
include the creation of shares with privileged voting rights, the
introduction of restrictions on the transferability of registered
shares, conditional and authorized capital increases, and restric-
tions or exclusions of shareholders’ preemptive rights.
The Articles of Association also require a two-thirds majority of
votes represented for approval of any change to their provisions
regarding the number of BoD members, any decision to remove
one-quarter or more of the BoD members, and any modification
to the provision establishing this qualified quorum.
Votes and elections are normally conducted electronically to
ascertain the exact number of votes cast. Voting by a show of
hands remains possible if a clear majority is predictable. Share-
holders representing at least 3% of the votes represented may
request that a vote or election be carried out electronically or by
written ballot. In order to allow shareholders to clearly express
their views on all individual topics, each item on the agenda is put
to a vote separately and BoD members are elected on a person-
by-person basis.
216
Convocation of general meetings of shareholders
The AGM must be held within six months of the close of the
financial year (31 December) and normally takes place in early
May. A personal invitation including a detailed agenda and expla-
nation of each motion is made available to every registered share-
holder at least 20 days ahead of the scheduled AGM. The meet-
ing agenda is also published in the Swiss Official Gazette of
Commerce as well as at www.ubs.com/agm.
Extraordinary General Meetings may be convened whenever
the BoD or the auditors consider it necessary. Shareholders indi-
vidually or jointly representing at least 10% of the share capital
may at any time, including during an AGM, ask in writing for an
Extraordinary General Meeting to be convened to address a spe-
cific issue they put forward.
Placing of items on the agenda
Pursuant to our Articles of Association, shareholders individually
or jointly representing shares with an aggregate minimum par
value of CHF 62,500 may submit proposals for matters to be
placed on the agenda for consideration at the next general meet-
ing of shareholders.
We publish the deadline for submitting such proposals in the
Swiss Official Gazette of Commerce and at www.ubs.com/agm.
Requests for items to be placed on the agenda must include the
actual motions to be put forward, together with a short explana-
tion. The BoD formulates opinions on the proposals, which are
published together with the motions.
Registrations in the share register
The general rules for entry into our Swiss share register with vot-
ing rights also apply before general meetings of shareholders. The
same rules apply to our US transfer agent that operates the US
share register for all UBS Group AG shares in a custodian account
in the US. In order to determine the voting rights of each share-
holder, our share register generally closes two business days
before a shareholder meeting. Our independent proxy agent pro-
cesses voting instructions from shareholders with voting right as
long as technically possible, generally also until two business days
before a shareholder meeting.
217
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Board of Directors
The Board of Directors (BoD) of UBS Group AG, under the leader-
ship of the Chairman of the BoD (Chairman), consists of six to 12
members as per our Articles of Association (AoA). The BoD
decides on the strategy of the Group upon recommendation of
the Group Chief Executive Officer (Group CEO) and is responsible
for the overall direction, supervision and control of the Group and
its management, as well as for supervising compliance with appli-
cable laws, rules and regulations. The BoD exercises oversight
over UBS Group AG and its subsidiaries and is responsible for
ensuring the establishment of a clear Group governance frame-
work to ensure effective steering and supervision of the Group,
taking into account the material risks to which UBS Group AG and
its subsidiaries are exposed.
The BoD has ultimate responsibility for the success of the
Group and for delivering sustainable shareholder value within a
framework of prudent and effective controls, approves all finan-
cial statements for issue and appoints and removes all Group
Executive Board (GEB) members.
The BoD of UBS AG, under the leadership of the Chairman,
decides on the strategy of UBS AG upon recommendation by the
President of the Executive Board and exercises the ultimate super-
vision on management. Its ultimate responsibility for the success
of UBS AG is exercised subject to the parameters set by the Group.
Members of the Board of Directors
At the AGM on 10 May 2016, Michel Demaré, David Sidwell, Reto
Francioni, Ann F. Godbehere, William G. Parrett, Isabelle Romy,
Beatrice Weder di Mauro and Joseph Yam were re-elected as
members of the BoD, and Robert W. Scully and Dieter Wemmer
were elected for their first term. At the same time, Axel A. Weber
was re-elected Chairman of the Board of Directors, and Ann F.
Godbehere, Michel Demaré, Reto Francioni and William G. Parrett
were elected as members of the Compensation Committee. Addi-
tionally, ADB Altorfer Duss & Beilstein AG was elected indepen-
dent proxy agent. Following their election, the BoD appointed
Michel Demaré as Vice Chairman and David Sidwell as Senior
Independent Director of UBS Group AG.
Article 31 of our AoA limits the number of mandates that
members of the BoD may hold outside the UBS Group to four
board memberships in listed companies and five additional man-
dates in non-listed companies. Mandates in companies that are
controlled by us or that control us are not subject to this limita-
tion. In addition, members of the BoD may hold no more than 10
mandates at UBS’s request and 10 mandates in associations, char-
itable organizations, foundations, trusts, and employee welfare
foundations. No member of the BoD reaches the thresholds
described in article 31 of the AoA.
The following biographies provide information on the BoD
members and the Group Company Secretary. In addition to infor-
mation on mandates, the biographies include information on
memberships or other activities or functions, as required by the
SIX Swiss Exchange Corporate Governance Directive. As of 1 Jan-
uary 2017, the role of Group Company Secretary has been
assumed by Markus Baumann. He succeeded Luzius Cameron,
who assumed a new role within the firm.
All members of UBS Group AG’s BoD are also members of UBS
AG’s BoD, and committee membership is the same for both enti-
ties. However, as of 1 January 2017, the only BoD committees of
UBS AG are the Audit Committee and the Risk Committee. The
Senior Independent Director function is also no longer applicable
to UBS AG.
218
Axel A. Weber
Michel Demaré
David Sidwell
German, born 1957
Belgian and Swiss, born 1956
American (US) and British, born 1953
Functions at UBS Group AG
Senior Independent Director / Chairperson of the Risk
Committee / member of the Governance and Nominating
Committee
Professional history and education
David Sidwell was elected to the BoD of UBS AG at the 2008
AGM and of UBS Group AG in November 2014. In April
2010, he was appointed Senior Independent Director for the
first time. He has chaired the Risk Committee since 2008 and
has been a member of the Governance and Nominating
Committee since 2011. Mr. Sidwell was Executive Vice
President and CFO of Morgan Stanley between 2004 and
2007. Before joining Morgan Stanley he worked for
JPMorgan Chase & Co., where, in his 20 years of service, he
held a number of different positions, including controller
and, from 2000 to 2004, CFO of the Investment Bank. Prior
to this, he was with Price Waterhouse in both London and
New York. Mr. Sidwell graduated from Cambridge University
and qualified as a chartered accountant with the Institute of
Chartered Accountants in England and Wales.
Other activities and functions
– Senior advisor at Oliver Wyman, New York
– Board member of Chubb Limited
– Board member of GAVI Alliance
– Chairman of the Board of Village Care, New York
– Director of the National Council on Aging, Washington, DC
Functions at UBS Group AG
Chairman of the Board of Directors / Chairperson of the
Corporate Culture and Responsibility
Committee / Chairperson of the Governance and
Nominating Committee
Functions at UBS Group AG
Independent Vice Chairman / member of the Audit
Committee / member of the Compensation
Committee / member of the Governance and Nominating
Committee
Professional history and education
Michel Demaré was elected to the BoD of UBS AG at the
2009 AGM and of UBS Group AG in November 2014. In April
2010, he was appointed independent Vice Chairman for the
first time. He has been a member of the Audit Committee
since 2009 and the Governance and Nominating Committee
since 2010. He became a member of the Compensation
Committee in 2013. Mr. Demaré joined ABB in 2005 as Chief
Financial Officer (CFO) and as a member of the Group
Executive Committee. He stepped down from his function in
ABB in January 2013. Between February and August 2008,
he acted as the interim CEO of ABB. From September 2008
to March 2011, he combined his role as CFO with that of
President of Global Markets. Mr. Demaré joined ABB from
Baxter International Inc., where he was CFO Europe from
2002 to 2005. Prior to this, he spent 18 years at the Dow
Chemical Company, holding various treasury and risk man-
agement positions
in Belgium, France, the US and
Switzerland. Between 1997 and 2002, Mr. Demaré was CFO
of the Global Polyolefins and Elastomers division. He began
his career as an officer in the multinational banking division
of Continental Illinois National Bank of Chicago, and was
based in Antwerp. Mr. Demaré graduated with an MBA from
the Katholieke Universiteit Leuven, Belgium, and holds a
degree in applied economics from the Université Catholique
de Louvain, Belgium.
Other activities and functions
– Chairman of the Board of Syngenta
– Board member of Louis-Dreyfus Commodities Holdings BV
– Vice Chairman of the Supervisory Board of IMD, Lausanne
– Chairman of the Syngenta Foundation for Sustainable
Agriculture
– Advisory Board member of the Department of Banking
and Finance at the University of Zurich
Professional history and education
Axel A. Weber was elected to the Board of Directors (BoD) of
UBS AG at the 2012 AGM and of UBS Group AG in November
2014. He is Chairman of the BoD of both UBS AG and UBS
Group AG. He has chaired the Governance and Nominating
Committee since 2012 and became Chairperson of the
Corporate Culture and Responsibility Committee in 2013.
Mr. Weber was president of the German Bundesbank be-
tween 2004 and 2011, during which time he also served as
a member of the Governing Council of the European Central
Bank, a member of the Board of Directors of the Bank for
International Settlements, German governor of
the
International Monetary Fund, and as a member of the G7
and G20 Ministers and Governors. He was a member of the
steering committees of the European Systemic Risk Board in
2011 and the Financial Stability Board from 2010 to 2011.
From 2002 to 2004, Mr. Weber served as a member of the
German Council of Economic Experts. His academic career
encompasses professorships in international economics,
monetary economics and economic theory at the universities
of Cologne, Frankfurt am Main, Bonn and Chicago.
Mr. Weber holds a master’s degree in economics from the
University of Constance and a PhD in economics from the
University of Siegen, where he also received his habilitation.
He holds honorary doctorates from the universities of
Duisburg-Essen and Constance.
Other activities and functions
– Board member of the Swiss Bankers Association
– Member of the Board of Trustees of Avenir Suisse
– Advisory Board member of the “Beirat Zukunft
Finanzplatz”
– Board member of the Swiss Finance Council
– Chairman of the Board of the Institute of International
Finance
– President of the International Monetary Conference
– Member of the European Financial Services Round Table
– Member of the European Banking Group
– Member of the Monetary Economics and International
Advisory Panel, Monetary Authority of Singapore
– Member of the Group of Thirty, Washington, DC
– Chairman of the DIW Berlin Board of Trustees
– Advisory Board member of the Department of Economics
at the University of Zurich
219
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Reto Francioni
Ann F. Godbehere
William G. Parrett
Swiss, born 1955
Canadian and British, born 1955
American (US), born 1945
Functions at UBS Group AG
Member of the Compensation Committee / member of the
Corporate Culture and Responsibility Committee / member
of the Risk Committee
Professional history and education
Reto Francioni was elected to the BoD of UBS AG at the
2013 AGM and of UBS Group AG in November 2014. He has
been a member of the Corporate Culture and Responsibility
Committee since 2013, the Compensation Committee since
2014 and the Risk Committee since 2015. He was CEO of
Deutsche Börse AG from 2005 to 2015. Since 2006, he has
been a professor of applied capital markets theory at the
University of Basel. From 2002 to 2005, he was Chairman of
the Supervisory Board and President of the SWX Group,
Zurich. Mr. Francioni was co-CEO and Spokesman for the
Board of Directors of Consors AG, Nuremberg, from 2000 to
2002. Between 1993 and 2000, he held various manage-
ment positions at Deutsche Börse AG, including that of
Deputy CEO from 1999 to 2000. From 1992 to 1993, he
served in the corporate finance division of Hoffmann-La
Roche, Basel. Prior to this, he was on the executive board of
Association Tripartite Bourses for several years. From 1985
to 1988, he worked for the former Credit Suisse, holding
positions in the equity sales and legal departments. He
started his professional career in 1981 in the commerce
division of Union Bank of Switzerland. Mr. Francioni
completed his studies in law in 1981 and his PhD in 1987 at
the University of Zurich.
Other activities and functions
– Board member of Coca-Cola HBC AG
– Chairman of the Board of Swiss International Air Lines AG
– Board member of Francioni AG
– Board member of MedTech Innovation Partners AG
Functions at UBS Group AG
Chairperson of the Compensation Committee / member of
the Audit Committee
Professional history and education
Ann F. Godbehere was elected to the BoD of UBS AG at the
2009 AGM and of UBS Group AG in November 2014. She
has chaired the Compensation Committee since 2011 and
has been a member of the Audit Committee since 2009.
Ms. Godbehere was appointed CFO and Executive Director
of Northern Rock in February 2008, serving in these roles
during the initial phase of the business’s public ownership
until the end of January 2009. Prior to this role, she served
as CFO of Swiss Re Group
from 2003 to 2007.
Ms. Godbehere was CFO of its Property & Casualty division
in Zurich for two years. Prior to this, she served as CFO of the
Life & Health division in London for three years. From 1997
to 1998, she was CEO of Swiss Re Life & Health Canada and
head of IT for Swiss Re in North America. Between 1996 and
1997, she was CFO of Swiss Re Life & Health North America.
Ms. Godbehere is a certified general accountant and was
made a fellow of the Chartered Professional Accountant
Association in 2014 and fellow of the Certified General
Accountant Association of Canada in 2003.
Other activities and functions
– Board member of Prudential plc
(chairman of the audit committee)
– Board member of Rio Tinto plc
(chairman of the audit committee)
– Board member of Rio Tinto Limited
(chairman of the audit committee)
Functions at UBS Group AG
Chairperson of the Audit Committee / member of the
Compensation Committee / member of the Corporate
Culture and Responsibility Committee
Professional history and education
William G. Parrett was elected to the BoD of UBS AG at the
October 2008 Extraordinary General Meeting and of UBS
Group AG in November 2014. He has chaired the Audit
Committee since 2009, has been a member of the Corporate
Culture and Responsibility Committee since 2012 and the
Compensation Committee since 2015. Mr. Parrett served his
entire executive career with Deloitte Touche Tohmatsu. He
was CEO from 2003 until his retirement in 2007. Between
1999 and 2003, he was a Managing Partner of Deloitte &
Touche USA LLP and served on Deloitte’s Global Executive
Committee between 1999 and 2007. Mr. Parrett founded
Deloitte’s US National Financial Services Industry Group in
1995 and its Global Financial Services Industry Group in
1997, both of which he led as Chairman. In his 40 years of
experience in professional services, Mr. Parrett served public,
private, governmental and state-owned clients worldwide.
Mr. Parrett has a bachelor’s degree in accounting from
St. Francis College, New York, and is a certified public
accountant (New York).
Other activities and functions
– Board member of the Eastman Kodak Company
(chairman of the audit and finance committee)
– Board member of the Blackstone Group LP
(chairman of the audit committee and chairman of the
conflicts committee)
– Board member of British American Tobacco plc
– Board member of Thermo Fisher Scientific Inc.
(chairman of the audit committee)
– Board member of Conduent Inc.
– Member of the Committee on Capital Markets Regulation
– Member of the Carnegie Hall Board of Trustees
– Past Chairman of the Board of the United States Council
for International Business
– Past Chairman of United Way Worldwide
220
Isabelle Romy
Robert W. Scully
Beatrice Weder di Mauro
Swiss, born 1965
American (US), born 1950
Italian and Swiss, born 1965
Functions at UBS Group AG
Member of the Audit Committee / member of the
Governance and Nominating Committee
Function at UBS Group AG
Member of the Risk Committee
Functions at UBS Group AG
Member of the Audit Committee / member of the Risk
Committee
Professional history and education
Isabelle Romy was elected to the BoD of UBS AG at the 2012
AGM and of UBS Group AG in November 2014. She has
been a member of the Audit Committee and the Governance
and Nominating Committee since 2012. Ms. Romy is a part-
ner at Froriep Legal AG, a large Swiss business law firm.
From 1995 to 2012, she worked for another major Swiss law
firm based in Zurich, where she was a partner from 2003 to
2012. Her legal practice includes litigation and arbitration in
cross-border cases. Ms. Romy has been an associate profes-
sor at the University of Fribourg and at the Federal Institute
of Technology in Lausanne (EPFL) since 1996. Between 2003
and 2008, she served as a deputy judge at the Swiss Federal
Supreme Court. From 1999 to 2006, she was a member of
the Ethics Commission at the EPFL. Ms. Romy earned her
PhD in law (Dr. iur.) at the University of Lausanne in 1990
and has been a qualified attorney-at-law admitted to the bar
since 1991. From 1992 to 1994, she was a visiting scholar at
Boalt Hall School of Law, University of California, Berkeley,
and completed her professorial thesis at the University of
Fribourg in 1996.
Other activities and functions
– Vice Chairman of the Sanction Commission of SIX Swiss
Exchange
– Member of the Fundraising Committee of the Swiss
National Committee for UNICEF
Professional history and education
Robert W. Scully was elected to the BoD of UBS AG and UBS
Group AG at the 2016 AGM. He has been a member of the
Risk Committee since 2016. Mr. Scully served as a Member
of the Office of the Chairman of Morgan Stanley from 2007
to 2009 and was its Co-President responsible for Asset
Management, Discover Credit Cards from 2006 to 2007.
Prior to assuming the position of Co-President, he was
Chairman of Global Capital Markets from 2004 to 2006,
Vice Chairman of Investment Banking from 1999 to 2006,
and Managing Director from 1996 to 2009. Mr. Scully was
Managing Director at Lehman Brothers from 1993 to 1996,
having worked for Scully Brothers Foss & Wight from 1989
to 1993 as Managing Director and for Salomon Brothers in
Investment Banking and Capital Markets from 1980 to
1989, where he became a Managing Director in 1984. He
began his career in the banking industry with Chase
Manhattan Bank in 1972 and then worked as an investment
banker for Blyth Eastman Dillon & Co. from 1977 to 1980.
Mr. Scully graduated in 1972 with a bachelor’s degree in
psychology from Princeton University and holds an MBA
from Harvard University.
Other activities and functions
– Board member of Chubb Limited
– Board member of Zoetis Inc.
– Board member of KKR & Co LP
– Board member of the Dean’s Advisors of Harvard
Business School
Professional history and education
Beatrice Weder di Mauro was elected to the BoD of UBS AG
at the 2012 AGM and of UBS Group AG in November 2014.
She has been a member of the Audit Committee since 2012
and became a member of the Risk Committee in 2013. She
has been a professor of economics, economic policy and in-
ternational macroeconomics at the Johannes Gutenberg
University of Mainz since 2001. Currently she is a distin-
guished fellow at INSEAD in Singapore (on leave from the
University of Mainz). Ms. Weder di Mauro has served as non-
executive director on the boards of globally leading compa-
nies in development finance, pharmaceuticals, technology
and insurance. Ms. Weder di Mauro was a member of the
German Council of Economic Experts from 2004 to 2012. In
2010, she was a resident scholar at the International
Monetary Fund (IMF) in Washington, DC, and, in 2006, a
visiting scholar at the National Bureau of Economic
Research, Cambridge, MA. She was an associate professor of
economics at the University of Basel between 1998 and
2001 and a research fellow at the United Nations University
in Tokyo from 1997 to 1998. Prior to this, she was an econo-
mist at the IMF in Washington, DC. Ms. Weder di Mauro
earned her PhD in economics at the University of Basel in
1993 and received her habilitation there in 1999.
Other activities and functions
– Supervisory Board member of Robert Bosch GmbH
– Board member of Bombardier Inc.
– Member of the ETH Zurich Foundation Board of Trustees
– Economic Advisory Board member of Fraport AG
– Advisory Board member of Deloitte Germany
– Deputy Chairman of the University Council of the
University of Mainz
– Member of the Senate of the Max Planck Society
221
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Dieter Wemmer
Joseph Yam
Markus Baumann
Swiss and German, born 1957
Chinese and Hong Kong citizen, born 1948
Swiss, born 1963
Function at UBS Group AG
Member of the Risk Committee
Professional history and education
Dieter Wemmer was elected to the BoD of UBS AG and UBS
Group AG at the 2016 AGM. He has been a member of the
Risk Committee since 2016. Mr. Wemmer has been Chief
Financial Officer (CFO) of Allianz SE since January 2013. He
joined Allianz SE in 2012 as a member of the Board of
Management, responsible for the insurance business in
France, Benelux, Italy, Greece and Turkey and for the Center
of Competence “Global Property & Casualty.” He was CFO
of Zurich Insurance Group (Zurich) from 2007 to 2011. From
2010 to 2011 he was made Zurich’s Regional Chairman of
Europe. Prior to this, Mr. Wemmer was CEO of the Europe
General Insurance business and member of Zurich’s Group
Executive Committee from 2004 to 2007. He held various
other management positions in the Zurich Group such as
Chief Operating Officer of the Europe General Insurance
business from 2003 to 2004, Head of Mergers and
Acquisitions from 1999 to 2003 and Head of Financial
Controlling from 1997 to 1999. He began his career in the
insurance industry within the Zurich Group in 1986 in
Cologne after graduating from the University of Cologne
with a master’s degree and acquiring his doctorate in math-
ematics in 1985.
Other activities and functions
– Administrative Board member Allianz Asset Management
AG and Allianz Investment Management SE, both Allianz
Group mandates
– Member of the CFO Forum
– Member of the Systemic Risk Working Group of the ECB
and the BIS
– Chairman of the Economic & Finance Committee of
Insurance Europe
– Member of the Berlin Center of Corporate Governance
Functions at UBS Group AG
Member of the Corporate Culture and Responsibility
Committee / member of the Risk Committee
Function at UBS Group AG
Group Company Secretary
Professional history and education
Markus Baumann was appointed Group Company Secretary
of UBS Group AG and Company Secretary of UBS AG by the
Board of Directors as of January 2017. He has been with UBS
for over 35 years and has held a broad range of leadership
roles across the Group in Switzerland, the US and Japan, in-
cluding Chief of Staff to the Chairman of the Board of
Directors since 2015 and Chief Operating Officer of Group
Internal Audit from 2006 to 2015. Before this, he worked as
Chief Operating Officer EMEA for UBS Asset Management.
Earlier in his career, Mr. Baumann worked in Japan for four
years as Corporate Planning Officer and assistant to the
CEO. He joined UBS in 1979 as a banking apprentice,
covering the full range of universal banking activities.
Mr. Baumann holds an MBA from INSEAD Fontainebleau
and a Swiss Federal Diploma as a Business Analyst.
Professional history and education
Joseph Yam was elected to the BoD of UBS AG at the 2011
AGM and of UBS Group AG in November 2014. He has been
a member of the Corporate Culture and Responsibility
Committee and the Risk Committee since 2011. He is
Executive Vice President of the China Society for Finance and
Banking and in that capacity has served as an advisor to the
People’s Bank of China since 2009. Mr. Yam was instrumen-
tal in the establishment of the Hong Kong Monetary
Authority and served as Chief Executive from 1993 until his
retirement in 2009. He began his career in Hong Kong as a
statistician in 1971 and served the public for over 38 years.
During his service, he occupied several positions such as
Director of the Office of the Exchange Fund from 1991,
Deputy Secretary for Monetary Affairs from 1985 and
Principal Assistant Secretary for Monetary Affairs from 1982.
Mr. Yam graduated from the University of Hong Kong in
1970 with first class honors in social sciences. He holds hon-
orary doctorate degrees and professorships from a number
of universities in Hong Kong and overseas.
Other activities and functions
– Board member of Johnson Electric Holdings Limited
– Board member of UnionPay International Co., Ltd.
– International Advisory Council member of China
Investment Corporation
– Distinguished Research Fellow at the Institute of Global
Economics and Finance at the Chinese University of
Hong Kong
222
Elections and terms of office
The BoD proposes the individual nominated to be Chairman, who
in turn is elected by shareholders at the AGM.
In addition, shareholders elect each member of the BoD indi-
vidually, as well as the members of the Compensation Commit-
tee, on an annual basis. The BoD in turn appoints one or more
Vice Chairmen, a Senior Independent Director, the members of
the BoD committees and their respective Chairpersons, and the
Group Company Secretary.
As set out in the Organization Regulations, BoD members are
normally expected to serve for a minimum of three years. No BoD
member may serve for more than 12 consecutive terms of office.
In exceptional circumstances, the BoD may extend this limit.
Organizational principles and structure
Following each AGM, the BoD meets to appoint one or more
Vice Chairmen, a Senior Independent Director, the BoD commit-
tee members other than the Compensation Committee mem-
bers, who are elected by the shareholders, and their respective
Chairpersons. At the same meeting, the BoD appoints a Group
Company Secretary, who acts as secretary to the BoD and its
committees.
According to the Articles of Association and the Organization
Regulations, the BoD meets as often as business requires, but it
must meet at least six times a year. During 2016, a total of 19 BoD
meetings and calls were held, nine of which were attended by
GEB members. Average participation in BoD meetings and calls
was 97%. In addition to the BoD meetings attended by the GEB,
the Group CEO partly attended most meetings of the BoD with-
out GEB participation. The average duration of these meetings
and calls was 110 minutes. In 2016, the frequency and length of
meetings were the same for UBS Group AG and UBS AG.
At every BoD meeting, each committee chairperson provides
the BoD with an update on current activities of his or her commit-
tee as well as important committee issues.
At least once a year, the BoD reviews its own performance as
well as the performance of each of its committees. This review is
based on an assessment of the BoD under the auspices of the
Governance and Nominating Committee, as well as on a self-
assessment of the BoD committees, and seeks to determine
whether the BoD and its committees are functioning effectively
and efficiently. The self-assessment of the BoD committees for
2016 will be concluded in spring 2017. At least every three years,
the BoD assessments include an appraisal by an external expert.
The latest, concerning the year 2015, was completed in spring
2016 and concluded that the BoD was operating effectively.
The committees listed on the following pages assist the BoD in
the performance of its responsibilities. These committees and
their charters are described in the Organization Regulations, pub-
lished at www.ubs.com/governance. Topics of common interest
or affecting more than one committee were discussed at joint
committees’ meetings. During 2016, seven joint committees’
meetings were held for UBS Group AG (the same number of
meetings was also held for UBS AG).
Board of Directors
Members on
31 December 2016
Meeting attendance
without GEB2
Meeting and call
attendance with GEB
Key responsibilities include:
Axel A. Weber, Chairman
Michel Demaré
David Sidwell
Reto Francioni
Ann F. Godbehere
William G. Parrett
Isabelle Romy
Robert W. Scully1
Beatrice Weder di Mauro
Dieter Wemmer1
Joseph Yam
10/10
10/10
10/10
10/10
10/10
10/10
10/10
7/7
10/10
4/7
10/10
100%
100%
100%
100%
100%
100%
100%
100%
100%
57%
100%
9/9
9/9
9/9
9/9
9/9
9/9
8/9
6/6
9/9
3/6
9/9
100%
100% The BoD has ultimate responsibility for the success of the Group and for delivering sustain-
able shareholder value within a framework of prudent and effective controls. It decides on
the Group’s strategic aims and the necessary financial and human resources upon recommen-
dation of the Group CEO and sets the Group’s values and standards to ensure that its
obligations to its shareholders and other stakeholders are met.
100%
Refer to the Organization Regulations of UBS Group AG at www.ubs.com/governance
for more information
100%
100%
100%
89%
100%
100%
50%
100%
1 Robert W. Scully and Dieter Wemmer were elected to the BoD at the AGM 2016. 2 Additionally, two unscheduled calls took place in 2016.
223
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Audit Committee
The Audit Committee consists of five BoD members as indicated
in the table below, all of whom were determined by the BoD to be
fully independent. As a group, members of the Audit Committee
must have the necessary qualifications and skills to perform all of
their duties and together must possess financial literacy and expe-
rience in banking and risk management.
The Audit Committee itself does not perform audits but moni-
tors the work of the external auditors, Ernst & Young Ltd (EY),
who in turn are responsible for auditing UBS Group AG’s and UBS
AG’s consolidated and standalone annual financial statements
and for reviewing the quarterly financial statements.
Together with the external auditors and Group Internal Audit,
the Audit Committee in particular reviews the annual financial
statements of UBS Group AG and UBS AG as well as the con-
solidated annual and the quarterly financial statements and the
consolidated annual report of UBS Group AG and UBS AG, as
proposed by management, in order to recommend approval to
the BoD or propose any adjustments the Audit Committee con-
siders appropriate.
Periodically, and at least annually, the Audit Committee
assesses the qualifications, expertise, effectiveness, independence
and performance of the external auditors and their lead audit
partner, in order to support the BoD in reaching a decision in rela-
tion to the appointment or dismissal of the external auditors and
to the rotation of the lead audit partner. The BoD then submits
these proposals to the shareholders for approval at the AGM.
During 2016, the Audit Committee held 8 committee meet-
ings and 10 calls with an average participation rate of 96%. On
average the duration of each of the meetings and calls was
approximately 140 minutes. In 2016, for both UBS Group AG and
UBS AG, the frequency and length of meetings were the same. All
meetings and calls of the Audit Committee were attended by the
Group Chief Financial Officer and the Group Controller and Chief
Accounting Officer and most of the meetings were attended by
the Group CEO. In addition, the chair of the committee met once
with FINMA and on a periodic basis with the Federal Reserve Bank
of New York (FRBNY).
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 qualifies as a financial expert. The New York
Stock Exchange (NYSE) listing standards on corporate governance
set more stringent independence requirements for members of
audit committees than for the other members of the BoD. Each of
the five members of the Audit Committee is an external BoD
member who, in addition to satisfying our independence criteria,
does not receive, directly or indirectly, any consulting, advisory or
compensatory fees from UBS Group AG other than in his or her
capacity as a BoD member, does not hold, directly or indirectly,
UBS Group AG shares in excess of 5% of the outstanding capital
and (except as noted below) does not serve on the audit commit-
tees of more than two other public companies. However, the NYSE
listing standards on corporate governance allow for an exemption
for audit committee members to serve on more than three audit
committees of public companies, provided that all BoD members
determine that such simultaneous service does not impair the
member’s ability to effectively serve on each committee and to
fulfill his or her obligations. Considering the credentials of William
G. Parrett, the BoD has granted this exemption in his case.
Audit Committee
Members on
31 December 2016
Meeting and
call attendance
Key responsibilities include:
William G. Parrett (Chair)
Michel Demaré
Ann F. Godbehere
Isabelle Romy
Beatrice Weder di Mauro
18/18
16/18
18/18
18/18
16/18
100% The function of the Audit Committee is to serve as an independent and objective body with oversight of:
89%
100%
100%
89%
(i) UBS Group AG’s and the Group’s accounting policies, financial reporting and disclosure controls and procedures;
(ii) the quality, adequacy and scope of external audit;
(iii) UBS Group AG’s and the Group’s compliance with financial reporting requirements;
(iv) the Executives’ approach to internal controls with respect to the production and integrity of the financial statements
and disclosure of the financial performance; and
(v) the performance of Group Internal Audit in conjunction with the Chairman.
The Executives are responsible for the preparation, presentation and integrity of the financial statements. External
auditors are responsible for auditing UBS Group AG’s and the Group’s annual financial statements and for reviewing
the quarterly financial statements.
Refer to the Organization Regulations of UBS Group AG at www.ubs.com/governance for more information
224
Compensation Committee
The Compensation Committee consists of four independent BoD
members as indicated in the table. The Compensation Committee
also reviews the compensation disclosures included in this report.
During 2016, the Compensation Committee held seven meet-
ings and two calls with a participation rate of 100%. On average
the duration of each of the meetings and calls was approximately
100 minutes. The meetings were held in the presence of external
advisors, the Chairman and generally the Group CEO. In 2016,
the frequency and length of meetings were the same for both
UBS Group AG and UBS AG. The chair of the committee met with
regulators as appropriate.
➔ Refer to “Our compensation governance framework” and “Total
Reward Principles” in the “Compensation” section of this report
for more information on the Compensation Committee’s decision-
making procedures
Corporate Culture and Responsibility Committee
As of 31 December 2016, the Corporate Culture and Responsibil-
ity Committee consisted of the Chairman and three independent
BoD members as listed in the table. The Group CEO and the
Global Head of UBS and Society are permanent guests of the Cor-
porate Culture and Responsibility Committee, while the regional
Presidents attend two of the meetings as guests. During 2016, six
meetings were held with an average participation rate of 92%.
On average the duration of each of the meetings was approxi-
mately 80 minutes. In 2016, the frequency and length of meet-
ings were the same for both UBS Group AG and UBS AG.
➔ Refer to the “UBS and Society” section of this report for more
information
Compensation Committee
Members on
31 December 2016
Meeting and
call attendance
Key responsibilities include:
Ann F. Godbehere (Chair)
Michel Demaré
Reto Francioni
William G. Parrett
9/9
9/9
9/9
9/9
100% The function of the Compensation Committee is responsible for:
100%
100%
100%
(i) supporting the BoD in its duties to set guidelines on compensation and benefits,
(ii) approving the total compensation for the Chairman and the non-independent BoD members,
(iii) establishing, together with the Chairman, financial and non-financial performance targets for the Group CEO and
reviewing, upon the recommendation from the Group CEO, financial and non-financial performance targets for the other
GEB members,
(iv) evaluating, in consultation with the Chairman, the performance of the Group CEO in meeting agreed targets, as well
as informing the BoD of the outcome of the performance assessments of the GEB members,
(v) proposing, together with the Chairman, total individual compensation for the independent BoD members and Group
CEO for approval by the BoD and
(vi) proposing to the BoD for approval, upon recommendation by the Group CEO, the total individual compensation for
GEB members.
Refer to the Organization Regulations of UBS Group AG at www.ubs.com/governance for more information
Corporate Culture and Responsibility Committee
Members on
31 December 2016
Axel A. Weber (Chair)
Reto Francioni
William G. Parrett
Joseph Yam
Meeting and
call attendance
Key responsibilities include:
6/6
5/6
5/6
6/6
83%
100% The Corporate Culture and Responsibility Committee supports the BoD in its duties to safeguard and advance the
Group’s reputation for responsible and sustainable conduct. Its function is forward-looking in that it monitors and
reviews societal trends and transformational developments and assesses their potential relevance for the Group.
In undertaking this assessment, it reviews stakeholder concerns and expectations pertaining to the societal performance
of UBS and to the development of its corporate culture. The Corporate Culture and Responsibility Committee’s function
also encompasses the monitoring of the current state and implementation of the programs and initiatives within the
Group pertaining to corporate culture and corporate responsibility.
100%
83%
Refer to the Organization Regulations of UBS Group AG at www.ubs.com/governance for more information
225
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Governance and Nominating Committee
As of 31 December 2016, the Governance and Nominating Com-
mittee consisted of the Chairman and three independent mem-
bers as listed in the table. During 2016, eight meetings and one
call were held with a participation rate of 100%. On average the
duration of each of the meetings and the call was approximately
50 minutes. In 2016, the frequency and length of meetings were
similar for both UBS Group AG and UBS AG. All meetings of the
Governance and Nominating Committee were attended by the
Group CEO.
Risk Committee
As of 31 December 2016, the Risk Committee comprised six inde-
pendent BoD members as listed in the table. During 2016, the
Risk Committee held eight committee meetings and three calls
with an average participation rate of 95%. On average the dura-
tion of each of the meetings and calls was approximately 280
minutes. In 2016, the frequency and length of meetings were the
same for both UBS Group AG and UBS AG. Usually, the Group
CEO, the Group CFO, the Group CRO and the Group General
Counsel attend the meetings and calls. The committee met once
with the FRBNY and the Connecticut Department of Banking. The
chair met once each with the FCA, the PRA and with FINMA, and
with the FRBNY on a periodic basis.
Governance and Nominating Committee
Members on
31 December 2016
Axel A. Weber (Chair)
Michel Demaré
Isabelle Romy
David Sidwell
Risk Committee
Members on
31 December 2016
David Sidwell (Chair)
Reto Francioni
Robert W. Scully 1
Meeting and
call attendance
Key responsibilities include:
9/9
9/9
9/9
9/9
100% The function of the Governance and Nominating Committee is to support the BoD in fulfilling its duty to establish best
100%
100%
100%
practices in corporate governance across the Group, to conduct a BoD assessment (self- or external assessment), to
establish and maintain a process for appointing new BoD members and GEB members (in the latter case, upon proposal
of the Group CEO) and to manage the succession planning of all GEB members.
Refer to the Organization Regulations of UBS Group AG at www.ubs.com/governance for more information
Meeting and
call attendance
Key responsibilities include:
11/11
11/11
7/8
100%
88%
100% The function of the Risk Committee is to oversee and support the BoD in fulfilling its duty to supervise and set an
appropriate risk management and control framework in the areas of:
(i) risk management and control, including credit, market, country, legal, compliance, operational and conduct risks;
(ii) treasury and capital management, including funding, liquidity and equity attribution; and
(iii) balance sheet management.
The Risk Committee considers the potential effects of the aforementioned risks on the Group’s reputation. For these
purposes, the Risk Committee will receive all relevant information from the GEB and has the authority to meet with
regulators / third parties in consultation with the Group CEO.
Refer to the Organization Regulations of UBS Group AG at www.ubs.com/governance for more information
Beatrice Weder di Mauro
11/11
100%
Dieter Wemmer 1
Joseph Yam
6/8
75%
11/11
100%
1 Robert W. Scully and Dieter Wemmer were elected to the BoD at the AGM 2016.
226
Special Committee
The Special Committee is an ad hoc committee with a standing
composition and is called and held on an ad hoc basis.
The Special Committee is composed of four independent BoD
members and focuses on internal and regulatory investigations.
As of 31 December 2016, David Sidwell chaired the Special Com-
mittee with Michel Demaré, William G. Parrett and Isabelle Romy
as additional members. During 2016, four committee meetings
and four telephone conferences were held with an average par-
ticipation rate of 94%. On average the duration of each of the
meetings and telephone conferences was approximately 110 min-
utes. In 2016, the frequency and length of meetings were similar
for both UBS Group AG and UBS AG.
Roles and responsibilities of the Chairman of the Board
of Directors
Axel A. Weber serves as a full-time Chairman of the BoD, in line
with his employment contract.
The Chairman coordinates tasks within the BoD, calls BoD
meetings and sets their agendas. Under the leadership of the
Chairman, the BoD decides on the strategy of the Group upon
recommendations by the Group CEO, exercises ultimate supervi-
sion over management and appoints all GEB members.
The Chairman presides over all general meetings of sharehold-
ers and works with the committee chairpersons to coordinate the
work of all BoD committees. Together with the Group CEO, the
Chairman is responsible for ensuring effective communication
with shareholders and other stakeholders, including government
officials, regulators and public organizations. This is in addition to
establishing and maintaining a close working relationship with
the Group CEO and other GEB members, and providing advice
and support when appropriate; including continuing to support
the firm’s cultural change as a key priority on the basis of our
Principles and Behaviors.
In 2016, the Chairman met on a regular basis with core super-
visory authorities, including FINMA and the Swiss National Bank,
in Switzerland, the FRBNY / Connecticut Department of Banking in
the US, and with the PRA and the FCA in the UK. Meetings with
other important supervisory authorities, in regions such as Asia-
Pacific, EMEA and the US, were scheduled on an ad hoc or needs-
driven basis.
Roles and responsibilities of the Vice Chairmen and
the Senior Independent Director
The BoD appoints one or more Vice Chairmen and a Senior Inde-
pendent Director. If the BoD appoints more than one Vice Chair-
man, one of them must be independent. Michel Demaré has been
appointed as Vice Chairman, and David Sidwell has been
appointed as Senior Independent Director. A Vice Chairman is
required to lead the BoD in the absence of the Chairman and to
provide support and advice to the Chairman. At least twice a year,
the Senior Independent Director organizes and leads a meeting of
the independent BoD members in the absence of the Chairman.
In 2016, three independent BoD meetings were held for UBS
Group AG and UBS AG with an average participation of 93% and
an average duration of approximately 80 minutes. The Senior
Independent Director relays to the Chairman any issues or con-
cerns brought forth by the independent BoD members and acts as
a point of contact for shareholders and stakeholders seeking to
engage in discussions with an independent BoD member.
Important business connections of independent members
of the Board of Directors
As a global financial services provider and a major Swiss bank,
we enter into business relationships with many large companies,
including some in which our BoD members assume manage-
ment or independent board responsibilities. The Governance
and Nominating Committee determines in each instance
whether the nature of the Group’s business relationship with
such a company might compromise our BoD members’ capacity
to express independent judgment.
Our Organization Regulations require three-quarters of the UBS
Group AG BoD members and one-third at UBS AG to be indepen-
dent. For this purpose, independence is determined in accordance
with the FINMA circular 08 / 24 “Supervision and Internal Con-
trol,” the New York Stock Exchange rules, and the rules and regu-
lations of other securities exchanges on which the UBS Group AG
shares are listed, if any, applying the strictest standard.
In 2016, our BoD met the standards of the Organization Regu-
lations for the percentage of directors that are considered inde-
pendent under the criteria described above. Due to our Chair-
man’s full-time employment by UBS Group AG, he is not
considered independent.
All relationships and transactions with UBS Group AG’s inde-
pendent BoD members are conducted in the ordinary course of
business and are on the same terms as those prevailing at the time
for comparable transactions with non-affiliated persons. All rela-
tionships and transactions with BoD members’ associated compa-
nies are conducted at arm’s length.
➔ Refer to “Note 32 Related parties” in the “Consolidated financial
statements” section of this report for more information
Checks and balances: Board of Directors and
Group Executive Board
We operate under a strict dual board structure, as mandated by
Swiss banking law. The separation of responsibilities between the
BoD and the GEB is clearly defined in the Organization Regula-
tions. The BoD decides on the strategy of the Group upon recom-
mendations by the Group CEO and supervises and monitors the
business, whereas the GEB, headed by the Group CEO, has execu-
tive management responsibility. The functions of Chairman of the
BoD and Group CEO are assigned to two different people, ensur-
ing a separation of power. This structure establishes checks and
balances and preserves the institutional independence of the BoD
from the day-to-day management of the Group, for which
responsibility is delegated to the GEB under the leadership of the
Group CEO. No member of one board may simultaneously be a
member of the other.
227
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Supervision and control of the GEB remain with the BoD. The
authorities and responsibilities of the two bodies are governed by
the Articles of Association and the Organization Regulations, includ-
ing the latter document’s “Annex B – Key approval authorities.”
➔ Refer to www.ubs.com/governance for more information
on checks and balances for the Board of Directors and
Group Executive Board
Skills, expertise and training of the Board of Directors
The BoD is composed of members with a broad spectrum of skills,
educational backgrounds, experience and expertise from a range
of sectors that reflect the nature and scope of the firm’s business.
With a view to recruiting needs, the Governance and Nominating
Committee uses a skills / experience matrix as a tool to identify any
gaps in the competencies considered most relevant to the BoD,
taking into consideration the bank’s business composition, risk
profile, strategy and geographic reach.
We asked our Board members to rate their 4 strongest compe-
tencies out of the following 12 categories:
– banking (wealth management, asset management, personal
and corporate banking)
– experience as chief executive officer or chairman
– executive board leadership experience (e.g., as chief financial
officer, chief risk officer or chief operating officer)
– corporate responsibility and sustainability
– finance, audit, accounting
– human resources management, including compensation
– insurance
– investment banking, capital markets
– legal, compliance
– regulator, central bank
– risk management
– technology, cyber security
The Governance and Nominating Committee reviews these
categories annually to confirm that it continues to match the
most relevant skill and experience competencies.
For 2016, competencies in all twelve categories were repre-
sented in our BoD. Particularly strong levels of experience and
expertise existed in the areas of:
– finance, audit, accounting
– risk management
– regulator, central bank and
– banking and investment banking
Furthermore, 9 of the 11 BoD members have held or currently
hold chairman, CEO or other executive board-level leadership
positions.
Moreover, education remained an important priority for our
BoD members. In addition to a comprehensive induction program
for new BoD members, continuous training and topical deep-
dives are part of the BoD agenda.
228
Information and control instruments vis-à-vis the Group
Executive Board
The BoD is kept informed of the activities of the GEB in various
ways, including minutes of GEB meetings being made available to
the BoD. The Group CEO and other GEB members also regularly
update the BoD on important issues at BoD meetings.
At BoD meetings, BoD members may request from BoD or GEB
members any information about matters concerning the Group
that they require to fulfill their duties. Outside meetings, BoD
members may request information from other BoD and GEB
members. Such requests must be approved by the Chairman.
The internal audit function independently, objectively and sys-
tematically assesses:
– the effectiveness of processes to define strategy and risk appe-
tite as well as the overall adherence to the approved strategy
– the effectiveness of governance processes, risk management
and internal controls
– the soundness of the risk and control culture
– the effectiveness and sustainability of remediation activities
– the reliability and integrity of financial and operational infor-
mation, i.e., whether activities are properly, accurately and
completely recorded, and the quality of underlying data and
models, and
– the effectiveness of processes to comply with legal, regulatory
and statutory requirements, as well as with internal policies
and contracts, i.e., assessing whether such requirements are
met, and the adequacy of processes to sustainably meet them
The Head of Group Internal Audit (GIA) reports directly to the
Chairman. In addition, the internal audit organization has a func-
tional reporting line to the Audit Committee in line with their
responsibilities as set forth in our Organization Regulations. The
Audit Committee annually assesses and approves the appropriate-
ness of Group Internal Audit’s annual audit plan and annual audit
objectives, and monitors GIA’s discharge of its annual audit objec-
tives, including being informed of the results of the annual audit
plan. The Audit Committee is in regular contact with the Head of
GIA. GIA issues quarterly governance and annual activity reports,
providing a broad overview of significant audit results and key
issues, control themes and trends based on individual audit results,
continuous risk assessment and issue assurance results. The reports
are provided to the Chairman of the BoD, members of the Audit
and the Risk Committees, the GEB and other stakeholders.
➔ Refer to the “Risk management and control” section of this
report for more information
Group Executive Board
The Board of Directors (BoD) delegates the management of the
business to the Group Executive Board (GEB).
Management contracts
Responsibilities, authorities and organizational principles
of the Group Executive Board
Under the leadership of the Group CEO, the GEB has executive
management responsibility for the steering of the Group and its
business. It assumes overall responsibility for developing the
Group and business division strategies and the implementation of
approved strategies. The GEB constitutes itself as the risk council
of the Group. In this function, the GEB has overall responsibility
for establishing and supervising the implementation of risk man-
agement and control principles, as well as for managing the risk
profile of the Group as a whole, as determined by the BoD and
the Risk Committee. In 2016, the GEB held 16 meetings and two
GEB offsite meetings. In 2016, the frequency of meetings for both
UBS Group AG and UBS AG was the same.
➔ Refer to the Organization Regulations of UBS Group AG at
www.ubs.com/governance for more information on the
authorities of the Group Executive Board
Responsibilities and authorities of the Group Asset and
Liability Management Committee
The Group Asset and Liability Management Committee (Group
ALCO), established by the GEB, is responsible for supporting the
GEB in its responsibility to promote the usage of the Group’s
assets and liabilities in line with the Group’s strategy, regulatory
commitments and the interests of shareholders and other stake-
holders. Group ALCO proposes the framework for capital man-
agement, capital allocation, funding and liquidity risk and pro-
poses limits and targets for the Group to the BoD for approval. It
oversees the balance sheet management of the Group, its busi-
ness divisions and Corporate Center. The Organization Regula-
tions additionally specify which powers of the GEB are delegated
to the Group ALCO. In 2016, the Group ALCO held nine meetings
for UBS Group AG and UBS AG.
We have not entered into management contracts with any com-
panies or natural persons that do not belong to the Group.
Members of the Group Executive Board
As per our announcement of 11 May 2016, Lukas Gähwiler
assumed a new strategic role as Chairman of Region Switzerland
as of 1 September 2016. He stepped down from the GEB and from
his role as President Personal & Corporate Banking and President
UBS Switzerland. Martin Blessing, formerly CEO of Commerzbank
AG until April 2016, succeeded Lukas Gähwiler in all of his roles
and became a member of the GEB as of 1 September 2016.
In line with Swiss law, article 36 of UBS Group AG’s Articles of
Association (AoA) limits the number of mandates that members
of the GEB may hold outside the UBS Group to one board mem-
bership in a listed company (other than UBS Group AG and UBS
AG) and five additional mandates in non-listed companies. In
addition, GEB members may hold no more than 10 mandates at
the request of the company and eight mandates in associations,
charitable organizations, foundations, trusts and employee wel-
fare foundations. No member of the GEB reaches the threshold
described in article 36 of the AoA.
The following biographies provide information on the GEB
members currently in office. In addition to information on man-
dates, the biographies include memberships or other activities or
functions, as required by the SIX Swiss Exchange Corporate Gov-
ernance Directive.
At UBS AG, management of the business is also delegated,
and the Executive Board, under the leadership of its President, has
executive management responsibility for UBS AG and its business.
All members of UBS Group AG’s GEB are also members of UBS
AG’s Executive Board, with the exception of Mr. Blessing. Similarly
to the Group ALCO, UBS AG’s Asset and Liability Management
Committee is responsible for promoting the usage of UBS AG’s
financial resources in line with the UBS AG and Group strategy
and regulatory requirements.
229
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Sergio P. Ermotti
Martin Blessing
Christian Bluhm
Swiss, born 1960
German, born 1963
German, born 1969
Function at UBS Group AG
Group Chief Executive Officer
Professional history and education
Sergio P. Ermotti has been Group Chief Executive Officer of
UBS Group AG since November 2014, having held the same
position at UBS AG since November 2011 and on an interim
basis between September and November 2011. Mr. Ermotti
became a member of the GEB in April 2011 and was
Chairman and CEO of UBS Group Europe, Middle East and
Africa from April to November 2011. From 2007 to 2010, he
was Group Deputy Chief Executive Officer at UniCredit,
Milan, and was responsible for the strategic business areas
of Corporate and Investment Banking, and Private Banking.
He joined UniCredit in 2005 as Head of Markets &
Investment Banking Division. Between 2001 and 2003, he
worked at Merrill Lynch, serving as co-Head of Global Equity
Markets and as a member of the Executive Management
Committee for Global Markets & Investment Banking. He
began his career with Merrill Lynch in 1987 and held vari-
ous positions within equity derivatives and capital markets.
Mr. Ermotti is a Swiss-certified banking expert and is a
graduate of the Advanced Management Programme at
Oxford University.
Functions at UBS Group AG
President Personal & Corporate Banking and President UBS
Switzerland
Function at UBS Group AG
Group Chief Risk Officer
Professional history and education
Martin Blessing is a member of the GEB of UBS Group AG.
He was appointed President Personal & Corporate Banking
and President UBS Switzerland as well as President of the
Executive Board of UBS Switzerland AG in September
2016. Before joining UBS, he was CEO of Commerzbank
AG from 2008 to April 2016. In his 15 years at
Commerzbank, he held various senior management posi-
tions on Commerzbank’s Executive Board: in 2008, he be-
came Spokesman of the Executive Board; from 2004 to
2008, he was Head of Corporate Banking, and he was
Head IT & Operations from 2006 to 2008. From 2001 to
2004, he was Head of Private Clients. From 2000 to 2001,
Mr. Blessing served as CEO, Advance Bank of the Dresdner
Bank. From 1997 to 2000, he acted as Dresdner’s joint
Head Private Clients. Mr. Blessing worked for McKinsey &
Company from 1989 to 1996, the last two years as a part-
ner. Mr. Blessing holds an MBA from the University of
Chicago and graduated in 1987 in business administration
from the University of St. Gallen.
in
joined UBS
January 2016. He
Professional history and education
Christian Bluhm became a member of the GEB and was ap-
pointed Group Chief Risk Officer of UBS Group AG and UBS
AG
from FMS
Wertmanagement where he had been Chief Risk & Financial
Officer since 2010 and Spokesman of the Executive Board
from 2012 to 2015. From 2004 to 2009, he worked for Credit
Suisse where he was Managing Director responsible for
Credit Risk Management in Switzerland and Private Banking
worldwide. Mr. Bluhm was Head of Credit Portfolio
Management until 2008 and then Head of Credit Risk
Management Analytics & Instruments after the financial crisis
in 2008. From 2001 to 2004, he worked for Hypovereinsbank
in Munich in Group Credit Portfolio Management, heading a
team that specialized in Structured Finance Analytics. Before
starting his banking career with Deutsche Bank in Credit Risk
Management in 1999, he worked as a postdoctoral fellow at
Cornell University in Ithaca and as a scientific assistant at the
University of Greifswald. Mr. Bluhm holds a degree in math-
ematics and informatics from the University of Erlangen-
Nuremberg and received his PhD in mathematics in 1996
from the same university.
Other activities and functions
– Chairman of the Board of Directors of UBS Switzerland AG
– Chairman of the Board of Directors of UBS Business
Other activities and functions
– Executive Board member of Baden-Baden
Entrepreneur Talks
Solutions AG
– Chairman of the UBS Optimus Foundation Board
– Chairman of the Fondazione Ermotti, Lugano
– Chairman and President of the Board of the Swiss-
American Chamber of Commerce
– Board member of the Fondazione Lugano per il Polo
Culturale, Lugano
– Board member of the Global Apprenticeship Network
– Member of the Institut International d’Etudes Bancaires
Other activities and functions
– Board member of UBS Business Solutions AG
– Board member of UBS Switzerland AG
230
Markus U. Diethelm
Kirt Gardner
Sabine Keller-Busse
Swiss, born 1957
American (US), born 1959
German and Swiss, born 1965
Function at UBS Group AG
Group General Counsel
Function at UBS Group AG
Group Chief Financial Officer
Function at UBS Group AG
Group Head Human Resources
Professional history and education
Kirt Gardner became a member of the GEB and was ap-
pointed Group Chief Financial Officer of UBS Group AG and
UBS AG in January 2016. He was CFO Wealth Management
from 2013 to 2015. Prior to this, he held a number of leader-
ship positions at Citigroup, including CFO and Head of
Strategy within Global Transaction Services from 2010 to
2013, Head of Strategy, Planning and Risk Strategy for the
Corporate and Institutional Division from 2006 to 2010 and
Head of Global Strategy and Cost Management for the
Consumer Bank from 2004 to 2006. Prior to this, he held the
position of Global Head of Financial Services Strategy for
BearingPoint, for which he worked in Asia and New York for
four years. From 1994 to 2000, he was Managing Director
with Barents Group, working in the US, Asia, Latin America
and Europe. Mr. Gardner holds a bachelor’s degree in eco-
nomics from Williams College, a master’s degree from the
University of Pennsylvania and an MBA in finance from
Wharton School.
Other activities and functions
– Board member of UBS Business Solutions AG
Professional history and education
Sabine Keller-Busse became a member of the GEB of UBS
Group AG and UBS AG in January 2016. She has been Group
Head Human Resources since August 2014. Having joined
UBS in 2010, she served as Chief Operating Officer UBS
Switzerland until 2014. Prior to this, she led Credit Suisse’s
Private Clients Region Zurich division for two years. From
1995 to 2008, Ms. Keller-Busse worked for McKinsey &
Company, where she had been Senior Partner since 2001.
She started her professional career at Siemens AG in a train-
ee program, which she completed with a commercial diplo-
ma. Ms. Keller-Busse holds a master’s degree in business
administration from the University of St. Gallen and received
a PhD in business administration from the same university.
Other activities and functions
– Board member of SIX Group
(Chairman of the nomination & compensation committee)
– Foundation Board member of the UBS Pension Fund
– Foundation Board member of the University Hospital Zurich
Professional history and education
Markus U. Diethelm has been Group General Counsel of
UBS Group AG since November 2014, having held the same
position at UBS AG since September 2008, when he became
a member of the GEB. He was Executive Board member of
UBS Business Solutions AG from 2015 to 2016. From 1998
to 2008, he served as Group Chief Legal Officer at Swiss Re,
and he was appointed to the company’s Group Executive
Board in 2007. Prior to this, he was with Los Angeles-based
law firm Gibson, Dunn & Crutcher and focused on corporate
matters, securities transactions, litigation and regulatory in-
vestigations while working out of the firm’s Brussels and
Paris offices. From 1989 to 1992, he practiced at Shearman
& Sterling in New York, specializing in mergers and acquisi-
tions. In 1988, he worked at Paul, Weiss, Rifkind, Wharton &
Garrison in New York. After starting his career in 1983 with
Bär & Karrer, he served as a law clerk at the District Court of
Uster in Switzerland from 1984 to 1985. Mr. Diethelm holds
a law degree from the University of Zurich and a master’s
degree and a PhD from Stanford Law School. Mr. Diethelm is
a qualified attorney-at-law admitted to the bar in Zurich,
Geneva and in New York State.
Other activities and functions
– Board member of UBS Business Solutions AG
– Chairman of the Swiss-American Chamber of
Commerce’s legal committee
– Member of the Swiss Advisory Council of the American
Swiss Foundation
– Member of the Foundation Council of the UBS
International Center of Economics in Society
– Foundation Board member of the International Red Cross
and Red Crescent Museum
– Member of the Professional Ethics Commission of the
Association of Swiss Corporate Lawyers
231
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Ulrich Körner
Axel P. Lehmann
Tom Naratil
German and Swiss, born 1962
Swiss, born 1959
American (US), born 1961
Functions at UBS Group AG
President Asset Management and President UBS Europe,
Middle East and Africa
Function at UBS Group AG
Group Chief Operating Officer
Professional history and education
Ulrich Körner has been President Asset Management of UBS
Group AG (formerly CEO Global Asset Management) since
November 2014, having held the same position at UBS AG
since January 2014. He became a member of the GEB in
April 2009 and was Group Chief Operating Officer from
2009 to 2013. In addition, he was appointed President UBS
Europe, Middle East and Africa (formerly CEO of UBS Group
Europe, Middle East and Africa) in December 2011. In 1998,
Mr. Körner joined Credit Suisse. He served as a member of
the Credit Suisse Group Executive Board from 2003 to 2008,
holding various management positions, including CFO and
Chief Operating Officer. From 2006 to 2008, he was respon-
sible for the entire Swiss client business as CEO Credit Suisse
Switzerland. Mr. Körner received a PhD in business adminis-
tration from the University of St. Gallen and served for sev-
eral years as an auditor at Price Waterhouse and as a man-
agement consultant at McKinsey & Company.
Other activities and functions
– Member of the Supervisory Board of UBS Europe SE
– Chairman of the Foundation Board of the UBS Pension Fund
– Chairman of the Widder Hotel, Zurich
– Vice President of the Board of Lyceum Alpinum Zuoz
– Member of the Financial Service Chapter Board of the
Swiss-American Chamber of Commerce
– Advisory Board member of the Department of Banking
and Finance at the University of Zurich
– Member of the business advisory council of the Laureus
Foundation Switzerland
Professional history and education
Axel P. Lehmann became a member of the GEB and was
appointed Group Chief Operating Officer of UBS Group AG
and UBS AG in January 2016. He has been President of the
Executive Board of UBS Business Solutions AG since March
2016. He was a member of the BoD of UBS AG from 2009 to
2015 and of UBS Group AG from 2014 to 2015. During his
entire tenure on the Board, he had been a member of the
Risk Committee and, from 2011 to 2013, a member of the
Governance and Nominating Committee. Mr. Lehmann be-
came a member of Zurich Insurance Group’s (Zurich) Group
Executive Committee in 2002, holding various management
positions, including CEO for the European and North
America businesses, and from 2008 to 2015 as Chief Risk
Officer with additional responsibilities for Group IT, as
Regional Chairman for Europe, Middle East and Africa and
Chairman for Farmers Group Inc. In 2001, he was appointed
CEO for Northern, Central and Eastern Europe and Zurich
Group Germany, having served as a member of the compa-
ny’s Group Management Board since 2000 with responsibil-
ity for group-wide business development functions. In 1996,
he joined Zurich as a member of the Executive Committee of
Zurich Switzerland and subsequently held various executive
management and corporate development positions within
Zurich Switzerland. Prior to joining Zurich, Mr. Lehmann was
head of corporate planning and controlling at Swiss Life,
project manager and Vice President of the Institute of
Insurance Economics at the University of St. Gallen and
a visiting professor at Bocconi University
in Milan.
Mr. Lehmann holds a PhD and a master’s degree in business
administration and economics from the University of
St. Gallen. He is also a graduate of the Wharton Advanced
Management Program and an honorary professor of
business administration and service management at the
University of St. Gallen.
Other activities and functions
– Board member of UBS Business Solutions AG
– Co-Chair of the Global Future Council of the Future of
Financial and Monetary Systems of WEF
– Chairman of the Board of the Institute of Insurance
Economics at the University of St. Gallen
– Member of the International and Alumni Advisory Board
at the University of St. Gallen
– Member of the Swiss-American Chamber of Commerce
Chapter Doing Business in USA
Functions at UBS Group AG
President Wealth Management Americas and President UBS
Americas
Professional history and education
Tom Naratil became President Wealth Management
Americas and President UBS Americas of UBS Group AG and
UBS AG in January 2016. He became a member of the GEB
in June 2011 and was Group CFO of UBS AG from 2011 to
2015. He held the same position for UBS Group AG from
2014 to 2015. In addition to the role of Group CFO, he was
Group Chief Operating Officer from 2014 to 2015. He was
President of the Executive Board of UBS Business Solutions
AG from 2015 to March 2016. He served as CFO and Chief
Risk Officer of Wealth Management Americas from 2009
until his appointment as Group CFO in 2011. Before 2009,
he held various senior management positions within UBS,
including heading the Auction Rate Securities Solutions
Group during the financial crisis in 2008. He was named
Global Head of Marketing, Segment & Client Development
in 2007, Global Head of Market Strategy & Development in
2005, and Director of Banking and Transactional Solutions,
Wealth Management USA, in 2002. During this time, he was
a member of the Group Managing Board. He joined Paine
Webber Incorporated in 1983 and after the merger with UBS
became Director of the
Investment Products Group.
Mr. Naratil holds an MBA in economics from New York
University and a Bachelor of Arts in history from Yale University.
Other activities and functions
– Chairman of UBS Americas Holding LLC
– Board member of the American Swiss Foundation
– Board member of the Clearing House Supervisory Board
– Member of the Board of Consultors for the College of
Nursing at Villanova University
232
Andrea Orcel
Kathryn Shih
Jürg Zeltner
Italian, born 1963
British, born 1958
Swiss, born 1967
Function at UBS Group AG
President Investment Bank
Function at UBS Group AG
President UBS Asia Pacific
Function at UBS Group AG
President Wealth Management
Professional history and education
Andrea Orcel has been President Investment Bank of UBS
Group AG (formerly CEO Investment Bank) since November
2014, having held the same position for UBS AG since
November 2012. He became a member of the GEB in July
2012 and was co-CEO of the Investment Bank from July to
November 2012. In January 2016, he was appointed Senior
Officer Outside of Australia for UBS Australia Branch, and
since December 2014, he has additionally held the position
as Chief Executive for UBS Limited and UBS AG London
Branch. He joined UBS from Bank of America Merrill Lynch,
where he had been Executive Chairman Investment Bank
since 2009, President of Emerging Markets (excluding Asia)
since 2010 and CEO of European Card Services since 2011.
Prior to the acquisition of Merrill Lynch by Bank of America,
Mr. Orcel was a member of Merrill Lynch’s global manage-
ment committee and Head of Global Origination, which
combined Investment Banking and Capital Markets. He held
a number of other leadership positions, including President
of Global Markets & Investment Banking for Europe, Middle
East and Africa (EMEA) and Head of EMEA Origination be-
ginning in 2004. Between 2003 and 2007, he led the Global
Financial Institutions Group, of which he had been part since
joining Merrill Lynch in 1992. Prior to this, he worked at
Goldman Sachs and the Boston Consulting Group. Mr. Orcel
holds an MBA from INSEAD and a degree in economics and
commerce, summa cum laude, from the University of Rome.
Other activities and functions
– Board member of UBS Limited
– Board member of UBS Americas Holding LLC
Professional history and education
Kathryn Shih became a member of the GEB of UBS Group
AG and UBS AG and was appointed President UBS Asia
Pacific in January 2016. She has been Head Wealth
Management Asia Pacific since 2002. She was CEO of UBS
Hong Kong from 2003 to 2008. Prior to this, she held various
leadership positions in Wealth Management Asia Pacific. She
has been with the firm for nearly 30 years, since joining
Swiss Bank Corporation in 1987 as a client advisor and then
serving as Head Private Banking from 1994 to 1998. In the
1980s, Ms. Shih worked for Citibank in the Consumer
Services Group and as an executive trainee with PCI Capital
Asia Ltd. She conferred as a Certified Private Wealth
Professional by the Private Wealth Management Association,
Hong Kong, in 2015 and as a Certified Financial Planner
from the Institute of Financial Planners, Hong Kong, in 2001
and completed the Advanced Executive Program at
Northwestern University in 1999. Ms. Shih holds a bachelor
of arts degree from Indiana University in the US and a mas-
ter’s degree in business management from the Asian
Institute of Management in the Philippines.
Other activities and functions
– Board member of Kenford International Ltd.
– Board member of Shih Co Charitable Foundation Ltd.
– Board member of Zygate Group Ltd.
– Member of the Hong Kong Trade Development Council
(Financial Services Advisory Committee)
Professional history and education
Jürg Zeltner became President of Wealth Management of
UBS Group AG (formerly CEO of UBS Wealth Management)
in November 2014, having held the same position for UBS
AG since January 2012. He became a member of the GEB in
February 2009, and until January 2012, he served as co-CEO
of UBS Wealth Management & Swiss Bank. In November
2007, he was appointed as Head of Wealth Management
North, East & Central Europe. From 2005 to 2007, he was
CEO of UBS Deutschland, Frankfurt, and, prior to this, he
held various management positions in the former Wealth
Management division of UBS. Between 1987 and 1998, he
was with Swiss Bank Corporation in various roles within the
Private and Corporate Client division in Berne, New York and
Zurich. Mr. Zeltner holds a diploma in business administra-
tion from the College of Higher Vocational Education in
Berne and is a graduate of the Advanced Management
Program at Harvard Business School.
Other activities and functions
– Board member of the German-Swiss Chamber of Commerce
– Member of the IMD Foundation Board, Lausanne
233
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Change of control and defense measures
We refrain from restrictions regarding change of control and
defense measures that would hinder developments initiated in, or
supported by, the financial markets. We also do not have any
specific defenses in place to prevent hostile takeovers.
Duty to make an offer
According to the Swiss Financial Market Infrastructure Act, an
investor who has acquired more than 331⁄3% of all voting rights of
a company listed in Switzerland (directly, indirectly or in concert
with third parties), whether they are exercisable or not, is required
to submit a takeover offer for all listed shares outstanding. We
have not elected to change or opt out of this rule.
Clauses on change of control
Neither the employment agreement with the Chairman of the
BoD nor any employment contracts with the GEB members or
employees holding key functions within the company (Group
Managing Directors) contain change of control clauses.
All employment contracts with GEB members stipulate a notice
period of six months. During the notice period, GEB members are
entitled to their salaries and the continuation of existing employ-
ment benefits and may be eligible to be considered for a discre-
tionary performance award based on their contribution during
the time worked.
In case of a change of control, we may, at our discretion, accel-
erate the vesting of and / or relax applicable forfeiture provisions
of employees’ awards, and defer lapse date of options or stock
appreciation rights.
➔ Refer to the “Compensation” section of this report for more
information
234
Auditors
Audit is an integral part of corporate governance. While safe-
guarding their independence, the external auditors closely coordi-
nate their work with Group Internal Audit. The Audit Committee,
and ultimately the Board of Directors (BoD), supervises the effec-
tiveness of audit work.
Special auditor for capital increase
At the AGM on 7 May 2015, BDO AG were reappointed as special
auditors for a three-year term of office. The special auditors pro-
vide audit opinions in connection with capital increases indepen-
dently from the auditors.
Fees paid to external independent auditors
The fees (including expenses) paid to EY are set forth in the table
below. In addition, EY received CHF 26.0 million in 2016 (CHF
29.3 million in 2015) for services performed on behalf of our
investment funds, many of which have independent fund boards
or trustees.
Audit work includes all services necessary to perform the audit
for the Group in accordance with applicable laws and generally
accepted auditing standards, as well as other assurance services
that conventionally only the auditor can provide. These include
statutory and regulatory audits, attest services and the review of
documents to be filed with regulatory bodies. The additional ser-
vices classified as audit in 2016 included several engagements for
which EY were mandated at the request of FINMA.
➔ Refer to “Board of Directors” in this section for more information
on the Audit Committee
External independent auditors
At the Annual General Meeting (AGM) of shareholders in 2016,
Ernst & Young Ltd (EY) were re-elected as auditors for the Group
for a one-year term of office. EY assume virtually all auditing func-
tions according to laws, regulatory requests and the Articles of
Association. Since 2015, Marie-Laure Delarue has been the EY
lead partner in charge of the Group financial audit and her incum-
bency is limited to five years. Since 2016, Ira S. Fitlin has been the
co-signing partner for the financial statement audit, with an
incumbency limit of seven years. Patrick Schwaller has been the
Lead Auditor to the Swiss Financial Market Supervisory Authority
(FINMA) since 2015, with an incumbency limited to six years due
to prior audit service to UBS in another role. Marc Ryser has been
the co-signing partner for the FINMA audit since 2012, with an
incumbency limit of seven years.
During 2016, the Audit Committee held 10 meetings and
calls with the external auditors. In addition, one training session
was held.
Fees paid to external independent auditors
UBS Group AG and its subsidiaries (including UBS AG) paid the following fees (including expenses) to its external independent auditors.
CHF thousand
Audit
Global audit fees
Additional services classified as audit (services required by law or statute, including work of a non-recurring nature mandated by regulators)
Total audit
Non-audit
Audit-related fees
of which: assurance and attest services
of which: control and performance reports
of which: consultation concerning financial accounting and reporting standards
Tax services
Other
Total non-audit
1 Of the total audit and non-audit fees of CHF 69,283 thousand for UBS Group AG (consolidated), CHF 67,483 thousand relates to UBS AG (consolidated).
31.12.16
31.12.15
49,585
9,214
58,7991
7,685
2,893
4,177
615
1,747
1,051
10,4841
45,516
14,191
59,707
8,684
3,327
5,260
96
3,088
1,102
12,874
235
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Audit-related work comprises assurance and related services
that are traditionally performed by the auditor, such as attest ser-
vices related to financial reporting, internal control reviews, per-
formance standard reviews and consultation concerning financial
accounting and reporting standards.
Tax work involves services performed by professional staff in
EY’s tax division and includes tax compliance and tax consultation
with respect to our own affairs.
”Other” services are permitted services which include technical
IT security control reviews and assessments.
Preapproval procedures
To ensure EY’s independence, all services provided by EY have to
be preapproved by the Audit Committee. A preapproval may be
granted either for a specific mandate or in the form of a blanket
preapproval authorizing a limited and well-defined type and
amount of services.
The Audit Committee has delegated preapproval authority to
its Chairperson, and the Group Chief Financial Officer (Group
CFO) and Group Controller and Chief Accounting Officer submit
all proposals for services by EY to the Chairperson of the Audit
Committee for approval, unless there is a blanket preapproval in
place. At each quarterly meeting, the Audit Committee is
informed of the approvals granted by its Chairperson and of ser-
vices authorized under blanket preapprovals.
Group Internal Audit
Group Internal Audit (GIA) performs the internal auditing func-
tion for the Group (including UBS AG, where it is referred to as
Internal Audit) and in 2016 operated with an approved head-
count of 365 personnel. It is an independent and objective func-
tion that supports the Group in achieving its strategic, opera-
tional, financial and compliance objectives, and the BoD in
discharging its governance responsibilities. GIA provides assur-
ance by assessing the reliability of financial and operational infor-
mation, effectiveness of processes for compliance with legal,
regulatory and statutory requirements. Audit reports that include
significant issues are provided to the Group CEO, relevant GEB
members and other responsible management. The Chairman,
Audit Committee and Risk Committee of the BoD are also regu-
larly informed of such issues.
In addition, GIA assures whether issues with moderate to sig-
nificant impact have been successfully remediated. This responsi-
bility applies to issues identified by all sources: business manage-
ment (first line of defense), control functions (second line of
defense), GIA (third line of defense), external auditors and regula-
tors. GIA also cooperates closely with risk control functions and
internal and external legal advisors on investigations into major
control issues.
To maximize GIA’s independence from management, the Head
of GIA reports to the Chairman of the BoD and to the Audit Com-
mittee, which assesses annually whether GIA has sufficient
resources to perform its function, as well as its independence and
performance. GIA’s role, position, responsibilities and accountabil-
ity are set out in our Organization Regulations and the Charter for
Group Internal Audit, published at www.ubs.com/governance.
The latter also applies to UBS AG’s internal audit function. GIA has
unrestricted access to all accounts, books, records, systems, prem-
ises and personnel, and must be provided with all information and
data that it needs to fulfill its auditing duties. The Audit Commit-
tee may order special audits to be conducted, and other BoD
members, committees or the Group CEO may request such audits
in consultation with the Audit Committee.
GIA enhances the efficiency of its work through coordination
and close cooperation with the external auditors.
236
Information policy
We provide regular information to our shareholders and to the
financial community.
Financial disclosure principles
Financial reports for UBS Group AG will be published
as follows
First quarter 2017
Second quarter 2017
Third quarter 2017
28 April 2017
28 July 2017
27 October 2017
The Annual General Meeting of shareholders of
UBS Group AG will take place as follows
2017
2018
4 May 2017
3 May 2018
We fully support transparency and consistent and informative dis-
closure. We aim to communicate our strategy and results in a
manner that allows stakeholders to gain a good understanding of
how our Group works, what our growth prospects are and the
risks our businesses and our strategy entail. We assess feedback
from analysts and investors on a regular basis and, where appro-
priate, reflect this in our disclosures. To continue achieving these
goals, we apply the following principles in our financial reporting
and disclosure:
– Transparency that enhances the understanding of economic
drivers and builds trust and credibility
– Consistency within each reporting period and between report-
ing periods
– Simplicity that allows readers to gain a good understanding of
the performance of our businesses
➔ Refer to the corporate calendar at www.ubs.com/investors for
future financial report publication and other key dates, including
– Relevance by focusing not only on what is required by regulation
or statute but also on what is relevant to our stakeholders and
UBS AG’s financial report publication dates
– Best practice that leads to improved standards
Consistent with our financial reporting and disclosure princi-
ples, our financial reports contain disclosures aligned with the rec-
ommendations issued by the Enhanced Disclosure Task Force
(EDTF) in its “Enhancing the Risk Disclosures of Banks“ report on
29 October 2012. We regard the improvement of our disclosures
as an ongoing commitment.
➔ Refer to our EDTF index under “Annual reporting” at www.ubs.
com/investors for more information on the location of relevant
disclosures in line with the EDTF recommendations within our
Annual Report or Pillar 3 report 2016
We meet with institutional investors worldwide throughout
the year and regularly hold results presentations, attend and pre-
sent at investor conferences and, from time to time, host investor
days. When possible, investor meetings are hosted by senior man-
agement and are always attended by members of our Investor
Relations team. We use various technologies such as webcasting,
audio links and cross-location video conferencing to widen our
audience and maintain contact with shareholders globally.
We make our publications available to all shareholders simultane-
ously to ensure they have equal access to our financial information.
Registered shareholders may opt to receive a physical copy of
our annual report or our annual review, which reflects on specific
initiatives and achievements of the Group and provides an over-
view of the Group’s activities during the year as well as key finan-
cial information. Shareholders can also request UBS Group AG’s
quarterly financial reports, or download our financial publications
electronically at www.ubs.com/investors. In addition, sharehold-
ers can change their subscription preferences at www.ubs.com/
shareholderportal.
➔ Refer to www.ubs.com/investors for a complete set of published
reporting documents and a selection of senior management
industry conference presentations
➔ Refer to the “Information sources” section of this report for
more information
237
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Corporate governance
Financial reporting policies
We report our Group’s results at the end of every quarter, includ-
ing a breakdown of results by business division and disclosures or
key developments relating to risk management and control, capi-
tal, liquidity and funding management. Each quarter, we publish
quarterly financial reports for UBS Group AG on the same day as
the earnings releases.
UBS Group AG’s and UBS AG’s consolidated financial state-
ments are prepared in accordance with International Financial
Reporting Standards as issued by the International Accounting
Standards Board.
➔ Refer to “Note 1 Summary of significant accounting policies” in
the “Consolidated financial statements” section of this report for
more information on the basis of accounting
We are committed to maintaining the transparency of our
reported results and to permit analysts and investors to make
meaningful comparisons with prior periods. If there is a major
reorganization of our business divisions or if changes to account-
ing standards or interpretations lead to a material change in the
Group’s reported results, our results are restated for previous peri-
ods as required by applicable accounting standards. These restate-
ments show how our results would have been reported on the
new basis and provide clear explanations of all relevant changes.
US disclosure requirements
As a foreign private issuer, we must file reports and other informa-
tion, including certain financial reports, with the US Securities and
Exchange Commission (SEC) under the US federal securities laws.
We file an annual report on Form 20-F and furnish our quarterly
financial reports and other material information under cover of
Form 6-K to the SEC. These reports are available at www.ubs.
com/investors and on the SEC’s website at www.sec.gov.
An evaluation was carried out under the supervision of man-
agement, including the Group CEO, Group CFO and the Group
Controller and Chief Accounting Officer, on the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a–
15e) under the US Securities Exchange Act of 1934. Based on that
evaluation, the Group CEO and Group CFO concluded that our
disclosure controls and procedures were effective as of 31 Decem-
ber 2016. No significant changes have been made to our internal
controls or to other factors that could significantly affect these
controls subsequent to the date of their evaluation.
➔ Refer to the “Consolidated financial statements” section of this
report for more information
238
UBS and Society
As a leader in sustainability in the financial industry, we focus on
the long term and work to create value for our stakeholders. We
are committed to promoting the common good by being proac-
tive, purposeful and accountable. Our UBS and Society organiza-
tion coordinates all our activities and capabilities in sustainable
investing (SI) and philanthropy, environmental and human rights
policies governing client and supplier relationships, our own envi-
ronmental footprint, as well as our firm’s community investment.
We succeed as an organization by generating long-term, sus-
tainable and measurable benefits for our clients, shareholders and
communities. Our thinking and acting in this regard are embed-
ded in one of our firm’s Principles, namely sustainable perfor-
mance, and we focus on ensuring that our investment-related
activities take into consideration long-term sustainability and the
broader perspective.
We are continuously looking for better ways to do business
and support our clients and communities. Our concept of stew-
ardship goes beyond our clients’ assets, to encompass taking care
of what we leave behind for future generations. This means that
we also measure our performance relating to the environment,
good governance, our social impact and other key components of
sustainability. To this end, we assess our progress against the fol-
lowing overarching aims:
UBS and Society overarching aims and
selection of key targets
1 Making sustainability the everyday standard across the firm
– Retain favorable position of UBS in key ESG ratings
2 Making sustainable performance part of every client conversation
– Conduct conversations with key institutional clients about ESG themes
and expectations
3 Supporting clients in channeling a growing portion of their assets toward
addressing societal challenges, including through innovative financial mechanisms
– Business divisions and areas to explore and launch innovative financial products
and services
4 Training employees on sustainability
– Execute divisional trainings in order to support implementation of
Mainstreaming Sustainable Performance initiative
5 Creating a credible sustainability approach
– Execute action plans for integrating ESG factors across UBS’s core investment processes
– Further moving UBS Annual Review toward integrated reporting
6 Measuring the impact of our community investment activities
– Track and monitor data set showing impact of Community Affairs-related
activities / projects
7 Supporting the transition to a low-carbon economy through our
comprehensive climate change strategy
– Execute on 2020 greenhouse gas reduction target and operational environmental
targets, including the execution of the RE100 plan
– Investigate emerging methodologies and forward-looking climate change disclosure
We organize UBS and Society via three pillars: how we do
business, how we support our clients and how we support our
communities.
➔ Refer to www.ubs.com/ubsandsociety for more information
239
Corporate governance, responsibility and compensation
Corporate governance, responsibility and compensation
UBS and Society
How we do business
Strong, well-understood principles and policies are the founda-
tion for empowering our people to operate in a manner that
meets the expectations of our stakeholders. We also recognize
that we have a role to play in leading debates on important soci-
etal topics and in collaborating to set high standards in and
beyond our industry.
Governance
Our Board of Directors’ (BoD’s) Corporate Culture and Responsi-
bility Committee (CCRC) monitors the current state and imple-
mentation of the Group’s programs and initiatives pertaining to
corporate culture and corporate responsibility. It also regularly
reviews stakeholder expectations and concerns about UBS’s soci-
etal performance and corporate culture. The CCRC’s function is
forward-looking in that it monitors and reviews societal trends
and transformational developments and assesses their potential
relevance to the Group. The Group Chief Executive Officer (Group
CEO) and the Global Head of UBS and Society are permanent
guests of the committee. In 2016, the regional Presidents attended
two of the six yearly CCRC meetings as guests.
The UBS and Society Operating Committee oversees and coor-
dinates the execution of UBS and Society at Group Executive
Board (GEB) level. In 2016, the committee was chaired by the
Wealth Management and Asia Pacific Presidents.
The Global Environmental & Social Risk Committee, at GEB
level, defines the environmental and social risk (ESR) framework
and independent controls that align UBS’s ESR appetite with UBS
and Society. It is chaired by the Group Chief Risk Officer, who is
responsible for the development and implementation of princi-
ples and appropriate independent control frameworks for ESR
within UBS.
The business divisions set, develop and execute relevant annual
objectives for UBS and Society initiatives. Corporate Center
defines the annual objectives related to in-house environmental
and responsible supply chain management. Objectives related to
Community Affairs are developed and executed at regional level,
within the global framework of the UBS and Society program.
➔ Refer to “Board of Directors” in the “Corporate governance”
section of this report for more information
➔ Refer to the Organization Regulations of UBS Group AG at
www.ubs.com/governance for the charter of the CCRC
➔ Refer to the 2017 GRI objectives of UBS at www.ubs.com/gri for
The Global Head of UBS and Society leads the execution and
more information
further development of UBS and Society.
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240
Key principles and policies
The principles and standards set out in our Code of Conduct and
Ethics (Code) apply to all aspects of our business and the way we
engage with our stakeholders. The Code aims to support a culture
where ethical and responsible behavior is ingrained. All employ-
ees have to confirm annually that they have read the Code and
other key documents and policies. In 2016, we continued training
and raising employee awareness of the Code, including through a
mandatory conduct and culture training module.
The CCRC oversees the annual review of the Code by the GEB
and the BoD. Following the 2015 / 2016 review, the current Code
was published in mid-2016.
➔ Refer to the UBS Code of Conduct and Ethics at www.ubs.com/
code for more information
The Code incorporates key components of UBS and Society,
notably managing environmental and social risks, investing sustain-
ably, and contributing to the well-being of our local communities
to promote our goal of generating long-term, sustainable and
measurable benefits for our clients, shareholders and communities.
The scope, principles, responsibilities and structure of UBS and
Society are set out in more detail in our UBS and Society policy.
➔ Refer to www.ubs.com/ubsandsociety-policy for more information
Stakeholder relations and employee engagement
The activities we describe in this section are designed to identify
and enable us to address the key points at which UBS is able to
exert a positive impact on society and the environment. Our regu-
lar engagement with a wide range of stakeholders and many sig-
nificant external organizations and initiatives supports us in this
important process.
In addition, our annual UBS Materiality Assessment, as defined
by the Global Reporting Initiative (GRI), helps us capture the views
of our stakeholders on the topics they regard as most relevant to
our firm.
Our GRI-based Materiality Assessment draws on formal and
informal monitoring, from our dialog with stakeholders and from
relevant external studies and reports. The results of the assess-
ment are captured in a GRI-based materiality matrix that distills
the views of the stakeholders with whom we interact. It covers 25
topics, the top-rated being, as in 2015, “conduct and culture,”
“client protection” and “financial stability and resilience.”
Actively engaging employees is a critical factor in the success-
ful execution of the UBS and Society strategy. This ranges from
sustainability-related training and awareness raising activities,
including on sustainable investing to about 1,200 employees in
our wealth management businesses in 2016, to the Grand Chal-
lenge, a major UBS and Society initiative, in which more than
1,200 employees took part and came up with 245 proposals for
innovative financial solutions to help address some of society’s
biggest challenges.
➔ Refer to www.ubs.com/materiality for the UBS 2016 GRI-based
materiality matrix and for more information on the assessment
process
➔ Refer to the “Our employees” section of this report for more
information on our firm’s culture and employees
241
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Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
UBS and Society
Advancing sustainability in the financial sector – UBS’s key activities in 2016
Initiative
Focus topic
Role / activity of UBS
Key outcome of initiative in 2016
UN Global Compact (UNGC) Sustainable
Development Goals
(SDGs)
Green finance
G20 Green Finance Study
Group (GFSG)
Keynote speech by UBS Chairman at UNGC
Leaders Summit on the financial sector’s role
in implementing the SDGs
Call to action for companies to integrate
SDGs in their activities
UBS case study on climate change stress
testing presented at GFSG meeting and
included in input paper for G20 summit
Input paper Environmental risk analysis by
financial institutions – a review of global
practice
UN Environment
Programme (UNEP)
Sustainable financial
system
Financial Stability Board
(FSB) Task Force on
Climate-related Financial
Disclosures (TCFD)
European Financial
Services Round Table (EFR)
Climate change
Climate change
Member of Swiss team and contributor to
Swiss report Proposals for a Roadmap
towards a Sustainable Financial System in
Switzerland
Member of TCFD and feedback provider on
its draft reports
Report UNEP Inquiry: Design of a Sustainable
Financial System
TCFD recommendations
UBS Chairman signed the Call for a strong,
ambitious implementation of the Paris
Agreement (Call)
UBS case study on climate change
Call document submitted for the 22nd Con-
ference of the Parties (COP)
Natural Capital Finance
Alliance (NCFA)
Natural Capital Finance
Alliance (NCFA)
Natural capital
Project partner to pilot test drought scenar-
ios in bank portfolios
Drought stress testing tool and report under
development
Natural capital
Member of technical advisory panel
National Action Plan (NAP)
Switzerland
Human rights
Participant in multi-stakeholder
consultation process
Thun Group of Banks
Human rights
Convener of Group
Project launch in Switzerland
(hosted by UBS)
Publication of NAP
Discussion paper on the implications of UN
Guiding Principles 13 and 17 (January 2017)
Organisation for Economic
Co-operation and
Development (OECD)
Due diligence
Member of the advisory board of the OECD
Responsible Business Conduct project
OECD paper on responsible business conduct
for institutional investors
Principles for Responsible
Investing (PRI)
Proxy voting
Co-lead of PRI collaboration platform Explor-
ing the proxy voting chain
Publication of findings
Policy Outlook (POLO)
Platform
Sustainability
regulation
WWF Banking on World
Heritage Sites
UNESCO (natural)
world heritage sites
Co-convener of Platform
Platform’s first annual roundtable
Participant in WWF-organized workshops
Assessment of banks’ policies wording and
implementation
242
Environmental and social risk assessments
Cases referred for assessment2
by region
Americas
Asia Pacific
Europe, Middle East and Africa
Switzerland
by business division
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center3
GRI1
FS2
FS2
FS2
FS2
FS2
FS2
FS2
FS2
FS2
FS2
FS2
For the year ended
31.12.16
2,671
31.12.15
2,192
31.12.14
1,812
% change from
31.12.15
22
395
556
341
1,379
429
20
1,226
2
971
23
295
520
257
1,120
396
20
980
0
776
20
354
317
297
844
291
21
749
7
654
90
34
7
33
23
8
0
25
25
15
1 Global Reporting Initiative (refer to www.globalreporting.org). FS stands for the performance indicators defined in the GRI Financial Services Sector Supplement. 2 Transactions and client onboarding requests referred
to and assessed by environmental and social risk function. 3 Relates to procurement / sourcing of products and services.
Management of environmental and social risks
We use our ESR framework to assess and manage potential
adverse effects on the environment and on human rights, as well
as any associated environmental and social risks to which our cli-
ents’ and our own assets may be exposed. Our comprehensive
ESR standards, which are regularly reviewed by our Global ESR
Committee, govern client and supplier relationships and are
enforced Group-wide.
We have set ESR standards in product development, invest-
ments, financing and for supply chain management decisions. As
part of our due diligence process we engage with clients and sup-
pliers to better understand their processes and policies and to
explore how any environmental and social risks may be mitigated.
We avoid transactions, products, services, activities or suppliers if
they are associated with material environmental and social risks that
cannot be properly assessed or mitigated. Our ESR standards include
the description of controversial activities and other areas of concern
we will not engage in, or we will only engage in under stringent
criteria, as outlined below. We will not do business with a counter-
party or an issuer that in our judgment does not address environ-
mental or social issues in an appropriate and responsible manner.
Our standard risk, compliance and operations processes involve
procedures and tools for identifying, assessing and monitoring
environmental and social risks. These include client onboarding,
transaction due diligence, product development and investment
decision processes, own operations, supply chain management
and portfolio reviews. These processes are geared toward identi-
fying clients, transactions or suppliers potentially in breach of our
standards or otherwise subject to significant environmental and
human rights controversies. Advanced data analytics on compa-
nies associated with such risks is integrated into the web-based
compliance tool we use before we enter into a client or supplier
relationship, or transaction. The systematic nature of this tool sig-
nificantly enhances our ability to identify potential risk. In 2016,
2,671 referrals were assessed by our environmental and social risk
unit, of which 83 were rejected or not further pursued, 258 were
approved with qualifications and 26 were pending.
➔ Refer to www.ubs.com/esr for more information
We will not do business
if associated with severe
environmental or social
damage to or through the
use of:
– UNESCO world heritage sites
– Wetlands, endangered species
– High conservation value forests,
illegal logging and use of fire
– Child labor, forced labor, indige-
nous peoples’ rights
We will only do business
under stringent criteria in the
following areas:
– Soft commodities: palm oil,
soy, timber
– Power generation:
coal-fired power plants, large
dams, nuclear power
– Extractives: hydraulic fractur-
ing, oil sands, arctic drilling,
coal mining, precious metals,
diamonds
Climate change strategy
Our climate change strategy is part of the UBS and Society gover-
nance, overseen by the CCRC. We focus on risk management,
investments, financing, research and our own operations. We
identify and manage climate-related risks and opportunities as
part of our ISO 14001-certified environmental management sys-
tem. At portfolio level, we regularly review sensitive sectors and
activities, and we also estimate our firm’s vulnerability to climate
change risks using scenario-based stress testing approaches and
other forward-looking portfolio analyses.
In December 2016, the Financial Stability Board’s Task Force on
Climate-related Financial Disclosures (TCFD) provided its guidance
on climate-related disclosures, which UBS welcomes and sup-
ports. While we will fully evaluate the TCFD’s recommendations
for our 2017 disclosure, our climate change strategy already
encompasses the four thematic areas covered by the TCFD’s rec-
ommendations, namely governance, strategy, risk management,
and metrics and targets.
➔ Refer to www.ubs.com/climate for more information on our
climate change strategy
243
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
UBS and Society
In-house environmental management
We manage our environmental program through an environ-
mental management system in accordance with the ISO 14001
standard. In addition, our greenhouse gas (GHG) emissions data
is externally verified on the basis of ISO 14064 standards. Our
environmental program encompasses investments in sustainable
real estate and efficient information technology, energy and
water efficiency, paper and waste reduction and recycling, the
use of environmentally friendly products, such as renewable
energy or recycled paper, and business travel and employee com-
muting reduction.
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244
We set quantitative targets to reduce UBS’s Group-wide CO2
emissions and the environmental impact of our operations. In
support of our commitment to RE100, a global initiative that
encourages multinational companies to make a commitment to
using 100% renewable power by 2020, we have committed to
sourcing 100% of the firm’s electricity from renewable sources by
2020. This will reduce the firm’s GHG footprint by 75% by 2020
compared with 2004 levels.
In 2016, we further reduced UBS’s GHG emissions by 1.8%, or
2.8% per full-time employee, year on year. We recorded a total
reduction of 54% from baseline year 2004. In 2016, we reduced
our energy consumption by more than 14% compared with
2012, thus outperforming our target of a 10% reduction by
2016. In 2016, 55.6% of UBS’s worldwide electricity consump-
tion was sourced from renewable energy.
➔ Refer to www.ubs.com/environment for more information on
our environmental targets and performance
Responsible supply chain management
We aim to reduce negative environmental and social effects of the
goods and services UBS purchases, and we engage with suppliers
to promote responsible practices. Our responsible supply chain
management (RSCM) principles embed UBS’s ethics and values in
our interactions with our suppliers, contractors and service
partners. We apply an RSCM framework to identify, assess and
monitor supplier practices with regard to human and labor rights,
the environment, health and safety, and anti-corruption principles.
In 2016, remediation measures were requested for 40% of
suppliers of newly sourced goods and services with potentially
high impact to improve their adherence to UBS’s RSCM standards.
➔ Refer to www.ubs.com/rscm for more information
500000.0936
437500.0819
375000.0702
312500.0585
250000.0468
187500.0351
125000.0234
62500.0117
0.0000
Sustainability ratings and recognitions1
Ratings and recognitions
Scope
UBS result
Dow Jones Sustainability
Indices (DJSI)
Environmental, Social and Governance (ESG) performance
Industry Group Leader
Index member of DJSI World and DJSI Europe
FTSE4Good Index
ESG performance
CDP
Sustainalytics
MSCI
Climate change
ESG performance
ESG performance
STOXX ESG Leaders Index
ESG performance
Index member
Climate A List
ranked eighth among 249 sector peers
BBB score
Index member
Oekom
GRESB
GRESB
ESG performance
Corporate responsibility prime status
Sustainability assessment of real estate (RE) equity and
RE debt funds
– Green Star status for 14 AM Global equity funds
– Highest rating (five stars) for 7 out of 14 funds
Sustainability assessment of infrastructure funds
– UBS International Infrastructure Fund (IIF I) ranked first
Bloomberg New Energy
Finance
Ranking of global renewable energy and
cleantech financing
for infrastructure funds globally
– IIF I and IIF II top-ranked in Management & Policy
rankings
– ranked third in the Public Markets co-lead manager
category
– ranked fifteenth in the M&A financial adviser category
UK Stewardship Code
Quality of asset manager’s reporting as regards the
UK Stewardship Code’s seven principles and supporting
guidance
Tier 1 signatory
Better Society Award (UK)
Partnership with a national charity
National CSR Award (UK)
Best Community Development
Winner
Winner
Company for Good
Driving corporate giving in Singapore
Founding Member (status by invitation only)
1 All information provided is as of 31 December 2016.
Ratings and recognitions
Our commitment and progress in the area of sustainability are
reflected in important external ratings, rankings and recognitions.
In 2016, our firm maintained its leadership position in the Diversi-
fied Financials industry group of the Dow Jones Sustainability Indi-
ces (DJSI), the most widely recognized sustainability rating. The
DJSI evaluates companies’ sustainability practices and recognizes
the best performers. The Industry Group Leader report for UBS
explains that, through the implementation of UBS and Society,
UBS ensures that it fulfills its commitment to provide consistent
and sustainable returns to its clients, while also promoting ethical
practices for the common good. It highlights innovative financial
products launched by UBS, cites the firm as exemplary in social
and environmental reporting practices and emphasizes UBS’s
impressive progress in mitigating risk.
How we support our clients
In 2016, we made a commitment to ensure that all of our invest-
ment activities take into consideration long-term and broader per-
spectives that can be relevant for investment performance.
Our clients increasingly want financial advice as well as the
right products in order to use their resources to address societal
issues. As the world’s largest wealth manager, we are well placed
to provide this support, based on a consistent Group-wide
approach.
Sustainable investments
As of 31 December 2016, sustainable investments increased to
CHF 976 billion compared with CHF 934 billion as of the end of
2015, representing 35% of our total invested assets. Major
increases in relative terms were observed among our integration
and impact investments, which increased 64% and 228%,
respectively, compared with 2015.
245
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
UBS and Society
Key sustainable investing products and services in 2016 (select)
Product / service
Business division
Key features
UBS Oncology Impact Fund1
Wealth Management
(WM)
UBS Loans for Growth1
WM
Sustainable investing research1
UBS Long Term Themes
Equity Fund1
WM, Wealth Manage-
ment Americas
(WMA), Investment
Bank (IB)
WM, Asset
Management (AM)
ESG Portfolio Analyzer1
Philanthropy advisory1
WMA
WM, WMA
UBS Optimus Foundation1
Actively managed funds1
Voting (on behalf of clients)1
Renewable energy and
cleantech financing1
Green Bonds1
Energy check-up for SMEs2
WM
AM
AM
IB
IB
– Aimed at developing new and innovative treatments for one of the most prominent
challenges in health care: cancer
– Closed at USD 471 million
– Provides innovative debt-based funding to emerging markets financial intermediaries,
which in turn lend to small and medium-sized companies to support local economic
development
– USD 50 million impact fund
– Sustainable value creation in emerging markets; Doing well by doing good:
– impact investing; Gender diversity matters; Green bonds are investable; Going Fur-
ther – a philanthropic health portfolio
– 38 ESG Industry Postcards
– Invests in companies, which are solution providers for challenges, including water
scarcity, emerging market infrastructure, waste management and recycling and
emerging market health care
– Provides transparency and analysis of ESG topics in client portfolios
– A total of over 400 ultra high net worth individuals or philanthropists attended UBS
Philanthropy Forums in the Americas, Asia and Switzerland
– Substantial advisory services for nearly 1,000 clients
– CHF 59 million raised in donations
– CHF 59 million grants to partners approved
– Launched in 2016: US Corporate Bond Sustainable, US Enhanced Sustainable Equity,
Switzerland Enhanced Sustainable
– Provided instructions (based on AM’s corporate governance principles) to vote on
97,670 separate resolutions, at 9,895 company meetings
– Participation in significant renewables and cleantech deals globally, for both estab-
lished utilities clients and innovative growth stage companies
– Participation in three major Green Bond issuances
Personal & Corporate
Banking (P&C)
– UBS SME efficiency bonus for energy reduction plan with overall energy savings of
20,452 MWh / a, equivalent to the annual energy consumption of approximately
1,000 single-family homes
Preferred strategic partner for
advisory and financing transac-
tions related to Switzerland’s
energy strategy 20501
1 All information provided is as of 31 December 2016. 2 Information provided is as of 31 December 2015.
P&C
– Supports energy utilities in raising capital on international capital markets to
progress their quest for renewable energy
– 13 strategic transactions executed for Switzerland’s five large energy utilities
In Wealth Management, we aim to systematically include a sus-
tainable investing (SI) optionality in our mandate offerings, and to
provide our clients with impact investing products and sustainable
mutual fund solutions. In 2016, we further expanded the SI option-
ality to core affluent and high net worth clients from Global Emerg-
ing Markets, Germany and Italy. UBS ManageTM offerings with SI
focus are constructed with a focus on investing in instruments with
a favorable SI rating, while staying in line with our Chief Investment
Office House View. On average one in five UBS ManageTM Advanced
[CH] clients chooses the SI focus for their newly opened mandate.
We also arrange platforms, roundtables and networking events for
our clients to exchange ideas and gather know-how.
Asset Management offers a range of SI funds that combine
material sustainability factors with a rigorous fundamental invest-
ment process. We apply the concept of shared value, according to
which companies pursue sustainability practices and create value
not only for the shareholder but also for a wider range of stakehold-
ers. Our investment themes include renewable energy, environmen-
tal stewardship, social integration, healthcare, resource efficiency,
and demographics. We continue to work on a cutting-edge, multi-
year mandate from a large pension fund to build a global impact
equities portfolio with measureable societal impact. Once devel-
oped and vetted, the social impact metrics arising from the man-
date will help influence Asset Management’s investment strategies.
246
The Investment Bank provides capital-raising and strategic
advisory services globally to companies offering products that
make a positive contribution to climate change mitigation and
adaptation, including those in the solar, wind, hydro, energy effi-
ciency, waste and biofuels, and transport sectors. In 2016, the
total deal value in equity or debt capital market services relating
to these areas was CHF 59.8 billion, and CHF 106.3 billion in
financial advisory services.
Personal & Corporate Banking clients have access to appropri-
ate products from Asset Management and Wealth Management
and are participating in our Group-wide approach to sustainable
investing. We also support Swiss small and medium-sized enter-
prises (SME) in their energy-saving efforts. As promoted by the
Swiss Energy Agency’s SME model, clients benefit from the
agency’s “energy check-up for SMEs” at reduced costs and are
granted UBS cash premiums for committing to an energy reduc-
tion plan within the scheme.
Having the financial expertise, networks and access to the cap-
ital required to build or support innovative financial products, we
are committed to introducing novel financial solutions that can be
replicated and scaled. With our Oncology Impact Fund and the
Loans for Growth impact fund, we confirmed our leading position
in the impact investing space.
As of 31 December 2016, we also held green bonds in the
amount of CHF 460 million in our high-quality liquid assets port-
folios under the management of Corporate Center – Group Asset
and Liability Management.
➔ Refer to www.ubs.com/sustainableinvesting for more information
Sustainable investments1
CHF billion, except where indicated
GRI2
31.12.16
31.12.15
31.12.14
31.12.15
For the year ended
% change from
UBS total invested assets
Core SI products and mandates
Integration3
Integration / RPI4
Impact investing6
Exclusionary screening7
Third-party8
Norms-based screening9
Total sustainable investments
SI proportion of total invested assets (%)
FS11
FS11
FS11
FS11
FS11
FS11
FS11
FS11
FS11
2,821
145.43
5.53
54.60
2.49
76.11
6.70
830.35
975.79
34.59
2,689
138.45
3.37
49.06
0.76
79.20
6.06
795.07
933.53
34.72
2,734
110.21
2.62
34.665, 10
68.60
4.3410
466.5210
576.7310
21.09
5
5
64
11
228
(4)
10
4
5
1 All figures are based on the level of knowledge as of January 2017. 2 FS stands for the performance indicators defined in the Global
Reporting Initiative Financial Services Sector Supplement. 3 Applies to the active selection of companies, focusing on how a company’s
strategies, processes and products impact its financial success, the environment and society. This includes best-in-class, thematic investments or
the systematic and explicit inclusion of environmental, social and governance (ESG) factors into traditional financial analysis. 4 UBS Asset
Management Responsible Property Investment (RPI) strategy. 5 Invested assets, subject to RPI strategy in 2014, were restated. 6 Impact
investments are targeted investments with a financial return and a clear social and / or environmental return objective. No data available for
2014. 7 Includes customized screening services (single or multiple exclusion criteria). 8 SI products from third-party providers applying either
integration, impact investing and / or exclusionary approach. 9 Reporting scope expanded in 2015 to include all actively managed discretionary
segregated mandates. Duplication with other SI categories was subtracted to avoid double counting. 10 Due to changes in reporting scopes in
2015, comparability with 2014 data is limited.
Sustainable investing is an approach that seeks to
incorporate environmental, social and / or governance
considerations into investment decisions. SI strategies
seek to achieve one or several of the following objec-
tives: achieve a positive environmental or social impact,
align investments with an investor’s personal values or
improve portfolio risk and return characteristics.
Core SI includes all SI products that involve a strict
and diligent asset selection process including exclusions
and / or different types of positive selection such as
best-in-class, thematic or ESG integration and impact
investing.
Norms-based screening includes all assets that are
subject to restrictions under UBS policy on the prohibi-
tion of investments in companies related to anti-person-
nel mines and cluster munitions (includes all actively
managed discretionary segregated mandates and all
actively managed retail and institutional funds).
Research
In response to growing client demand, we research the impact of
environmental, social and governance (ESG) issues on various sec-
tors and companies. Our specialized teams regularly publish
research on topics that we believe will shape our future. Our
experience and sector knowledge help us determine what is
material by raising questions about the effects of ESG issues on
the competitive landscape in the global sectors that we cover, as
well as about how companies are affected in relative terms.
Our Chief Investment Office Wealth Management (CIO) regu-
larly translates key societal and environmental concerns into
investment themes as part of its Longer Term Investments series
and global Research-based Advice. In 2016, some notable exam-
ples of this were sustainable value creation in emerging markets,
gender diversity and energy efficiency.
For our sustainability-specific strategies in Asset Management,
we have developed a cutting-edge database of fundamental sus-
tainability data, at firm and industry group level. It is used along-
side valuation data from our analysts to rank the investment uni-
verse on both fundamental and sustainability attractiveness. The
database mirrors the approach taken by the Sustainability
Accounting Standards Board in building its Materiality Matrix™.
We believe that this sustainability key performance indicator data-
base gives us a significant proprietary edge in integrating funda-
mental and material sustainability data into the investment pro-
cesses. It allows us to ensure that valuation and sustainability
factors are taken into account and receive equal weighing in the
decision-making process.
247
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
UBS and Society
Philanthropy
Building on our award-winning track record and 12 years’ experi-
ence, we have a global team of in-house experts in place who
specialize in all areas of philanthropy and strategic charitable giv-
ing. We support clients as they develop their own philanthropic
approach from offering objective, independent and tailored
advice, to providing them with the opportunity to attend impor-
tant events and access a global network of likeminded individuals
with whom to collaborate and share their ideas and knowledge.
➔ Refer to www.ubs.com/philanthropy for more information
Optimus Foundation
UBS Optimus Foundation is an award-winning, expert grant-mak-
ing foundation that helps our clients use their wealth to drive
positive and sustainable social change for children. The founda-
tion connects clients with inspiring entrepreneurs, new technolo-
gies and proven models that help children to survive and thrive. It
selects and continuously monitors programs that improve chil-
dren’s health, education and protection and that have the poten-
tial to be transformative, scalable and sustainable. As UBS covers
all of the foundation’s administrative costs, it guarantees that
100% of all donations go to the support programs that deliver
such benefits for children. In 2016, we helped improve the well-
being of 1.6 million children globally. Effective philanthropy is
about more than simply funding existing programs. It is also about
long-term thinking. That is why, in certain instances, Optimus
supports partners in building their capacities, enabling them to
reach more children more efficiently, funds research to better
understand the issues that prevent children from thriving and
undertakes advocacy efforts to promote wider adoption of the
most promising programs.
➔ Refer to www.ubs.com/optimus for more information
How we support our communities
We have a responsibility toward the communities in which we
operate. We therefore have a long-standing global Community
Affairs strategy, executed through regional programs focused on
two key themes: education and entrepreneurship. Through these
programs, we build sustainable partnerships with non-profit orga-
nizations and social enterprises to overcome disadvantages in our
local communities, thus ensuring we make a lasting impact. Some
examples include:
– Project Entrepreneur, an initiative to increase female-founded
high-growth start-ups in the US
We engage beyond financial support – our employees are key
to the success of our community programs. We encourage
employees to support our local communities by:
– facilitating employee volunteering,
– offering employees up to two days a year to volunteer, and
– matching employees’ donations to charities.
By providing diverse opportunities for our employees to volun-
teer their time and skills in support of our community partners,
we seek to align our community program with our core business.
Since 2014, we have enhanced our focus on measuring the
impact of our community programs by using the London Bench-
marking Group’s standard model for measuring and reporting on
our community investment globally. This framework, together
with global coordination of reporting, allows us to effectively
evaluate and focus our programs.
Community investment 2016
In 2016, we strengthened our strategic focus on education and
entrepreneurship through increased global measurement and
coordination and by enhancing existing and new partnerships in
our local communities. We also launched UBS Social Innovators, a
UBS and Society initiative to help build further alignment with our
business. A search to identify and support high-potential social
enterprises that are delivering innovative solutions to society’s
most pressing challenges culminated in the selection of 12
regional finalists and three UBS Social Innovators from over 1,200
expressions of interest from 96 countries. The program will
increasingly build upon existing regional Community Affairs pro-
grams to support social enterprise skills, such as our partnerships
with Social Entrepreneurship Impact & Finance (seif) in Switzer-
land and the Foundation for Young Australians’ Young Social Pio-
neer Program in Australia.
In 2016, UBS made direct cash contributions totaling CHF 30
million. 91% of UBS’s Community Affairs grants were made in
the areas of education and entrepreneurship. 30% of our
employees volunteered in social and community engagement
projects compared with 27% in 2015. Additionally, UBS contrib-
uted a total of CHF 23 million to its affiliated foundations in Swit-
zerland, to the UBS Optimus Foundation and to the UBS Anniver-
sary Education Initiative.
Our Community Affairs program benefited 117,389 young
people and entrepreneurs across all of the regions in which we
operate.
➔ Refer to www.ubs.com/community for more information and
– Young Enterprise Switzerland, including hosting a very suc-
examples of our community investments
cessful company competition for students
– Halogen Foundation’s Network For Teaching Entrepreneurship
in Singapore dedicated to teaching disadvantaged youths lead-
ership, entrepreneurial skills and financial literacy
– The Bridge Academy secondary school in London, supporting
students from disadvantaged backgrounds to achieve best-
ever exam results
248
Corporate governance, responsibility and compensation
UBS and Society key performance indicators in 2016
UBS and Society
How we do business
2004
2,671
New business or client cases referred to environmental and social risk unit
83
rejected
2,304
approved
258
approved with
qualifi cations
•••
26
pending
Remediation measures
requested for 40%
of suppliers of newly sourced
goods and services with
potentially high impacts
54%
reduction of UBS
GHG emissions
2016
75%
reduction
target
2020
How we support
our clients
How we support
our communities
91% spent in the fi elds of
education and entrepreneurship
2,821 UBS total invested assets
(in CHF billion)
976 = 35% Total sustainable investments
830 Norms-based screening
CHF 30 million
direct cash contributions
117,389
direct benefi ciaries
as a result of our
community investment
193 community partners
supported worldwide
18,386
employees volunteered
155,325
hours on community projects
145 Core SI products and mandates
UBS Optimus Foundation
UBS contributed a total of CHF 23 million to its affi liated
foundations in Switzerland, to its Anniversary Education Initiative and
to the UBS Optimus Foundation
CHF 59 million raised in donations
CHF 59 million grants to partners approved
249
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Our employees
Our employees
Our ability to deliver on our business strategy is closely linked
with the quality and commitment of our employees. Our human
resource (HR) strategy therefore seeks to ensure that we hire,
support, develop and engage employees at all levels who have
the diverse backgrounds, skills and experience to advise our cli-
ents, navigate volatile markets, develop new products, embrace
innovation and manage both risk and evolving regulations. We
invest in our employees and support initiatives that build engage-
ment and strengthen our corporate culture, based on our belief
that the right strategy and a strong, cohesive culture drive excel-
lent performance.
Building our culture
Having a strong culture is vital to our sustained success. In 2013,
we introduced the three keys to success – our Pillars, Principles
and Behaviors. They help us achieve our vision, execute our strat-
egy and determine how we work together. Since then, we have
continuously focused on driving cultural change and on embed-
ding our core values more deeply into the identity of the firm. In
2016, we continued our large-scale culture change program, with
over 200 ongoing initiatives at all levels of the organization:
Group, divisional and regional. One key initiative is our Group
Franchise Awards (GFA) program, which we have implemented to
recognize culture-building behavior. The GFA allow us to track
cross-business collaboration and ideas for simplifying our pro-
cesses. The program has created a lot of momentum and has
been deployed across the Group.
Our three keys to success
Our Pillars are the foundation
for everything we do.
Capital strength
Effi ciency and effectiveness
Risk management
Our Principles are what we
stand for as a fi rm.
Client focus
Excellence
Sustainable performance
Our Behaviors are what we
stand for individually.
Integrity
Collaboration
Challenge
250
Attracting and recruiting talent
Positive culture change is both advanced and sustained through
individuals who share our vision and core values. Therefore, a key
effort has been to define a relevant and differentiating commit-
ment to select these candidates.
We source employees through a variety of channels. Our first
priority is to consider current employees for open roles. Internal
mobility builds connections across the firm and enables employ-
ees at all levels to leverage existing skills and develop new ones.
Having long-term career prospects with us is an important driver
for career satisfaction with existing employees and it attracts
external talent.
From outside the firm, we source candidates directly and
through job boards, advertisements, social media, external recruit-
ment agencies and employee referrals. In 2016, as an employer of
choice for people at all career stages, we received almost 490,000
applications and we hired 7,886 external candidates, including
401 client advisors for Wealth Management and 178 financial
advisors for Wealth Management Americas.
Throughout 2016, we continued to hire new employees to
support the growth of our Business Solution Centers (BSCs) in the
US, India, China and Poland. Co-locating teams of HR, IT, Opera-
tions, Risk Control and other specialists enhances collaboration
and efficiency and reduces overall costs. In 2016, offshore and
nearshore employees accounted for approximately 15% of our
global Corporate Center workforce. We expect the growth of our
BSCs to continue into 2017, with a particular focus on the Asia
Pacific region.
Hiring and training entry level talent is a priority for all busi-
ness divisions. In 2016, we hired 750 interns and employed 478
new university graduates in one of our graduate talent programs.
In Switzerland, we hired 290 apprentices for business and IT
roles, and 197 trainees for our Bank Entry Program for high
school graduates.
➔ Refer to www.ubs.com/careers for more information and to
follow our careers blog
➔ Refer to www.ubs.com/awards for more information on UBS’s
rankings as an employer
A top employer again in 2016
– World’s Most Attractive Employers (Universum): global top 50
– 2016 Financial Services Gender-Equality Index member (Bloomberg)
– Switzerland’s Most Attractive Employers (Universum): ranked second by business students
– Vault Banking 50 (Vault, US)
– The Times Top 100 Graduate Employers (The Times)
– Ideal Financial Services Employers (eFinancialCareers): Asia top 20
Diversity and inclusion
The work we have done to build a cohesive and collaborative
culture is amplified by our ongoing success in increasing diversity
and inclusion across the firm. In our experience, teams with diver-
sity in race, ethnicity, age, gender, background, education, sexual
orientation and other aspects better understand and relate to cli-
ents’ needs. Diversity of thought, opinion and experience helps us
make better decisions. Similarly, an inclusive work environment
attracts high-quality people and makes the firm a better place to
work. Our HR policies and procedures underscore our commit-
ment to a diverse and inclusive workplace, with equal opportuni-
ties for all employees.
We are committed to hiring, retaining and promoting more
women at all levels across the firm. In 2016, among other initia-
tives, we continued to build on our aspiration to increase the ratio
of women in management roles to one-third. We embedded
management accountability for supporting this goal and contin-
ued to develop career support, HR processes and technology solu-
tions to help us better retain women at all career stages.
Gender distribution by employee category1
In May 2016, we launched a new UBS Career Comeback pro-
gram in Switzerland and the US aimed at enabling professionals
to return to corporate jobs after a career break. In Switzerland,
our program is unique in that it hires people into permanent posi-
tions for which we are currently recruiting, while in the US we
hire people into potentially permanent roles through a structured
16-week program. Both programs feature on-the-job experience,
classroom learning and mentoring. Altogether, the 2016 pro-
gram gave 26 women and one man the opportunity to relaunch
their careers.
In addition to our strategic initiatives, every year we support
numerous internal and external activities in each region focused
on education and coaching. Internally, our employee networks
host events on gender, culture, life stage, sexual orientation and
other topics on a regular basis. In 2016, we sponsored 32
employee networks globally, with more than 18,500 members.
➔ Refer to www.ubs.com/diversity for more information
Headcount as of 31.12.16
Male
Female
Total
Officers (Director and
above)
Officers (other officers)
Employees
Total
Number
18,021
5,432
23,453
%
77
23
100
Number
12,100
8,165
20,265
%
60
40
100
Number
7,165
9,902
17,067
%
42
58
100
Number
37,286
23,499
60,785
%
61
39
100
1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount (in this table only). This accounts for the total UBS employee number of 60,785 as of 31 December 2016, which
excludes staff from UBS Card Center, Hotel Seepark Thun, Wolfsberg and the Widder Hotel.
251
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Our employees
Developing and managing our workforce
(cid:41)(cid:71)(cid:80)(cid:70)(cid:71)(cid:84)(cid:2)(cid:70)(cid:75)(cid:85)(cid:86)(cid:84)(cid:75)(cid:68)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:68)(cid:91)(cid:2)(cid:73)(cid:71)(cid:81)(cid:73)(cid:84)(cid:67)(cid:82)(cid:74)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:19)(cid:124)(cid:2)
(cid:42)(cid:71)(cid:67)(cid:70)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:2)(cid:67)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:24)
Developing current and future leaders is crucial to our success,
and we expect them to be champions for our strategy and cul-
ture. Each year, programs like our Senior Leadership Experience
for the firm’s senior executives, along with mid- and first-level line
manager programs, help define our expectations for leadership
excellence, build confidence in our strategy and increase commit-
ment to the firm’s three keys to success.
Beyond strategic initiatives, we also offer key talent develop-
ment programs, business education and role-specific training.
Group-wide key talent programs prepare both junior and senior
employees for enhanced responsibilities and line management or
leadership roles. We also place particular emphasis on providing
training and development opportunities for early-career and mid-
level employees. For example, we are one of the top educators of
entry level talent in Switzerland, investing each year in training
programs for more than 2,000 young people, including students,
high school and university graduates, interns and apprentices.
In 2016, our permanent employees participated in approxi-
mately 719,000 development activities, including mandatory
training on compliance, business and other topics. This was an
average of 11.8 training sessions, or 2.4 training days, per
employee.
(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2)
(cid:20)(cid:18)(cid:14)(cid:25)(cid:27)(cid:23)(cid:2)
(cid:25)(cid:14)(cid:24)(cid:21)(cid:19)(cid:2)
(cid:19)(cid:19)(cid:14)(cid:18)(cid:27)(cid:20)(cid:2)
(cid:20)(cid:19)(cid:14)(cid:20)(cid:24)(cid:25)
(cid:25)(cid:14)(cid:26)(cid:25)(cid:24)
(cid:19)(cid:20)(cid:14)(cid:27)(cid:19)(cid:27)
(cid:22)(cid:14)(cid:21)(cid:24)(cid:26)
(cid:24)(cid:14)(cid:25)(cid:20)(cid:22)
(cid:21)(cid:14)(cid:23)(cid:25)(cid:23)
(cid:22)(cid:14)(cid:18)(cid:23)(cid:24)
(cid:25)(cid:14)(cid:24)(cid:26)(cid:18)
(cid:19)(cid:21)(cid:14)(cid:23)(cid:26)(cid:25)
(cid:2)
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(cid:81)(cid:80)(cid:78)(cid:91)(cid:16)(cid:2)(cid:46)(cid:81)(cid:81)(cid:77)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:86)(cid:2)(cid:85)(cid:87)(cid:68)(cid:84)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:70)(cid:67)(cid:86)(cid:67)(cid:14)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:75)(cid:85)(cid:86)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:55)(cid:53)(cid:2)(cid:67)(cid:86)(cid:2)(cid:19)(cid:27)(cid:14)(cid:27)(cid:22)(cid:23)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85)(cid:2)(cid:67)(cid:86)(cid:2)(cid:26)(cid:23)(cid:18)(cid:16)(cid:2)
(cid:39)(cid:47)(cid:39)(cid:35)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:75)(cid:85)(cid:86)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:55)(cid:45)(cid:2)(cid:67)(cid:86)(cid:2)(cid:23)(cid:14)(cid:22)(cid:24)(cid:24)(cid:14)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:39)(cid:87)(cid:84)(cid:81)(cid:82)(cid:71)(cid:2)(cid:67)(cid:86)(cid:2)(cid:23)(cid:14)(cid:22)(cid:21)(cid:27)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:47)(cid:75)(cid:70)(cid:70)(cid:78)(cid:71)(cid:2)(cid:39)(cid:67)(cid:85)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:35)(cid:72)(cid:84)(cid:75)(cid:69)(cid:67)(cid:2)(cid:67)(cid:86)(cid:2)(cid:19)(cid:26)(cid:25)(cid:16)(cid:2)(cid:54)(cid:74)(cid:75)(cid:85)(cid:2)(cid:67)(cid:69)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:85)(cid:2)
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(cid:37)(cid:71)(cid:80)(cid:86)(cid:71)(cid:84)(cid:14)(cid:2)(cid:42)(cid:81)(cid:86)(cid:71)(cid:78)(cid:2)(cid:53)(cid:71)(cid:71)(cid:82)(cid:67)(cid:84)(cid:77)(cid:2)(cid:54)(cid:74)(cid:87)(cid:80)(cid:14)(cid:2)(cid:57)(cid:81)(cid:78)(cid:72)(cid:85)(cid:68)(cid:71)(cid:84)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:57)(cid:75)(cid:70)(cid:70)(cid:71)(cid:84)(cid:2)(cid:42)(cid:81)(cid:86)(cid:71)(cid:78)(cid:16)(cid:2)
Spotlight on advisor training
In 2012, UBS defined expectations for its
client advisors that developed into a
formal certification program. In doing so,
we became the first Swiss bank to have
certified client advisors. Since then, more
than 4,300 UBS client advisors have
completed the program.
Strong advisory skills are a business
imperative, and we invest accordingly in
training for client-facing employees.
Examples include:
– All client advisors in Wealth Manage-
ment must earn an externally
accredited certificate and recertify
every three years.
– All client advisors in Personal &
Corporate Banking must earn
a role-based and externally
accredited certificate and recertify
every three years.
– Certain client-facing employees are
nominated for the Wealth Manage-
ment Master, a partnership between
UBS and Rochester-Bern Executive
Programs. In 2016, the first 75
graduates were awarded a dual
degree: a master of science in wealth
management from the University of
Rochester and a master of advanced
studies in finance from the University
of Bern.
– Financial advisors in the US are fully
registered and remain informed on
changing industry and market dynam-
ics through a comprehensive manda-
tory training curriculum and continuing
education offerings.
– Select Wealth Management Americas
financial advisors participate in
firm-sponsored development events to
enhance their market and client-facing
skill sets as well as their knowledge of
current wealth management topics.
– Aspiring financial advisors in the US are
required to complete a rigorous
24-month training program; select
candidates participate in a specialized
Wealth Planning Analyst program prior
to managing client accounts.
252
(cid:20)(cid:22)(cid:18)(cid:18)(cid:18)
(cid:19)(cid:26)(cid:18)(cid:18)(cid:18)
(cid:19)(cid:20)(cid:18)(cid:18)(cid:18)
(cid:24)(cid:18)(cid:18)(cid:18)
(cid:18)
Managing and rewarding performance
Effective people management is key to sustaining a high-perform-
ing and culturally cohesive organization. We assess performance
and behavior, the two elements that impact long-term profitabil-
ity and culture. Our year-end reviews thus measure both what
was achieved and how those results were achieved. Separate rat-
ings underscore the importance of the firm’s Behaviors for indi-
vidual and Group success, and both are considered in develop-
ment, reward and promotion decisions.
Our compensation philosophy is to align the interests of our
employees with those of our clients and investors. Our Total
Reward Principles underpin our approach to compensation by
establishing a framework that balances performance with pru-
dent risk-taking, and aim to:
– attract and engage a talented, diverse workforce
– foster effective performance management
– align reward with sustainable performance
– support appropriate and controlled risk-taking
➔ Refer to the “Compensation” section of this report for more
information
Personnel by region
Full-time equivalents
Americas
of which: US
Asia Pacific
Europe, Middle East and Africa
of which: UK
of which: rest of Europe
of which: Middle East and Africa
Switzerland
Total
As of
31.12.16
31.12.15
31.12.14
% change from
31.12.15
20,522
19,695
7,539
10,746
5,206
5,373
167
20,581
59,387
20,816
19,897
7,539
10,505
5,373
4,957
176
21,238
60,099
20,951
19,715
7,385
10,254
5,425
4,663
166
21,564
60,155
(1)
(1)
0
2
(3)
8
(5)
(3)
(1)
253
Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation
Our employees
Our responsibilities
Employees have a voice in shaping our culture
We aim to be a high-quality employer, with our identity and our
values embedded into all of our people management practices.
We offer competitive benefits to all employees, which may include
insurance, pension, retirement and personal leave. These benefits
often go beyond market practice or legal requirements. For exam-
ple, we offer employees up to two days each year to volunteer in
local communities. We also support flexible working arrange-
ments, including telecommuting, part-time roles, job sharing and
partial retirement. On a divisional level, initiatives like Wealth
Management’s Health Matters program empower employees to
prioritize their health and accentuate health as a key driver of
performance. In 2016, related initiatives included Global Health
Day, in which more than 6,000 employees participated, and a
Global Health & Performance Conference.
A wide range of resources are available to help employees
navigate work-life issues and personal challenges. For example,
assistance programs offer support and counseling for challenges
such as illness, conflict, bereavement, mental health issues or
elderly care. Also, new parents in all locations can take paid time
off after a child is born or adopted. We meet the statutory paren-
tal leave standards in all locations and exceed them in most. As an
example, paid leave in the US and Puerto Rico is set at 16 weeks
for the primary caregiver and two weeks for the secondary care-
giver. In addition, we have redeployment and outplacement pro-
grams in every region, as well as clear policies and processes for
handling redundancies.
Our Code of Conduct and Ethics (Code) is the basis for all HR
policies, guidelines and procedures. It includes a commitment to
the health and safety of both employees and external staff.
➔ Refer to www.ubs.com/healthandsafety for more information
We strive to listen to our employees, and offering opportunities to
influence the firm’s future is important to us. In 2016, UBS invited
all permanent employees to provide feedback on how we are
doing as a firm. The goal was to give employees a voice in shaping
our culture, to challenge the status quo and to improve the firm.
Globally, 74% of eligible employees participated in the survey. A
significant majority of respondents agreed that they like and are
proud to work at UBS, and a similar proportion thinks the firm has
a positive work environment with a healthy work-life balance. In
addition to the Group-wide survey, we poll representative employ-
ees several times a year. Our ongoing ambition is to have a highly
motivated workforce that models integrity, collaboration and
challenge in their daily work. We also want to be the clear
employer of choice in the financial services industry. Our goal is to
achieve overall engagement ratings in the top quartile.
Grievances and whistleblowing protection
No firm is exempt from workplace issues. Therefore, we have
established procedures in every region to help us resolve any
employee grievances, and employees are strongly encouraged to
speak with their line manager or HR about any concerns. Like-
wise, our whistleblowing policy and procedures offer multiple
channels for staff to raise concerns, either openly or anonymously,
about suspected breaches of laws, regulations, rules and other
legal requirements to which the Group is subject, or of our Code,
policies or relevant professional standards.
➔ Refer to the “Risk management and control” section of this
report for more information
Employee representation
As a responsible employer, we maintain an open dialog with our
employee representation groups. The UBS Employee Forum for
Europe includes representatives from 16 countries and considers
pan-European issues that may affect our performance, prospects
or operations. Similar forums in Switzerland and the UK address
topics such as health and safety, changes to workplace conditions,
pensions, redundancies and business transfers. Collectively, these
groups represent approximately 51% of our global workforce.
254
Our workforce at a glance 1
34%
in the Americas
35%
in Switzerland
7,876
12,919
7,680
13,587
More than 50%
in Switzerland have
worked here
10+ years
Total employees (FTE)
59,387
712 fewer than a year ago (FTE)
60,785 employees (by headcount)
4,368
6,724
18%
in EMEA
13%
in Asia Pacifi c
3,575
4,056
Offi ce locations in
52
countries worldwide
Citizens of 137 countries
Our workforce
has employees
of all ages
1% Traditionalists (up to 1945)
19% Baby Boomers (1946 – 64)
35% Generation Y (1981+)
45% Generation X (1965 – 80)
More than 150
languages spoken
41is the average age 9 is the average years of service
61%
are men
(37,286)
39%
are women
(23,499)
1Calculated on / as of 31.12.16 on a headcount basis of 60,785 unless specifi ed to be on a full-time equivalent (FTE) basis, where we include proportionate numbers of part-time employees.
255
Corporate governance, responsibility and compensation Compensation
Dear shareholders,
The Board of Directors and I wish to thank
you for your support at last year’s Annual
General Meeting and for sharing your
views on our compensation practices over
the course of the past year. I am pleased
to present our Compensation Report
for 2016.
2016 performance
Despite continued strong industry-wide
headwinds in 2016, including a chal-
lenging market environment and negative
investor sentiment, we delivered solid
results while prudently managing resources
and risk. We also increased our cost
savings run rate by around CHF 0.5 billion
to CHF 1.6 billion.
UBS’s net profit attributable to share-
holders was CHF 3.2 billion. UBS’s capital
position remained strong, with a fully
applied CET1 capital ratio of 13.8% and a
fully applied CET1 leverage ratio of 3.5%.
The Board of Directors (BoD) intends to
propose a dividend of CHF 0.60 per share
to shareholders for the financial year 2016,
which is unchanged from the ordinary
dividend for the financial year 2015.
2016 performance award
and expenses
In line with the Group and business
division performance in 2016, the firm’s
total performance award management
pool for the year was CHF 2.9 billion,
down 17% from 2015. As in previous
years, the overall performance award
pool was determined based on a range
of performance considerations, including
risk-adjusted profit and capital strength.
2016 compensation framework
Our compensation framework has
remained largely unchanged since 2012
with no material changes for 2016.
We focused on ensuring stability of our
overall framework and reinforcing our
principles. The consistency in our
approach to compensation over the past
five years has strengthened our culture of
sustainable performance, accountability
and appropriate risk-taking.
The performance award pool for the
Group Executive Board (GEB), including
the Group CEO, was CHF 71.9 million.
On a per capita basis, given the expansion
to 12 full-time equivalent members in
2016, the per capita performance award
decreased by 16%. As a percentage of
the adjusted Group profit before tax, the
GEB performance award pool was 1.3%,
well below the cap of 2.5%.
Compared with most of our peers’
compensation frameworks, we believe
our framework ensures a closer alignment
of employee and investor interests by
linking a greater proportion of variable
compensation to the firm’s own equity
and debt instruments and subjecting
awards to longer deferral periods.
With this approach, our compensation
framework rewards longer-term perfor-
mance, supports our capital base and
allows us to pay competitively. As of
31 December 2016, CHF 2.3 billion of
the Deferred Contingent Capital Plan was
included in our eligible capital and
contributed 1.0% to our loss-absorbing
capacity ratio.
256
Corporate governance, responsibility and compensationCompensationAdvisory vote Dear shareholders,
New regulatory requirements in 2016
continued to drive local adjustments of
our compensation practices. For instance,
in the UK, the Prudential Regulation
Authority and the Financial Conduct
Authority introduced the Senior Managers
and Certification Regime, which tightens
the requirements for the personal
accountability of individuals in certain
senior roles. As required, we have
implemented specific compensation
changes for Senior Management
Functions, such as extending the deferral
of variable compensation to 7 years
and extending the claw-back period to
10 years.
Culture and behaviors
To emphasize our focus on behavior as
part of the UBS culture, we reward not
only what results were achieved, but also
how they were achieved.
Since 2010 we have had a structured
Incidents & Consequences process
in place which ensures that disciplinary
actions and control incidents are reflected
in year-end compensation decisions.
Beginning in 2016, the firm has introduced
a multi-year review of incidents to
ensure a holistic view on reward-related
decisions. Our disciplinary approach for
violations of our Code of Conduct and
Ethics, and the incorporation of conduct
risk in our operational risk framework
demonstrate our commitment to treat
each other as well as our clients and
counterparties appropriately and to act
with integrity in the financial markets.
Annual General Meeting 2017
The BoD and the Compensation
Committee appreciate the opportunity
to engage with many of our shareholders
on compensation matters.
At the Annual General Meeting (AGM)
2017 on 4 May 2017, we will seek your
support on the following compensation-
related items:
– the maximum aggregate amount of
compensation for the BoD for the
period from AGM 2017 to AGM 2018
– the maximum aggregate amount
of fixed compensation for the GEB
for 2018
Ann F. Godbehere
Chair of the Compensation
Committee of the Board of
Directors
– the aggregate amount of variable
compensation for the GEB for 2016
– shareholder endorsement in an
advisory vote for the Compensation
Report
You will find more information about our
2016 compensation approach on the
following pages.
Ann F. Godbehere
Chair of the Compensation Committee of
the Board of Directors
257
Corporate governance, responsibility and compensationAdvisory vote
2016 compensation philosophy
Total Reward Principles
Our compensation philosophy is to align the interests of our
employees with those of our clients and investors, building on our
guiding principles of client focus, excellence and sustainable per-
formance. Our Total Reward Principles establish the framework
for determining our performance award pool and guide the allo-
cation and delivery mechanisms of compensation to employees,
including deferred compensation programs. The Principles under-
pin our approach to compensation by establishing a framework
that balances performance and prudent risk-taking with a focus
on conduct and sound risk management practices.
Our compensation structure is aligned with our strategic
priorities. It encourages employees to develop a strong client
franchise, create sustainable value and achieve the highest
standards of performance. Moreover, we reward behavior that
helps build and protect the firm’s reputation – specifically integ-
rity, collaboration and challenge. We strive for excellence and
sustainable performance in everything we do. Compensation for
each employee is based on individual, team, business division
and Group performance, within the context of the markets in
which we operate.
Overview of our Total Reward Principles
Our Total Reward Principles outline how we structure our compensation framework and apply it to all employees globally. They may
vary in certain locations due to local laws and regulations. The table below provides a summary of our Total Reward Principles.
Attract and engage a diverse, talented workforce
We provide talented employees with pay that is appropriately balanced between fixed and variable elements, competitive
in the market and paid out over an appropriate period
Foster effective individual performance management
and communication
Thorough evaluation of individual performance and adherence to our behaviors, combined with effective communication,
ensures there is a direct connection between achievement of business objectives and compensation across the firm
Align reward with sustainable performance
We cultivate a culture of integration and collaboration within the firm. Our approach to compensation fosters a sense of
engagement among employees and serves to align their long-term interests with those of clients and stakeholders
Support appropriate and controlled risk-taking
Compensation is structured such that employees behave in a manner consistent with the firm’s risk framework and
tolerance, thereby protecting our capital and reputation, and enhancing the quality of our financial results, in line with
what our investors expect from us
258
Corporate governance, responsibility and compensationCompensationAdvisory vote Approach to compensation
How are performance awards determined and allocated?
Market
position
and trends
Affordability
Overall
performance
Create
sustainable
shareholder
value
Strategic
initiatives
Capital
strength
Risk
profile
How is total reward delivered?
– Substantial amounts of awards deferred and
aligned with investors
– At least 50% deferred for Key Risk Takers
– Long-term deferral of up to fi ve years, or longer for
certain regulated employees
– Shareholder- and debt holder-aligned vehicles
Performance award pool is determined
by considering risk-adjusted and
sustainable performance, including:
– quality of earnings
– progress on strategic initiatives
– affordability
– market competitiveness / position
– returns to investors
Performance award pool is allocated to
employees based on Group, business division,
team and individual performance, including:
– client focus
– fi nancial results and capital management
– risk management
– people and talent development
– Principles and Behaviors
Pension contribution / benefi ts
+
Deferred Contingent
Capital Plan
+
Equity Ownership Plan
+
d
r
a
w
e
r
l
a
t
o
T
d
r
a
w
a
e
c
n
a
m
r
o
f
r
e
P
Longer-term
performance
award
Immediate performance
award in the form of cash
Shorter-term
performance
award
+
Base salary / fi xed compensation
What are our Group Executive Board
pay for performance safeguards?
Pay structure
– At least 80% of awards are at risk of forfeiture
– Cap on individual performance awards and cap on
total GEB performance award pool
– No leverage in compensation plans
– Share ownership requirements
Performance award process
– Allocations based on a balanced scorecard with
quantitative and qualitative key performance
indicators
– Control function evaluation
Employment terms
– Six-month notice period in employment contracts
– No hedging strategies allowed
Shareholder approval
– Binding votes on aggregate GEB compensation
– Advisory vote on the Compensation Report
259
Corporate governance, responsibility and compensationAdvisory vote
2016 performance and compensation funding
Our performance in 2016
In 2016, our businesses were exposed to a variety of adverse fac-
tors, including low and negative interest rates, geopolitical ten-
sions, divisive politics and persistent regulatory uncertainty, which
resulted in a challenging year for the industry. Throughout the
year, we remained focused on disciplined strategic execution and
on providing advice to our clients to help them navigate through
turbulent global markets.
Despite the numerous challenges we faced, we reported a
solid financial performance and again demonstrated that our bal-
anced business mix and geographic diversification are important
differentiators for UBS. Adjusted1 profit before tax declined 5% to
CHF 5.3 billion and net profit attributable to UBS Group AG
shareholders decreased by 48% to CHF 3.2 billion, mainly due to
a significant net upward revaluation of deferred tax assets in
2015, which was not repeated in 2016. Our adjusted return on
tangible equity for 2016 was 9.0%, and 11.1% excluding the
effects of deferred tax assets.
We made good progress on our ambitious CHF 2.1 billion cost
reduction target, increasing our net cost savings run rate by
around CHF 0.5 billion to CHF 1.6 billion, despite elevated regula-
tory costs and while investing for growth.
From a capital perspective, we ended 2016 with a strong fully
applied common equity tier 1 (CET1) capital ratio of 13.8%,
despite an increase in risk-weighted assets (RWA) due to regula-
tory changes. At the end of 2016, our fully applied CET1 leverage
ratio was 3.53%, up from 3.35% at the end of 2015. We contin-
ued to complete measures to improve our resolvability, establish-
ing our US intermediate holding company and implementing our
Group service company structure.
Despite the challenges for UBS and the industry as a whole,
our solid results and disciplined execution, together with our
strong capital position, have enabled our Board of Directors to
propose a dividend of CHF 0.60 per share. This is unchanged from
last year’s ordinary dividend and represents a payout ratio of 71%
of net profit attributable to shareholders.
1 Please refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results.
Profit before tax, adjusted
CHF million
Diluted earnings per share (EPS)
CHF
Return on tangible equity (RoTE),
adjusted
in %
(5 %)
(49 %)
(470 bps)
5,635
5,341
1.64
1.80
0.9
0
2015
2016
2015
15.0
12.0
9.0
6.0
3.0
0.0
13.7
2015
0.84
2016
9.0
2016
8,000
4,000
0
260
7999.9998
6666.6665
5333.3332
3999.9999
2666.6666
1333.3333
0.0000
1.5
1.2
0.9
0.6
0.3
0.0
15
12
9
6
3
0
Corporate governance, responsibility and compensationCompensationAdvisory vote Performance award pool funding
Our performance award pool funding framework is based on
business performance, which is measured across multiple dimen-
sions. We assess Group and business division performance,
including achievement against a set of performance targets, and
we also consider performance relative to industry peers, general
market competitiveness and progress against our strategic objec-
tives, including capital growth as well as risk-weighted assets, bal-
ance sheet and cost efficiency. We look at the firm’s risk profile
and culture, the extent to which operational risks and audit issues
have been identified and resolved, and the success of risk reduc-
tion initiatives. Certain risk-related objectives are the same Group-
wide and include adhering to investment risk guidelines, Group
risk policies, and avoiding significant operational risks.
Each business division’s performance award pool is initially
accrued as a percentage of profit before performance award,
which is risk-adjusted by factoring in a capital charge. In deter-
mining the final pool, we also consider progress on our strategic
objectives, quality of earnings, affordability, returns to investors
and market competitiveness. Business division performance is
adjusted for items that do not represent underlying performance,
primarily restructuring expenses, litigation and regulatory costs
arising from matters that predate current management, and gains
or losses related to divestments or sales of real estate.
Our compensation philosophy focuses on balancing perfor-
mance with prudent risk-taking and retaining talented employees.
To achieve this, as performance improves, we reduce our overall
performance award funding percentage. In strong years, this pre-
vents excessive compensation, resulting in an increased propor-
tion of contribution before compensation being available for dis-
tribution to shareholders or being added to the Group’s capital. In
contrast, when performance declines, the performance award
pool will generally decrease, but, we may increase the funding
rate to remain flexible enough to make adequate provisions to
ensure our compensation practices remain competitive.
Our Wealth Management business reported adjusted pre-tax
profit of CHF 2.4 billion, a decrease of 15% compared with 2015,
as reduced costs were more than offset by lower revenues due to
a variety of factors, including negative client sentiment and cross-
border outflows, which drove a 21% decline in transaction reve-
nue and a 7% decline in recurring net fee income. Net new
money was CHF 26.8 billion, reflecting an annual growth rate of
2.8%, despite cross-border outflows of CHF 14 billion.
Wealth Management Americas reported record adjusted profit
before tax of USD 1.3 billion, up 43% compared with 2015.
Operating income increased by 3%, while expenses decreased by
2%. The business division also implemented changes to its oper-
ating model to move decision-making closer to clients; better
leveraging its capabilities and investing in technology aimed at
empowering our people with more effective resources. Net new
money was USD 15.4 billion, representing an annual growth rate
of 1.5%.
Personal & Corporate Banking reported its best adjusted pre-
tax profit since 2008 of CHF 1.8 billion, up 4% compared with
2015. Net new business volume growth for personal banking was
3.1% and the business division also achieved its highest net client
acquisition in personal banking.
Our Asset Management business reported adjusted pre-tax
profit of CHF 552 million, down 10% compared with 2015. Net
new money outflows excluding money market flows totaled CHF
22.5 billion for the year. 2016 was a challenging year for active
asset managers, with accelerated shifts out of active into passive
investments.
Adjusted pre-tax profit in the Investment Bank decreased 34%
to CHF 1.5 billion, as lower revenues were partly offset by lower
costs. Market conditions and broader macroeconomic trends over
2016 did not favor our business and geographic mix. Adjusted
return on attributed equity of 19.6% for 2016 reflects the busi-
ness division’s early actions on costs and proactive balance sheet
management. The business division again maintained strict disci-
pline on resource utilization, reducing its leverage ratio denomi-
nator by 14%. Risk-weighted assets increased by 12% to CHF 70
billion, predominantly due to regulatory requirements and
changes to our operational risk RWA allocation.
Corporate Center reported an adjusted pre-tax loss of CHF 2.1
billion compared with a loss of CHF 2.6 billion in 2015, mainly
reflecting reduced expenses in Services and Non-core and Legacy
Portfolio in 2016.
➔ Refer to “Group performance” in the “Financial and operating
performance” section of this report for more information
261
Corporate governance, responsibility and compensationAdvisory vote Performance award funding process – illustrative overview
Financial
performance
1
Risk adjustment
Consultation of
Group CEO with
the business
division Presidents
Compensation
Committee / BoD
governance and
discretion
3
Levers
Adjusted
business division
financial
performance
2
Risk-adjusted
business
division
performance
award pool
Business
division
KPIs
Qualitative,
risk and
regulatory
assessment
Relative
performance
vs peers
Market
position
and trends
4
5
Recommended
business
division
performance
award pool
Final
performance
award pool
Adjusted business division
financial performance
The preliminary business division performance award pool amounts are driven and assessed by financial performance. The adjusted business
division performance excludes items that are not reflective of the underlying performance
Risk-adjusted business
division performance
award pool
Predetermined business division-specific performance award pool funding rates are applied to risk-adjusted performance. In addition, credit risk,
market risk and operational risk (including conduct) are taken into account
Business division KPIs
Each division is assessed based on specific KPIs (e.g., net new money growth rate, return on attributed equity)
Qualitative, risk and
regulatory assessment
Qualitative assessment (e.g., quality of earnings, industry awards), assessment of regulatory compliance and risk assessment (such as legal,
compliance, reputational and operational risk). Qualitative assessment also ensures full alignment to our Total Reward Principles
Relative performance
vs peers
Performance is also assessed relative to our peers
Market position
and trends
Market intelligence based on external advisors helps assess the competitiveness of our pay levels and compensation structure.
It also provides a prospective view of market trends in terms of absolute compensation levels, compensation framework and industry practice
Recommended business
division performance
award pool
Final performance
award pool
The business division performance award pool determination process results in a performance award pool recommendation from the Group CEO
(after consultation with the business division Presidents), which is submitted to the Compensation Committee for consideration
The Compensation Committee considers the recommen dation in the context of our overall performance, capital strength, risk profile, affordability,
returns to investors, progress on strategic initiatives, market competitiveness / position, as well as business and geographic trends. The committee
ensures it is in line with our strategy embodied in our Total Reward Principles to create sustainable shareholder value and may alter the recom-
mendations of the Group CEO (upward or downward, including recommending a zero award) before making its fi nal recommendation to the BoD
1
2
3
4
5
262
Corporate governance, responsibility and compensationCompensationAdvisory vote 2016 performance award pool and expenses
Performance award expenses
Performance award expenses
CHF billion
The performance award pool, which includes all discretionary
performance-based variable awards for 2016, was CHF 2.9 bil-
lion, reflecting a decrease of 17% compared with 2015.
3.5
3.0
2.5
Performance award expenses for 2016 decreased by 7% to
CHF 3.0 billion. This reflects the decrease in the performance
award pool for 2016, partly offset by higher expenses related to
the amortization of awards from prior years. The “Performance
award expenses” chart on this page compares the performance
award pool with performance award expenses.
➔ Refer to the “Our deferred variable compensation plans for
2016” section of this report for more information
2.0
1.5
1.0
0.5
0.0
CHF billion
3.5
1.0
Awards
for
performance
year deferred
to future
periods2
(incl.
accounting
adjustments)
(17%)1
3.2
0.7
2.5
Amortization
of prior-year
awards
Awards
expenses for
performance
year
3.0
0.8
2.2
Amortization
of prior-year
awards
Awards
expenses for
performance
year
2.9
0.7
Awards
for
performance
year deferred
to future
periods2
(incl.
accounting
adjustments)
Performance
award pool
2015
Performance
award pool
2016
(7%)
1 Excluding employer-paid taxes and social security. 2 Estimate. The actual amount to be expensed in future
periods may vary, e.g., due to forfeitures.
263
Corporate governance, responsibility and compensationAdvisory vote 2016 compensation for the Group CEO and
the other GEB members
Base salary, role-based allowance, pensions and benefits
Each GEB member receives a fixed base salary, which is reviewed
annually by the Compensation Committee. The Group CEO’s
annual base salary for 2016 was CHF 2.5 million and has remained
unchanged since his appointment in 2011. The other GEB mem-
bers received a salary of CHF 1.5 million (or local currency equiva-
lent). This level has also remained unchanged since 2011.
One GEB member is considered a Material Risk Taker (MRT) in
the UK and is in a UK Senior Management Function (SMF). There-
fore, he receives a role-based allowance in addition to his base
salary. This allowance reflects the market value of this specific role
and is only paid while the GEB member is considered an MRT.
Such an allowance represents a shift in the compensation mix
between fixed and variable compensation and not an increase in
total compensation. The allowance consists of a cash portion and
a blocked UBS share award, which is granted annually.
Pension contributions and benefits for GEB members are in line
with local practices for other employees. No enhanced or supple-
mentary pension contributions are made for the GEB.
At the Annual General Meeting (AGM), shareholders are asked
to approve the maximum aggregate amount of fixed compensa-
tion for the members of the GEB for the following financial year.
➔ Refer to the “Our compensation model for employees other than
GEB members” section of this report for more information on
MRTs and SMFs
➔ Refer to the “Our compensation governance framework” section
of this report for more information on the shareholders’ vote on
the GEB compensation
Performance assessment
Annual performance awards for the Group CEO and other GEB
members are at the full discretion of the Board of Directors (BoD)
and, in aggregate, subject to shareholder approval at the AGM.
We use individual balanced scorecards to assess the GEB mem-
bers’ performance against a number of quantitative and qualita-
tive key performance indicators (KPIs).
The quantitative measures for the Group CEO are based on
overall Group performance. For other GEB members, they are
based on both Group performance and the performance of the
relevant business division and / or region; for those who lead
Group control functions, or who are solely regional Presidents, are
assessed on the performance of the Group and the function or
region they oversee. Quantitative measures account for 65% of
the assessment.
Qualitative measures, which relate to our Pillars, Principles and
Behaviors, account for 35% of the assessment and are the same
for all GEB members, including the Group CEO. The second table
below provides an overview of the quantitative and qualitative
KPIs, which the balanced scorecard is based on.
The weighting between Group, business division, regional and
functional KPIs varies depending on a GEB member’s role. A sig-
nificant weight is given to Group KPIs for all GEB members.
The performance assessment on the basis of the quantitative
and qualitative measures results in an overall rating, which is the
starting point for determining a GEB member’s annual performance
award. This approach is not mechanical, as the Compensation
Committee can exercise its judgment with respect to the perfor-
mance achieved relative to the prior year, the strategic plan, and
competitors, and considers the Group CEO’s recommendation.
The Compensation Committee’s recommendations are then
reviewed and must be approved by the BoD. The Compensation
Committee, and then the full BoD, follow a similar process in set-
ting the compensation for the Group CEO, except that the Group
CEO gives no recommendation on his own award.
While the BoD retains full discretion in determining variable
compensation for the Group CEO and the other GEB members,
the total amount of the awards may not exceed 2.5% of adjusted
Group profit before tax. Additionally, variable compensation for
individual GEB members and the Group CEO may not exceed the
specified individual compensation caps, as described later in this
section.
The final aggregate performance award for the GEB, including
the Group CEO, for a financial year is subject to shareholder
approval at the following AGM. The individual variable perfor-
mance awards for each GEB member will only be confirmed upon
shareholder approval at the AGM.
264
Corporate governance, responsibility and compensationCompensationAdvisory vote Overview of the GEB compensation determination process
The compensation for the Group CEO and the other GEB members is governed by a rigorous process under Compensation Committee
and BoD oversight. The illustration below shows how compensation for all GEB members is determined.
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(cid:75)(cid:80)(cid:73)
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(cid:67)(cid:2)(cid:85)(cid:74)(cid:81)(cid:84)(cid:86)(cid:71)(cid:84)(cid:15)(cid:86)(cid:71)(cid:84)(cid:79)(cid:14)(cid:2)(cid:75)(cid:79)(cid:79)(cid:71)(cid:70)(cid:75)(cid:67)(cid:86)(cid:71)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74)(cid:2)
(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:70)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:2)(cid:67)(cid:2)(cid:78)(cid:81)(cid:80)(cid:73)(cid:71)(cid:84)(cid:15)(cid:86)(cid:71)(cid:84)(cid:79)(cid:2)
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(cid:2)
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(cid:37)(cid:81)(cid:79)(cid:82)(cid:71)(cid:80)(cid:85)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:75)(cid:70)(cid:71)(cid:84)(cid:85)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)
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(cid:74)(cid:75)(cid:85)(cid:2)(cid:81)(cid:89)(cid:80)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:70)(cid:85)(cid:11)
(cid:54)(cid:74)(cid:71)(cid:2)(cid:386)(cid:80)(cid:67)(cid:78)(cid:2)(cid:70)(cid:71)(cid:69)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:2)(cid:75)(cid:85)(cid:2)(cid:67)(cid:86)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:70)(cid:75)(cid:85)(cid:69)(cid:84)(cid:71)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)
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(cid:67)(cid:82)(cid:82)(cid:84)(cid:81)(cid:88)(cid:67)(cid:78)
1 Senior Management Functions have extended deferral periods, with the deferred performance awards vesting in equal installments between years 3 and 7.
265
Corporate governance, responsibility and compensationAdvisory vote Overview of the quantitative and qualitative measures – balanced scorecard
Quantitative and qualitative measures consider performance versus plan as well as year-on-year performance and other factors includ-
ing relative performance and market conditions.
Quantitative / qualitative measures
Group
A range of fi nancial metrics including adjusted Group return on tangible equity, adjusted Group profi t before tax,
CET1 capital ratio (fully applied)
Business division, regional and or functional
KPIs (if applicable)¹
Business division and / or regional KPIs vary but may include: net new money growth rate, adjusted divisional / regional
profi t before tax, adjusted cost / income ratio, net new business volume growth rate, net interest margin, adjusted RoAE,
Basel III RWA and LRD expectations
Pillars
Capital management
Establishes and maintains capital strength and CET1 capital ratio. Generates effi ciencies and deploys our capital more
effi ciently and effectively
Specifi c functional KPIs for Corporate Center GEB members
Effi ciency and effectiveness
Contributes to the development and execution of our strategy. The measure also looks to ensure that there is success across
all business lines, functions and regions
Risk management
Ensures risk management through an effective control framework. Captures the degree to which risks are self-identifi ed and
focuses on the individual’s success in ensuring compliance with all the various regulatory frameworks. Helps shape the fi rm’s
relationship with regulators through ongoing dialog
Principles²
Client focus
Increases client satisfaction and maintains high levels of satisfaction over the long term. This includes promoting collaboration
across business divisions and fostering the delivery of the whole fi rm to our clients
Excellence
Human Capital Management – develops successors for the most senior positions, facilitates talent mobility within
the fi rm and promotes a diverse and inclusive workforce
Sustainable performance
Brand and Reputation – protects the Group’s reputation and ensures full compliance with our standards and principles
Product and Service Quality – strives for excellence in the products and services we offer to our clients
Culture – takes a personal role in making Principles and Behaviors front and center of the business requirements. Furthermore,
this measure evaluates the individual’s ability to reinforce a culture of accountability and responsibility, demonstrating our
commitment to be a responsible corporate citizen and to act with integrity in all our interactions with stakeholders
Behaviors
Integrity
Is responsible and accountable for what they say and do; cares about clients, investors and colleagues; acts as a role model
Collaboration
Places the interests of clients and the fi rm before their own and those of their business; works across the fi rm;
respects and values diverse perspectives
Challenge
Encourages self and others to constructively challenge the status quo; learns from mistakes and experiences
1 Both regional and functional KPIs may include qualitative measures. 2 Overall results may also consider strategic progress and result relative to market environment.
266
Corporate governance, responsibility and compensationCompensationAdvisory vote Benchmarking against peers
When recommending performance awards for the Group CEO
and the other GEB members, the Compensation Committee
reviews the respective total compensation for each role against
the broader market as well as a group of peer companies selected
for the comparability of their size, business mix, geographic pres-
ence and the extent to which they compete against us for talent.
The Compensation Committee also considers our peers’ strate-
gies, practices, pay levels and regulatory environment. Overall, the
total compensation for a GEB member’s specific role considers the
compensation paid by our primary peer group for a comparable
role and performance.
The Compensation Committee periodically reviews and
approves the primary peer group for executive compensation. For
2016, the primary peer group remained unchanged and consisted
of:
Bank of America
Credit Suisse
Julius Baer
Barclays
BlackRock
BNP Paribas
Citigroup
Deutsche Bank
Morgan Stanley
Goldman Sachs
Standard Chartered
HSBC
JPMorgan Chase
The DCCP contributes to the Group’s total loss-absorbing cap-
ital, and the awards granted to GEB members are subject to a
common equity tier 1 capital ratio write-down trigger of 10%,
which is higher than the trigger for other employees and holders
of similar debt issued by the UBS Group. Moreover, GEB members
forfeit 20% of the granted DCCP award for each loss-making
year during the vesting period. This means that 100% of the
award is subject to risk of forfeiture in addition to the capital ratio
trigger.
For the GEB member whose role is considered an SMF, the
overall deferral period is seven years, and the awards are subject
to the applicable claw-back provisions. Given that an SMF is also
a UK MRT, 50% of any immediate cash is delivered in vested
shares that are blocked for six months, as required by regulators.
Additionally, EOP installments are required to be blocked for an
additional six months upon vesting.
For GEB members, the average deferral period is 4.4 years. Our
compensation plans have no upward leverage, such as multiplier
factors, and therefore do not encourage excessive risk-taking.
The Compensation Committee has determined that perfor-
mance conditions for all GEB members’ awards due to vest in
March 2017 have been satisfied and thus the awards will vest
in full.
➔ Refer to the “Our deferred variable compensation plans for
2016” section of this report for more information
This group is broadened for the purposes of business division
benchmarking and for the review of specific roles, as appropriate.
➔ Refer to the “Our compensation model for employees other than
GEB members” section of this report for more information on
2016 deferred performance awards
For each GEB member, at least 80% of the performance award is
deferred, while a maximum of 20% can be paid out in the form
of immediate cash, subject to a cap of CHF / USD 1 million (or local
currency equivalent). Any amount above this cap is granted in
notional shares under the Equity Ownership Plan (EOP).
For the performance year 2016, a minimum of 50% of the
overall performance award is granted under the EOP, which vests
in three equal installments in years 3 to 5, provided that perfor-
mance conditions are met.
The remaining 30% of the overall performance award is
granted under the Deferred Contingent Capital Plan (DCCP).
Under the DCCP, GEB members are awarded notional additional
tier 1 instruments that vest after five years with discretionary
annual interest payments.
MRTs and SMFs
➔ Refer to “Vesting of outstanding awards granted in prior years
subject to performance conditions” under “Supplemental
information” in this section of this report for more information
Share ownership requirements: aligning GEB members’
interests with those of our shareholders
In addition to our compensation framework, our share ownership
policy requires the Group CEO to hold a minimum of 500,000
UBS shares and other GEB members to hold a minimum of
350,000 UBS shares. GEB members must build up their minimum
shareholding within five years from their appointment and retain
it throughout their tenure. The total number of UBS shares held
by a GEB member consists of any vested or unvested shares and
any privately held shares. GEB members may not sell any UBS
shares before they reach the aforementioned minimum owner-
ship thresholds. At the end of 2016, the GEB members met the
required share ownership level, except for those newly appointed
during 2016, who will have five years to build up and meet the
required share ownership level.
267
Corporate governance, responsibility and compensationAdvisory vote Caps on the GEB performance award pool
Employment contracts
The size of the GEB performance award pool may not exceed
2.5% of the adjusted Group profit before tax. This links overall
GEB compensation to the firm’s profitability.
For 2016, the Group’s adjusted profit before tax was CHF 5.3
billion and the total GEB performance award pool was CHF 71.9
million (CHF 71.3 million in 2015). The performance award pool
as a percentage of adjusted Group profit before tax was 1.3%,
which is well below the cap of 2.5%.
In line with the individual compensation caps introduced in
2013 on the proportion of fixed pay to variable pay for all GEB
members, the Group CEO’s performance award is capped at five
times his fixed compensation. Performance awards of other GEB
members are capped at seven times their fixed compensation. For
2016, performance awards for GEB members and the Group CEO
were, on average, 3.3 times their fixed compensation (excluding
benefits and contributions to retirement benefit plans).
The employment contracts of the GEB members do not include
severance terms, sometimes referred to as golden parachutes, or
supplementary pension plan contributions. All employment con-
tracts for GEB members are subject to a notice period of six
months. A GEB member leaving the firm before the end of a per-
formance year may be considered for a discretionary performance
award based on their contribution during that performance year
and in line with the approach described in this report. Such
awards are at the full discretion of the BoD, which may decide not
to grant any awards.
268
Corporate governance, responsibility and compensationCompensationAdvisory vote 2016 compensation framework for GEB members
Up to 20% of the annual performance award is paid in the form of immediate cash and at least 80% will be deferred for up to five
years1, with at least 50% granted under the Equity Ownership Plan (EOP) and the remaining 30% under the Deferred Contingent
Capital Plan (DCCP). The compensation framework for 2016 remains the same as for 2015. The chart below is an illustrative example.
Payout of performance award¹
Key features
Pay for performance and safeguards
30%
Notional additional tier 1 (AT1) instruments
30% of the performance award is granted under the
Deferred Contingent Capital Plan (DCCP). The award
vests after 5 years, subject to write-down if a trigger or viabi-
lity event occurs. The award is subject to 20% forfeiture
for each financial year if UBS does not achieve an adjusted
Group profit before tax
Notional interest payments will be made annually, subject
to review and confirmation by the firm
The award is subject to continued employment and
harmful acts provisions
Notional shares
16%
At least 50% of the performance award is granted under
the Equity Ownership Plan (EOP). The award vests in equal
installments after years 3, 4 and 5, subject to both Group
and business division performance. Up to 100% of the
installment due to vest may be forfeited
The award is subject to continued employment and
harmful acts provisions
Up to 20% of the performance award is paid out in cash2
immediately, subject to a cash cap of CHF / USD 1 million.
Any amount above the cash cap is granted under the EOP
Our compensation framework is designed to pay for
performance. A performance award is based on a balanced
scorecard assessing the individual’s performance against
a number of quantitative and qualitative key performance
indicators
At least 80% of the performance award is at risk
of forfeiture
Compensation plan forfeiture provisions enable the fi rm to
reduce the unvested deferred portion if the compensation
plans’ relevant performance conditions are not met
Our compensation framework contains a number of features
designed to ensure that risk is appropriately managed with
safeguards to discourage inappropriate risk-taking:
– no upward leverage, such as multiplier factors. Potential
realized pay cannot exceed the award granted (excluding
potential share price appreciation, dividends and interest
payments). The final deferred payout can be forfeited up
to 100% in cases where performance conditions are not
met or harmful acts provisions apply
– a balanced mix of shorter-term and longer-term
performance awards with a focus on deferral
– a cap on the total GEB performance award pool of 2.5%
of adjusted Group profit before tax
– individual caps on the proportion of fixed to variable pay
for the Group CEO and other GEB members
– six-month notice period included in the employment con-
tracts
– an evaluation of each GEB member’s risk control
effectiveness and adherence to risk-related policies
and guidelines as part of their individual qualitative
assessment
– provisions that enable the firm to trigger forfeiture of
some, or all, of the unvested deferred performance
award if an employee commits certain harmful acts,
or if the employment is terminated for cause
17%
17%
DCCP
30%
EOP
at
least
50%
20%
Cash
up to
20%
Base
salary3
2016
2017
2018
2019
2020
2021
2022
Share
retention
500,000 shares for the Group CEO
350,000 shares for other GEB members
GEB members are required to hold a certain number
of UBS shares as long as they are in office.
This holding has to be built up within a maximum of
five years from the date of their appointment to the GEB
1 Senior Management Functions have extended deferral periods, with the deferred performance awards vesting in equal installments between years 3 and 7. 2 UK Material Risk Takers receive 50% in form of blocked
shares. 3 May include role-based allowances that have been made in line with market practice in response to regulatory requirements.
269
Corporate governance, responsibility and compensationAdvisory vote 2016 compensation for the Group Chief Executive Officer
The performance award for the Group CEO, Sergio Ermotti, is
based on the achievement of both quantitative and qualitative
performance targets as described earlier in this section. These tar-
gets were set to reflect the strategic priorities determined by the
Chairman and the BoD, including risk-adjusted profitability, our
capital position and adjusted return on tangible equity, as well as
a range of qualitative measures to assess the quality and sustain-
ability of the performance. Mr. Ermotti’s performance assessment
was also based on behavioral measures. The table on the follow-
ing page summarizes the metrics used to assess Mr. Ermotti’s per-
formance as Group CEO for 2016.
The BoD recognized Mr. Ermotti’s strong leadership in a year in
which the Group achieved solid financial performance despite a
challenging business environment. He successfully managed the
capital position of the bank and achieved strong capital ratios.
Adjusted profit before tax declined by 5% to CHF 5.3 billion,
and net profit attributable to UBS Group AG shareholders was
down 48% to CHF 3.2 billion, mainly due to a significant net
upward revaluation of deferred tax assets in 2015, which was not
repeated in 2016. UBS’s adjusted return on tangible equity for
2016 was 9.0% and 11.1% excluding the effects of deferred tax
assets.
UBS made good progress on achieving its ambitious CHF 2.1
billion net cost reduction target; increasing net cost savings by
CHF 0.5 billion to CHF 1.6 billion despite elevated regulatory
costs, while also investing to strengthen its competitive position.
The BoD also considered Mr. Ermotti’s focus on maintaining
UBS’s capital strength, which is the foundation of our success.
UBS ended 2016 with a strong fully applied CET1 capital ratio of
13.8%; above our 13% target, and a fully applied CET1 leverage
ratio of 3.53%, which is already above the 2020 minimum. The
firm also issued over CHF 14 billion in AT1 capital instruments and
TLAC-eligible senior unsecured notes, bringing its total loss-
absorbing capacity to over CHF 73 billion.
The firm ended the year with a strong financial position under
Mr. Ermotti’s leadership and, as a result, the BoD intends to pro-
pose to the shareholders an ordinary dividend of CHF 0.60 in line
with the ordinary dividend for 2015.
In 2016, under Mr. Ermotti’s oversight, the firm successfully
executed a series of measures to improve the resolvability of the
Group in response to too big to fail requirements in Switzerland
and other countries. The establishment of UBS Americas Holding
LLC as our US intermediate holding company was completed, and
our Group service company implemented.
The BoD also acknowledged the strong performance relative
to qualitative goals in 2016. Mr. Ermotti remained committed to
our strategy, focused on disciplined execution and continued to
drive cost reduction programs while maintaining a clear tone from
the top regarding the risk and control environment.
Mr. Ermotti demonstrated his strong commitment to clients, to
steer the development and implementation of client-centric prod-
ucts and to deliver services of high quality. One of Mr. Ermotti’s
significant achievements in 2016 was the successful recomposi-
tion of the Group Executive Board (GEB). As part of his continued
commitment to talent retention and development, he spear-
headed initiatives to improve diversity at senior levels, to
strengthen internal mobility and to ensure succession planning.
Mr. Ermotti set a clear and consistent expectation with regard
to Behaviors. The BoD considered the further significant progress
made in the organization’s cultural transformation, which remains
a key priority under Mr. Ermotti’s leadership.
Reflecting his achievements in 2016, the BoD approved the
proposal by the Compensation Committee to grant Mr. Ermotti a
performance award of CHF 10.9 million, bringing his total com-
pensation for the year (excluding benefits and contributions to his
retirement benefit plan) to CHF 13.4 million. The performance
award is subject to shareholder approval as part of the aggregate
GEB 2016 variable compensation and will be delivered with 61%
deferred in EOP over years 3 to 5 and 30% in DCCP after 5 years,
subject to the achievement of certain performance and other for-
feiture conditions. The remaining 9% (CHF 1 million) will be deliv-
ered in immediate cash.
➔ Refer to the “Our deferred variable compensation plans for
2016” section of this report for more information
270
Corporate governance, responsibility and compensationCompensationAdvisory vote Balanced scorecard for the Group CEO
Quantitative1 measures (65%)
Weighting
2016 results
Adjusted Group profi t before tax
25%
CHF 5,341 million
Adjusted Group RoTE
Capital management2
CET1 capital ratio, fully applied
Post-stress CET1 ratio, fully applied
CET1 leverage ratio, fully applied
25%
15%
9.0%
13.8%
>10%
3.53%
Qualitative3 measures (35%)
Weighting
Measures
2016 vs plan
2016 vs 2015
2016 vs plan
2016 vs 2015
2016 vs plan
2016 vs 2015
2016 assessment
100%
2016 assessment
100%
Capital management
Pillars
Effi ciency and effectiveness
Risk management
Client focus
Optimizes usage of resources across business and legal entities.
Generates effi ciencies and deploys our capital effi ciently and
effectively across business units
Effective management of the organization‘s cost basis while
maintaining proper risk controls and service quality to clients as
well as ensuring appropriate reinvestment in our businesses
vs goals
Ensures risk management through an effective control framework.
Captures the degree to which risks are self-identifi ed and focuses
on the individual‘s success in ensuring compliance with the Group
and all various regulatory frameworks
Focus on unrivaled client focus at every level of our business,
building relationships that make us stand out from our peers.
Promotes collaboration across business divisions and fosters the
delivery of the whole fi rm to our clients to ensure continued and
growing levels of satisfaction over the long term
Principles4
Excellence
35%
Drives an organization that strives for excellence in everything we
do, from the people we employ to the products and services we
offer to our clients
vs goals
Sustainable performance
Integrity
Behaviors
Collaboration
Challenge
Maintains focus on the long term and works continuously to
strengthen our reputation as a rock-solid fi rm providing consistent
returns to our stakeholders. Protects the Group‘s reputation and
ensures full compliance with our standards and principles across
all stakeholders
Ensures the organization is creating an environment where
employees are responsible and accountable for what they say and
do, that they care about clients, investors and colleagues, and acts
as a role model
Drives the organization to place the interests of clients and the
fi rm before the employees‘ own and those of their business, to
work across the fi rm and to respect and value diverse
perspectives
Supports and encourages self and others to constructively
challenge the status quo; learns from mistakes and experiences
vs goals
1 Quantitative measures and target levels were based on internal performance objectives in our 2016 Operating Plan. 2 CET1 capital ratio and post-stress CET1 ratio exceeded plan and required capital thresholds.
Overall assessment was driven by CET1 leverage ratio. 3 The qualitative measures used to assess the effectiveness of the Group CEO are outlined in detail in the table “Overview of the quantitative and qualitative
measures – balanced scorecard” in this report. 4 Overall results also consider strategic progress and result relative to market environment.
271
Corporate governance, responsibility and compensationAdvisory vote Total compensation for GEB members for the performance
year 2016
The GEB performance awards are at the discretion of the Board of
Directors (BoD) based on the assessment of quantitative and qual-
itative performance measures and, in aggregate, subject to share-
holder approval. The aggregate performance award pool for the
GEB, which increased from 10 to 12 full-time equivalent mem-
bers, was CHF 71.9 million for 2016. On a per capita basis, the
performance award decreased by 16% compared with 2015.
At the AGM 2017, shareholders will vote on the aggregate
2016 total variable compensation for the GEB.
Audited |
Total compensation for GEB members
CHF, except where indicated1
Name, function
Sergio P. Ermotti, Group CEO
(highest-paid)
Sergio P. Ermotti, Group CEO
(highest-paid)
Aggregate of all GEB
members9, 10, 11
For the
year
Base salary2
Contribution
to retirement
benefit plans3
Benefits4
Total fixed
compensation
Immediate
cash5
Annual
performance
award under
EOP6
Annual
performance
award under
DCCP7
Total
variable
compensation
Total
fixed and
variable
compensation8
2016
2,500,000
261,181
42,577
2,803,758
1,000,000
6,630,000
3,270,000
10,900,000
13,703,758
2015
2016
2015
2,500,000
261,181
50,080
2,811,261
1,000,000
7,050,000
3,450,000
11,500,000
14,311,261
21,601,925
2,387,649 1,977,703
25,967,277
11,289,350
39,040,650
21,570,000
71,900,000
97,867,277
19,138,288
1,407,042 1,614,998
22,160,327
9,745,110
40,129,890
21,375,000
71,250,000
93,410,328
1 Local currencies have been translated into Swiss francs at the exchange rates stated in “Note 34 Currency translation rates” in the “Consolidated financial statements” section of this report, or at the performance
award currency exchange rate. 2 Includes role-based allowances that have been made in line with market practice in response to the EU Capital Requirements Directive of 2013 (CRD IV). 3 Includes the portion related
to the employer’s contribution to the statutory pension scheme. 4 All benefits are valued at market price. 5 In accordance with the remuneration section of the UK Prudential Regulation Rulebook, the immediate cash
includes blocked shares for one GEB member. 6 For EOP awards for the performance year 2016, the number of shares has been determined by dividing the amount by CHF 15.75 or USD 15.67, the average closing
share price of UBS shares over the last ten trading days in February 2017. For EOP awards for the performance year 2015, the number of shares was determined by dividing the amount by CHF 14.98 and USD 15.09,
the average closing share price of UBS shares over the last ten trading days in February 2016. 7 The amounts reflect the amount of the notional additional tier 1 instrument excluding future notional interest. For DCCP
awards for the performance year 2016, the notional interest rate is set at 5.95% for awards denominated in US dollars and 2.55% for awards denominated in Swiss francs. For DCCP awards for the performance year
2015, the notional interest rate is set at 7.35% for awards denominated in US dollars and 4.15% for awards denominated in Swiss francs. 8 Excludes the portion related to the legally required employer’s social security
contributions for 2016 and 2015, which are estimated at grant at CHF 5,131,867 and CHF 4,132,667, respectively, of which CHF 856,796 and CHF 898,596, respectively, for the highest-paid GEB member. The legally
required employees’ social security contributions are included in the amounts shown in the table above, as appropriate. 9 Twelve GEB members were in office on 31 December 2016 and 10 members were in office on
31 December 2015. 10 2016 includes compensation for Lukas Gähwiler for eight months in office as a GEB member. 11 Excludes salaries and employer’s contribution to the statutory pension scheme and benefits as
part of the employment contract during the notice period of CHF 1,753,997 for two GEB members who stepped down on 31 December 2015. No such payments were made in 2015.
Fixed and variable compensation for GEB members1
CHF in million, except where indicated
Amount
%
Amount
Total for the year ended 2016
Not deferred
Total compensation
Amount3
Number of beneficiaries
Fixed compensation3, 4
Cash-based
Equity-based
Variable compensation
Immediate cash5
Equity Ownership Plan (EOP)
Deferred Contingent Capital Plan (DCCP)
94
13
22
20
2
72
11
39
22
100
23
21
2
77
12
42
23
33
22
20
2
11
11
0
0
%
35
100
16
Deferred2
Amount
61
0
0
0
61
0
39
22
%
65
0
84
Total for
the year
ended 2015
Amount
90
10
19
17
3
71
10
40
21
1 The figures relate to all GEB members in office in 2016, including compensation for Lukas Gähwiler for eight months in office as a GEB member. 2 Based on the specific plan vesting and reflecting the total award value
at grant, which may differ from the accounting expenses. 3 Excludes benefits and employer’s contribution to retirement benefit plans. 4 Includes base salary and role-based allowances, rounded to the nearest million.
5 Includes allocation of vested but blocked shares, in line with the remuneration section of the UK Prudential Regulation Rulebook.
272
Corporate governance, responsibility and compensationCompensationAdvisory vote 2016 compensation for the Board of Directors
Chairman of the BoD
Independent BoD members
Under the leadership of the Chairman, Axel A. Weber, the BoD
determines, among other things, the strategy for the Group based
on recommendations by the Group CEO, exercises ultimate super-
vision over management and appoints all GEB members.
The Chairman presides over all general meetings of sharehold-
ers, and works with the committee chairpersons to coordinate the
work of all BoD committees. Together with the Group CEO, the
Chairman is responsible for ensuring effective communication
with shareholders and other stakeholders, including government
officials, regulators and public organizations. This is in addition to
establishing and maintaining a close working relationship with
the Group CEO and other GEB members, and providing advice
and support when appropriate, as well as continuing to support
the firm’s cultural change as a key priority on the basis of our
Principles and Behaviors.
The Chairman’s total compensation is contractually capped at
CHF 5.7 million, excluding benefits and pension fund contribu-
tions. His total compensation for 2016 consisted of a cash pay-
ment of CHF 3.5 million and a share component of CHF 2.2 mil-
lion delivered in 139,682 UBS shares at CHF 15.75 per share. The
shares are blocked from distribution for four years. Accordingly,
his total reward, including benefits and pension fund contribu-
tions for his service as Chairman for the full year 2016, was CHF
6,069,569.
➔ Refer to “Board of Directors” in the “Corporate governance”
section of this report for more information on the responsibili-
ties of the Chairman
The share component ensures that the Chairman’s pay is
aligned with the Group’s long-term performance. The Chairman’s
employment agreement does not provide for severance terms or
supplementary contributions to pension plans. Benefits for the
Chairman are in line with local practices for UBS employees. The
Compensation Committee approves the Chairman’s compensation
annually, taking into consideration fee or compensation levels for
comparable roles outside the firm.
All BoD members except the Chairman are deemed independent
directors and receive a fixed base fee of CHF 325,000 per annum.
In addition to the base fee, independent BoD members receive
committee retainers for their services on the firm’s various board
committees. The Senior Independent Director and the Vice Chair-
man of the BoD each receive an additional retainer of CHF
250,000. Independent BoD members must use a minimum of
50% of their fees to purchase UBS shares that are blocked for
four years. They may elect to use up to 100% of their fees to
purchase blocked UBS shares. In all cases, the number of shares
that independent BoD members are entitled to purchase is
calculated at a discount of 15% below the average market
price over the last 10 trading days in February. Independent BoD
members do not receive performance awards, severance payments
or benefits. The chart on the following page provides details
and additional information on the remuneration framework for
independent BoD members.
Base fees, committee retainers and any other payments to be
received by independent BoD members are subject to an annual
review based on a proposal submitted by the Chairman of the
BoD to the Compensation Committee, which in turn submits a
recommendation to the BoD for approval. The BoD proposes at
each AGM for shareholder approval the aggregate amount of
BoD remuneration, including compensation of the Chairman,
which applies until the subsequent AGM.
The “Remuneration details and additional information for
independent BoD members” table shows the remuneration for
each independent BoD member for the period from AGM 2016 to
AGM 2017. The fixed base fees are unchanged from the 2015 / 16
period and have been broadly flat since 1998.
273
Corporate governance, responsibility and compensationAdvisory vote 2016 / 2017 remuneration framework for independent BoD members
CHF, except where indicated
Fees include retainers for Committee chair or membership and / or specific roles that are paid per annum. At least 50% of the total
amounts must be used to purchase shares that are blocked for four years.
Fixed base fee
Senior Independent Director retainer
Vice Chairman retainer
Audit Committee
Compensation Committee
Governance and Nominating Committee
Corporate Culture and Responsibility Committee
Risk Committee
325,000
250,000
250,000
Chair
Member
300,000
200,000
300,000
100,000
100,000
50,000
400,000
200,000
Pay mix 1
Blocked
shares
Cash
50%
Delivery
50%
1 Independent BoD members can elect to use 100% of their remuneration to purchase blocked UBS shares. UBS blocked shares are granted with a price discount of 15% and are blocked for four years.
2016
2017
2018
2019
2020
2021
Audited |
Total payments to BoD members
CHF, except where indicated
Aggregate of all BoD members
For the year
2016
2015
Total1
13,219,569
12,778,308
1 Includes social security contributions paid by the BoD members but excludes the portion related to the legally required social security contributions paid by UBS, which for 2016 are estimated at grant at CHF 662,740
and for 2015 at CHF 653,272.
Audited |
Compensation details and additional information for non-independent BoD members
CHF, except where indicated
Name, function1
Axel A. Weber, Chairman
For the year
Base salary
2016
2015
3,500,000
3,500,000
Annual share
award2
2,200,000
2,200,000
Contributions
to retirement
benefit plans4
261,181
261,181
Benefits3
108,388
72,959
Total5
6,069,569
6,034,141
1 Axel A. Weber was the only non-independent member in office on both 31 December 2016 and 31 December 2015. 2 These shares are blocked for four years. 3 Benefits are all valued at market price. 4 Includes
the portion related to UBS’s contribution to the statutory pension scheme. 5 Excludes the portion related to the legally required social security contributions paid by UBS, which for 2016 are estimated at grant at CHF
368,695 and for 2015 at CHF 368,257. The legally required social security contributions paid by the non-independent BoD members are included in the amounts shown in this table, as appropriate.
274
Corporate governance, responsibility and compensationCompensationAdvisory vote Audited |
Remuneration details and additional information for independent BoD members
CHF, except where indicated
e
e
t
t
i
m
m
o
C
n
o
i
t
a
s
n
e
p
m
o
C
e
e
t
t
i
m
m
o
C
y
t
i
l
i
b
i
s
n
o
p
s
e
R
d
n
a
e
r
u
t
l
u
C
e
t
a
r
o
p
r
o
C
e
e
t
t
i
m
m
o
C
t
i
d
u
A
M M
M M
M
M
C
C
M
M
C M
C M
M
M
M
M
M
M
M
M
M
M
M
d
n
a
e
c
n
a
n
r
e
v
o
G
e
e
t
t
i
m
m
o
C
g
n
i
t
a
n
m
o
N
i
M
M
M
M
M
M
e
e
t
t
i
m
m
o
C
k
s
i
R
C
C
M
M
M
M
M
M
M
M
M
M
Name, function1
Michel Demaré,
Vice Chairman
David Sidwell, Senior
Independent Director
Reto Francioni,
member
Ann F. Godbehere,
member
Axel P. Lehmann,
former member
William G. Parrett,
member
Isabelle Romy,
member
Robert W. Scully,
member
Jes Staley, former
member
Beatrice Weder di Mauro,
member
Dieter Wemmer,
member
Joseph Yam,
member
Total 2016 / 2017
Total 2015 / 2016
Additional
payments2
250,000
250,000
250,000
250,000
For the period
AGM to AGM
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
2016 / 2017
2015 / 2016
Base fee
325,000
325,000
325,000
325,000
325,000
325,000
325,000
325,000
–
210,347
325,000
325,000
325,000
325,000
325,000
–
–
154,375
325,000
325,000
215,000
–
325,000
325,000
Committee
retainer(s)
400,000
400,000
500,000
500,000
350,000
255,000
500,000
500,000
–
129,444
450,000
402,500
300,000
300,000
200,000
–
–
142,500
400,000
400,000
160,000
–
250,000
250,000
Share
percentage4
50
Number of
shares5, 6
36,407
50
50
50
50
50
50
50
–
100
50
50
50
50
100
–
–
0
50
50
50
–
50
50
38,295
40,141
42,223
25,205
22,780
30,806
32,403
–
25,217
28,939
28,574
23,338
24,548
29,917
–
–
0
27,072
28,476
14,002
–
21,471
22,584
Total3
975,000
975,000
1,075,000
1,075,000
675,000
580,000
825,000
825,000
–
339,792
775,000
727,500
625,000
625,000
525,000
–
–
296,875
725,000
725,000
375,000
–
575,000
575,000
7,150,000
6,744,167
Legend: C = Chairperson of the respective Committee, M = Member of the respective Committee
1 10 independent BoD members were in office on 31 December 2016. Robert W. Scully and Dieter Wemmer were elected at the AGM on 10 May 2016. Nine independent BoD members were in office on 31 December
2015. Jes Staley was elected at the AGM on 7 May 2015 and stepped down on 28 October 2015. Reto Francioni was appointed as a Risk Committee member on 29 October 2015 and William G. Parrett was appointed
as a Compensation Committee member on 29 October 2015, both succeeding Jes Staley. Axel P. Lehmann stepped down as BoD member on 31 December 2015. Jes Staley, Reto Francioni, William G. Parrett and Axel P.
Lehmann were remunerated pro rata temporis for 2015. On Dieter Wemmer’s request, his remuneration has been reduced to account for his meeting attendance as he faced a number of scheduling conflicts in
2016. 2 These payments are associated with the Vice Chairman or the Senior Independent Director function. 3 Excludes UBS’s portion related to the legally required social security contributions, which for the period
from the AGM 2016 to the AGM 2017 are estimated at grant at CHF 294,045 and which for the period from the AGM 2015 to the AGM 2016 were estimated at grant at CHF 285,015. The legally required social security
contributions paid by the independent BoD members are included in the amounts shown in this table, as appropriate. 4 Fees are paid 50% in cash and 50% in blocked UBS shares. However, independent BoD members
may elect to have 100% of their remuneration paid in blocked UBS shares. 5 For 2016, UBS shares, valued at CHF 15.75 (average price of UBS shares at the SIX Swiss Exchange over the last 10 trading days of February
2017), were granted with a price discount of 15%. These shares are blocked for four years. For 2015, UBS shares, valued at CHF 14.98 (average price of UBS shares at the SIX Swiss Exchange over the last 10 trading
days of February 2016), were granted with a price discount of 15%. These shares are blocked for four years. 6 Number of shares is reduced in case of the 100% election to deduct legally required contributions. All
remuneration payments are, where applicable, subject to social security contributions and / or withholding tax.
275
Corporate governance, responsibility and compensationAdvisory vote
Our compensation governance framework
Board of Directors and Compensation Committee
The Board of Directors (BoD) is ultimately responsible for approv-
ing and overseeing the compensation strategy proposed by the
Compensation Committee, which determines compensation-
related matters in line with the principles set forth in the Articles
of Association.
As determined in the Articles of Association and the firm’s
Organization Regulations, the Compensation Committee is the
supervisory body for our human resources and compensation
policies. It ensures that we have appropriate governance and
oversight of our compensation process and practices, that we
have strong alignment between pay and performance, and that
our compensation system does not encourage inappropriate risk-
taking. Our Compensation Committee consists of four indepen-
dent BoD members who are elected annually by the shareholders
at the Annual General Meeting (AGM).
Among other responsibilities, the Compensation Committee,
The Compensation Committee meets at least four times a year.
In 2016, the Compensation Committee held seven meetings and
two conference calls. All meetings were fully attended. The Chair-
man of the BoD attended all meetings and the Group CEO all but
one meeting. The Chairman of the BoD and the Group CEO were
not present during discussions related to their own compensation
or performance evaluations. The Chairperson of the Compensa-
tion Committee may also invite other executives to join the meet-
ing in an advisory capacity. No individual whose compensation is
reviewed is allowed to attend meetings during which specific
decisions are made about their compensation. Such decisions are
at the discretion of the Compensation Committee and the BoD.
After the meetings, the Chairperson of the Compensation
Committee reports to the BoD on the activities of the Compensa-
tion Committee and the matters discussed. In addition, where
necessary, the Chairperson submits proposals for approval by the
full BoD. The minutes of Compensation Committee meetings are
sent to all members of the BoD.
on behalf of the BoD:
– reviews our Total Reward Principles
– reviews and approves the design of the compensation frame-
On 31 December 2016, the Compensation Committee mem-
bers were Ann F. Godbehere, who chairs the committee, Michel
Demaré, Reto Francioni and William G. Parrett.
work
– reviews performance award funding throughout the year and
proposes the final performance award pool to the BoD for
approval
– together with the Group CEO, reviews performance targets
and performance assessments and proposes base salaries and
annual performance awards for the other GEB members to the
BoD, which approves the total compensation of each GEB
member
– together with the Chairman of the BoD, establishes perfor-
mance targets, evaluates performance and proposes the com-
pensation for the Group CEO to the BoD
– approves the total compensation for the Chairman of the BoD
– together with the Chairman, proposes the total individual
compensation for independent BoD members for approval by
the BoD
– together with the BoD, proposes the maximum aggregate
amounts of compensation for the BoD and for the GEB, to be
submitted for approval by shareholders at the AGM
– reviews the Compensation Report and approves any material
public disclosures on compensation matters
External advisors
The Compensation Committee may retain external advisors to
support it in fulfilling its duties. In 2016, HCM International Ltd.
provided independent advice on compensation matters. HCM
International Ltd. holds no other mandates with UBS. The com-
pensation consulting firm Willis Towers Watson provided the
Compensation Committee with data on market trends and
benchmarks, including in relation to GEB and BoD compensation.
Various subsidiaries of Willis Towers Watson provide similar data
to Human Resources in relation to compensation for employees
below the BoD and GEB level. Willis Towers Watson holds no
other compensation-related mandates with UBS.
The Risk Committee’s role in compensation
The Risk Committee, a committee of the BoD, works closely with
the Compensation Committee to ensure that our approach to
compensation reflects proper risk management and control. The
Risk Committee supervises and sets appropriate risk management
and risk control principles and receives regular briefings on how
risk is factored into the compensation process. It also monitors
Group Risk Control’s involvement in compensation and reviews
risk-related aspects of the compensation process.
➔ Refer to www.ubs.com/governance for more information
276
Corporate governance, responsibility and compensationCompensationAdvisory vote Compensation Committee 2016 / 2017 key activities and timeline
This table provides an overview of the Compensation Committee’s key scheduled activities from AGM 2016 to AGM 2017.
June
July
Sept
Oct
Nov
Dec
Jan
Mar
Strategy, policy and governance
Revised Total Reward Principles
3-year strategic plan on variable compensation
Compensation disclosure and stakeholder communication matters
AGM reward-related items
Compensation Committee governance
Annual compensation review
Accruals and full-year forecast of the performance award pool funding
Performance targets and performance assessment of the Group CEO and
GEB members
Group CEO and GEB members salaries and individual performance awards
Update on market practice, trends and peer group matters
Pay for performance, including governance on certain higher-paid employees, and
non-standard compensation arrangements
Board of Directors remuneration
Compensation framework
Compensation framework and deferred compensation matters
Risk and regulatory
Risk management in the compensation approach and joint meeting with BoD Risk Committee
Regulatory activities impacting employees and engagement with regulators
Compensation governance
The table below provides an overview of compensation governance by specific role.
Recipients
Compensation recommendations developed by Approved by
Communicated by
Chairman of the BoD
Chairperson of the Compensation Committee
Compensation Committee1
Compensation Committee
Independent BoD members
(remuneration system and fees)
Compensation Committee and Chairman of the BoD
BoD1
Chairman of the BoD
Group CEO
Compensation Committee and Chairman of the BoD
Other GEB members
Compensation Committee and Group CEO
BoD1
BoD1
Key Risk Takers (KRTs) /
(senior) employees
Respective GEB member together with functional
management team
Individual compensation for KRTs and senior
employees: Group CEO
Performance award pool for all employees: BoD
1 Aggregate compensation for the GEB and aggregate remuneration for the BoD are subject to shareholder approval.
Chairman of the BoD
Group CEO
Line manager
277
Corporate governance, responsibility and compensationAdvisory vote Shareholder engagement and say-on-pay votes
at the AGM
Approved compensation
UBS is committed to an ongoing dialog with our shareholders to
ascertain their perspectives on developments and trends in com-
pensation and corporate governance matters. In line with the
Swiss Ordinance against Excessive Compensation in Listed Stock
Corporations, we seek binding shareholder approval for the
aggregate compensation for the GEB and for the BoD. The BoD
believes that prospective approval for the fixed remuneration for
the BoD and the GEB provides the firm and its governing bodies
with the certainty necessary to operate effectively. Furthermore,
retrospective approval for the GEB’s variable compensation awards
aligns total compensation for the GEB to performance and contri-
bution and to developments in the market place and across peers.
The combination of the binding votes on compensation and the
advisory vote on the compensation framework reflects our com-
mitment to our shareholders to having their say-on-pay.
➔ Refer to “Provisions of the Articles of Association related to
compensation” at the end of this section for more information
For the performance year 2016, shareholders approved at the
AGM 2015 a maximum aggregate fixed compensation amount
of CHF 25,000,000 for the members of the GEB, including base
salaries, role-based allowances in response to CRD IV, estimated
standard contribution to retirement benefit plans, other benefits
and a buffer. Following the increase in the number of GEB mem-
bers from 10 to 12 as of January 2016, the aggregate fixed com-
pensation paid in 2016 to current and former1 GEB members
exceeded the approved amount for 2016. Funded from the avail-
able statutory supplementary amount2, as approved by share-
holders in 2014, an additional amount of CHF 2,721,274 was
used to pay a portion of the fixed compensation of the new GEB
members.
1 Includes salaries and employer’s contribution to the statutory pension scheme and benefits as part of the employment contract during the notice period for two GEB members who stepped down on 31 December 2015.
No such payments were made in 2015. 2 The additional amount was used to equally fund the increase of the Group Executive Board, with Sabine Keller-Busse as Group Head Human Resources and Axel P. Lehmann
as Group Chief Operating Officer (Group COO). The Group COO role was held by the Group CFO in prior years and was split in 2016; the Group Head Human Resources role has been a GEB level role since 2016.
Say-on-pay – compensation-related votes at the AGM 2016
2016 AGM say-on-pay voting schemes
Binding vote on GEB variable compensation
Proposal on the aggregate amount of variable
compensation for the GEB for the past perfor-
mance year
Shareholders approved CHF
71,250,000 for the financial year
20151, 2, 3
85.9%
CHF 71,250,000
2016 actual shareholder votes Vote “for” Compensation granted
Binding vote on GEB fixed compensation
Proposal on the maximum amount of fixed
compensation for the GEB for the following
financial year
Shareholders approved CHF
28,500,000 for the financial year
2017
95.1%
To be disclosed in the
2017 Compensation
Report
Binding vote on BoD remuneration
Advisory vote on Compensation Report
Proposal on the maximum aggregate amount of
remuneration for the BoD for the period from
AGM to AGM. This ensures that the term of office
and the compensation period are aligned
Proposal on the prior-year Compensation Report,
which provides valuable feedback on compensation
practice in relation to UBS’s compensation
framework, governance and policy
Shareholders approved CHF
14,000,000 for the period from the
2016 AGM to 2017 AGM1,2
91.8%
CHF 13,219,569
Shareholders approved the UBS
Group AG Compensation Report
2015 in an advisory vote
84.8%
1 Local currencies are translated into Swiss francs at the exchange rates stated in “Note 36 Currency translation rates” in the “Consolidated financial statements” section of the Annual Report 2015. 2 Excludes the
portion related to the legally required employer’s social security contributions. 3 Ten GEB members were in office on 31 December 2015.
278
Corporate governance, responsibility and compensationCompensationAdvisory vote Our compensation model for employees other than GEB members
Base salary
Employees’ fixed compensation reflects their level of skills, role
and experience, as well as local market practices. Fixed compen-
sation generally consists of a base salary and, if applicable, a role-
based allowance. Base salaries are usually paid monthly or fort-
nightly. We offer our employees competitive base salaries,
although salary levels vary between functions and locations. Since
2011, salary increases have been limited. With effect from March
2017, total base salaries increased by CHF 80 million or 1.4%.
Such increases will continue to be granted to employees who
were promoted, have scarce or in-demand skillsets, delivered a
very strong performance or took on increased responsibilities.
Overall, we focus on total compensation. For example, 2016
performance award pools take into account salary increases
granted earlier in the year. We will continue to review salaries and
performance awards in light of market developments, affordabil-
ity, our performance and our commitment to deliver sustainable
returns to our shareholders.
In addition to a base salary and as part of fixed compensation,
some regulated employees may receive a role-based allowance as
described in the “Material Risk Takers” section of this report. Such
allowance represents a shift in the compensation mix between
fixed and variable compensation and not an increase in total com-
pensation.
Pensions, benefits, and employee share purchase program
We offer certain benefits to our employees such as health insur-
ance and retirement benefits. These benefits may vary depending
on the employee’s location and are intended to be competitive in
each of the markets in which we operate. Pension contributions
and pension plans also vary across locations and countries in
accordance with local requirements and market practice. How-
ever, pension plan rules in any one location are generally the same
for all employees, including management.
The Equity Plus Plan is our employee share purchase program.
It allows employees below the rank of managing director to con-
tribute up to 30% of their base salary and / or up to 35% of their
performance award (up to CHF / USD 20,000 annually) for the
purchase of UBS shares. Eligible employees may buy UBS shares at
market price and receive one matching share for every three
shares purchased through the program. The matching shares vest
after three years, provided the employee remains employed with
the firm and has retained the purchased shares throughout the
holding period.
➔ Refer to “Note 26 Pension and other post-employment benefit
plans” in the “Consolidated financial statements” section of this
report for more information
Performance award
Most of our employees are eligible for an annual discretionary
performance award. The level of the award depends on the firm’s
overall performance, the employee’s business division perfor-
mance, as well as individual performance and behavior, reflecting
their overall contribution to the firm’s success. The award is at the
complete discretion of the firm. To link pay with performance, the
key performance indicators (KPIs) used to measure our progress in
executing our strategy are taken into account when determining
the size of each business division’s performance award pool. The
KPIs also serve as a basis for setting specific performance condi-
tions for vesting of certain deferred compensation plan grants.
In addition to the firm’s principles around Client focus, Excel-
lence and Sustainable performance, on an individual level, behav-
iors related to Integrity, Collaboration and Challenge are part of
the performance management approach. Therefore, when assess-
ing performance, we not only take into account what was
achieved, but also how those results were achieved.
279
Corporate governance, responsibility and compensationAdvisory vote Benchmarking
Because of the diversity of our businesses, our choice of bench-
mark companies focuses on the comparability of business divi-
sion, location and scope of role. For certain businesses or roles,
we may take into account practices at other major international
banks, other large Swiss private banks, private equity firms, hedge
funds and non-financial firms. Furthermore, we also benchmark
employee compensation internally for comparable roles within
and across business divisions and locations.
Deferral of performance awards
We encourage our employees to deliver sustainable performance.
In practice, this means that employees with the highest levels of
compensation have a higher effective deferral rate of their perfor-
mance awards. If an employee’s total compensation exceeds
CHF / USD 300,000, a significant part of their performance award
will be deferred for up to five years, or longer for certain regulated
employees.
The deferred amount increases at higher marginal rates in line
with the value of the performance award. The portion of the per-
formance award paid out in immediate cash is capped at CHF / USD
1 million (or the equivalent in other currencies). Amounts in excess
of the cash cap are deferred in notional shares under the Equity
Ownership Plan (EOP). The effective deferral rate therefore
depends on the amount of the performance award and the
amount of total compensation.
Of the deferred annual performance award, at least 60% is
deferred in UBS notional shares under the EOP and up to 40% is
deferred in notional instruments under the Deferred Contingent
Capital Plan (DCCP). Asset Management employees receive at
least 75% of their deferred performance awards in notional funds
under the EOP and up to 25% under the DCCP. The average
deferral period for deferred performance awards for employees
below GEB level is 3.5 years.
➔ Refer to the “Our deferred variable compensation plans for
2016” section of this report for more information
➔ Refer to “Note 27 Equity participation and other compensation
plans” in the “Consolidated financial statements” section of this
report for more information on local plans
280
Corporate governance, responsibility and compensationCompensationAdvisory vote Other variable compensation components
To support hiring and retention, particularly at senior levels, we
may offer certain other compensation components. These include:
– Replacement payments to compensate employees for deferred
awards forfeited as a result of joining the firm. Such payments
are industry practice and are often necessary to attract senior
candidates, who generally have a significant portion of their
awards deferred at their current employer, where continued
employment is required to avoid forfeiture.
– Retention payments made to key employees to induce them to
stay, particularly during critical periods for the firm.
– On a very limited basis, guarantees may be required to attract
individuals with certain skills and experience. These awards are
fixed incentives subject to our standard deferral rules and are
limited to the first full year of employment.
– Award grants to employees hired late in the year to replace
performance awards that they would have earned at their pre-
vious employer, but have foregone by joining the firm. These
awards are structured with the same level of deferral as for
employees at a similar level at UBS. In exceptional cases, candi-
dates may be offered a sign-on award to increase the chances
of them accepting our offer.
These other variable compensation components are subject to
a comprehensive governance process. Authorization and respon-
sibility may go up to the BoD Compensation Committee, depend-
ing on the amount or type of such payments.
Employees who are made redundant may receive severance
payments. Our severance terms comply with the applicable local
laws (legally obligated severance). In certain locations, we may
provide severance packages that are negotiated with our local
social partners and may go beyond the applicable minimum legal
requirements (standard severance). Such payments are governed
by location-specific severance policies. In addition, we may make
severance payments that exceed legally obligated or standard sev-
erance payments (supplemental severance) where we believe that
they are aligned with market practice and appropriate under the
circumstances. No severance payments are made to members of
the GEB.
Sign-on payments, replacement payments, guarantees and severance payments
CHF million, except where indicated
Total sign-on payments1
of which: Key Risk Takers2
Total replacement payments3
of which: Key Risk Takers2
Total guarantees3
of which: Key Risk Takers2
Total severance payments1, 4
of which: Key Risk Takers2
Total 2016
of which: expenses
recognized in 20165
of which: expenses
to be recognized in
2017 and later
43
19
65
26
13
0
271
4
27
12
24
17
6
0
271
4
16
8
41
9
7
0
0
0
Total 2015
Number of beneficiaries
2016
2015
21
11
85
44
44
29
166
2
145
10
221
14
17
0
2,637
17
114
14
252
27
35
13
1,850
6
1 GEB members are not eligible for sign-on or severance payments. 2 Expenses for Key Risk Takers are full-year amounts for individuals in office on 31 December 2016. Key Risk Takers include employees with a total
compensation exceeding CHF / USD 2.5 million (Highly Paid Employees). 3 No GEB member received replacement payments or guarantees for 2016 or 2015. 4 Severance payments include legally obligated and
standard severance. 5 Expenses before post-vesting transfer restrictions.
281
Corporate governance, responsibility and compensationAdvisory vote Compensation for financial advisors in
Wealth Management Americas
In line with market practice for US wealth management busi-
nesses, the compensation for financial advisors in Wealth Manage-
ment Americas is based on production payout and awards. Pro-
duction payout, paid monthly, is primarily based on compensable
revenue. Financial advisors may also qualify for deferred awards,
which vest over various time periods of up to 10 years depending
on the type of award. The awards are based on strategic perfor-
mance measures, including production, length of service with the
firm and net new business. Production payout rates and awards
may be reduced for, among other things, errors, negligence or
carelessness, or a failure to comply with the firm’s rules, standards,
practices and policies or applicable laws and regulations.
Key Risk Takers
Key Risk Takers (KRTs) are globally defined as those employees
who, by the nature of their roles, have been determined to mate-
rially set, commit or control significant amounts of the firm’s
resources and / or exert significant influence over its risk profile.
This includes employees who work in front-office roles, logistics
and control functions. Identifying KRTs is part of our risk control
framework and an important element in ensuring we incentivize
only appropriate risk-taking. For 2016, 661 employees were clas-
sified as KRTs, including all 12 GEB members. This group also
includes all employees with a total compensation exceeding
CHF / USD 2.5 million (Highly Paid Employees) who may not have
been identified as KRTs during the performance year.
The performance of employees identified as KRTs during the
performance year is evaluated by the control functions.
In line with regulatory requirements, KRTs’ performance awards
are subject to a mandatory deferral of at least 50%, regardless of
whether the deferral threshold has been met. A KRT’s deferred
compensation award will only vest if the relevant Group and / or
business division performance conditions are met. Like for all other
employees, the deferred portion of KRTs’ compensation is also
subject to forfeiture or reduction if the KRT commits harmful acts.
Group Managing Directors (GMDs) receive part of their annual
performance award under the DCCP and EOP with the same vest-
ing conditions as for KRTs.
Fixed and variable compensation for Key Risk Takers1
CHF million, except where indicated
Amount
%
Amount
Total for the year ended 2016
Not deferred
Total compensation
Amount4
Number of beneficiaries
Fixed compensation4, 5
Cash-based
Equity-based
Variable compensation
Immediate cash6
Equity Ownership Plan (EOP)
Deferred Contingent Capital Plan (DCCP)
1,138
100
649
386
357
29
752
233
322
197
34
31
3
66
21
28
17
619
386
357
29
233
233
0
0
%
54
100
31
Deferred2
Amount
519
0
0
0
519
0
322
197
%
46
0
69
Total for the year
ended 20153
Amount
1,413
659
398
376
22
1,015
280
462
273
1 Includes employees with a total compensation exceeding CHF / USD 2.5 million (Highly Paid Employees), excluding GEB members who were in office on 31 December 2016. 2 Based on the specific plan vesting and
reflecting the total value at grant, which may differ from the accounting expenses. 3 Figures for 2015 as reported in our Annual Report 2015. 4 Excludes benefits and employer’s contribution to retirement benefit
plans. 5 Includes base salary and role-based allowances. 6 Includes allocation of vested but blocked shares, in line with the remuneration section of the UK Prudential Regulation Rulebook.
282
Corporate governance, responsibility and compensationCompensationAdvisory vote Material Risk Takers
UK Senior Managers and Certification Regime
For entities that are regulated in the EU, we have to identify indi-
viduals who are deemed to be Material Risk Takers (MRTs) based
on the guidelines issued by the European Banking Authority
(EBA). In the UK, under the guidance of the Prudential Regulation
Authority (PRA) and the Financial Conduct Authority (FCA), we
identified a group of 640 UK MRTs for 2016. This group consists
of senior management, risk takers, staff engaged in control func-
tions and any employee whose total compensation is above a cer-
tain threshold. In line with the EBA guidelines, 50% of UK MRTs’
performance awards that are paid out immediately are delivered
in UBS shares that are blocked for six months. Any notional shares
granted to UK MRTs under the EOP for their performance in 2016
are subject to an additional six-month blocking period post vest-
ing. Since 2015, performance awards granted to UK MRTs have
also been subject to claw-back provisions for a period of up to
seven years from the date of grant. Under these provisions, the
firm may claim repayment of both the immediate and the deferred
element of any discretionary performance award if an individual is
found to have contributed substantially to causing significant
financial losses to the Group or a material downward restatement
of disclosed results, or engaged in misconduct and / or failed to
take expected actions, which contributed to significant harm to
the Group’s reputation.
In line with market practice, MRTs may receive a role-based
allowance in addition to their base salary. This role-based allow-
ance reflects the market value of a specific role and is fixed, non-
forfeitable compensation. Unlike salary, a role-based allowance is
paid only for as long as the employee is in a specific role. Impor-
tantly, the role-based allowance represents a shift in the compen-
sation mix between fixed and variable compensation and not an
increase in total compensation.
Similar to 2015, the 2016 role-based allowances consisted of
an immediate cash portion and, where applicable, a blocked UBS
share award. Other EU-based employees who are subject to regu-
lation have similar compensation structures in order to comply
with EBA and local requirements.
In March 2016, the Senior Managers and Certification Regime
(SMCR) of the UK PRA and FCA came into effect. Under the
SMCR, certain specified responsibilities are allocated to named
individuals performing designated Senior Management Functions
(SMFs). Individuals in the certification group under SMCR are
those performing certain significant functions, MRTs and / or those
in certain other identified categories.
SMFs are subject to specific compensation requirements, which
we have implemented for the performance year 2016, including
longer deferral and claw-back periods. We have extended the
deferral period for SMFs to seven years, with the deferred perfor-
mance awards vesting in equal installments between years 3 and
7. We have also amended the claw-back policy to allow claw-back
for up to 10 years from the date of performance award grants
(applicable if an individual is subject to an investigation at the end
of the initial seven-year claw-back period).
Control functions and Group Internal Audit
Our control functions, Risk Control (including Compliance),
Finance and Legal, must be independent in order to monitor risk
effectively. Therefore, we determine their compensation indepen-
dently from the revenue producers that they oversee, supervise or
support. Their performance award pool is not based on the per-
formance of these businesses, but on the performance of the
Group as a whole. In addition, we consider other factors, such as
how effectively the function has performed, and our market posi-
tion. Decisions on individual compensation for the senior manag-
ers of the control functions are made by the function heads and
approved by the Group CEO. Decisions on individual compensa-
tion for the members of Group Internal Audit (GIA) are made by
the Head of GIA and approved by the Chairman of the BoD. Upon
proposal by the Chairman, total compensation for the Head of
GIA is approved by the Compensation Committee in consultation
with the Audit Committee.
283
Corporate governance, responsibility and compensationAdvisory vote Our deferred variable compensation plans for 2016
Deferred compensation
To ensure our employees’ and stakeholders’ interests are aligned
and that compensation is appropriately linked to longer-term sus-
tainable performance, a significant part of performance awards
above a total compensation threshold are deferred in UBS notional
shares and / or UBS notional instruments for up to five years, or
longer for certain regulated employees.
For all employees with a total compensation above CHF / USD
300,000, a specific amount of the overall performance award is
deferred. For 2016, 48% of the overall performance award for
this group of employees was deferred.
Our current performance award components are not classified
as “on-top” long-term incentive awards, because they are not
granted in addition to and beyond an annual performance award
and they do not include leverage features based on potential
future performance. We believe UBS has one of the most rigorous
deferral regimes in the industry.
Overview of our deferred variable compensation plans
The average deferral period is 4.4 years for GEB members and
3.5 years for employees below GEB level. To promote sustainable
performance over the longer-term, our deferred compensation
components are kept at risk through a mix of notional equity and
capital instruments with long durations and malus conditions.
Malus conditions enable the firm to forfeit unvested deferred
awards under certain circumstances, including performance and
harmful acts provisions. Deferred awards granted to the most
senior employees and to Highly Paid Employees (employees with
a total compensation exceeding CHF / USD 2.5 million) remain
subject to performance conditions. Deferred compensation is
delivered through two plans: the Equity Ownership Plan (EOP)
primarily aligns employee interest with those of our shareholders
and the Deferred Contingent Capital Plan (DCCP) aligns with the
interests of bondholders.
Benefi ciaries
GEB members, Key Risk Takers and all employees with total compensation greater than
CHF / USD 300,000
GEB members, Key Risk Takers and all employees with total
compensation greater than CHF / USD 300,000
Equity Ownership Plan
Deferred Contingent Capital Plan
Deferral mix
(between EOP and DCCP)
Vesting schedule
Share price
Forfeiture clauses
Harmful acts
Performance conditions
s
n
o
i
t
i
d
n
o
C
g
n
i
c
n
e
u
fl
n
i
t
u
o
y
a
p
GEB members: at least 62.5%
Asset Management employees: at least 75%
All other employees: at least 60%
GEB members: up to 37.5%
Asset Management employees: up to 25%
All other employees: up to 40%
GEB members / SMFs: vests in three installments after years 3, 4 and 5
Asset Management employees: vests in three installments after years 2, 3 and 5
All other employees: vests in equal installments after years 2 and 3
SMFs: vests in two installments after years 6 and 7
GEB members (who are not SMFs) and all other employees:
vests in full after 5 years
√
√
√
√
√
GEB members, GMDs, Key Risk Takers (including Highly Paid Employees) and SMFs: number of
UBS shares delivered at vesting depends on the achievement of both Group and respective business
division performance conditions1
Depends on whether a trigger event or viability event has
occurred and, for GEB members, also on profi tability
Profi tability as funding driver
√
√
Instrument
UBS notional shares 2 (eligible for dividend equivalents)
Notional instruments and interest
1 Includes Asset Management employees who are GMDs or Key Risk Takers (including Highly Paid Employees). 2 Notional funds for Asset Management employees.
284
Corporate governance, responsibility and compensationCompensationAdvisory vote
Equity Ownership Plan
The Equity Ownership Plan (EOP) is a mandatory deferral plan for
all employees with total compensation greater than CHF / USD
300,000. These employees receive at least 60% of their deferred
performance award under the EOP in notional shares, which are
eligible for reinvested dividend equivalents. For 2016, around
4,800 employees received EOP awards. EOP awards are granted
annually.
The plan includes provisions that allow the firm to reduce or
fully forfeit the unvested deferred portion of the granted EOP
award if an employee commits certain harmful acts, and in most
cases trigger forfeiture where employment has been terminated.
EOP awards granted to Asset Management employees have a
different vesting schedule and deferral mix, as shown in the table
“Overview of our deferred variable compensation plans” on the
previous page, and are granted as cash-settled notional funds.
This aligns Asset Management employee compensation closer
with industry standards and thus helps us retain our best talent.
EOP awards granted to GEB members, Group Managing Direc-
tors (GMDs), Key Risk Takers (including Highly Paid Employees)
and SMFs will only vest if both Group and business division perfor-
mance requirements are met. Group performance is measured on
the basis of average adjusted Group RoTE over the performance
period. Business division performance is measured on the basis of
the business division’s average adjusted RoAE. For Corporate Cen-
ter employees, it is measured on the basis of the aggregate RoAE
of all business divisions. By linking the vesting of EOP awards with
minimum return on equity performance over a multi-year time
horizon, we encourage our employees to develop and manage
the business in a way that delivers sustainable returns.
At Group level, the performance requirement for the award to
be able to vest in full is an adjusted RoTE of 8%. The intent is to
promote sustained performance by keeping variable compensa-
tion of earlier years at a prudently established level of risk.
The primary measure to determine vesting of EOP awards is
the average adjusted Group RoTE. If the average adjusted Group
RoTE is equal to or above the performance threshold of 8%, the
EOP award will vest in full, provided that the relevant business
division performance requirement has also been met. If the
average adjusted Group RoTE is 0% or negative, the installment
will be fully forfeited for the entire firm regardless of any business
division’s individual performance. If the average adjusted Group
RoTE is between 0% and 8%, the award will vest on a linear basis
at 0–100%, again provided that the relevant business division
performance requirement is met.
The secondary measure to determine vesting of EOP awards is
business division RoAE. If the business division RoAE performance
threshold (refer to the table on the next page) is met, the EOP
award will vest in accordance with the achievement of the primary
measure. However, if the RoAE falls below the minimum threshold
but is above 0%, the award will be partly forfeited. The extent of
the forfeiture depends on how far the actual RoAE falls below the
performance threshold for that business division and can be up
to 40% of the award that would otherwise vest based on the
average adjusted Group RoTE. If the actual RoAE for a business
division is 0% or negative, the installment will be fully forfeited for
that business division. The Compensation Committee determines
whether the performance requirements have been met.
Adjusted Group RoTE performance
2014
2015
2016
Performance before tax (adjusted)
Required threshold level
285
In%
16
12
8
4
0
16
12
8
4
25
20
15
10
0
5
0
16
12
8
4
0
Corporate governance, responsibility and compensationAdvisory vote Group performance
Business divisional performance
Illustrative example (assuming constant share price)
% vesting
based on
Group RoTE
100% vesting at a
Group RoTE of ≥ 8%
Adjustment
0% forfeiture if RoAE is
at or above threshold
based on
business
divisional
RoAE
Assume an EOP award of CHF 100,000 granted to an Investment Bank employee due
to vest in 2020, and an actual average adjusted Group RoTE and Investment Bank RoAE
(averaged over the performance years 2017 to 2019) of XX% and XX%, respectively.
To determine the percentage of shares that vest
Partial forfeiture of up to
40% determined on
a linear basis if RoAE is
between threshold and 0%
–50%
of 100k
Partial forfeiture determined on
a linear basis if Group RoTE is
between 0% and 8%
100% forfeiture at a
Group RoTE of ≤ 0%
100% forfeiture if
RoAE ≤ 0%
– the award is reduced by 50% due to Group
performance (as a XX% Group RoTE is 50% of the
Group RoTE threshold) and
– the award is reduced by a further 20% due to the
Investment Bank’s divisional performance (the X.X%
RoAE represents half of the XX% Investment Bank
(50k)
RoAE threshold).
100k
–20%
of 50k
(10k)
50k
40k
Instalment about
to vest
Adjustment
due to Group
performance
Vesting based
on Group
performance
Adjustment
due to divisional
performance
Amount vesting
Illustrative example for EOP performance requirements
The amount due to vest under the EOP will depend on the degree
to which the RoAE and RoTE performance requirements have
been satisfied. Assuming a constant share price, the award may
forfeit up to 100% based on the Group RoTE performance. The
remaining award is further subject to 100% forfeiture if the busi-
ness division RoAE is less than 0%, or up to 40% if the business
division RoAE is between 0% and the business division perfor-
mance threshold.
Example:
– EOP award grant: CHF 100,000 in equity
– Adjusted Group RoTE threshold: 8%. 3-year average Group
performance: 4%
– Business division RoAE threshold: 20%. 3-year average business
division performance: 10%
(50k)
100k
(10k)
50k
50% (–50k)
reduction due
to Group RoTE
20% (–10k)
reduction due to
divisional RoAE
40k
Grant award
in equity
Vesting based
on Group
performance
Final amount
vesting based on
business division
performance
delivered in equity
Performance requirements for EOP awards granted in February 2017
The Compensation Committee annually reviews the Group RoTE
and each business division’s RoAE performance requirement for
the upcoming performance award grants under the EOP. The per-
formance requirements are set in the light of past experience as
well as forward-looking three-year strategic plan considerations.
Final performance requirements also reflect changes in the attrib-
uted equity framework. Once set, they remain in place for all EOP
performance vesting installments for that particular award year.
(50k)
100k
Installment vesting after
Applicable performance period
3 years
4 years
50k
50% (–50k)
reduction due
to Group RoTE
5 years
2 years
2017, 2018 and 2019
2018, 2019 and 2020
2019, 2020 and 2021
40k
2017 and 2018
20% (–10k)
reduction due to
divisional RoAE
Grant award
in equity
3 years
Vesting based
on Group
performance
2017, 2018 and 2019
Final amount
vesting based on
divisional
performance
delivered in equity
≥8%
≥30%
≥12%
≥12%
≥20%
≥10%
≥15%
GEB / SMF
GMDs, Key Risk Takers (including Highly Paid Employees)
Group RoTE performance threshold
Adjusted Group RoTE performance threshold
Business division RoAE performance thresholds
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center1
1 For Corporate Center employees, operating businesses RoAE performance threshold.
286
100
80
60
40
20
0
100
80
60
40
20
0
100
80
60
40
20
0
Corporate governance, responsibility and compensationCompensationAdvisory vote Deferred Contingent Capital Plan
The Deferred Contingent Capital Plan (DCCP) is a mandatory
deferral plan for all employees with total compensation greater
than CHF / USD 300,000. These employees receive up to 40% of
their deferred performance award under the DCCP, with the
exception of Asset Management employees, who receive up to
25%, and GEB members, who receive up to 37.5%. DCCP awards
are granted annually. For 2016, around 4,800 employees received
DCCP awards.
Employees are awarded notional additional tier 1 (AT1) instru-
ments, which can be settled either in the form of a cash payment
or a perpetual, marketable AT1 instrument, at the discretion of
the firm. Prior to grant, employees can elect to have their DCCP
awards denominated in either Swiss francs or US dollars.
DCCP awards vest in full after five years and up to seven years
for SMFs, unless there is a trigger event. They are written down if
the Group’s common equity tier 1 (CET1) capital ratio falls below
10% for GEB members and below 7% for all other employees.
Awards are also forfeited if a viability event occurs, that is, if
FINMA notifies the firm in writing that the DCCP awards must be
written down to prevent an insolvency, bankruptcy or failure of
UBS, or if the firm receives a commitment of extraordinary sup-
port from the public sector that is necessary to prevent such an
event. As an additional performance condition, GEB members
forfeit 20% of their award for each loss-making year during the
vesting period. Like the EOP, the DCCP also has provisions that
allow the firm to apply malus on some, or all, of the unvested
deferred portion of a granted award if an employee commits cer-
tain harmful acts, or in most cases trigger forfeiture where
employment has been terminated.
Under the DCCP, employees may receive discretionary annual
interest payments. The notional interest rate for grants in 2017
was 2.55% for awards denominated in Swiss francs and 5.95%
for awards denominated in US dollars. These interest rates are
based on the current market rates for such AT1 instruments. Inter-
est will be paid out annually, subject to review and confirmation
by the firm.
The DCCP contributes to the Group’s total loss-absorbing cap-
ital. Therefore, DCCP awards not only support competitive pay,
but also provide a loss absorption buffer that protects the firm’s
capital position. The following table illustrates the impact of the
DCCP on our AT1 and tier 2 capital as well as on our total loss-
absorbing capacity ratio.
➔ Refer to the “Supplemental information” section of this report
for more information on performance award- and personnel-
related expenses
➔ Refer to the “Our compensation model for employees other
than GEB members” section of this report for more information
on longer vesting and claw-back periods for MRTs and SMFs
Impact of the Deferred Contingent Capital Plan on our loss-absorbing capacity1
CHF million, except where indicated
Deferred Contingent Capital Plan (DCCP)
of which: high-trigger loss-absorbing additional tier 1 capital
of which: high-trigger loss-absorbing tier 2 capital2
DCCP contribution to the total loss-absorbing capacity ratio (%)3
31.12.16
2,271
1,380
891
1.0
31.12.15
1,903
991
912
0.9
31.12.14
1,413
467
946
0.7
1 Refer to “Bondholder information” at www.ubs.com/investors for more information on the capital instruments of UBS Group AG and of UBS AG both on a consolidated and a standalone basis. 2 DCCP awards granted
for the performance years 2012 and 2013. Swiss SRB framework including transitional arrangements (phase-in) as of 31 December 2016. Based on the former Swiss SRB framework for 31 December 2015 and
31 December 2014. 3 Impact for periods prior to 31 December 2016 were calculated for the former Swiss SRB total capital ratio.
287
Corporate governance, responsibility and compensationAdvisory vote Supplemental information
Performance awards granted for the 2016 performance year
The “Total variable compensation” table below shows the amount
of variable compensation awarded to employees for the perfor-
mance year 2016, together with the number of beneficiaries for
each type of award granted. In the case of deferred awards, the
final amount paid to an employee depends on performance con-
ditions and consideration of relevant forfeiture provisions. The
deferred share award amount is based on the market value of
these awards on the date of grant.
The “Deferred compensation” table on the next page shows
the current economic value of unvested outstanding deferred
variable compensation awards subject to ex-post adjustments.
For share-based plans, the economic value is determined based
on the closing share price on 30 December 2016. For notional
funds, it is determined using the latest available market price for
the underlying funds at year-end 2016, and for deferred cash
plans, it is determined based on the outstanding amount of cash
owed to award recipients. All awards made under our deferred
variable compensation plans listed in the “Deferred compensa-
tion” table on the next page are subject to ex-post adjustments,
whether implicitly, through exposure to share price movements, or
explicitly, for example, through forfeitures instigated by the firm.
➔ Refer to “Note 27 Equity participation and other compensation
plans” in the “Consolidated financial statements” section of this
report for more information
Total variable compensation1
CHF million, except where indicated
Cash performance awards
Deferred Contingent Capital Plan
UBS share plans
Equity Ownership Plan – notional funds
Total performance award pool
CHF million, except where indicated
Total variable compensation – other3
CHF million, except where indicated
Total WMA financial advisor compensation5
Expenses
2016
1,817
133
214
26
2015
2,073
172
261
28
2,191
2,535
Expenses
2016
266
2015
184
Expenses
2016
2,695
2015
2,673
Expenses deferred to
future periods
2016
2015
Adjustments2
2016
2015
0
266
372
34
671
0
343
524
34
900
0
0
54
0
54
(1)
0
63
0
62
Total
Number of beneficiaries
2016
1,817
399
639
60
2015
2,072
514
848
63
2016
47,581
4,785
4,388
428
2015
46,272
5,432
5,036
438
2,916
3,497
47,603
46,311
Expenses deferred to
future periods
2016
162
2015
248
Expenses deferred to
future periods
2016
804
2015
1,716
Adjustments2
2016
(98)4
2015
(160)4
Total
2016
330
2015
271
Adjustments2
2016
2015
0
0
Total
Number of beneficiaries
2016
3,499
2015
4,389
2016
7,025
2015
7,038
1 Expenses under “Total variable compensation – other” and “Total WMA financial advisor compensation” are not part of UBS’s performance award pool. 2 Adjustments relating to post-vesting transfer restrictions
and other adjustments. 3 Replacement payments and retention plan payments, including the 2012 Special Plan Award Program. 4 Included in expenses deferred to future periods is an amount of CHF 98 million
(2015: CHF 160 million) relating to future interest on the DCCP. As the amount recognized as performance award represents the present value of the award at the date it is granted to the employee, this interest amount
is adjusted out in the analysis. 5 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated
based on financial advisor productivity, firm tenure 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.
288
Corporate governance, responsibility and compensationCompensationAdvisory vote Performance award expenses in the 2016 performance year
Amortization of deferred compensation
Performance award expenses include all immediate expenses
related to 2016 compensation awards and expenses deferred to
2016 related to awards made in prior years. The chart “Amortiza-
tion of deferred compensation” shows the amount at the end of
2016 of unrecognized awards to be amortized in subsequent
years. This was CHF 1.6 billion for 2016 and CHF 1.7 billion for
2015.
The table below shows the value of actual ex-post explicit and
implicit adjustments to outstanding deferred compensation in the
financial year 2016. Ex-post adjustments occur after an award has
been granted. Ex-post explicit adjustments occur when we adjust
compensation by forfeiting deferred awards. Ex-post implicit
adjustments are unrelated to any action taken by the firm and
occur as a result of share price movements that impact the value
of an award. The total value of ex-post explicit adjustments made
to UBS shares in 2016, based on the approximately 5 million
shares forfeited during 2016, is a reduction of CHF 77 million. The
total value of ex-post explicit adjustments made to UBS options
and share-settled stock appreciation rights (SARs) in 2016, based
on the approximately 0.1 million options / SARs forfeited during
2016, is a reduction of CHF 0.5 million. The size of implicit
adjustments is mainly due to an increase in the share price.
However, the share price as of year-end means that many of the
options previously granted remain out of the money. Hence, the
majority of outstanding option awards had no intrinsic value at
the end of 2016.
CHF billion
(10%)
(16%)
0.8
0.7
0.7
1.7
0.1
1.6
Amortized
Forfeited
31.12.15
Unrecognized
awards to be
amortized,
including awards
granted in
1Q16 for the
performance
year 2015
Expected
amortization
of prior-year
awards in 2017
Annual
awards
granted,
including
awards
granted in
1Q17 for the
performance
year 2016
31.12.16
Unrecognized
awards to be
amortized,
including awards
granted in
1Q17 for the
performance
year 2016
Deferred compensation1, 2
CHF million, except where indicated
Deferred Contingent Capital Plan
Equity Ownership Plan
Equity Ownership Plan – notional funds
Discontinued deferred compensation plans4
Total
Relating to awards
for 2016
399
639
60
0
1,098
Relating to awards for
prior years3
1,890
2,531
378
6
Total
2,289
3,171
438
6
4,805
5,903
of which: exposed to
ex-post adjustments
Total deferred compensation
year-end 2015
100%
100%
100%
100%
1,911
3,520
455
19
5,905
1 Based on specific plan vesting and reflecting the economic value of the outstanding awards, which may differ from the accounting expenses. 2 Refer to “Note 27 Equity participation and other compensation plans”
in the “Consolidated financial statements” section of this report for more information. 3 Takes into account the ex-post implicit adjustments, given the share price movements since grant. 4 Senior Executive Equity
Ownership Plan (SEEOP), Incentive Performance Plan (IPP).
Ex-post explicit and implicit adjustments to deferred compensation in 20161
CHF million
UBS notional bonds (DCCP)
UBS shares (EOP, SEEOP)2
UBS options (KESOP) and SARs (KESAP)2
UBS notional funds (EOP)3
Ex-post explicit adjustments4
31.12.16
31.12.15
Ex-post implicit adjustments
to unvested awards5
31.12.16
31.12.15
(48)
(77)
0
(3)
(53)
(146)
(1)
(6)
107
0
11
412
0
3
1 Compensation (performance awards and other variable compensation) relating to awards for previous performance years. 2 Senior Executive Equity Ownership Plan (SEEOP), Key Employee Appreciation Rights Plan
(KESAP) and Key Employee Stock Option Plan (KESOP) are discontinued deferred compensation plans. 3 Awards granted under this plan are cash-settled and 100% susceptible to ex-post implicit adjustments. 4 Ex-post
explicit adjustments are calculated as units forfeited during the year, valued at the share price on 30 December 2016 (CHF 15.95) and on 30 December 2015 (CHF 19.52) for UBS shares and valued with the fair value
at grant for UBS options. For the notional funds awarded to Asset Management employees under the EOP, this represents the forfeiture credits recognized in 2016 and 2015. For the DCCP, the fair value at grant of the
forfeited awards during the year is reflected. 5 Ex-post implicit adjustments for UBS shares are calculated based on the difference between the weighted average grant date fair value and the share price at year-end.
The amount for notional funds is calculated using the mark-to-market change during 2016 and 2015.
289
Amortization of deferred compensation
CHF billion
Amortization of deferred compensation
CHF billion
X%
(X%)
0.7
0.9
0.7
1.6
0.1
1.7
Amortized
Forfeited
31.12.14
Unrecognized
awards to be
amortized
including awards
granted in
1Q15 for the
performance
year 2014
Expected
amortization
of prior-year
awards in 2016
Annual
awards
granted
including
awards
granted in
1Q16 for the
performance
year 2015
31.12.15
Unrecognized
awards to be
amortized
including awards
granted in
1Q16 for the
performance
year 2015
2.0
1.5
1.0
0.5
0.0
Corporate governance, responsibility and compensationAdvisory vote
Total personnel expenses for 2016
As of 31 December 2016, there were 59,387 employees (on a
full-time equivalent basis). The “Personnel expenses” table below
shows our total personnel expenses for 2016. It includes salaries,
pension contributions and other personnel costs, social security
contributions and variable compensation. Variable compensation
includes discretionary cash performance awards paid in 2017 for
the 2016 performance year, the amortization of unvested deferred
awards granted in previous years and the cost of deferred awards
granted to employees who are eligible for retirement in the con-
text of the compensation framework at the date of grant.
The performance award pool reflects the value of discretionary
performance awards granted relating to the 2016 performance
year, including awards that are paid out immediately and those
that are deferred. To determine our variable compensation
expenses, the following adjustments are required in order to rec-
oncile the performance award pool to the accounting expenses
recognized in the Group’s financial statements prepared in accor-
dance with IFRS:
– reduction for the unrecognized future amortization (including
accounting adjustments) of unvested deferred awards granted
in 2017 for the performance year 2016
– addition for the 2016 amortization of unvested deferred
awards granted in prior years
As a large part of compensation consists of deferred awards,
the amortization of unvested deferred awards granted in prior
years forms a significant part of the IFRS accounting expenses in
both 2015 and 2016.
➔ Refer to “Note 27 Equity participation and other compensation
plans” in the “Consolidated financial statements” section of this
report for more information
Personnel expenses
CHF million
Salaries1
Cash performance awards
Deferred Contingent Capital Plan
Deferred cash plans
UBS share plans
UBS share option plans
Equity Ownership Plan – notional funds
Total variable compensation – performance awards2
of which: guarantees for new hire
Variable compensation – other2
of which: replacement payments3
of which: forfeiture credits
of which: severance payments4
of which: retention plan and other payments
Contractors
Social security
Pension and other post-employment benefit plans5
Wealth Management Americas: financial advisor compensation2, 6
Other personnel expenses
Total personnel expenses7
Relating to awards
for 2016
Relating to awards for
prior years
Total 2016
Expenses
6,230
1,817
133
0
214
0
26
2,191
6
266
24
0
217
26
420
723
670
2,695
541
13,737
0
(42)
295
6
485
0
39
781
23
151
62
(73)
0
163
0
24
0
6,230
1,775
428
6
699
0
65
2015
6,282
1,980
429
12
722
0
67
2014
6,269
1,714
349
12
680
0
65
2,972
3,210
2,820
30
418
86
(73)
217
188
420
747
670
38
346
76
(86)
157
198
365
820
808
48
466
81
(70)
162
292
234
791
711
1,002
24
1,983
3,697
565
15,720
3,552
600
15,981
3,385
605
15,280
1 Includes role-based allowances. 2 Refer to “Note 27 Equity participation and other compensation plans” in the “Consolidated financial statements” section of this report for more information. 3 Payments made to
compensate employees for deferred awards forfeited as a result of joining UBS. Includes the expenses recognized in the financial year (mainly the amortization of the award). 4 Includes legally obligated and standard
severance payments. 5 Includes credits related to changes to retiree benefit plans in the US of CHF 24 million, CHF 41 million for the years ended 31 December 2015 and 31 December 2014, respectively. Refer to
“Note 26 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information. 6 Consists of grid-based compensation based directly on
compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes expenses related to
compensation commitments with financial advisors entered into at the time of recruitment, which are subject to vesting requirements. 7 Includes net restructuring expenses of CHF 751 million, CHF 460 million and
CHF 327 million for the years ended 31 December 2016, 31 December 2015 and 31 December 2014, respectively. Refer to “Note 30 Changes in organization and disposals” in the “Consolidated financial statements”
section of this report for more information.
290
Corporate governance, responsibility and compensationCompensationAdvisory vote Vesting of outstanding awards granted in prior years subject to performance conditions
The tables below show the extent to which the performance conditions for awards granted in prior years have been met and the per-
centage of the awards that vest in 2017.
Senior Executive Equity Ownership Plan (SEEOP) 2011 / 2012
Performance requirement
Performance achieved
% of installment vesting
Adjusted operating profit before tax for the business division or, for
Corporate Center, adjusted Group operating profit before tax
As the Group and the business divisions reported an operating profit for 2016,
the profitability performance condition has been satisfied, hence the fifth
installment of the SEEOP 2011 / 2012 awards vests in full
100%
Equity Ownership Plan (EOP) 2012 / 2013, EOP 2013 / 2014 and EOP 2014 / 2015
Performance requirement
Performance achieved
Group return on tangible equity and the divisional return on attrib-
uted equity
The Group and divisional performance conditions have been satisfied. For the
EOP 2012 / 2013, the second installment for the GEB members vests in full. For
the EOP 2013 / 2014, the first installment for the GEB members and the second
installment for all other employees, covered under the plan, vest in full. For the
EOP 2014 / 2015, the first installment for all other employees covered under
the plan vests in full
% of installment vesting
100%
291
Corporate governance, responsibility and compensationAdvisory vote Discontinued deferred compensation plans
The table below lists discontinued compensation plans that had outstanding balances as of 31 December 2016 or that were retired in
2016. The firm has not granted any options since 2009. The strike price for stock options awarded under prior compensation plans has
not been reset.
➔ Refer to “Note 27 Equity participation and other compensation plans” in the “Consolidated financial statements” section of this report for
more information
Plan
Years
granted
Eligible employees
Instrument
Performance conditions
Vesting period and
other conditions
Status as of
March 2017
Senior Executive Equity Ownership
Plan (SEEOP)
2010–2012
GEB members and
GMDs
Shares
Depends on whether the
business division makes a
loss (the amount forfeited
depends on the extent of
the loss and generally
ranges from 10% to 50%
of the award portion due
to vest)
Expired
Vests in equal install-
ments over a five-year
period, subject to
continued employment
and harmful act
provisions
Key Employee Stock Appreciation
Rights Plan (KESAP) and Key
Employee Stock Option Plan
(KESOP)
2002–2009
Selected employees
(approximately
17,000 employees
between 2002 and
2009)
Share-settled
stock apprecia-
tion rights
(SARs) or stock
options
None
Senior Executive Stock Appreciation
Rights Plan (SESAP) and Senior
Executive Stock Option Plan
(SESOP)
2002–2009
GEB members and
members of the
Group Managing
Board
Share-settled
SARs or stock
options
None
Expired (some
options / SARs
remain exercisable)
Expired (some
options / SARs
remain exercisable)
Vests in full three years
after grant, subject to
continued employment,
non-solicitation of
clients and employees
and non- disclosure of
proprietary information
Vests in full three years
after grant, subject to
continued employment,
non-solicitation of
clients and employees
and non- disclosure of
proprietary information
292
Corporate governance, responsibility and compensationCompensationAdvisory vote List of tables
Share and option ownership / entitlements of GEB members
Total of all vested and unvested shares of GEB members
Number of shares of BoD members
Total of all blocked and unblocked shares of BoD members
Vested and unvested options of GEB members
Loans granted to GEB members
Loans granted to BoD members
Compensation paid to former BoD and GEB members
Page
294
294
295
295
296
297
297
297
293
Corporate governance, responsibility and compensationAdvisory vote Audited |
Share and option ownership / entitlements of GEB members1
Name, function
Sergio P. Ermotti, Group Chief Executive Officer
Martin Blessing, President Personal & Corporate Banking and
President UBS Switzerland
Christian Bluhm, Group Chief Risk Officer
Markus U. Diethelm, Group General Counsel
Lukas Gähwiler, former President Personal & Corporate
Banking and President UBS Switzerland
Kirt Gardner, Group Chief Financial Officer
Sabine Keller-Busse, Group Head Human Resources
Ulrich Körner, President Asset Management and
President UBS EMEA
Axel P. Lehmann, Group Chief Operating Officer
Tom Naratil, President Wealth Management Americas and
President UBS Americas
Andrea Orcel, President Investment Bank
Kathryn Shih, President UBS Asia Pacific
Jürg Zeltner, President Wealth Management
Total
on
31 December
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Number of
unvested
shares / at risk2
1,365,537
947,964
Number of
vested shares
Total number
of shares
265,515
155,736
1,631,052
1,103,700
0
–
0
–
538,520
447,694
–
558,657
142,646
–
0
–
0
–
154,820
61,797
–
1,515
38,581
–
0
–
0
–
693,340
509,491
–
560,172
181,227
–
Potentially
conferred
voting
rights in %
0.097
0.059
0.000
0.000
0.041
0.027
0.030
0.011
200,272
120,897
321,169
0.019
–
797,165
642,813
0
–
838,193
598,172
1,203,535
933,686
567,777
–
881,976
683,767
6,535,621
6,747,010
–
95,597
95,597
277,978
–
352,634
310,054
207,114
117,646
0
–
1,075
3,721
1,514,211
1,677,989
–
892,762
738,410
277,978
–
1,190,827
908,226
1,410,649
1,051,332
567,777
–
883,051
687,488
8,049,832
8,424,999
0.053
0.039
0.017
0.071
0.049
0.084
0.056
0.034
0.053
0.037
0.479
0.450
Number of
options3
0
Potentially
conferred
voting
rights in %4
0.000
0
0
–
0
–
0
0
–
0
0
–
0
–
0
0
0
–
412,917
555,115
0
0
143,869
–
64,164
86,279
620,950
1,401,686
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.025
0.030
0.000
0.000
0.009
0.004
0.005
0.037
0.075
1 Includes all vested and unvested shares and options of GEB members, including those held by related parties. 2 Includes shares granted under variable compensation plans with forfeiture provisions. The actual number
of shares vesting in the future will be calculated under the terms of the plans. Refer to the “Our deferred variable compensation plans for 2016” section of this report for more information on the plans. 3 Refer to
“Note 27 Equity participation and other compensation plans” in the “Consolidated financial statements” section of this report for more information. 4 No conversion rights outstanding.
Audited |
Total of all vested and unvested shares of GEB members1, 2
Shares on 31 December 2016
8,049,833
1,514,211
1,267,603
1,750,024
1,762,463
1,132,150
Total
of which: vested
of which: vesting
2017
2018
2019
2020
Shares on 31 December 2015
8,424,999
1,677,989
1,148,988
1,561,296
2,004,014
1,314,398
2016
2017
2018
2019
2021
623,381
2020
718,314
1 Includes shares held by related parties. 2 Includes shares granted under variable compensation plans with forfeiture provisions. The actual number of shares vesting in the future will be calculated under the terms of
the plans. Refer to the “Our deferred variable compensation plans for 2016” section of this report for more information.
294
Corporate governance, responsibility and compensationCompensationAdvisory vote Audited |
Number of shares of BoD members1
Name, function
Axel A. Weber, Chairman
Michel Demaré, Vice Chairman
David Sidwell, Senior Independent Director
Reto Francioni, member
Ann F. Godbehere, member
Axel P. Lehmann, former member2
William G. Parrett, member
Isabelle Romy, member
Robert W. Scully, member2
Beatrice Weder di Mauro, member
Dieter Wemmer, member2
Joseph Yam, member
Total
on 31 December
Number of shares held
Voting rights in %
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
635,751
488,889
254,287
215,992
205,540
163,317
51,567
28,787
201,457
169,054
–
252,761
104,385
104,271
91,038
66,490
0
–
99,737
71,261
0
–
109,938
87,354
1,753,700
1,648,176
0.038
0.026
0.015
0.012
0.012
0.009
0.003
0.002
0.012
0.009
–
0.014
0.006
0.006
0.005
0.004
0.000
–
0.006
0.004
0.000
–
0.007
0.005
0.104
0.088
1 Includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2016 and 2015. 2 Dieter Wemmer and Robert W. Scully were newly elected at the
AGM on 10 May 2016 and Axel P. Lehmann stepped down from the BoD as of 31 December 2015 and joined the GEB on 1 January 2016.
Audited |
Total of all blocked and unblocked shares of BoD members1
Total
of which:
unblocked
Shares on 31 December 2016
1,753,700
276,602
Shares on 31 December 2015
1 Includes shares held by related parties.
1,648,176
211,748
of which: blocked until
2017
337,751
2016
232,917
2018
385,005
2017
384,118
2019
367,597
2018
416,408
2020
386,745
2019
402,985
295
Corporate governance, responsibility and compensationAdvisory vote Audited |
Vested and unvested options of GEB members1
on 31 December
Total
number of
options2
Number of
options3
Year of
grant
Vesting
date
Expiry
date
Strike
price
Tom Naratil, President Wealth Management Americas and President UBS Americas
2016
2015
412,917
555,115
Kathryn Shih, President UBS Asia Pacific
2016
2015
143,869
–
Jürg Zeltner, President Wealth Management
2016
64,164
2015
86,279
131,277
181,640
100,000
142,198
131,277
181,640
100,000
69,270
74,599
7,105
7,105
7,103
223
42,628
7,106
7,103
7,103
110
242
230
221
7,105
7,105
7,103
223
42,628
2007
2008
2009
2006
2007
2008
2009
2007
2008
2007
2007
2007
2007
2008
2006
2006
2006
2006
2006
2006
2006
2007
2007
2007
2007
2008
01.03.2010
01.03.2011
01.03.2012
01.03.2009
01.03.2010
01.03.2011
01.03.2012
28.02.2017
28.02.2018
27.02.2019
28.02.2016
28.02.2017
28.02.2018
27.02.2019
01.03.2010
01.03.2011
28.02.2017
28.02.2018
01.03.2008
01.03.2009
01.03.2010
02.03.2009
01.03.2011
01.03.2007
01.03.2008
01.03.2009
03.03.2008
09.06.2008
08.09.2008
08.12.2008
01.03.2008
01.03.2009
01.03.2010
02.03.2009
01.03.2011
28.02.2017
28.02.2017
28.02.2017
02.03.2017
28.02.2018
28.02.2016
28.02.2016
28.02.2016
03.03.2016
09.06.2016
08.09.2016
08.12.2016
28.02.2017
28.02.2017
28.02.2017
02.03.2017
28.02.2018
CHF 73.67
CHF 35.66
CHF 11.35
CHF 72.57
CHF 73.67
CHF 35.66
CHF 11.35
CHF 73.67
CHF 35.66
CHF 67.00
CHF 67.00
CHF 67.00
CHF 67.08
CHF 35.66
CHF 65.97
CHF 65.97
CHF 65.97
CHF 65.91
CHF 61.84
CHF 65.76
CHF 67.63
CHF 67.00
CHF 67.00
CHF 67.00
CHF 67.08
CHF 35.66
1 Includes all options held by GEB members, including those held by related parties. 2 No conversion rights outstanding. 3 Refer to “Note 27 Equity participation and other compensation plans” in the “Consolidated
financial statements” section of this report for more information.
296
Corporate governance, responsibility and compensationCompensationAdvisory vote Audited |
Loans granted to GEB members1
In line with article 38 of the Articles of Association of UBS Group
AG, GEB members may be granted loans. Such loans are made in
the ordinary course of business on substantially the same terms as
those granted to other employees, including interest rates and
collateral, and neither involve more than the normal risk of col-
lectability nor contain any other unfavorable features for the firm.
The total amount of such loans must not exceed CHF 20 million
per GEB member.
CHF, except where indicated2
Name, function
Ulrich Körner, President Asset Management and President UBS EMEA (highest loan in 2016)
Ulrich Körner, President Asset Management and President UBS EMEA (highest loan in 2015)
Aggregate of all GEB members
on 31 December
2016
2015
2016
2015
Loans3
8,286,193
10,621,777
37,137,3474
29,032,017
1 No loans have been granted to related parties of the GEB members at conditions not customary in the market. 2 Local currencies are translated into Swiss francs at the exchange rates stated in “Note 34 Currency
translation rates” in the “Consolidated financial statements” section of this report. 3 All loans granted are secured loans. 4 Excludes an unused uncommitted credit facility of CHF 2,430,050 that had been granted
to one GEB member.
Audited |
Loans granted to BoD members1
In line with article 33 of the Articles of Association of UBS Group
AG, loans to independent BoD members are made in the ordinary
course of business at general market conditions. The Chairman as
a non-independent member may be granted loans in the ordinary
course of business on substantially the same terms as those
granted to employees, including interest rates and collateral, nei-
ther involving more than the normal risk of collectability nor con-
taining any other unfavorable features for the firm. The total
amount of such loans must not exceed CHF 20 million per BoD
member.
CHF, except where indicated2
Aggregate of all BoD members
on 31 December
2016
2015
Loans3, 4
3,653,3705
3,604,950
1 No loans have been granted to related parties of the BoD members at conditions not customary in the market. 2 Local currencies are translated into Swiss francs at the exchange rates stated in “Note 34 Currency
translation rates” in the “Consolidated financial statements” section of this report. 3 All loans granted are secured loans. 4 CHF 600,000 for Reto Francioni and CHF 3,053,370 for William G. Parrett in 2016 and CHF
600,000 for Reto Francioni and CHF 3,004,950 for William G. Parrett in 2015. 5 Excludes an unused uncommitted credit facility of CHF 254,448 that had been granted to one BoD member.
Audited |
Compensation paid to former BoD and GEB members1
CHF, except where indicated2
Former BoD members
Aggregate of all former GEB members3
Aggregate of all former BoD and GEB members
For the year
Compensation
Benefits
2016
2015
2016
2015
2016
2015
0
0
0
435,448
0
435,448
0
0
44,381
39,999
44,381
39,999
Total
0
0
44,381
475,447
44,381
475,447
1 Compensation or remuneration that is related to the former members’ activity on the BoD or GEB or that is not at market conditions. 2 Local currencies are translated into Swiss francs at the exchange rates stated
in “Note 34 Currency translation rates” in the “Consolidated financial statements” section of this report. 3 Includes a payment in 2016 to one former GEB member and payments in 2015 to two former GEB members.
297
Corporate governance, responsibility and compensationAdvisory vote Provisions of the Articles of Association related to compensation
Under the say-on-pay provisions in Switzer-
land, shareholders of Swiss-listed compa-
nies have significant influence over board
and management compensation. At UBS,
this is achieved by means of an annual
binding say-on-pay vote in accordance
with the following Articles of Association
provisions related to compensation:
Say-on-pay: The AGM shall approve the
proposals of the BoD in relation to the
maximum aggregate amount of compen-
sation of the BoD for the period until
the next AGM, the maximum aggregate
amount of fixed compensation of the
GEB for the following financial year
and the aggregate amount of variable
compensation of the GEB for the
preceding financial year. The BoD may
submit for approval deviating or addi-
tional proposals. In the event the AGM
does not approve a proposal, the BoD
shall determine, taking into account all
relevant factors, an aggregate amount or
partial amounts for subsequent approval
by shareholders.
Principles of compensation: Compensation
of the BoD comprises a base remuneration
and may comprise other compensation
elements and benefits. Compensation of
the GEB consists of fixed and variable
compensation elements. Variable compen-
sation elements depend on quantitative
and qualitative performance measures
as determined by the BoD. Remuneration
of the BoD and compensation of the
GEB may be paid or granted in the form
of cash, shares, financial instruments
or units, in kind or in the form of benefits.
The BoD determines the key features such
as grant, vesting, exercise and forfeiture
conditions and applicable harmful acts
provisions.
Additional amount for GEB members
hired after the vote on the aggregate
amount of compensation by the AGM:
For the compensation of GEB members
who will be appointed after the approval
for compensation by the AGM, and to
the extent that the aggregate amount of
compensation as approved does not
suffice, an amount of up to 40% of the
average of total annual compensation
paid or granted to the GEB during the
previous three years is available without
further approval by the AGM.
➔ Refer to www.ubs.com/governance for
more information
298
Corporate governance, responsibility and compensationCompensationAdvisory vote 299
Corporate governance, responsibility and compensationAdvisory vote Advisory vote
300
Corporate governance, responsibility and compensationCompensation Consolidated
financial
statements
Table of contents
304 Management’s report on internal control over financial
reporting
305 Report of the independent registered public accounting
firm on internal control over financial reporting
307 Statutory auditor’s report on the audit of the consolidated
financial statements
313 Report of the independent registered public accounting
firm on the consolidated financial statements
358
359
366
366
367
369
358 Balance sheet notes: assets
358
10 Due from banks and loans (held at amortized cost)
11 Allowances and provisions for credit losses
12 Derivative instruments and hedge accounting
13
Financial assets available for sale and held to maturity
Property, equipment and software
14
15 Goodwill and intangible assets
16 Other assets
314 UBS Group AG consolidated financial statements
Income statement
314 Primary financial statements
314
315 Statement of comprehensive income
317 Balance sheet
318 Statement of changes in equity
322 UBS Group AG shares issued and treasury shares held
323 Statement of cash flows
325 Notes to the UBS Group AG consolidated
financial statements
1
Summary of significant accounting policies
Segment reporting
Income statement notes
3
Net interest and trading income
Net fee and commission income
Other income
Personnel expenses
General and administrative expenses
Income taxes
Earnings per share (EPS) and shares outstanding
325
345
350
350
351
351
352
352
353
357
2
4
5
6
7
8
9
370 Balance sheet notes: liabilities
370
Financial liabilities designated at fair value
17 Due to banks and customers
18
19 Debt issued held at amortized cost
Provisions and contingent liabilities
20
21 Other liabilities
386 Additional information
386
22
Fair value measurement
Restricted and transferred financial assets
23
24 Offsetting financial assets and financial liabilities
25 Measurement categories, credit risk and maturity
26
27
28
analysis of financial instruments
Pension and other post-employment benefit plans
Equity participation and other compensation plans
Interests in subsidiaries and other entities
Business combinations
29
30 Changes in organization and disposals
31 Operating leases and finance leases
32
Related parties
Invested assets and net new money
33
34 Currency translation rates
35
36 Main differences between IFRS and Swiss GAAP
Events after the reporting period
370
371
373
385
407
410
412
417
432
441
449
450
452
453
456
457
457
458
Financial statements Management’s report on internal control over
financial reporting
Management’s responsibility for internal control over
financial reporting
The Board of Directors and management of UBS Group AG (UBS)
are responsible for establishing and maintaining adequate internal
control over financial reporting. UBS’s internal control over finan-
cial reporting is designed to provide reasonable assurance regard-
ing the preparation and fair presentation of published financial
statements in accordance with IFRS as issued by the IASB.
UBS’s internal control over financial reporting includes those
policies and procedures that:
– pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions
of assets;
– provide reasonable assurance that transactions are recorded as
necessary to permit preparation and fair presentation of finan-
cial statements, and that receipts and expenditures of the com-
pany are being made only in accordance with authorizations of
UBS management; and
– provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over finan-
cial reporting may not prevent or detect misstatements. Also, pro-
jections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Management’s assessment of internal control over financial
reporting as of 31 December 2016
UBS management has assessed the effectiveness of UBS’s internal
control over financial reporting as of 31 December 2016 based on
the criteria set forth by the Committee of Sponsoring Organiza-
tions of the Treadway Commission (COSO) in Internal Control –
Integrated Framework (2013 Framework). Based on this assess-
ment, management believes that, as of 31 December 2016, UBS’s
internal control over financial reporting was effective.
The effectiveness of UBS’s internal control over financial report-
ing as of 31 December 2016 has been audited by Ernst & Young
Ltd, UBS’s independent registered public accounting firm, as
stated in their report appearing on pages 305 to 306, which
expresses an unqualified opinion on the effectiveness of UBS’s
internal control over financial reporting as of 31 December 2016.
Reports of the statutory auditor / independent registered
public accounting firm
The accompanying reports of the independent registered public
accounting firm on the financial statements (refer to page 313)
and internal control over financial reporting (refer to pages
305 – 306) of UBS Group AG are included in our filing on 10 March
2017 with the Securities and Exchange Commission on Form 20-F
pursuant to US reporting obligations.
The accompanying statutory auditor’s report on the audit of
the consolidated financial statements (refer to pages 307 – 312) of
UBS Group AG is included in our filings on 10 March 2017 with
all other relevant non-US exchanges.
304
Consolidated financial statements 305
Financial statements 306
Consolidated financial statements 307
Financial statements 308
309
Financial statements 310
311
Financial statements 312
313
Financial statements UBS Group AG consolidated
financial statements
Primary financial statements
Audited |
Income statement
CHF million, except per share data
Note
31.12.16
Interest income
Interest expense
Net interest income
Credit loss (expense) / recovery
Net interest income after credit loss expense
Net fee and commission income
Net trading income
Other income
Total operating income
Personnel expenses
General and administrative expenses
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Total operating expenses
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Net profit / (loss) attributable to preferred noteholders
Net profit / (loss) attributable to non-controlling interests
Net profit / (loss) attributable to shareholders
Earnings per share (CHF)
Basic
Diluted
3
3
3
11
4
3
5
6
7
14
15
8
9
9
13,787
(7,373)
6,413
(37)
6,376
16,397
4,948
599
28,320
15,720
7,434
985
91
24,230
4,090
805
3,286
82
3,204
0.86
0.84
For the year ended
% change from
31.12.15
13,177
(6,445)
6,732
(117)
6,615
17,140
5,742
1,107
30,605
15,981
8,107
920
107
25,116
5,489
(898)
6,386
183
6,203
1.68
1.64
31.12.14
31.12.15
13,194
(6,639)
6,555
(78)
6,477
17,076
3,842
632
28,027
15,280
9,387
817
83
25,567
2,461
(1,180)
3,640
142
32
3,466
0.93
0.91
5
14
(5)
(68)
(4)
(4)
(14)
(46)
(7)
(2)
(8)
7
(15)
(4)
(25)
(49)
(55)
(48)
(49)
(49)
314
Consolidated financial statements
Statement of comprehensive income
CHF million
Comprehensive income attributable to shareholders
Net profit / (loss)
Other comprehensive income that may be reclassified to the income statement
Foreign currency translation
Foreign currency translation movements, before tax
Foreign exchange amounts reclassified to the income statement from equity
Income tax relating to foreign currency translation movements
Subtotal foreign currency translation, net of tax
Financial assets available for sale
Net unrealized gains / (losses) on financial assets available for sale, before tax
Impairment charges reclassified to the income statement from equity
Realized gains reclassified to the income statement from equity
Realized losses reclassified to the income statement from equity
Income tax relating to net unrealized gains / (losses) on financial assets available for sale
Subtotal financial assets available for sale, net of tax
Cash flow hedges
Effective portion of changes in fair value of derivative instruments designated as cash flow hedges, before tax
Net realized (gains) / losses reclassified to the income statement from equity
Income tax relating to cash flow hedges
Subtotal cash flow hedges, net of tax
Total other comprehensive income that may be reclassified to the income statement, net of tax
Other comprehensive income that will not be reclassified to the income statement
Defined benefit plans
Gains / (losses) on defined benefit plans, before tax
Income tax relating to defined benefit plans
Subtotal defined benefit plans, net of tax
Own credit on financial liabilities designated at fair value
Gains / (losses) from own credit on financial liabilities designated at fair value, before tax
Income tax relating to own credit on financial liabilities designated at fair value
Subtotal own credit on financial liabilities designated at fair value, net of tax
Total other comprehensive income that will not be reclassified to the income statement, net of tax
Total other comprehensive income
Total comprehensive income attributable to shareholders
Table continues on the next page.
For the year ended
31.12.16
31.12.15
31.12.14
3,204
6,203
3,466
251
126
(84)
292
240
5
(372)
25
28
(73)
246
(1,082)
170
(666)
(447)
(876)
52
(824)
(120)
5
(115)
(939)
(140)
(90)
(2)
(231)
175
1
(292)
44
8
(63)
544
(1,182)
128
(509)
(804)
316
(18)
298
1,800
2
(7)
1,795
335
75
(243)
25
(51)
141
2,068
(1,185)
(195)
689
2,625
(1,410)
238
(1,172)
298
(1,172)
(1,386)
1,817
(506)
5,698
1,453
4,920
315
Financial statements Statement of comprehensive income (continued)
Table continued from previous page.
CHF million
Comprehensive income attributable to preferred noteholders
Net profit / (loss)
Other comprehensive income that will not be reclassified to the income statement
Foreign currency translation movements, before tax
Income tax relating to foreign currency translation movements
Subtotal foreign currency translation, net of tax
Total comprehensive income attributable to preferred noteholders
Comprehensive income attributable to non-controlling interests
Net profit / (loss)
Other comprehensive income that may be reclassified to the income statement
Other comprehensive income that may be reclassified to the income statement, before tax
Income tax relating to other comprehensive income that may be reclassified to the income statement
Total other comprehensive income that may be reclassified to the income statement, net of tax
Other comprehensive income that will not be reclassified to the income statement
Foreign currency translation movements, before tax
Income tax relating to foreign currency translation movements
Subtotal foreign currency translation, net of tax
Gains / (losses) on defined benefit plans, before tax
Income tax relating to defined benefit plans
Subtotal defined benefit plans, net of tax
Total other comprehensive income that will not be reclassified to the income statement, net of tax
Total other comprehensive income
Total comprehensive income attributable to non-controlling interests
Total comprehensive income
Net profit / (loss)
Other comprehensive income
of which: other comprehensive income that may be reclassified to the income statement
of which: other comprehensive income that will not be reclassified to the income statement
Total comprehensive income
For the year ended
31.12.16
31.12.15
31.12.14
142
80
0
80
221
32
5
(2)
3
80
0
80
(44)
8
(36)
44
47
79
3,640
1,580
2,628
(1,048)
5,220
82
0
0
0
271
0
271
0
0
0
271
271
352
3,286
(1,116)
(447)
(669)
2,170
183
(12)
2
(10)
(95)
0
(95)
6
(1)
5
(90)
(99)
83
6,386
(605)
(814)
208
5,781
316
Consolidated financial statements Balance sheet
CHF million
Assets
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Trading portfolio assets
of which: assets pledged as collateral which may be sold or repledged by counterparties
Positive replacement values
Cash collateral receivables on derivative instruments
Loans
Financial assets designated at fair value
Financial assets available for sale
Financial assets held to maturity
Investments in associates
Property, equipment and software
Goodwill and intangible assets
Deferred tax assets
Other assets
Total assets
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities
Negative replacement values
Cash collateral payables on derivative instruments
Due to customers
Financial liabilities designated at fair value
Debt issued
Provisions
Other liabilities
Total liabilities
Equity
Share capital
Share premium
Treasury shares
Retained earnings
Other comprehensive income recognized directly in equity, net of tax
Equity attributable to shareholders
Equity attributable to non-controlling interests
Total equity
Total liabilities and equity
Note
31.12.16
31.12.15
31.12.15
% change from
10, 11
24
24
22
23
12, 22, 24
24
10, 11
22, 24, 25
13, 22
13
28
14
15
8
16
17
24
24
22
12, 22, 24
24
17
18, 22, 24
19
20
8, 21
107,767
13,156
15,111
66,246
96,575
30,260
158,411
26,664
306,325
65,353
15,676
9,289
963
8,331
6,556
13,155
25,436
935,016
10,645
2,818
6,612
22,824
153,810
35,472
423,672
55,017
103,649
4,174
62,020
880,714
385
28,254
(2,249)
31,725
(4,494)
53,621
682
54,302
935,016
91,306
11,948
25,584
67,893
124,035
51,943
167,435
23,763
311,954
6,146
62,543
954
7,695
6,568
12,835
22,160
942,819
11,836
8,029
9,653
29,137
162,430
38,282
390,185
62,995
93,147
4,164
75,652
885,511
385
31,164
(1,693)
29,504
(4,047)
55,313
1,995
57,308
942,819
18
10
(41)
(2)
(22)
(42)
(5)
12
(2)
963
(75)
1
8
0
2
15
(1)
(10)
(65)
(32)
(22)
(5)
(7)
9
(13)
11
0
(18)
(1)
0
(9)
33
8
11
(3)
(66)
(5)
(1)
317
Financial statements Other comprehensive
income recognized
directly in equity,
net of tax1
(5,866)
of which:
foreign currency
translation
of which:
financial assets
available for sale
(7,425)
95
of which:
cash flow
hedges
1,463
Total equity
attributable to
shareholders
48,002
Preferred
Non-controlling
noteholders
interests
Total equity
1,893
41
49,936
Share
premium
33,906
Treasury
shares
(1,031)
Retained
earnings
20,608
Share
capital
384
0
(918)3
455
643
(265)
3
909
3
(938)2
45
2,295
3,466
(1,172)
(2,219)
1,449
22,134
6,502
6,203
298
868
29,504
2,625
2,625
366
(218)
(3,093)
(804)
(804)
(150)
(4,047)
1,795
1,795
593
(369)
(5,406)
(231)
(231)
(220)
(5,857)
141
141
(25)
16
228
(63)
(63)
7
172
689
689
(203)
135
2,084
(509)
(509)
63
1,638
0
(918)
190
64
3
909
(938)
45
3
0
0
0
0
9
1
0
4,920
3,466
2,625
(1,172)
(4,968)
3,299
50,608
(1,538)
200
479
33
858
(2,760)
5,698
6,203
(804)
298
0
1,724
55,313
(918)
190
64
909
0
3
3
45
1
1
5,220
3,640
2,628
(1,208)
160
54,368
(1,538)
0
0
0
9
1
0
200
479
33
858
5,781
6,386
(814)
304
(95)
0
57,308
(142)
(4)
(1,084)
1
221
142
80
(1,974)
0
0
1
79
32
3
(36)
80
6,942
(3,299)
3,760
0
83
183
(10)
5
(95)
(1,724)
1,995
(124)
(2,884)
Statement of changes in equity
CHF million
Balance as of 1 January 2014
Issuance of share capital
Acquisition of treasury shares
Delivery of treasury shares under share-based compensation plans
Other disposal of treasury shares
Premium on shares issued and warrants exercised
Share-based compensation expensed in the income statement
Tax (expense) / benefit
Dividends
Equity classified as obligation to purchase own shares
Preferred notes
New consolidations / (deconsolidations) and other increases / (decreases)
Total comprehensive income for the year
of which: net profit / (loss)
of which: other comprehensive income (OCI) that may be reclassified to the income statement, net of tax
of which: OCI that will not be reclassified to the income statement, net of tax – defined benefit plans
of which: OCI that will not be reclassified to the income statement, net of tax – foreign currency translation
Changes to legal structure / reorganization: effect of establishment of UBS Group AG
Changes to legal structure / reorganization: increase in UBS Group AG’s ownership interest in UBS AG
Balance as of 31 December 2014
Issuance of share capital
Acquisition of treasury shares
Delivery of treasury shares under share-based compensation plans
Other disposal of treasury shares
Premium on shares issued and warrants exercised
Share-based compensation expensed in the income statement
Tax (expense) / benefit
Dividends
Equity classified as obligation to purchase own shares
New consolidations / (deconsolidations) and other increases / (decreases)
Total comprehensive income for the year
of which: net profit / (loss)
(3,078)
2,006
37
32,590
(1,393)
(37)
24
372
0
(1,538)3
797
4783
(596)
1
33
858
9
(2,760)2
1
of which: other comprehensive income (OCI) that may be reclassified to the income statement, net of tax
of which: OCI that will not be reclassified to the income statement, net of tax – defined benefit plans
of which: OCI that will not be reclassified to the income statement, net of tax – foreign currency translation
Changes to legal structure / reorganization: increase in UBS Group AG’s ownership interest in UBS AG
Balance as of 31 December 2015
13
385
1,029
31,164
(37)
(1,693)
318
Consolidated financial statements Statement of changes in equity
CHF million
Balance as of 1 January 2014
Issuance of share capital
Acquisition of treasury shares
Delivery of treasury shares under share-based compensation plans
Other disposal of treasury shares
Premium on shares issued and warrants exercised
Share-based compensation expensed in the income statement
Tax (expense) / benefit
Dividends
Preferred notes
Equity classified as obligation to purchase own shares
New consolidations / (deconsolidations) and other increases / (decreases)
Total comprehensive income for the year
of which: net profit / (loss)
Balance as of 31 December 2014
Issuance of share capital
Acquisition of treasury shares
Delivery of treasury shares under share-based compensation plans
Other disposal of treasury shares
Premium on shares issued and warrants exercised
Share-based compensation expensed in the income statement
Tax (expense) / benefit
Dividends
Equity classified as obligation to purchase own shares
New consolidations / (deconsolidations) and other increases / (decreases)
Total comprehensive income for the year
of which: net profit / (loss)
of which: other comprehensive income (OCI) that may be reclassified to the income statement, net of tax
of which: OCI that will not be reclassified to the income statement, net of tax – defined benefit plans
of which: OCI that will not be reclassified to the income statement, net of tax – foreign currency translation
Changes to legal structure / reorganization: effect of establishment of UBS Group AG
Changes to legal structure / reorganization: increase in UBS Group AG’s ownership interest in UBS AG
Share
premium
33,906
Treasury
shares
(1,031)
Retained
earnings
20,608
Share
capital
384
0
(918)3
455
643
(265)
909
3
3
(938)2
45
(3,078)
2,006
37
32,590
(1,393)
(37)
24
372
0
(1,538)3
797
4783
(596)
1
33
858
9
1
(2,760)2
2,295
3,466
(1,172)
(2,219)
1,449
22,134
6,502
6,203
298
868
29,504
of which: other comprehensive income (OCI) that may be reclassified to the income statement, net of tax
of which: OCI that will not be reclassified to the income statement, net of tax – defined benefit plans
of which: OCI that will not be reclassified to the income statement, net of tax – foreign currency translation
Changes to legal structure / reorganization: increase in UBS Group AG’s ownership interest in UBS AG
Balance as of 31 December 2015
13
385
1,029
31,164
(37)
(1,693)
Other comprehensive
income recognized
directly in equity,
net of tax1
(5,866)
of which:
foreign currency
translation
of which:
financial assets
available for sale
(7,425)
95
of which:
cash flow
hedges
1,463
Total equity
attributable to
shareholders
48,002
Preferred
noteholders
Non-controlling
interests
1,893
41
Total equity
49,936
2,625
2,625
366
(218)
(3,093)
(804)
(804)
(150)
(4,047)
1,795
1,795
593
(369)
(5,406)
(231)
(231)
(220)
(5,857)
141
141
(25)
16
228
(63)
(63)
7
172
689
689
(203)
135
2,084
(509)
(509)
63
1,638
0
(918)
190
64
3
909
3
(938)
45
0
0
4,920
3,466
2,625
(1,172)
0
(4,968)
3,299
50,608
0
(1,538)
200
479
33
858
9
(2,760)
1
0
5,698
6,203
(804)
298
0
1,724
55,313
0
(918)
190
64
3
909
3
(142)
(4)
(1,084)
1
221
142
80
(1,974)
0
1
79
32
3
(36)
80
6,942
(3,299)
3,760
45
1
1
5,220
3,640
2,628
(1,208)
160
0
0
54,368
0
(1,538)
200
479
33
858
9
(124)
(2,884)
0
83
183
(10)
5
(95)
(1,724)
1,995
0
1
0
5,781
6,386
(814)
304
(95)
0
57,308
319
Financial statements Statement of changes in equity (continued)
CHF million
Balance as of 31 December 2015
Issuance of share capital
Acquisition of treasury shares
Delivery of treasury shares under share-based compensation plans
Other disposal of treasury shares
Premium on shares issued and warrants exercised
Share-based compensation expensed in the income statement
Tax (expense) / benefit
Dividends
Equity classified as obligation to purchase own shares
Preferred notes
New consolidations / (deconsolidations) and other increases / (decreases)
Total comprehensive income for the year
of which: net profit / (loss)
of which: other comprehensive income (OCI) that may be reclassified to the income statement, net of tax
of which: OCI that will not be reclassified to the income statement, net of tax – defined benefit plans
of which: OCI that will not be reclassified to the income statement, net of tax – own credit
of which: OCI that will not be reclassified to the income statement, net of tax – foreign currency translation
Share
premium
31,164
Treasury
shares
(1,693)
Retained
earnings
29,504
Share
capital
385
0
(1,401)3
796
493
(682)
(2)
5
861
28
(3,164)2
43
(44)
2,265
3,204
(824)
(115)
Balance as of 31 December 2016
385
28,254
(2,249)
31,725
(4,494)
(5,564)
98
972
53,621
1 Excludes defined benefit plans and own credit that are recorded directly in retained earnings. 2 Reflects the payment of an ordinary cash dividend of CHF 0.60 (2015: CHF 0.50, 2014: CHF 0.25) and the payment of
a special cash dividend of CHF 0.25 (2015: CHF 0.25) per dividend-bearing share out of the capital contribution reserve. 3 Includes treasury shares acquired and disposed of by the Investment Bank in its capacity as
a market-maker in UBS shares and related derivatives and to hedge certain issued structured debt instruments. These acquisitions and disposals are reported on the basis of net month-to-date movements
Other comprehensive
income recognized
directly in equity,
net of tax1
(4,047)
of which:
foreign currency
translation
of which:
financial assets
available for sale
(5,857)
172
of which:
cash flow
hedges
1,638
Total equity
attributable to
shareholders
Preferred
noteholders
Non-controlling
interests
1,995
55,313
0
(1,401)
115
46
5
861
28
(3,164)
0
0
(1)
1,817
3,204
(447)
(824)
(115)
0
Total equity
57,308
0
(1,401)
115
46
5
861
28
0
0
2,170
3,286
(447)
(824)
(115)
271
54,302
(83)
(3,246)
(1,583)
(1,583)
0
352
82
271
682
(447)
(447)
292
292
(73)
(73)
(666)
(666)
320
Consolidated financial statements Statement of changes in equity (continued)
CHF million
Balance as of 31 December 2015
Issuance of share capital
Acquisition of treasury shares
Delivery of treasury shares under share-based compensation plans
Other disposal of treasury shares
Premium on shares issued and warrants exercised
Share-based compensation expensed in the income statement
Tax (expense) / benefit
Dividends
Preferred notes
Equity classified as obligation to purchase own shares
New consolidations / (deconsolidations) and other increases / (decreases)
Total comprehensive income for the year
of which: net profit / (loss)
of which: other comprehensive income (OCI) that may be reclassified to the income statement, net of tax
of which: OCI that will not be reclassified to the income statement, net of tax – defined benefit plans
of which: OCI that will not be reclassified to the income statement, net of tax – own credit
of which: OCI that will not be reclassified to the income statement, net of tax – foreign currency translation
Share
premium
31,164
Treasury
shares
(1,693)
Retained
earnings
29,504
Share
capital
385
0
(1,401)3
796
493
(682)
(2)
5
861
28
(3,164)2
43
(44)
2,265
3,204
(824)
(115)
Other comprehensive
income recognized
directly in equity,
net of tax1
(4,047)
of which:
foreign currency
translation
of which:
financial assets
available for sale
(5,857)
172
of which:
cash flow
hedges
1,638
(447)
(447)
292
292
(73)
(73)
(666)
(666)
Total equity
attributable to
shareholders
55,313
0
(1,401)
115
46
5
861
28
(3,164)
0
0
(1)
1,817
3,204
(447)
(824)
(115)
0
Balance as of 31 December 2016
385
28,254
(2,249)
31,725
(4,494)
(5,564)
98
972
53,621
1 Excludes defined benefit plans and own credit that are recorded directly in retained earnings. 2 Reflects the payment of an ordinary cash dividend of CHF 0.60 (2015: CHF 0.50, 2014: CHF 0.25) and the payment of
a special cash dividend of CHF 0.25 (2015: CHF 0.25) per dividend-bearing share out of the capital contribution reserve. 3 Includes treasury shares acquired and disposed of by the Investment Bank in its capacity as
a market-maker in UBS shares and related derivatives and to hedge certain issued structured debt instruments. These acquisitions and disposals are reported on the basis of net month-to-date movements
Preferred
noteholders
Non-controlling
interests
1,995
(83)
(1,583)
0
352
82
271
682
Total equity
57,308
0
(1,401)
115
46
5
861
28
(3,246)
0
(1,583)
0
2,170
3,286
(447)
(824)
(115)
271
54,302
321
Financial statements For the year ended
31.12.16
31.12.15
3,849,731,535
1,034,854
3,850,766,389
3,717,128,324
132,603,211
3,849,731,535
98,706,275
90,448,847
(50,713,350)
138,441,772
87,871,737
89,594,586
(78,760,048)
98,706,275
UBS Group AG shares issued and treasury shares held
Number of shares
Shares issued
Balance at the beginning of the year
Issuance of shares
Balance at the end of the year
Treasury shares
Balance at the beginning of the year
Acquisitions
Disposals
Balance at the end of the year
Conditional share capital
As of 31 December 2016, 129,994,836 additional UBS Group AG
shares could have been issued to fund UBS’s employee share
option programs.
Additional conditional capital up to a maximum number of
380,000,000 UBS Group AG shares was available as of 31 Decem-
ber 2016 for conversion rights and warrants granted in connec-
tion with the issuance of bonds or similar financial instruments.
322
Consolidated financial statements Statement of cash flows
CHF million
Cash flow from / (used in) operating activities
Net profit / (loss)
Non-cash items included in net profit and other adjustments:
Depreciation and impairment of property, equipment and software
Amortization and impairment of intangible assets
Credit loss expense / (recovery)
Share of net profits of associates
Deferred tax expense / (benefit)
Net loss / (gain) from investing activities
Net loss / (gain) from financing activities
Other net adjustments
Net change in operating assets and liabilities:
Due from / to banks
Cash collateral on securities borrowed and reverse repurchase agreements
Cash collateral on securities lent and repurchase agreements
Trading portfolio and replacement values
Financial assets designated at fair value
Cash collateral on derivative instruments
Loans
Due to customers
Other assets, provisions and other liabilities
Income taxes paid, net of refunds
Net cash flow from / (used in) operating activities
Cash flow from / (used in) investing activities
Purchase of subsidiaries, associates and intangible assets
Disposal of subsidiaries, associates and intangible assets1
Purchase of property, equipment and software
Disposal of property, equipment and software
Purchase of financial assets available for sale
Disposal and redemption of financial assets available for sale
Net (purchase) / redemption of financial assets held to maturity
Net cash flow from / (used in) investing activities
Table continues on the next page.
For the year ended
31.12.16
31.12.15
31.12.14
3,286
6,386
3,640
985
91
37
(106)
(7)
(1,176)
9,647
(267)
(1,180)
7,933
(6,637)
6,054
(60,650)
(4,169)
3,658
33,572
(6,874)
(656)
(16,457)
(26)
93
(1,777)
209
(7,271)
54,097
(8,996)
36,328
920
107
117
(169)
(1,613)
(934)
(1,451)
3,686
1,763
(2,712)
(2,909)
6,830
(1,325)
3,285
1,386
(18,404)
8,696
(551)
3,109
(13)
477
(1,841)
542
(101,189)
93,584
817
83
78
(94)
(1,635)
(227)
2,135
(7,250)
(1,235)
32,262
(3,698)
(5,576)
2,696
(7,301)
(20,427)
8,804
4,734
(600)
7,205
(18)
70
(1,915)
350
(136,330)
140,438
(8,441)
2,596
323
Financial statements Statement of cash flows (continued)
Table continued from previous page.
CHF million
Cash flow from / (used in) financing activities
Net short-term debt issued / (repaid)
Net movements in treasury shares and own equity derivative activity
Distributions paid on UBS shares
Issuance of long-term debt, including financial liabilities designated at fair value
Repayment of long-term debt, including financial liabilities designated at fair value
Net changes in non-controlling interests and preferred notes
Net cash flow from / (used in) financing activities
Total cash flow
Cash and cash equivalents at the beginning of the year
Net cash flow from / (used in) operating, investing and financing activities
Effects of exchange rate differences on cash and cash equivalents
Cash and cash equivalents at the end of the year2
of which: cash and balances with central banks
of which: due from banks
of which: money market paper3
Additional information
Net cash flow from / (used in) operating activities includes:
Interest received in cash
Interest paid in cash
Dividends on equity investments, investment funds and associates received in cash4
For the year ended
31.12.16
31.12.15
31.12.14
5,440
(1,248)
(3,164)
33,256
(33,885)
(1,371)
(972)
103,044
18,900
(806)
121,138
107,715
11,959
1,465
(6,404)
(845)
(2,760)
47,790
(44,221)
(156)
(6,595)
116,715
(11,928)
(1,742)
103,044
91,306
10,814
924
(2,921)
(694)
(938)
40,982
(34,210)
(113)
2,108
96,284
11,909
8,522
116,715
104,073
11,772
869
12,228
6,129
1,595
11,144
5,270
2,120
11,321
5,360
1,961
1 Includes dividends received from associates. 2 CHF 2,662 million, CHF 3,963 million and CHF 4,178 million of cash and cash equivalents (mainly reflected in Due from banks) were restricted as of 31 December 2016,
31 December 2015 and 31 December 2014, respectively. Refer to Note 23 for more information. 3 Money market paper is included in the balance sheet under Trading portfolio assets (31 December 2016: CHF 75
million, 31 December 2015: CHF 795 million, 31 December 2014: CHF 835 million), Financial assets available for sale (31 December 2016: CHF 430 million, 31 December 2015: CHF 129 million, 31 December 2014:
CHF 34 million) and Financial assets designated at fair value (31 December 2016: CHF 959 million, 31 December 2015: CHF 0 million, 31 December 2014: CHF 0 million). 4 Includes dividends received from associates
(2016: CHF 50 million, 2015: CHF 114 million, 2014: CHF 54 million) reported within cash flow from / (used in) investing activities.
324
Consolidated financial statements Notes to the UBS Group AG consolidated financial statements
Note 1 Summary of significant accounting policies
a) Significant accounting policies
UBS Group AG was established in 2014 as the holding company
of the Group and in 2015 it increased its ownership interest in
UBS AG to 100%, following the successful completion of the pro-
cedure under article 33 of the Swiss Stock Exchange Act (SESTA
procedure). Refer to Note 30 for more information. The consoli-
dated financial statements of UBS Group AG were prepared as a
continuation of the consolidated financial statements of UBS AG,
applying the same accounting policies under International Finan-
cial Reporting Standards (IFRS).
This Note describes the significant accounting policies applied
in the preparation of the consolidated financial statements (the
“Financial Statements”) of UBS Group AG and its subsidiaries
(“UBS” or the “Group”). On 9 March 2017, the Financial State-
ments were authorized for issue by the Board of Directors.
Basis of accounting
The Financial Statements have been prepared in accordance with
International Financial Reporting Standards (IFRS), as issued by the
International Accounting Standards Board (IASB), and are pre-
sented in Swiss francs (CHF), the currency of Switzerland, where
UBS Group AG is incorporated.
Disclosures provided in the “Risk, treasury and capital manage-
ment” section of this report that are marked as audited form an
integral part of the Financial Statements. These disclosures relate
to requirements under IFRS 7, Financial Instruments: Disclosures
and IAS 1, Presentation of Financial Statements and are not
repeated in this section.
The accounting policies described in this Note have been
applied consistently in all years presented unless otherwise stated
in Note 1b.
Critical accounting estimates and judgments
Preparation of these Financial Statements under IFRS requires
management to apply judgment and make estimates and assump-
tions that affect reported amounts of assets, liabilities, income
and expenses and disclosure of contingent assets and liabilities,
and may involve significant uncertainty at the time they are made.
Such estimates and assumptions are based on the best available
information. UBS regularly reassesses the estimates and assump-
tions, which encompass historical experience, expectations of the
future and other pertinent factors, to determine their continuing
relevance based on current conditions and it updates them as
necessary. Changes in those estimates and assumptions may have
a significant impact on the Financial Statements. Further, actual
results may differ significantly from UBS’s estimates, which could
result in significant loss to the Group, beyond what it anticipated
or provided for.
The following areas contain estimation uncertainty or require
critical judgment and have a significant effect on the amounts
recognized in the Financial Statements:
– consolidation of structured entities (refer to item 1 in this Note
and to Note 28)
– fair value of financial instruments (refer to item 3f in this Note
and to Note 22)
– allowances and provisions for credit losses for financial assets
held at amortized cost (refer to item 3g in this Note and to
Note 11)
– pension and other post-employment benefit plans (refer to
item 7 in this Note and to Note 26)
– income taxes (refer to item 8 in this Note and to Note 8)
– goodwill (refer to item 11 in this Note and to Note 15)
– provisions and contingent liabilities (refer to item 12 in this
Note and to Note 20).
1) Consolidation
a. Consolidation principles
The Financial Statements comprise the financial statements of the
parent company (UBS Group AG) and its subsidiaries, including
controlled structured entities (SEs), presented as a single eco-
nomic entity, whereby intercompany transactions and balances
have been eliminated. UBS consolidates all entities that it controls,
which is the case when it has (i) power over the relevant activities
of the entity, (ii) exposure to an entity‘s variable returns and
(iii) the ability to use its power to affect an entity‘s returns.
Where an entity is governed by voting rights, control is gener-
ally indicated by a direct shareholding of more than one-half of
the voting rights.
325
Financial statements Note 1 Summary of significant accounting policies (continued)
In other cases, the assessment of control is more complex and
requires greater use of judgment. Where UBS has an interest in an
entity that absorbs variability, UBS considers whether it has power
over the relevant activities of the entity that allows it to affect the
variability of its returns. Consideration is given to all facts and cir-
cumstances to determine whether the Group has power over
another entity, that is, the current ability to direct the relevant activ-
ities of an entity when decisions about those activities need to be
made. Factors such as the purpose and design of the entity, rights
held through contractual arrangements such as call rights, put
rights or liquidation rights, as well as potential decision-making
rights are all considered in this assessment. Where the Group has
power over the relevant activities, a further assessment is made to
determine whether, through that power, it has the ability to affect
its own returns by assessing whether power is held in a principal or
agent capacity. Consideration is given to (i) the scope of decision-
making authority, (ii) rights held by other parties, including removal
or other participating rights, and (iii) exposure to variability, includ-
ing remuneration, relative to total variability of the entity as well as
whether that exposure is different from that of other investors. If,
after review of these factors, UBS concludes that it can exercise its
power to affect its own returns, the entity is consolidated.
Subsidiaries, including SEs, are consolidated from the date
when control is obtained and are deconsolidated from the date
when control ceases. Control, or the lack thereof, is reassessed if
facts and circumstances indicate that there is a change to one or
more of the elements needed to establish that control is present.
➔ Refer to Note 28 for more information
b. Structured entities
UBS sponsors the formation of SEs and interacts with non-spon-
sored SEs for a variety of reasons, including allowing clients to
obtain or be exposed to particular risk profiles, to provide funding
or to sell or purchase credit risk. An SE is an entity that has been
designed so that voting or similar rights are not the dominant fac-
tor in deciding who controls the entity. Such entities generally have
a narrow and well-defined objective and include those historically
referred to as special purpose entities and some investment funds.
UBS assesses whether an entity is an SE by considering the nature
of the activities of the entity as well as the substance of voting or
similar rights afforded to other parties, including investors and
independent boards or directors. UBS considers rights such as the
ability to liquidate the entity or remove the decision maker to be
similar to voting rights when the holder has the substantive ability
to exercise such rights without cause. In the absence of such rights
or in cases where the existence of such rights cannot be fully estab-
lished, the entity is considered to be an SE.
The classes of SEs UBS is involved with include:
– Securitization structured entities are established to issue securi-
ties to investors that are backed by assets held by the SE and
whereby (i) significant credit risk associated with the securi-
tized exposures has been transferred to third parties and
(ii) there is more than one risk position or tranche issued by the
securitization vehicle in line with the Basel III securitization
definition. All securitization entities are classified as SEs.
– Client investment structured entities are established predomi-
nantly for clients to invest in specific assets or risk exposures
through purchasing notes issued by the SE, predominantly on a
fixed-term basis. The SE may source assets via a transfer from
UBS or through an external market transaction. In some cases,
UBS may enter into derivatives with the SE to either align the
cash flows of the entity with the investor’s intended investment
objective or to introduce other desired risk exposures. In certain
cases, UBS may have interests in a third-party-sponsored SE to
hedge specific risks or participate in asset-backed financing.
– Investment fund structured entities have a collective invest-
ment objective, are managed by an investment manager and
are either passively managed, so that any decision making
does not have a substantive effect on variability, or are actively
managed and investors or their governing bodies do not have
substantive voting or similar rights. UBS creates and sponsors a
large number of funds in which it may have an interest through
the receipt of variable management fees and / or a direct invest-
ment. In addition, UBS has interests in a number of funds cre-
ated and sponsored by third parties, including exchange-traded
funds and hedge funds, to hedge issued structured products.
When UBS does not consolidate an SE, but has an interest in
an SE or has sponsored an SE, disclosures are provided on the
nature of these interests and sponsorship activities.
Critical accounting estimates and judgments
Each individual entity is assessed for consolidation in line with the
aforementioned consolidation principles. The assessment of control
can be complex and requires the use of significant judgment. As the
nature and extent of UBS’s involvement is unique to each entity,
there is no uniform consolidation outcome by entity. Certain entities
within a class may be consolidated while others may not.
➔ Refer to Note 28 for more information
326
Consolidated financial statements Note 1 Summary of significant accounting policies (continued)
2) Segment reporting
UBS‘s businesses are organized globally into five business divi-
sions: Wealth Management, Wealth Management Americas, Per-
sonal & Corporate Banking, Asset Management and the Invest-
ment Bank, all of which are supported by Corporate Center. The
five business divisions qualify as reportable segments for the pur-
pose of segment reporting and, together with Corporate Center,
reflect the management structure of the Group. Corporate Cen-
ter – Non-core and Legacy Portfolio is managed and reported as a
separate reportable segment within Corporate Center. Financial
information about the five business divisions and Corporate Cen-
ter (with its units: Services, Group Asset and Liability Management
(Group ALM), Non-core and Legacy Portfolio) is presented sepa-
rately in internal management reports to the Group Executive
Board, which is considered the “chief operating decision maker”
pursuant to IFRS 8, Operating Segments.
UBS’s internal accounting policies, which include management
accounting policies and service level agreements, determine the
revenues and expenses directly attributable to each reportable
segment. Transactions between the reportable segments are car-
ried out at internally agreed rates and are reflected in the operat-
ing results of the reportable segments. Revenue-sharing agree-
ments are used to allocate external client revenues to reportable
segments where several reportable segments are involved in the
value creation chain. Commissions are credited to the reportable
segments based on the corresponding client relationship. Total
intersegment revenues for the Group are immaterial, as the
majority of the revenues are allocated across the segments by
means of revenue-sharing agreements. Net interest income is
generally allocated to the reportable segments based on their bal-
ance sheet positions. Interest income earned from managing
UBS’s consolidated equity is allocated to the reportable segments
based on average attributed equity. Assets and liabilities of the
reportable segments are funded through and invested with Cor-
porate Center – Group ALM, and the net interest margin is
reflected in the results of each reportable segment.
Segment assets are based on a third-party view and do not
include intercompany balances. This view is in line with internal
reporting to the Group Executive Board. Certain assets managed
centrally by Corporate Center – Services and Corporate Center –
Group ALM may be allocated to the segments on a basis different
to that which the corresponding costs or revenues are allocated
to. For example, certain assets that are reported in Corporate
Center – Services or Corporate Center – Group ALM may be
retained on the balance sheets of these components of Corporate
Center notwithstanding that the costs or revenues associated
with these assets may be entirely or partly allocated to the seg-
ments. Similarly, certain assets are reported in the business divi-
sions, whereas the corresponding costs or revenues are entirely or
partly allocated to Corporate Center – Services and Corporate
Center – Group ALM.
➔ Refer to Note 2 for more information
3) Financial instruments
a. Recognition
UBS recognizes financial instruments when it becomes a party to
the contractual provisions of the instrument. UBS applies trade
date accounting to derivatives and settlement date accounting to
all non-derivative financial instruments.
UBS also acts in a fiduciary capacity, which results in the hold-
ing or placing of assets on behalf of individuals, trusts, retirement
benefit plans and other institutions. Unless the recognition criteria
are satisfied, these assets and the related income are excluded
from UBS’s Financial Statements, as they are not assets of UBS.
Client cash balances associated with derivatives clearing and
execution services are not recognized on the balance sheet if,
through contractual agreement, regulation or practice, the Group
neither obtains benefits from nor controls the client cash balances.
b. Classification, measurement and presentation
Upon initial recognition, UBS records financial instruments at fair
value plus directly attributable transaction costs in the case of
financial instruments not subsequently accounted for at fair value
through profit or loss. After initial recognition, UBS classifies,
measures and presents its financial assets and liabilities in accor-
dance with IAS 39, Financial Instruments: Recognition and Mea-
surement as described in the following table.
➔ Refer to Note 25a for an overview of financial assets and
liabilities by IAS 39 category
➔ Refer to the balance sheet for references to Notes that provide
information on the composition of individual financial asset and
liability categories
327
Financial statements Note 1 Summary of significant accounting policies (continued)
Financial assets
classification
Held for trading
Significant items included
Measurement and presentation
All derivatives with a positive replacement value, except those that are
designated and effective hedging instruments.
Measured at fair value with changes recognized in profit or loss.
Designated at fair
value through profit
or loss
Loans and receiv-
ables (amortized
cost)
Any other financial asset acquired principally for the purpose of selling or
repurchasing in the near term, or part of a portfolio of identified financial
instruments that are managed together and for which there is evidence of
a recent actual pattern of short-term profit taking. Included in this category
are debt instruments (including those in the form of securities, money mar-
ket paper and traded corporate and bank loans), equity instruments, and
assets held under unit-linked investment contracts.
A financial asset may be designated at fair value through profit or loss
only upon initial recognition and this designation is irrevocable.
The fair value option can be applied only if one of the following criteria
are met:
– the financial instrument is a hybrid instrument that includes a
substantive embedded derivative;
– the financial instrument is part of a portfolio that is risk managed on
a fair value basis and reported to senior management on that basis; or
– the application of the fair value option eliminates or significantly
reduces an accounting mismatch that would otherwise arise.
UBS designated at fair value through profit or loss the following
instruments:
– Certain structured loans, reverse repurchase and securities borrowing
agreements that are managed on a fair value basis.
– Loans that are hedged predominantly with credit derivatives. These
instruments are designated at fair value to eliminate an accounting
mismatch.
– As of 1 January 2016, certain newly purchased debt securities held as
high-quality liquid assets (HQLA) and managed by Corporate Center –
Group ALM on a fair value basis.
– Assets held to hedge delivery obligations related to cash-settled
employee compensation plans. These assets are designated at fair value
in order to eliminate an accounting mismatch that would otherwise
arise due to the liability being measured on a fair value basis.
Non-derivative financial assets with fixed or determinable payments that
are not quoted in an active market and are not assets for which the Group
may not recover substantially all of its initial net investment for reasons
other than credit deterioration. This classification includes:
– cash and balances with central banks
– cash collateral receivables on derivative instruments
– residential and commercial mortgages
– secured loans, including reverse repurchase agreements, receivables
under stock borrowing and lombard loans, and unsecured loans
– certain securities held within Corporate Center – Non-core and
Legacy Portfolio
– trade and lease receivables.
Changes in fair value, initial transaction costs and gains and losses realized
on disposal or redemption are recognized in Net trading income, except
interest and dividend income on non-derivatives (refer to item 3c in this
Note), derivatives designated as hedging instruments in certain types of
hedge accounting relationships and forward points on certain short dura-
tion foreign exchange contracts, which are reported in Net interest income.
Derivative assets are generally presented as Positive replacement values.
Bifurcated embedded derivatives are measured at fair value, but
presented on the same balance sheet line as the host contract measured
at amortized cost.
Derivatives that are designated and effective hedging instruments are also
measured at fair value. The presentation of fair value changes differs
depending on the type of hedge relationship (refer to item 3k in this Note
for more information).
Held for trading assets (other than derivatives) are presented as Trading
portfolio assets.
Financial assets designated at fair value through profit or loss are
presented as Financial assets designated at fair value.
Measured at amortized cost using the effective interest rate method less
allowances for credit losses (refer to items 3c and 3g in this Note).
Upfront fees and direct costs relating to loan origination, refinancing or
restructuring as well as to loan commitments are deferred and amortized
over the life of the loan using the effective interest rate method.
Loans and receivables are presented on the balance sheet primarily as
Cash and balances with central banks, Due from banks, Loans, Cash
collateral on securities borrowed, Reverse repurchase agreements and
Cash collateral receivables on derivative instruments.
Exchange-traded derivatives and certain OTC derivatives cleared through
central clearing counterparties which are either considered to be daily
settled or qualify for netting (refer to items 3d and 3j in this Note ) are
presented within Cash collateral receivables on derivative instruments.
328
Consolidated financial statements Note 1 Summary of significant accounting policies (continued)
Financial assets
classification
Available for sale
Significant items included
Measurement and presentation
Financial assets classified as available for sale are non-derivative financial
assets that are not classified as held for trading, designated at fair
value through profit or loss, or loans and receivables. This classification
mainly includes debt securities held as HQLA and managed by
Corporate Center – Group ALM, as well as certain asset-backed securities
managed by Corporate Center – Group ALM
Measured at fair value with unrealized gains and losses reported in Other
comprehensive income, net of applicable income taxes, until such invest-
ments are sold, collected or otherwise disposed of, or until any such invest-
ment is determined to be impaired (refer to item 3i in this Note). Upon
disposal, any accumulated balances in Other comprehensive income are
reclassified to the income statement and reported within Other income.
Held to maturity
Non-derivative financial assets with fixed or determinable payments and
fixed maturities for which UBS has the positive intention and ability to
hold to maturity. As of 1 January 2016, UBS classified as held to maturity
certain newly purchased debt securities held as HQLA and managed by
Corporate Center – Group ALM.
Interest and dividend income are recognized in the income statement in
accordance with item 3c in this Note. Refer to item 13 in this Note for
information on the treatment of foreign exchange translation gains and
losses.
Measured at amortized cost using the effective interest rate method less
allowances for credit losses (refer to items 3c and 3g in this Note).
Financial liabilities
classification
Held for trading
Designated at fair
value through profit
or loss
Significant items included
Measurement and presentation
– Obligations to deliver financial instruments, such as debt and equity
instruments, which UBS has sold to third parties, but does not own
(short positions).
– Liabilities held under unit-linked investment contracts.
– All derivatives with a negative replacement value, except those that are
designated and effective hedging instruments.
– Issued hybrid debt instruments that primarily include equity-linked,
credit-linked and rates-linked bonds or notes.
– Issued debt instruments managed on a fair value basis.
– Loan commitments that are hedged predominantly with credit derivatives
and hence eliminate an accounting mismatch.
Measurement of trading liabilities follows the same principles as held for
trading assets and measurement of liabilities designated at fair value
through profit or loss follows the same principles as assets designated at
fair value through profit or loss.
Presented as Trading portfolio liabilities and Financial liabilities designated
at fair value, respectively.
Derivative liabilities are generally presented as Negative replacement
values.
Bifurcated embedded derivatives are measured at fair value, but are
presented on the same balance sheet line as the host contract.
Derivatives that are designated and effective hedging instruments are also
measured at fair value. The presentation of fair value changes differs
depending on the type of hedge relationship (refer to item 3k in this Note
for more information).
Amounts due under unit-linked investment contracts are presented as
Other liabilities.
Amortized cost
– Demand and time deposits, retail savings / deposits, cash collateral
Measured at amortized cost using the effective interest rate method.
on securities lent, non-structured fixed-rate bonds, subordinated debt,
certificates of deposit, covered bonds.
– Cash collateral payables on derivative instruments.
Amortized cost liabilities are presented on the balance sheet primarily
as Due to banks, Due to customers, Cash collateral on securities lent,
Repurchase agreements, Cash collateral payables on derivative instruments
and Debt issued.
Exchange-traded derivatives and certain OTC derivatives cleared through
central clearing counterparties which are either considered to be daily
settled or qualify for netting (refer to items 3d and 3j of this Note ) are
presented within Cash collateral payables on derivative instruments.
329
Financial statements Note 1 Summary of significant accounting policies (continued)
c. Interest income and expense
Interest income or expense is determined by reference to a finan-
cial instrument‘s amortized-cost basis calculated using the effec-
tive interest rate (EIR) method. UBS also uses this method to deter-
mine the interest income and expense for financial instruments
(excluding derivatives) measured at fair value through profit or
loss that is presented within Net interest income.
Upfront fees, including loan commitment fees where a loan is
expected to be issued, and direct costs are included within the
initial measurement of a financial instrument measured at amor-
tized cost or classified as available for sale. Such fees and costs are
therefore recognized over the expected life of the instrument as
part of its EIR.
Fees related to loan commitments where no loan is expected
to be issued, as well as loan syndication fees where UBS does not
retain a portion of the syndicated loan or where UBS does retain
a portion of the syndicated loan at the same effective yield for
comparable risk as other participants, are included in Net fee and
commission income.
Interest income on financial assets, excluding derivatives, is
included in Interest income when positive and in Interest expense
when negative, because negative interest income arising on a
financial asset does not meet the definition of revenue. Similarly,
interest expense on financial liabilities, excluding derivatives, is
included in Interest expense, except when interest rates are nega-
tive, in which case it is included in Interest income. Dividend
income on all financial assets is included in Interest income.
➔ Refer to Note 3 for more information
d. Derecognition
Financial assets
UBS derecognizes a financial asset, or a portion of a financial
asset, from its balance sheet where the contractual rights to cash
flows from the asset have expired, or have been transferred, usu-
ally by sale, thus exposing the purchaser to either substantially all
the risks and rewards of the asset or a significant part of the risks
and rewards combined with the unconditional ability to sell or
pledge the asset.
A financial asset is considered to have been transferred when
UBS (i) transfers the contractual rights to receive the cash flows of
the financial asset or (ii) retains the contractual rights to receive
the cash flows of that asset, but assumes a contractual obligation
to pay the cash flows to one or more entities.
Where financial assets have been pledged as collateral or in
similar arrangements, they are considered to have been trans-
ferred if the counterparty has received the contractual right to the
cash flows of the pledged assets, as may be evidenced, for exam-
ple, by the counterparty’s right to sell or repledge the assets.
Where the counterparty to the pledged financial assets has not
received the contractual right to the cash flows, UBS does not
consider this to be a transfer for the purposes of derecognition.
UBS enters into certain transactions where it transfers financial
assets recognized on its balance sheet but retains either all or a
portion of the risks and rewards of the transferred financial assets.
If all or substantially all of the risks and rewards are retained, the
transferred financial assets are not derecognized from the balance
sheet; for example, securities lending and repurchase transactions
or where financial assets are sold to a third party with a total
return swap resulting in UBS retaining all or substantially all of the
risks and rewards of the transferred assets. These types of transac-
tions are accounted for as secured financing transactions as
described in item 3e of this Note.
In transactions where substantially all of the risks and rewards
of ownership of a financial asset are neither retained nor trans-
ferred, UBS derecognizes the financial asset if control over the
asset is surrendered, and the rights and obligations retained fol-
lowing the transfer are recognized separately as assets and liabili-
ties, respectively. In transfers where control over the financial
asset is retained, UBS continues to recognize the asset to the
extent of its continuing involvement, determined by the extent to
which it is exposed to changes in the value of the transferred asset
following the transfer.
Certain over-the-counter (OTC) derivative contracts and most
exchange-traded futures and options contracts cleared through
central clearing counterparties are considered to be settled on a
daily basis through the daily margining process, as the payment or
receipt of the variation margin represents legal or economic set-
tlement of a derivative contract, which results in derecognition of
the associated positive and negative replacement values.
➔ Refer to Notes 1b and 24 for more information
330
Consolidated financial statements Note 1 Summary of significant accounting policies (continued)
Financial liabilities
UBS derecognizes a financial liability from its balance sheet when
it is extinguished, such as when the obligation specified in the
contract is discharged, canceled or has expired. When an existing
financial liability is exchanged for a new one from the same lender
on substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification
results in derecognition of the original liability and the recognition
of a new liability with any difference in the respective carrying
amounts being recognized in the income statement.
e. Securities borrowing / lending and repurchase / reverse
repurchase transactions
Securities borrowing / lending and repurchase / reverse repurchase
transactions are generally entered into on a collateralized basis. In
such transactions, UBS typically borrows or lends equity and debt
securities in exchange for securities or cash collateral. Addition-
ally, UBS borrows securities from its clients’ custody accounts in
exchange for a fee.
These transactions are treated as collateralized financing trans-
actions where the securities transferred / received are not derecog-
nized or recognized on balance sheet. Securities trans-
ferred / received with the right to resell or repledge are disclosed
separately.
In reverse repurchase and securities borrowing agreements, the
cash delivered is derecognized and a corresponding receivable,
including accrued interest, is recorded in the balance sheet lines
Reverse repurchase agreements and Cash collateral on securities
borrowed, respectively, representing UBS’s right to receive the cash.
Similarly, in repurchase and securities lending agreements, the cash
received is recognized and a corresponding obligation, including
accrued interest, is recorded in the balance sheet lines Repurchase
agreements and Cash collateral on securities lent, respectively.
Additionally, the sale of securities that is settled by delivering secu-
rities received in reverse repurchase or securities borrowing transac-
tions triggers the recognition of a trading liability.
Repurchase and reverse repurchase transactions with the same
counterparty, maturity, currency and Central Securities Depository
(CSD) are generally presented net, subject to meeting the netting
requirements described in item 3j of this Note.
➔ Refer to Notes 23 and 24 for more information
f. Fair value of financial instruments
UBS accounts for a significant portion of its assets and liabilities at
fair value. Fair value is the price on the measurement date that
would be received for the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants in
the principal market, or in the most advantageous market in the
absence of a principal market.
All financial instruments measured at fair value are categorized
into one of three fair value hierarchy levels. The fair values of
Level 1 financial instruments are based on quoted prices in active
markets. The fair values of Level 2 financial instruments are based
on valuation techniques for which all significant inputs are, or are
based on, observable market data. The fair values of Level 3 finan-
cial instruments are based on valuation techniques for which sig-
nificant inputs are not based on observable market data.
Critical accounting estimates and judgments
The use of valuation techniques, modeling assumptions and esti-
mates of unobservable market inputs require significant judgment
and could affect the amount of gain or loss recorded for a par-
ticular position. Valuation techniques that rely more heavily on
unobservable inputs require a higher level of judgment to calcu-
late a fair value than those entirely based on observable inputs.
Valuation techniques, including models, that are used to deter-
mine fair values are periodically reviewed and validated by quali-
fied personnel, independent of those who created them. Models
are calibrated to ensure that outputs reflect observable market
data, to the extent possible. Also, models prioritize the use of
observable inputs, when available, over unobservable inputs.
Judgment is required in selecting appropriate models as well as
inputs for which observable data is less readily or not available.
UBS‘s valuation techniques may not fully reflect all the factors
relevant to the fair value of financial instruments held. Valuations
are therefore adjusted, where appropriate, to allow for additional
factors, including credit risk, model risk and liquidity risk.
UBS‘s governance framework over fair value measurement is
described in Note 22b.
The level of subjectivity and the degree of management judg-
ment involved in the development of estimates and the selection
of assumptions is more significant for instruments valued using
specialized and sophisticated models and where some or all of the
parameter inputs are less observable (Level 3 instruments) and
may require adjustment to reflect factors that market participants
would consider in estimating fair value, such as close-out costs,
credit exposure, model-driven valuation uncertainty, funding costs
and benefits, trading restrictions and other factors, which are pre-
sented in Note 22d. The Group provides a sensitivity analysis of
the impact upon the Level 3 financial instruments of using reason-
ably possible alternative assumptions for the unobservable param-
eters within Note 22g.
➔ Refer to Note 22 for more information
331
Financial statements Note 1 Summary of significant accounting policies (continued)
g. Allowances and provisions for credit losses for financial assets
held at amortized cost
A claim is impaired and an allowance or provision for credit losses
is recognized when objective evidence demonstrates that a loss
event was incurred after the initial recognition and that the loss
event has an impact on the future cash flows that can be reliably
estimated. UBS considers a claim to be impaired if it will be unable
to collect all amounts due on the claim based on the original con-
tractual terms due to credit deterioration of the issuer or counter-
party. A claim can be a loan or receivable carried at amortized
cost, or a commitment, such as a letter of credit, a guarantee or a
similar instrument.
An allowance for credit losses is reported as a decrease in car-
rying value of a claim on the balance sheet. For an off-balance
sheet item, such as a commitment, a provision for credit loss is
reported in Provisions. Changes to allowances and provisions for
credit losses are recognized in Credit loss expense / recovery.
➔ Refer to Notes 10 and 11 for more information
Critical accounting estimates and judgments
Allowances and provisions for credit losses are evaluated at both
a counterparty-specific level and collectively. Judgment is used in
making assumptions about the timing and amount of impairment
losses.
Counterparty-specific allowances and provisions
Loans are evaluated individually for impairment if objective evi-
dence indicates that a loan may be impaired. Individual credit
exposures are evaluated on the basis of the borrower’s overall
financial condition, resources and payment record, the prospects
of support from contractual guarantors and, where applicable,
the realizable value of any collateral. The impairment loss for a
loan is the excess of the carrying value of the financial asset over
the estimated recoverable amount. The estimated recoverable
amount is the present value, calculated using the loan’s original
effective interest rate, of expected future cash flows, including
amounts that may result from restructuring or the liquidation of
collateral. If a loan has a variable interest rate, the discount rate
for calculating the recoverable amount is the current effective
interest rate. Upon impairment, the accrual of interest income
based on the original terms of the loan is discontinued. Instead,
the increase in the present value of the impaired loan due to the
passage of time is calculated and reported within Interest income.
Collective allowances and provisions
Collective allowances and provisions are calculated for portfolios
with similar credit risk characteristics, taking into account histori-
cal loss experience and current conditions. The methodology and
assumptions used are reviewed regularly to reduce any differ-
ences between estimated and actual loss experience. For all of its
portfolios, UBS also assesses whether there have been any unfore-
seen developments that might result in impairments but are not
immediately observable at a counterparty level. To determine
whether an event-driven collective allowance for credit losses is
required, UBS considers global economic drivers to assess the
most vulnerable countries and industries. As the allowance can-
not be allocated to individual loans, the loans are not considered
to be impaired and interest is accrued on each loan according to
its contractual terms. If objective evidence becomes available that
indicates that an individual financial asset is impaired, it is removed
from the group of financial assets assessed for impairment on a
collective basis and is assessed separately as counterparty-specific.
All impaired loans are reviewed and analyzed at least annually.
Any subsequent changes to the amounts and timing of the
expected future cash flows compared with prior estimates result
in a change in the allowance for credit losses and are charged or
credited to Credit loss expense / recovery. An allowance for impair-
ment is reversed only when the credit quality has improved to
such an extent that there is reasonable assurance of timely collec-
tion of principal and interest in accordance with the original con-
tractual terms of the claim, or the equivalent value thereof. A
write-off is made when all or part of a claim is deemed uncollect-
ible or forgiven. Write-offs reduce the principal amount of a claim
and are charged against previously established allowances for
credit losses. Recoveries, in part or in full, of amounts previously
written off are credited to Credit loss expense / recovery.
332
Consolidated financial statements Note 1 Summary of significant accounting policies (continued)
h. Renegotiated loans
A renegotiated or restructured loan is a loan for which the terms
have been modified or for which additional collateral has been
requested that was not contemplated in the original contract.
Typical key features of terms and conditions granted through
renegotiation to avoid default include special interest rates, post-
ponement of interest or amortization payments, modification of
the schedule of repayments or amendment of loan maturity.
There is no change in the EIR following a renegotiation.
If a loan is renegotiated with preferential conditions (i.e., new
or modified terms and conditions are agreed upon which do not
meet the normal market criteria for the quality of the obligor and
the type of loan), it is still classified as non-performing. It will
remain so until the loan is collected or written off and will be
assessed for impairment on an individual basis.
Concessions granted where there is no evidence of financial
difficulty, or where any changes to terms and conditions are
within UBS‘s usual risk appetite, are not deemed restructured.
A restructuring of a loan could lead to a fundamental change
in the terms and conditions of a loan, resulting in the original loan
being derecognized and a new loan being recognized.
If a loan is derecognized in these circumstances, the new loan
is measured at fair value at initial recognition. Any allowance
taken to date against the original loan is derecognized and is not
attributed to the new loan. Consequently, the new loan is assessed
for impairment on an individual basis. If the loan is not impaired,
the loan is included within the general collective loan assessment
for the purpose of measuring credit losses.
i. Impairment of financial assets classified as available for sale
At each balance sheet date, UBS assesses whether indicators of
impairment are present. Available-for-sale debt instruments are
impaired when there is objective evidence, using the same criteria
described in item 3g, that, as a result of one or more events that
occurred after the initial recognition of the asset, the estimated
future cash flows have decreased.
Objective evidence that there has been an impairment of an
available-for-sale equity instrument is a significant or prolonged
decline in the fair value of the asset. UBS uses a rebuttable pre-
sumption that such instruments are impaired where there has
been a decline in fair value of more than 20% below its original
cost or fair value has been below original cost for more than six
months.
To the extent a financial asset classified as available for sale is
determined to be impaired, the related cumulative net unrealized
loss previously recognized in Other comprehensive income is
reclassified to the income statement within Other income. For
equity instruments, any further loss is recognized directly in the
income statement, whereas for debt instruments, any further loss
is recognized in the income statement only if there is additional
objective evidence of impairment. After the recognition of an
impairment on a financial asset classified as available for sale,
increases in the fair value of equity instruments are reported in
Other comprehensive income. For debt instruments, such
increases in the fair value, up to amortized cost in the transaction
currency, are recognized in Other income, provided that the fair
value increase is related to an event occurring after the impair-
ment loss was recorded. Increases in excess of that amount are
reported in Other comprehensive income.
j. Netting
UBS nets financial assets and liabilities on its balance sheet if (i) it
has the unconditional and legally enforceable right to set off the
recognized amounts, both in the normal course of business and in
the event of default, bankruptcy or insolvency of UBS and all of
the counterparties, and (ii) intends either to settle on a net basis
or to realize the asset and settle the liability simultaneously. Net-
ted positions include, for example, certain derivatives and repur-
chase and reverse repurchase transactions with various counter-
parties, exchanges and clearing houses.
In assessing whether UBS intends to either settle on a net basis,
or to realize the asset and settle the liability simultaneously,
emphasis is placed on the effectiveness of operational settlement
mechanics in eliminating substantially all credit and liquidity expo-
sure between the counterparties. This condition precludes offset-
ting on the balance sheet for substantial amounts of UBS’s finan-
cial assets and liabilities, even though they may be subject to
enforceable netting arrangements. For OTC derivative contracts,
balance sheet offsetting is generally only permitted in circum-
stances in which a market settlement mechanism exists via an
exchange or central clearing counterparty, that effectively accom-
plishes net settlement through a daily exchange of collateral via a
cash margining process. For repurchase arrangements and securi-
ties financing transactions, balance sheet offsetting may be per-
mitted only to the extent that the settlement mechanism elimi-
nates, or results in insignificant, credit and liquidity risk, and
processes the receivables and payables in a single settlement pro-
cess or cycle.
➔ Refer to Notes 1b and 24 for more information
333
Financial statements Note 1 Summary of significant accounting policies (continued)
k. Hedge accounting
The Group uses derivative instruments to manage exposures to
interest rate and foreign currency risks, including exposures aris-
ing from forecast transactions. Qualifying derivative and non-
derivative instruments may be designated as hedging instruments
in (i) hedges of the change in fair value of recognized assets or
liabilities (fair value hedges), (ii) hedges of the variability in future
cash flows attributable to a recognized asset or liability or highly
probable forecast transactions (cash flow hedges) or (iii) hedges of
a net investment in a foreign operation (net investment hedges).
At the time a financial instrument is designated in a hedge
relationship, UBS formally documents the relationship between
the hedging instrument(s) and hedged item(s), including the risk
management objectives and strategy in undertaking the hedge
transaction and the methods that will be used to assess the effec-
tiveness of the hedging relationship. Accordingly, UBS assesses,
both at the inception of the hedge and on an ongoing basis,
whether the hedging instruments, primarily derivatives, have
been “highly effective” in offsetting changes in the fair value or
cash flows associated with the designated risk of the hedged
items. A hedge is considered highly effective if the following crite-
ria are met: (i) at inception of the hedge and throughout its life,
the hedge is expected to be highly effective in achieving offsetting
changes in fair value or cash flows attributable to the hedged risk
and (ii) actual results of the hedge are within a range of 80–125%.
In the case of hedging forecast transactions, the transaction must
have a high probability of occurring and must present an expo-
sure to variations in cash flows that could ultimately affect the
reported net profit or loss. UBS discontinues hedge accounting
when (i) it determines that a hedging instrument is not, or has
ceased to be, highly effective as a hedge, (ii) the derivative expires
or is sold, terminated or exercised, (iii) the hedged item matures,
is sold or repaid or (iv) forecast transactions are no longer deemed
highly probable. The Group may also discontinue hedge account-
ing voluntarily.
Hedge ineffectiveness represents the amount by which the
changes in the fair value of the hedging instrument differ from
changes in the fair value of the hedged item attributable to the
hedged risk, or the amount by which changes in the present value
of future cash flows of the hedging instrument exceed changes in
the present value of expected cash flows of the hedged item.
Such ineffectiveness is recorded in current period earnings in Net
trading income. Interest income and expense on derivatives desig-
nated as hedging instruments in effective hedge relationships is
included in Interest income.
Fair value hedges
For qualifying fair value hedges, the change in the fair value of the
hedging instrument is recognized in the income statement along
with the change in the fair value of the hedged item that is attrib-
utable to the hedged risk. In fair value hedges of interest rate risk,
the fair value change of the hedged item attributable to the
hedged risk is reflected as an adjustment to the carrying value of
the hedged item. If the hedge accounting relationship is termi-
nated for reasons other than the derecognition of the hedged
item, the adjustment to the carrying value is amortized to the
income statement over the remaining term to maturity of the
hedged item using the effective interest rate method. For a port-
folio hedge of interest rate risk, the equivalent change in fair value
is reflected within Other assets or Other liabilities. If the hedge
relationship is terminated for reasons other than the derecogni-
tion of the hedged item, the amount included in Other assets or
Other liabilities is amortized to the income statement over the
remaining term to maturity of the hedged items using the straight-
line method.
Cash flow hedges
Fair value gains or losses associated with the effective portion of
derivatives designated as cash flow hedges for cash flow repricing
risk are recognized initially in Other comprehensive income within
Equity. When the hedged forecast cash flows affect profit or loss,
the associated gains or losses on the hedging derivatives are
reclassified from Equity to the income statement.
If a cash flow hedge of forecasted transactions is no longer
considered effective, or if the hedge relationship is terminated, the
cumulative gains or losses on the hedging derivatives previously
reported in Equity remain there until the committed or forecasted
transactions occur and affect profit or loss. If the forecasted trans-
actions are no longer expected to occur, the deferred gains or
losses are reclassified immediately to the income statement.
Hedges of net investments in foreign operations
Hedges of net investments in foreign operations are accounted
for similarly to cash flow hedges. Gains or losses on the hedging
instrument relating to the effective portion of the hedge are rec-
ognized directly in Equity (and presented in the statement of
changes in equity and statement of comprehensive income under
Foreign currency translation), while any gains or losses relating to
the ineffective and / or undesignated portion (for example, the
interest element of a forward contract) are recognized in the
income statement. Upon disposal or partial disposal of the foreign
operation, the cumulative value of any such gains or losses recog-
nized in Equity associated with the entity is reclassified to the
income statement.
Economic hedges that do not qualify for hedge accounting
Derivative instruments that are transacted as economic hedges,
but do not qualify for hedge accounting, are treated in the same
way as derivative instruments used for trading purposes (i.e., real-
ized and unrealized gains and losses are recognized in Net trading
income), except for the forward points on certain short duration
foreign exchange contracts, which are reported in Net interest
income.
➔ Refer to Note 12 for more information
334
Consolidated financial statements Note 1 Summary of significant accounting policies (continued)
l. Embedded derivatives
Derivatives may be embedded in other financial instruments (host
contracts). For example, they could be represented by the conver-
sion feature embedded in a convertible bond. Such hybrid instru-
ments arise predominantly from the issuance of certain structured
debt instruments. An embedded derivative is generally required to
be separated from the host contract and accounted for as a
standalone derivative instrument at fair value through profit or
loss if (i) the host contract is not carried at fair value with changes
in fair value reported in the income statement, (ii) the economic
characteristics and risks of the embedded derivative are not closely
related to the economic characteristics and risks of the host con-
tract and (iii) the terms of the embedded derivative would meet
the definition of a standalone derivative, were they contained in a
separate contract.
Typically, UBS applies the fair value option to hybrid instru-
ments (refer to item 3b in this Note for more information), in
which case bifurcation of an embedded derivative component is
not required.
m. Debt issued
Debt issued is carried at amortized cost, including contingent
capital instruments that contain contractual provisions under
which the principal amounts would be written down upon either
a specified CET1 ratio breach or a determination by FINMA that a
viability event has occurred. Such contractual provisions are not
derivatives as the underlying is deemed to be a non-financial vari-
able specific to a party to the contract. In contrast, where there is
a legal “bail-in” mechanism for write-down or conversion into
equity (as is the case, for instance, with senior unsecured debt
issued by the Group that is subject to write-down or conversion
under resolution authority granted to FINMA under Swiss law),
such mechanism does not form part of the contractual terms and,
therefore, does not affect the amortized cost accounting treat-
ment applied to these instruments. If the debt were to be written
down or converted into equity in a future period, this would result
in the full or partial derecognition of the financial liabilities, with
the difference between the carrying value of the debt written
down or converted into equity and the fair value of any equity
shares issued recognized in the income statement.
In cases where, as part of the Group’s risk management activ-
ity, fair value hedge accounting is applied to fixed-rate debt instru-
ments carried at amortized cost, their carrying amount is adjusted
for changes in fair value related to the hedged exposure. Refer to
item 3k for more information on hedge accounting.
Debt issued and subsequently repurchased in relation to mar-
ket-making or other activities is treated as redeemed. A gain or
loss on redemption (depending on whether the repurchase price
of the bond is lower or higher than its carrying value) is recorded
in Other income. A subsequent sale of own bonds in the market
is treated as a reissuance of debt.
n. Own credit
From 1 January 2016 onward, changes in the fair value of finan-
cial liabilities designated at fair value through profit or loss related
to own credit are recognized in Other comprehensive income
directly within Retained earnings and will not be reclassified to the
income statement in future periods.
➔ Refer to Note 1b for more information
o. Loan commitments
Loan commitments are arrangements under which clients can
borrow stipulated amounts under defined terms and conditions.
Loan commitments that can be canceled at any time by UBS at
its discretion are neither recognized on the balance sheet nor
included in off-balance sheet disclosures.
Loan commitments that cannot be canceled by UBS once the
commitments are communicated to the beneficiary or which are
revocable only due to automatic cancelation upon deterioration in
a borrower’s creditworthiness are considered irrevocable and are
classified as (i) derivative loan commitments measured at fair
value through profit or loss, (ii) loan commitments designated at
fair value through profit or loss or (iii) other loan commitments.
Other loan commitments are not recorded on the balance sheet,
but a provision is recognized through profit or loss if it is probable
that a loss has been incurred and a reliable estimate of the amount
of the obligation can be made. Any change in the liability relating
to these other loan commitments is recorded in the income state-
ment in Credit loss expense / recovery.
When a client draws on a commitment, the resulting loan is
presented under Loans, except for cases where designation at fair
value through profit or loss applies.
p. Financial guarantee contracts
Financial guarantee contracts are contracts that require the issuer
to make specified payments to reimburse the holder for an
incurred loss because a specified debtor fails to make payments
when due in accordance with the terms of a specified debt instru-
ment. UBS issues such financial guarantees to banks, financial
institutions and other parties on behalf of clients to secure loans,
overdrafts and other banking facilities.
Certain issued financial guarantees that are managed on a fair
value basis are designated at fair value through profit or loss.
Financial guarantees that are not managed on a fair value basis
are initially recognized in the financial statements at fair value and
are subsequently measured at the higher of the amount initially
recognized less cumulative amortization, and to the extent a pay-
ment under the guarantee has become probable, the present value
of the expected payment. Any change in the liability relating to
probable expected payments resulting from guarantees is recorded
in the income statement in Credit loss expense / recovery.
335
Financial statements Note 1 Summary of significant accounting policies (continued)
4) Fee income
UBS earns fee income from a diverse range of services it provides
to its clients. Fee income can be divided into two broad catego-
ries: (i) fees earned from services that are provided over a certain
period of time, such as portfolio management and advisory fees,
and (ii) fees earned from providing transaction-type services, such
as underwriting fees, corporate finance fees and brokerage fees.
Fees earned from services that are provided over a certain
period of time are recognized ratably over the service period, with
the exception of performance-linked fees or fee components with
specific performance criteria. Such fees are recognized when the
performance criteria are fulfilled and when collectibility is reason-
ably assured.
Fees earned from providing transaction-type services are rec-
ognized when the service has been completed and the fee is fixed
or determinable, i.e., not subject to refund or adjustment.
Fee income generated from providing a service which does not
result in the recognition of a financial instrument is presented
within Net fee and commission income. Fees generated from the
acquisition, issue or disposal of a financial instrument are pre-
sented in the income statement in line with the balance sheet
classification of that financial instrument.
➔ Refer to Note 4 for more information
5) Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash
equivalents comprise balances with an original maturity of three
months or less, including cash, money market paper and balances
with central and other banks.
6) Equity participation and other compensation plans
Equity participation plans
UBS has established several equity participation plans that are
settled in UBS‘s equity instruments or an amount that is based on
the value of such instruments. These awards are generally subject
to conditions that require employees to complete a specified
period of service and, for performance shares, to satisfy specified
performance targets. Compensation expense is recognized, on a
per tranche basis, over the service period based on an estimate of
the number of instruments expected to vest and is adjusted to
reflect actual outcomes. Where the service period is shortened,
for example in the case of employees affected by restructuring
programs or mutually agreed termination provisions, recognition
of expense is accelerated to the termination date.
Where no future service is required, such as for employees who
are retirement eligible or who have met certain age and years-of-
service criteria, the services are presumed to have been received
and compensation expense is recognized immediately on, or prior
to, the date of grant. Such awards may remain forfeitable until
the legal vesting date if certain non-vesting conditions are not
met, such as breach of good-leaver clauses or harmful acts. For
equity-settled awards, forfeiture events resulting from breach of a
non-vesting condition do not result in an adjustment to expense.
Compensation expense is measured by reference to the fair
value of the equity instruments on the date of grant adjusted,
when relevant, to take into account the terms and conditions
inherent in the award, including dividend rights, transfer restric-
tions in effect beyond the vesting date, and non-vesting condi-
tions. For equity-settled instruments, fair value is determined at
the date of grant and is not remeasured unless its terms are mod-
ified such that the fair value immediately after modification
exceeds the fair value immediately prior to modification. Any
increase in fair value resulting from a modification is recognized as
compensation expense, either over the remaining service period
or, for vested awards, immediately. For cash-settled awards, fair
value is remeasured at each reporting date such that the cumula-
tive expense recognized equals the cash distributed.
➔ Refer to Note 27 for more information
Other compensation plans
UBS has established deferred compensation plans which are set-
tled in cash or other financial instruments, the amount of which
may be fixed or may vary based on the achievement of specified
performance conditions or the value of specified underlying
assets. Compensation expense is recognized over the period that
the employee provides services to become entitled to the award.
Where the service period is shortened, for example in the case of
employees affected by restructuring programs or mutually agreed
termination provisions, recognition of expense is accelerated to
the termination date. Where no future service is required, such as
for employees who are retirement eligible or who have met cer-
tain age and years-of-service criteria, the services are presumed to
have been received and compensation expense is recognized
immediately on, or prior to, the date of grant. The amount recog-
nized is based on the present value of the amount expected to be
paid under the plan and is remeasured at each reporting date, so
that the cumulative expense recognized equals the cash or the fair
value of respective financial instruments distributed.
➔ Refer to Note 27 for more information
336
Consolidated financial statements Note 1 Summary of significant accounting policies (continued)
7) Pension and other post-employment benefit plans
UBS sponsors various post-employment benefit plans for its
employees worldwide, which include defined benefit and defined
contribution pension plans, and other post-employment benefits
such as medical and life insurance benefits that are payable after
the completion of employment.
➔ Refer to Note 26 for more information
Defined benefit pension plans
Defined benefit pension plans specify an amount of benefit that
an employee will receive, which usually depends on one or more
factors, such as age, years of service and compensation. The
defined benefit liability recognized in the balance sheet is the
present value of the defined benefit obligation less the fair value
of the plan assets at the balance sheet date with changes result-
ing from remeasurements recorded immediately in Other compre-
hensive income. If the fair value of the plan assets is higher than
the present value of the defined benefit obligation, the recogni-
tion of the resulting net defined benefit asset is limited to the
present value of economic benefits available in the form of
refunds from the plan or reductions in future contributions to the
plan. UBS applies the projected unit credit method to determine
the present value of its defined benefit obligations, the related
current service cost and, where applicable, past service cost. The
projected unit credit method sees each period of service as giving
rise to an additional unit of benefit entitlement and measures
each unit separately to build up the final obligation. These
amounts, which take into account the specific features of each
plan, including risk sharing between employee and employer, are
calculated periodically by independent qualified actuaries.
Critical accounting estimates and judgments
The net defined benefit liability or asset at the balance sheet date
and the related personnel expense depend on the expected future
benefits to be provided, determined using a number of economic
and demographic assumptions. A range of assumptions could be
applied, and different assumptions could significantly alter the
defined benefit liability or asset and pension expense recognized.
The most significant assumptions include life expectancy, the dis-
count rate, expected salary increases, pension increases and, in
addition for the Swiss plan and one of the US defined benefit
pension plans, interest credits on retirement savings account bal-
ances. Life expectancy is determined by reference to published
mortality tables. The discount rate is determined by reference to
the rates of return on high-quality fixed-income investments of
appropriate currency and term at the measurement date. The
assumption for salary increases reflects the long-term expecta-
tions for salary growth and takes into account inflation, seniority,
promotion and other relevant factors such as supply and demand
in the labor market. A sensitivity analysis for reasonable possible
movements in each significant assumption for UBS‘s post-employ-
ment obligations is provided within Note 26.
Defined contribution plans
A defined contribution plan is a pension plan under which UBS
pays fixed contributions into a separate entity from which post-
employment and other benefits are paid. UBS has no legal or
constructive obligation to pay further contributions if the plan
does not hold sufficient assets to pay employees the benefits
relating to employee service in the current and prior periods.
UBS’s contributions are expensed when the employees have ren-
dered services in exchange for such contributions. This is gener-
ally in the year of contribution. Prepaid contributions are recog-
nized as an asset to the extent that a cash refund or a reduction
in future payments is available.
Other post-employment benefits
UBS also provides post-employment medical and life insurance
benefits to certain retirees in the US and the UK. The expected
costs of these benefits are recognized over the period of employ-
ment using the same accounting methodology used for defined
benefit pension plans.
8) Income taxes
UBS is subject to the income tax laws of Switzerland and those of
the non-Swiss jurisdictions in which UBS has business operations.
The Group’s provision for income taxes is composed of current
and deferred taxes. Current income taxes represent taxes to be
paid or refunded for the current period or previous periods.
Deferred taxes are recognized for temporary differences
between the carrying amounts and tax bases of assets and liabili-
ties that will result in deductible amounts in future periods and
are measured using the applicable tax rates and laws that will be
in effect when such differences are expected to reverse
Deferred tax assets arise from a variety of sources, the most
significant being: (i) tax losses that can be carried forward to be
used against profits in future years and (ii) expenses recognized in
the Group‘s income statement that are not deductible until the
associated cash flows occur. Deferred tax assets are recognized
only to the extent that it is probable that sufficient taxable profits
will be available against which these differences can be used.
When an entity or tax group has a history of recent losses, deferred
tax assets are only recognized to the extent there are sufficient
taxable temporary differences or there is convincing other evi-
dence that sufficient taxable profit will be available against which
the unused tax losses can be utilized.
337
Financial statements Note 1 Summary of significant accounting policies (continued)
Deferred tax liabilities are recognized for temporary differences
between the carrying amounts of assets and liabilities in the bal-
ance sheet that reflect the expectation that certain items will give
rise to taxable income in future periods.
Deferred and current tax assets and liabilities are offset when
(i) they arise in the same tax reporting group, (ii) they relate to the
same tax authority, (iii) the legal right to offset exists and (iv) they
are intended to be settled net or realized simultaneously.
Current and deferred taxes are recognized as income tax benefit
or expense in the income statement except for current and deferred
taxes recognized (i) upon the acquisition of a subsidiary, (ii) for unre-
alized gains or losses on financial instruments that are classified as
available for sale, (iii) for changes in fair value of derivative instru-
ments designated as cash flow hedges, (iv) for remeasurements of
defined benefit plans, (v) for certain foreign currency translations of
foreign operations, and (vi) for gains and losses on the sale of trea-
sury shares. Amounts relating to points (ii), (iii), (iv) and (v) are rec-
ognized in Other comprehensive income within Equity.
Critical accounting estimates and judgments
Tax laws are complex and judgment and interpretations about the
application of such laws are required when accounting for income
taxes. UBS considers the performance of its businesses and the
accuracy of historical forecasts and other factors in evaluating the
recoverability of its deferred tax assets, including the remaining
tax loss carry-forward period, and its assessment of expected
future taxable profits in the forecast period used for recognizing
deferred tax assets. Estimating future profitability is inherently
subjective and is particularly sensitive to future economic, market
and other conditions, which are difficult to predict.
The level of deferred tax asset recognition is influenced by
management’s assessment of UBS‘s future profitability based on
relevant business plan forecasts. Existing assessments are reviewed
and, if necessary, revised to reflect changed circumstances. This
review is conducted annually, in the second half of each year, but
adjustments may be made at other times, if required. In a situa-
tion where recent losses have been incurred, convincing evidence
that there will be sufficient future profitability is required.
If profit forecast assumptions in future periods deviate from
the current outlook, the value of UBS‘s deferred tax assets may be
affected. Recognition of any decrease in the carrying amount of
deferred tax assets in the income statement would reduce net
profit and equity but would not affect cash flows.
Judgment is also required to forecast the expected outcome of
uncertain tax positions that may require the interpretation of tax
laws and the resolution of any income tax-related appeals or liti-
gation that are incorporated into the estimate of income and
deferred tax.
➔ Refer to Note 8 for more information
9) Investment in associates
Entities where UBS has significant influence over the financial and
operating policies of the entity, but does not have control, are
classified as investments in associates and accounted for under
the equity method of accounting. Typically, UBS has significant
influence when it holds or has the ability to hold between 20%
and 50% of a company’s voting rights. Investments in associates
are initially recognized at cost, and the carrying amount is
increased or decreased after the date of acquisition to recognize
the Group’s share of the investee’s comprehensive income and
any impairment losses.
➔ Refer to Note 28 for more information
improvements,
10) Property, equipment and software
Property, equipment and software includes own-used properties,
information technology hardware,
leasehold
externally purchased and internally generated software, as well as
communication and other similar equipment. Property, equip-
ment and software is carried at cost less accumulated deprecia-
tion and impairment losses and is reviewed at each reporting date
for indication for impairment. Software development costs are
capitalized only when the costs can be measured reliably and it is
probable that future economic benefits will arise. Depreciation of
property, equipment and software begins when they are available
for use, that is, when they are in the location and condition neces-
sary for them to be capable of operating in the manner intended
by management. Depreciation is calculated on a straight-line basis
over an asset‘s estimated useful life. The estimated useful eco-
nomic lives of UBS‘s property, equipment and software are:
– properties, excluding land: ≤ 67 years
– IT hardware and communication equipment: ≤ 7 years
– other machines and equipment: ≤ 10 years
– software: ≤ 10 years
– leasehold improvements: shorter of the lease term or the eco-
nomic life of asset (typically ≤ 20 years)
➔ Refer to Notes 1b and 14 for more information
338
Consolidated financial statements Note 1 Summary of significant accounting policies (continued)
11) Goodwill and intangible assets
Goodwill represents the excess of the cost of an acquisition over
the fair value of the Group‘s share of net identifiable assets of the
acquired entity at the date of the acquisition. Goodwill is not
amortized, but at the end of each reporting period, UBS assesses
whether there is any indication that goodwill is impaired. If such
indicators exist, UBS is required to test the goodwill for impair-
ment. Irrespective of whether there is any indication of impair-
ment, UBS tests goodwill for impairment annually. UBS considers
the segments, as reported in Note 2a, as separate cash-generat-
ing units, since this is the level at which the performance of invest-
ments is reviewed and assessed by management. The impairment
test is performed for each segment to which goodwill is allocated
by comparing the recoverable amount, based on its value-in-use,
to the carrying amount of the respective segment. An impairment
charge is recognized if the carrying amount exceeds the recover-
able amount.
If the estimated earnings and other assumptions in future
periods deviate from the current outlook, the value of UBS‘s
goodwill may become impaired in the future, giving rise to losses
in the income statement. Recognition of any impairment of
goodwill would reduce net profit and equity, but would not
affect cash flows.
Intangible assets are comprised of separately identifiable intan-
gible items arising from business combinations and certain pur-
chased trademarks and similar items. Intangible assets are recog-
nized at cost. The cost of an intangible asset acquired in a business
combination is its fair value at the date of acquisition. Intangible
assets with a finite useful life are amortized using the straight-line
method over their estimated useful life, generally not exceeding
20 years. In rare cases, intangible assets can have an indefinite
useful life, in which case they are not amortized. At each report-
ing date, intangible assets are reviewed for indications of impair-
ment. If such indications exist, the intangible assets are analyzed
to assess whether their carrying amount is fully recoverable. An
impairment loss is recognized if the carrying amount exceeds the
recoverable amount.
Critical accounting estimates and judgments
UBS‘s methodology for goodwill impairment testing is based on a
model which is most sensitive to the following key assumptions:
(i) forecasts of earnings available to shareholders in years one to
three, (ii) changes in the discount rates and (iii) changes in the
long-term growth rate. Key assumptions used to determine the
recoverable amounts of each segment are tested for sensitivity by
applying a reasonably possible change to those assumptions.
Refer to Note 15 for the discussion of how the reasonably possible
changes in those key assumptions may affect the results delivered
by UBS‘s model for goodwill impairment testing.
➔ Refer to Notes 2 and 15 for more information
12) Provisions and contingent liabilities
Provisions are liabilities of uncertain timing or amount, and are
recognized when (i) UBS has a present obligation as a result of a
past event, (ii) it is probable that an outflow of resources will be
required to settle the obligation and (iii) a reliable estimate of the
amount of the obligation can be made.
The majority of UBS’s provisions relate to litigation, regulatory
and similar matters, restructuring, employee benefits, real estate
and loan commitments and guarantees. Provisions that are similar
in nature are aggregated to form a class, while the remaining
provisions, including those of less significant amounts, are pre-
sented under Other provisions. Provisions are presented sepa-
rately on the balance sheet and, when they are no longer consid-
ered uncertain in timing or amount, are reclassified to Other
liabilities – Other.
The Group recognizes provisions for litigation, regulatory and
similar matters when, in the opinion of management after seek-
ing legal advice, it is more likely than not that the Group has a
present legal or constructive obligation as a result of past events,
it is probable that an outflow of resources will be required, and
the amount can be reliably estimated. Where these factors are
otherwise satisfied, a provision may be established for claims that
have not yet been asserted against the Group, but are neverthe-
less expected to be, based on the Group’s experience with similar
asserted claims.
Restructuring provisions are recognized when a detailed and
formal restructuring plan has been approved and a valid expecta-
tion has been raised that the restructuring will be carried out,
either through commencement of the plan or announcements to
affected employees.
Provisions are recognized for lease contracts if the unavoidable
costs of a contract exceed the benefits expected to be received
under it (onerous lease contracts). For example, this may occur
when a significant portion of a leased property is expected to be
vacant for an extended period.
Provisions for employee benefits are recognized mainly in
respect of service anniversaries and sabbatical leave.
Provisions are recognized at the best estimate of the consider-
ation required to settle the present obligation at the balance sheet
date. Such estimates are based on all available information and
are revised over time as more information becomes available. If
the effect of the time value of money is material, provisions are
discounted and measured at the present value of the expenditure
expected to settle or discharge the obligation, using a rate that
reflects the current market assessments of the time value of
money and the risks specific to the obligation.
When all conditions required to recognize a provision are not
met, a contingent liability is disclosed, unless the likelihood of an
outflow of resources is remote. Contingent liabilities are also dis-
closed for possible obligations that arise from past events whose
existence will be confirmed only by uncertain future events not
wholly within the control of UBS. Such disclosures are not made if
it is not practicable to do so.
339
Financial statements Note 1 Summary of significant accounting policies (continued)
Critical accounting estimates and judgments
Recognition of provisions often involves significant judgment in
assessing the existence of an obligation that results from past
events and in estimating the probability, timing and amount of
any outflows of resources. This is particularly the case for litiga-
tion, regulatory and similar matters, which, due to their nature,
are subject to many uncertainties making their outcome difficult
to predict. Such matters may involve unique fact patterns or novel
legal theories, proceedings that have not yet been initiated or are
at early stages of adjudication, or as to which alleged damages
have not been quantified by the claimants. Determining whether
an obligation exists as a result of a past event and estimating the
probability, timing and amount of any potential outflows is based
on a variety of assumptions, variables, and known and unknown
uncertainties.
The amount of any provision recognized is sensitive to the
assumptions used and there could be a wide range of possible
outcomes for any particular matter.
Statistical or other quantitative analytical tools are of limited
use in determining whether to establish or determine the amount
of provisions in the case of litigation, regulatory or similar matters.
Furthermore, information currently available to management may
be incomplete or inaccurate, increasing the risk of erroneous
assumptions with regard to the future development of such mat-
ters. Management regularly reviews all the available information
regarding such matters, including legal advice which is a signifi-
cant consideration, to assess whether the recognition criteria for
provisions have been satisfied and to determine the timing and
amount of any potential outflows.
➔ Refer to Note 20 for more information
13) Foreign currency translation
Transactions denominated in a foreign currency are translated
into the functional currency of the reporting entity at the spot
exchange rate on the date of the transaction. At the balance
sheet date, all monetary assets and liabilities denominated in for-
eign currency are translated into the functional currency using the
closing exchange rate. Non-monetary items measured at historical
cost are translated at the exchange rate on the date of the trans-
action. Foreign currency translation differences on non-monetary
financial assets classified as available for sale are generally
recorded directly in Equity until the asset is sold or becomes
impaired. However, translation differences on available for sale
monetary financial assets are reported in Net trading income on
an amortized-cost basis, along with all other foreign currency
translation differences on monetary assets and liabilities.
Upon consolidation, assets and liabilities of foreign operations
are translated into Swiss francs (CHF), UBS’s presentation cur-
rency, at the closing exchange rate on the balance sheet date, and
income and expense items are translated at the average rate for
the period. The resulting foreign currency translation differences
attributable to shareholders are recognized directly in Foreign cur-
rency translation within Equity, which forms part of Total equity
attributable to shareholders, whereas the foreign currency trans-
lation differences attributable to non-controlling interests are
shown within Equity attributable to non-controlling interests.
When a foreign operation is disposed or partially disposed of
and UBS loses control over the foreign operation, the cumulative
amount of foreign currency translation differences within Total
equity attributable to shareholders and Equity attributable to non-
controlling interests related to that foreign operation is reclassi-
fied to the income statement as part of the gain or loss on dis-
posal. When UBS disposes of a portion of its interest in a subsidiary
that includes a foreign operation but retains control, the related
portion of the cumulative currency translation balance is reclassi-
fied to Equity attributable to non-controlling interests.
➔ Refer to Note 34 for more information
14) Equity, treasury shares and contracts on UBS Group AG shares
Non-controlling interests and preferred noteholders
Net profit and Equity are presented including non-controlling
interests and preferred noteholders. Net profit is split into Net
profit attributable to shareholders, Net profit attributable to non-
controlling interests and Net profit attributable to preferred note-
holders. Equity is split into Equity attributable to shareholders,
Equity attributable to non-controlling interests and Equity attrib-
utable to preferred noteholders.
UBS Group AG shares held (treasury shares)
UBS Group AG shares held by the Group are presented in Equity
as Treasury shares at their acquisition cost and are deducted from
Equity until they are canceled or reissued. The difference between
the proceeds from sales of treasury shares and their weighted
average cost (net of tax, if any) is reported as Share premium.
Net cash settlement contracts
Contracts on UBS Group AG shares that require net cash settle-
ment, or provide the counterparty or UBS with a settlement
option that includes a choice of settling net in cash, are classified
as held for trading, with changes in fair value reported in the
income statement as Net trading income.
340
Consolidated financial statements Note 1 Summary of significant accounting policies (continued)
15) Leasing
UBS enters into lease contracts, or contracts that include lease
components, predominantly of premises and equipment, and
primarily as lessee. Leases that transfer substantially all the risks
and rewards, but not necessarily legal title in the underlying
assets, are classified as finance leases. All other leases are classi-
fied as operating leases. UBS is not a lessee in any material
finance leases.
Lease contracts classified as operating leases where UBS is the
lessee include non-cancellable long-term leases of office buildings
in most UBS locations. Operating lease rentals payable are recog-
nized as an expense on a straight-line basis over the lease term,
which commences with control of the physical use of the prop-
erty. Lease incentives are treated as a reduction of rental expense
and are recognized on a consistent basis over the lease term.
Where UBS acts as lessor under a finance lease, a receivable is
recognized in Loans at an amount equal to the present value of
the aggregate of the minimum lease payments plus any unguar-
anteed residual value that UBS expects to recover at the end of
the lease term. Initial direct costs are also included in the initial
measurement of the lease receivable. Lease payments received
during the lease term are allocated to repayment of the outstand-
ing receivable and interest income to reflect a constant periodic
rate of return on UBS’s net investment using the interest rate
implicit in the lease. UBS reviews the estimated unguaranteed
residual value annually, and if the estimated residual value to be
realized is less than the amount assumed at lease inception, a loss
is recognized for the expected shortfall.
Certain arrangements do not take the legal form of a lease but
convey a right to use an asset in return for a payment or series of
payments. For such arrangements, UBS determines at the incep-
tion of the arrangement whether the fulfillment of the arrange-
ment is dependent on the use of a specific asset or assets and, if
so, the arrangement is accounted for as a lease.
➔ Refer to Notes 10 and 31 for more information
b) Changes in accounting policies, comparability and other adjustments
Own credit
On 1 January 2016, UBS adopted the own credit presentation
requirements of IFRS 9, Financial Instruments. From this date
onward, changes in the fair value of financial liabilities desig-
nated at fair value through profit or loss related to own credit are
recognized in Other comprehensive income directly within
Retained earnings. As the Group does not hedge changes in own
credit arising on financial liabilities designated at fair value, pre-
senting own credit within Other comprehensive income does not
create or increase an accounting mismatch in the income state-
ment. The unrealized and any realized own credit recognized in
Other comprehensive income will not be reclassified to the
income statement in future periods. Changes in own credit pre-
sented in prior periods have not been restated and remain within
Net trading income.
.
Balance sheet classification of newly purchased high-quality
liquid debt securities
Starting 2016, UBS generally classifies newly purchased debt
securities held as high-quality liquid assets (HQLA), and managed
by Corporate Center – Group Asset and Liability Management
(Group ALM), as either financial assets designated at fair value
through profit or loss or financial assets held to maturity. Debt
securities acquired prior to 2016 and held for liquidity purposes
remain classified as available for sale financial assets.
Most of the HQLA debt securities purchased since the begin-
ning of 2016 are classified as financial assets designated at fair
value through profit or loss and are intended to reduce account-
ing mismatches by ensuring that changes in the fair value of the
securities are recognized in the income statement in line with the
associated interest rate derivatives used for risk management pur-
poses. A portion of HQLA debt securities are classified as financial
assets held to maturity.
341
Financial statements Note 1 Summary of significant accounting policies (continued)
Interest rate swaps converted to a settlement model
In 2016, UBS elected to convert its interest rate swaps (IRS) trans-
acted with the London Clearing House and Japan Securities Clear-
ing Corporation from the previous collateral model to a settle-
ment model. The IRS are now legally settled on a daily basis,
resulting in derecognition of the associated assets and liabilities.
Previously, UBS applied IAS 32 netting principles to offset the fair
value of IRS with the associated variation margin. Gross cash col-
lateral receivables and payables on derivative instruments and cor-
responding netting presented in Note 24 decreased by CHF 64
billion as of 31 December 2016, with no change to net cash col-
lateral receivables and payables on derivative instruments recog-
nized on the balance sheet. Consequently, the move to a settle-
ment model resulted in a significant decrease in the fair value of
interest rate swaps with the London Clearing House designated as
hedging instruments.
➔ Refer to Notes 12 and 24 for more information
Derecognition of exchange-traded derivative client cash balances
from the Group’s balance sheet
In accordance with the Group’s accounting policy, client cash bal-
ances associated with derivatives clearing and execution services
are not recognized on the balance sheet if, through contractual
agreement, regulation or practice, the Group neither obtains ben-
efits from nor controls the client cash balances. These conditions
are considered to have been met when (i) the Group is not permit-
ted to reinvest client cash balances, (ii) interest paid by central
counterparties (CCPs), brokers or deposit banks on cash deposits
forms part of the client cash balances with deductions being
made solely as compensation for clearing and execution services
provided, (iii) the Group does not guarantee and is not liable to
clients for the performance of the CCP, broker or deposit bank
and (iv) the client cash balances are legally isolated from the
Group’s estate.
During 2016, the Group formally and legally waived certain
rights available to it under the rules of the US Commodity Futures
Trading Commission that had previously enabled it to invest cer-
tain client cash balances in other assets, making them a source of
benefit to the Group. As a result, the Group derecognized related
client cash balances. Consequently, Cash collateral receivables on
derivative instruments decreased by CHF 2.5 billion, Due from
banks decreased by CHF 0.2 billion and Cash collateral payables
on derivative instruments decreased by CHF 2.7 billion as of
31 December 2016.
Transfer of the Risk Exposure Management function from
Corporate Center – Non-core and Legacy Portfolio to Corporate
Center – Group ALM
Consistent with changes in the manner in which operating seg-
ment performance is assessed, UBS transferred in 2016 the Risk
Exposure Management (REM) function from Corporate Center –
Non-core and Legacy Portfolio to Corporate Center – Group ALM
to further harmonize REM risk management responsibility with
the reporting structure and align it more closely with other activi-
ties performed by Corporate Center – Group ALM.
REM primarily performs risk management over credit, debit
and funding valuation adjustments for the Group’s over-the-coun-
ter derivatives portfolio. Prior-period segment profit and loss
information was restated to reflect this transfer, which had no
impact at a Group level. In Note 2, gross revenues from REM activ-
ities are now presented in Corporate Center – Group ALM within
Net interest income and Non-interest income. Revenue alloca-
tions from REM to business divisions and other Corporate Center
units are presented within Allocations from Corporate Center –
Group ALM to business divisions and other Corporate Center
units. There was no effect on operating profit before tax for any
segment for any period from this restatement. Prior-period infor-
mation for balance sheet assets has not been restated, as the
effect would not have been material.
Changes to statement of changes in equity
In 2016, UBS refined the presentation of effects from share-based
compensation on share premium and treasury shares in the state-
ment of changes in equity.
The new disclosure line Delivery of treasury shares under share-
based compensation plans, reflecting the average cost of treasury
shares, provides the effect on share premium and treasury shares
resulting from the delivery of treasury shares to employees. Also,
the effects from Share-based compensation expensed in the
income statement and Other disposal of treasury shares are now
presented separately. The former disclosure lines Disposal of trea-
sury shares, Treasury share gains / (losses) and Employee share and
share option plans have been removed.
These changes did not affect total equity or any components
of equity. Prior-period information has been adjusted accordingly.
Changes to the estimated useful life of certain IT hardware and
communication equipment and software
In 2016, UBS extended the estimated useful life for certain IT hard-
ware and communication equipment and software from five to
seven years, resulting in CHF 16 million and CHF 26 million lower
depreciation expenses in 2016, respectively. These changes are
expected to result in approximately CHF 120 million and CHF 60
million lower depreciation expenses in 2017 and 2018, respectively.
Annual Improvements to IFRSs 2012 – 2014 Cycle; Amendments
to IFRS 11, Joint Arrangements; IAS 16, Property, Plant and
Equipment; IAS 38, Intangible Assets; and IAS 1, Presentation of
Financial Statements
In 2016, UBS adopted a number of interpretations and amend-
ments to standards, that did not have a material impact on the
Group’s financial statements.
342
Consolidated financial statements Note 1 Summary of significant accounting policies (continued)
c) International Financial Reporting Standards and Interpretations to be adopted in 2017 and later and other adjustments
IFRS 9, Financial Instruments
In July 2014, the IASB published the final version of IFRS 9, Finan-
cial Instruments. The standard reflects the classification and mea-
surement, impairment and hedge accounting phases of the IASB’s
project to replace IAS 39, Financial Instruments: Recognition and
Measurement.
IFRS 9 requires all financial assets, except equity instruments,
to be classified at amortized cost, fair value through other com-
prehensive income (OCI) or fair value through profit or loss, on
the basis of the entity’s business model for managing the finan-
cial assets and its contractual cash flow characteristics. If a finan-
cial asset meets the criteria to be measured at amortized cost or
at fair value through OCI measurement, it can be designated at
fair value through profit or loss under the fair value option if
doing so would significantly reduce or eliminate an accounting
mismatch. Equity instruments that are not held for trading may
be accounted for at fair value through OCI, with no subsequent
reclassification of realized gains or losses to the income state-
ment, while all other equity instruments will be accounted for at
fair value through profit or loss. IFRS 9 classification and mea-
surement requirements for liabilities are unchanged except that
any gain or loss arising on a financial liability designated at fair
value through profit or loss that is attributable to changes in the
issuer’s own credit risk (own credit) is presented in OCI and not
recognized in the income statement.
IFRS 9 introduces a forward-looking expected credit loss (ECL)
approach, replacing the incurred loss impairment approach for
financial instruments in IAS 39, and the loss-provisioning approach
for financial guarantees and loan commitments in IAS 37, Provi-
sions, Contingent Liabilities and Contingent Assets. Expected
credit losses are required to be recognized in profit or loss for all
financial assets measured at amortized cost, debt instruments
measured at fair value through OCI, lease receivables, financial
guarantees and loan commitments. A 12-month expected credit
loss is generally recognized on inception, with a lifetime credit loss
required if a significant increase in credit risk (SICR) arises. A life-
time loss allowance is always recognized for credit-impaired
financial assets.
IFRS 9 also includes an optional revised hedge accounting
model, which further aligns the accounting treatment with the
risk management practices.
UBS early adopted the own credit presentation change in
the first quarter of 2016 and will adopt the classification and
measurement and impairment changes on 1 January 2018 in line
with the mandatory effective date. UBS is still assessing whether
it will adopt the optional IFRS 9 hedge accounting requirements
pending the IASB completing their project on macro hedge
accounting strategies. In line with IFRS 9, UBS does not intend to
restate prior periods and will recognize the difference between
carrying amounts as of 31 December 2017 and those on adoption
of IFRS 9 on 1 January 2018 in opening retained earnings.
UBS has assessed all material positions under the revised clas-
sification and measurement requirements and has identified cer-
tain debt instruments that will not qualify for amortized cost
accounting but will be measured at fair value through profit or
loss under IFRS 9. However, this is not expected to have significant
effects on UBS’s financial statements, as the instruments are pre-
dominantly collateralized short-term lending arrangements with
no material differences between their amortized cost value and
fair value. In addition, the Group is monitoring the IASB’s project
to amend IFRS 9 to allow for basic lending arrangements with
symmetrical break clauses to continue to qualify for amortized
cost accounting. These clauses are common features in Swiss pri-
vate mortgages as a consequence of Swiss law, and in Swiss cor-
porate lending due to market practice, and may result in compen-
sation for early termination being paid by either the borrower or
UBS. The IASB is expected to issue an exposure draft in April
2017, effective 1 January 2018 in line with IFRS 9’s effective date.
Based on the anticipated amendments, the Group expects that its
private mortgages and corporate loans can continue to be mea-
sured at amortized cost.
Overall, the level of credit losses is expected to increase under
IFRS 9 alongside additional income statement volatility due to the
use of uncertain forward-looking assumptions and the application
of the SICR approach. Initial ECL results, calculated for key portfo-
lios in a prototype environment with preliminary models and sce-
narios, indicate an increase in credit losses that should not have a
significant impact on equity on adoption, due to the relatively
short contractual maturities, the high quality of UBS’s loan book
and the current benign credit environment. Actual results on
1 January 2018 may differ significantly given the preliminary status
of the models and data included in the prototype and the possibil-
ity of changes in the macroeconomic environment. UBS continues
to monitor the potential effects of IFRS 9 on its regulatory capital
requirements, but does not expect any impact to be material.
➔ Refer to Note 1b for more information on own credit
343
Financial statements Note 1 Summary of significant accounting policies (continued)
IFRS 15, Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts
with Customers replacing IAS 18 Revenue. IFRS 15 establishes
principles for revenue recognition that apply to all contracts
with customers except those relating to financial instruments,
leases and insurance contracts and requires an entity to recog-
nize revenue as performance obligations are satisfied. In partic-
ular, the standard now specifies that variable consideration is
only recognized to the extent that it is highly probable that a
significant reversal will not occur when the uncertainty associ-
ated with the variable consideration is subsequently resolved.
This may affect when certain performance-based and asset-
based fees can be recognized.
It also provides guidance on when revenues and expenses
should be presented on a gross or net basis and establishes a
cohesive set of disclosure requirements for information on the
nature, amount, timing and uncertainty of revenue and cash
flows from contracts with customers.
UBS will adopt the standard as of its mandatory effective date
on 1 January 2018 and will apply it on a modified retrospective
basis, recognizing the cumulative effect of initially applying the
standard as an adjustment to the opening balance of retained
earnings. UBS continues to assess the impact of the new standard
on its financial statements, but currently does not expect any
impact to be material.
IFRS 16, Leases
In January 2016, the IASB issued IFRS 16, Leases, which replaces
IAS 17, Leases, and will come into effect on 1 January 2019. The
standard substantially changes how lessees must account for
operating lease commitments, requiring an on-balance sheet lia-
bility with a corresponding right-of-use asset to be recognized on
the balance sheet, compared with the current off-balance sheet
treatment of such leases. Early adoption is permitted for compa-
nies that also apply IFRS 15, Revenue from Contracts with Cus-
tomers. UBS expects to report an increase in assets and liabilities
from adoption in line with its operating lease commitments as at
1 January 2019.
➔ Refer to Note 31 for more information
Amendments to IAS 12, Income Taxes
In January 2016, the IASB issued narrow-scope amendments to
IAS 12, Income Taxes, clarifying how to account for deferred tax
assets related to debt instruments measured at fair value. Entities
are required to apply the amendments for annual periods begin-
ning on or after 1 January 2017. UBS expects that the adoption of
these amendments will not have a material impact on its financial
statements.
Amendments to IAS 7, Statement of Cash Flows
In January 2016, the IASB issued amendments to IAS 7, Statement
of Cash Flows, which, among other things, require companies to
provide information about changes in their financial liabilities aris-
ing from financing activities, including changes from cash flows
and non-cash changes, such as foreign exchange gains or losses.
UBS will adopt the amendments in the first quarter of 2017.
Amendments to IFRS 2, Share-based Payment
In June 2016, the IASB issued amendments to IFRS 2, Share-based
Payment, which are mandatorily effective as of 1 January 2018,
with early adoption permitted. The amendments require that the
approach used to account for vesting and non-vesting conditions
when measuring cash-settled share-based payments is consistent
with that used for equity-settled share-based payments. The
amendments also clarify the classification of share-based pay-
ments settled net of withholding tax as well as the accounting
consequences resulting from a modification of share-based pay-
ments from cash-settled to equity-settled. UBS expects that the
adoption of these amendments will not have a material impact on
its financial statements.
IFRIC 22, Foreign Currency Transactions and
Advance Consideration
In December 2016, the IFRS Interpretations Committee of the
IASB issued IFRIC Interpretation 22, Foreign Currency Transactions
and Advance Consideration, which clarifies that the date of the
transaction for the purpose of determining the exchange rate to
apply on initial recognition of the related asset, expense or income
is the date on which the entity initially recognizes the non-mone-
tary asset or non-monetary liability arising from the payment or
receipt of advance consideration. Entities are required to apply
IFRIC 22 for annual periods beginning on or after 1 January 2018.
UBS expects that the adoption of this IFRS Interpretation will not
have a material impact on its financial statements.
344
Consolidated financial statements Note 2a Segment reporting
The operational structure of the Group is comprised of Corporate
Center and five business divisions: Wealth Management, Wealth
Management Americas, Personal & Corporate Banking, Asset
Management and the Investment Bank.
Wealth Management
Wealth Management provides comprehensive advice and tailored
financial services to wealthy private clients around the world,
except those served by Wealth Management Americas. Its clients
benefit from the full spectrum of resources that UBS as a global
firm can offer, including banking and lending solutions, wealth
planning, investment management solutions and corporate
finance advice. Wealth Management’s guided architecture model
gives clients access to a wide range of products from the world’s
leading third-party institutions that complement its own products.
Wealth Management Americas
Wealth Management Americas provides advice-based solutions
through financial advisors who deliver a fully integrated set of
products and services specifically designed to address the needs
of their clients. Its business is primarily domestic US but includes
Canada and international business booked in the US.
Personal & Corporate Banking
Personal & Corporate Banking provides comprehensive financial
products and services to private, corporate and institutional cli-
ents in Switzerland and is among the leading players in the private
and corporate loan market in Switzerland, with a well-collateral-
ized and conservatively managed lending portfolio.
Its business is a central element of UBS’s universal bank delivery
model in Switzerland. Personal & Corporate Banking works with
the wealth management, investment bank and asset manage-
ment businesses to ensure that clients receive the best products
and solutions for their specific financial needs. Personal & Corpo-
rate Banking is also an important source of growth for other busi-
ness divisions in Switzerland through client referrals. In addition,
Personal & Corporate Banking manages a substantial part of
UBS’s Swiss infrastructure and banking products platform, both of
which are leveraged across the Group.
Asset Management
Asset Management provides investment management products
and services, platform solutions and advisory support to institu-
tions, wholesale intermediaries and wealth management clients
around the world, with an onshore presence in 22 countries. Asset
management is a leading fund house in Europe, the largest mutual
fund manager in Switzerland and one of the largest fund of hedge
funds and real estate investment managers in the world. Its global
investment capabilities include all major traditional and alternative
asset classes.
Investment Bank
The Investment Bank is present in over 35 countries, with princi-
pal offices in all major financial centers, providing investment
advice, financial solutions and capital markets access. It serves
corporate, institutional and wealth management clients across
the globe and forms a synergetic partnership with UBS’s wealth
management, personal and corporate banking and asset man-
agement businesses.
The business division is organized into Corporate Client Solu-
tions and Investor Client Services and also includes UBS Securities
Research.
Corporate Center
Corporate Center is comprised of Services, Group Asset and Liabil-
ity Management (Group ALM) and Non-core and Legacy Portfolio.
Services consists of the Group Chief Operating Officer area
(Group Corporate Services, Group Operations, Group Sourcing,
Group Technology), Group Finance, Group Legal, Group Human
Resources, Group Risk Control, Group Communications and Brand-
ing, Group Regulatory and Governance, and UBS and Society.
Group ALM manages the structural risks of UBS’s balance sheet,
including interest rate risk in the banking book, currency risk and
collateral risk, as well as the risks associated with the Group’s
liquidity and funding portfolios. Group ALM also seeks to optimize
the Group’s financial performance by better matching assets and
liabilities within the context of the Group’s liquidity, funding and
capital targets. Group ALM serves all business divisions and other
Corporate Center units through three main risk management
areas, and its risk management is fully integrated into the Group’s
risk governance framework.
Non-core and Legacy Portfolio is comprised of the positions
from businesses that were part of the Investment Bank prior to its
restructuring and is overseen by a committee chaired by the Group
Chief Risk Officer.
345
Financial statements Note 2a Segment reporting (continued)
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
Corporate Center
UBS
Services Group ALM
Non-core
and Legacy
Portfolio
CHF million
For the year ended 31 December 2016
Net interest income
Non-interest income
Allocations from CC – Group ALM to business
divisions and other CC units
Income1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from Corporate Center and other
business divisions
of which: services from CC – Services
Depreciation and impairment of property,
equipment and software
Amortization and impairment of intangible
assets2
Total operating expenses3
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Additional Information
Total assets
1,932
4,975
389
7,296
(5)
7,291
2,349
640
2,348
2,256
2
4
5,343
1,948
1,347
6,320
118
7,785
(3)
7,782
4,819
570
1,235
1,221
2
50
6,675
1,107
1,892
1,768
332
3,990
(6)
3,984
845
285
1,080
1,186
15
0
2,224
1,760
(33)
1,957
7
1,931
0
1,931
727
241
506
530
1
4
1,479
452
1,006
6,953
(260)
7,699
(11)
7,688
3,082
805
2,765
2,675
21
12
6,684
1,004
(322)
183
36
(102)
0
(102)
3,801
4,145
(8,164)
(8,204)
944
21
747
589
(295)
(512)
(219)
0
(219)
31
17
(49)
110
0
0
(1)
3
84
(110)
(23)
(13)
(36)
66
732
280
225
0
0
1,078
(849)
(218)
(1,114)
6,413
21,944
0
28,357
(37)
28,320
15,720
7,434
0
0
985
91
24,230
4,090
805
3,286
Additions to non-current assets
26
4
23
1
3
115,539
65,882
139,912
12,028
242,302
23,669
1,759
267,200
68,485
935,016
0
0
1,816
1 Impairments of financial assets available for sale for the year ended 31 December 2016 totaled CHF 5 million, of which CHF 3 million was recorded in Asset Management. 2 Refer to Note 15 for more
information. 3 Refer to Note 30 for information on restructuring expenses.
346
Consolidated financial statements Note 2a Segment reporting (continued)1
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
Corporate Center
UBS
Services Group ALM
Non-core
and Legacy
Portfolio
CHF million
For the year ended 31 December 2015
Net interest income
Non-interest income
Allocations from CC – Group ALM to business
divisions and other CC units
Income2
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from Corporate Center and other
business divisions
of which: services from CC – Services
Depreciation and impairment of property,
equipment and software
Amortization and impairment of intangible
assets3
Total operating expenses4
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Additional Information
Total assets
1,825
5,859
471
8,155
0
8,155
2,532
637
2,289
2,209
5
3
5,465
2,689
1,067
6,213
104
7,384
(4)
7,381
4,579
822
1,209
1,193
3
51
6,663
718
1,890
1,603
421
3,913
(37)
3,877
873
264
1,077
1,180
17
0
2,231
1,646
(34)
2,077
15
2,057
0
2,057
729
232
502
523
2
8
1,474
584
1,573
7,526
(211)
8,889
(68)
8,821
3,220
841
2,817
2,731
26
24
6,929
1,892
(340)
435
145
241
0
241
3,903
4,483
(8,215)
(8,245)
868
21
1,059
(818)
730
378
(832)
277
0
277
30
22
(57)
96
0
0
21
(101)
(114)
(195)
(8)
(203)
116
806
379
313
0
0
(5)
282
1,301
(1,503)
6,732
23,990
0
30,722
(117)
30,605
15,981
8,107
0
0
920
107
25,116
5,489
(898)
6,386
Additions to non-current assets
6
4
14
1
18
119,850
60,993
141,164
12,874
253,486
22,566
1,851
237,517
94,369
942,819
0
1
1,895
1 Figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting
standards or changes in accounting policies, and events after the reporting period. Refer to Note 1b for more information. 2 Impairments of financial assets available for sale for the year ended 31 December 2015
totaled CHF 1 million, all in Wealth Management. 3 Refer to Note 15 for more information. 4 Refer to Note 30 for information on restructuring expenses.
347
Financial statements
Note 2a Segment reporting (continued)1
Wealth
Management
Wealth
Management
Americas
Personal &
Corporate
Banking
Asset
Management
Investment
Bank
Corporate Center
UBS
Services Group ALM
Non-core
and Legacy
Portfolio
CHF million
For the year ended 31 December 2014
Net interest income
Non-interest income
Allocations from CC – Group ALM to business
divisions and other CC units
Income2
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from Corporate Center and other
business divisions
of which: services from CC – Services
Depreciation and impairment of property,
equipment and software
Amortization and impairment of intangible
assets3
Total operating expenses4
Operating profit / (loss) before tax
Tax expense / (benefit)
Net profit / (loss)
Additional Information
Total assets
1,693
5,726
481
7,902
(1)
7,901
2,467
918
2,180
2,122
4
5
5,574
2,326
864
6,004
116
6,984
15
6,998
4,363
550
1,137
1,121
0
48
6,099
900
1,801
1,575
461
3,836
(95)
3,741
850
293
1,074
1,196
17
0
2,235
1,506
(39)
1,914
27
1,902
0
1,902
643
305
478
495
2
9
1,435
467
1,583
6,823
(100)
8,306
2
8,308
2,964
2,671
2,711
2,658
32
15
8,392
(84)
(338)
158
217
37
0
37
3,843
4,123
(8,046)
(8,084)
762
6
688
(652)
731
101
(831)
2
0
2
26
22
(48)
88
0
0
0
2
258
(751)
(371)
(863)
2
(862)
124
505
514
404
0
0
1,144
(2,005)
6,555
21,550
0
28,105
(78)
28,027
15,280
9,387
0
0
817
83
25,567
2,461
(1,180)
3,640
Additions to non-current assets
7
6
9
2
7
127,588
56,026
143,711
15,207
292,347
19,871
1,677
237,902
169,826
1,062,478
0
0
1,708
1 Figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting
standards or changes in accounting policies, and events after the reporting period. Refer to Note 1b for more information. 2 Impairments of financial assets available for sale for the year ended 31 December 2014
totaled CHF 76 million, of which CHF 49 million was recorded in the Investment Bank and CHF 23 million in Corporate Center – Non-core and Legacy Portfolio. 3 Refer to Note 15 for more information. 4 Refer to
Note 30 for information on restructuring expenses.
348
Consolidated financial statements
Note 2b Segment reporting by geographic location
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 perfor-
mance 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 Corporate Center – Non-core
and Legacy Portfolio, are managed at a Group level. These reve-
nues are included in the Global line.
The geographic analysis of non-current assets is based on the
location of the entity in which the assets are recorded.
For the year ended 31 December 2016
Americas
of which: US
Asia Pacific
Europe, Middle East and Africa
Switzerland
Global
Total
For the year ended 31 December 2015
Americas
of which: US
Asia Pacific
Europe, Middle East and Africa
Switzerland
Global
Total
For the year ended 31 December 2014
Americas
of which: US
Asia Pacific
Europe, Middle East and Africa
Switzerland
Global
Total
Total operating income
Total non-current assets
CHF billion
Share %
CHF billion
Share %
11.7
11.1
4.1
6.1
6.8
(0.4)
28.3
41
39
14
22
24
(1)
100
7.4
7.0
0.7
1.8
6.0
0.0
15.9
47
44
4
11
38
0
100
Total operating income
Total non-current assets
CHF billion
Share %
CHF billion
Share %
11.3
10.7
5.0
6.8
7.1
0.5
30.6
37
35
16
22
23
2
100
7.1
6.7
0.5
1.7
5.9
0.0
15.2
47
44
3
11
39
0
100
Total operating income
Total non-current assets
CHF billion
Share %
CHF billion
Share %
10.7
10.1
4.6
6.8
6.8
(0.9)
28.0
38
36
16
24
24
(3)
100
7.0
6.6
0.4
1.5
5.6
0.0
14.6
48
45
3
10
38
0
100
349
Financial statements Income statement notes
Note 3 Net interest and trading income
CHF million
Net interest and trading income
Net interest income
Net trading income
Total net interest and trading income
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
of which: Corporate Client Solutions
of which: Investor Client Services
Corporate Center
of which: Services
of which: Group ALM
of which: own credit on financial liabilities designated at fair value1
of which: Non-core and Legacy Portfolio
Total net interest and trading income
Net interest income
Interest income
Interest income from loans and deposits2, 3
Interest income from securities financing transactions4
Interest income from trading portfolio5
Interest income from financial assets and liabilities designated at fair value
Interest income from financial assets available for sale and held to maturity5
Total
Interest expense
Interest expense on loans and deposits6
Interest expense on securities financing transactions7
Interest expense on trading portfolio8
Interest expense on financial assets and liabilities designated at fair value
Interest expense on debt issued
Total
Net interest income
Net trading income
Investment Bank Corporate Client Solutions
Investment Bank Investor Client Services
Other business divisions and Corporate Center
Net trading income
of which: net gains / (losses) from financial assets designated at fair value
of which: net gains / (losses) from financial liabilities designated at fair value9
For the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
6,413
4,948
11,361
2,998
1,839
2,532
(29)
4,277
822
3,455
(256)
(89)
(104)
(62)
11,361
9,570
1,136
2,465
361
253
6,732
5,742
12,474
3,034
1,537
2,613
(5)
5,186
1,001
4,185
110
(3)
426
553
(313)
6,555
3,842
10,397
2,845
1,352
2,536
0
4,517
1,030
3,487
(854)
34
16
292
(904)
12,474
10,397
8,625
896
3,071
194
391
8,722
752
3,196
208
315
13,787
13,177
13,194
826
1,233
1,614
841
2,858
7,373
6,413
188
3,332
1,428
4,948
(191)
(1,362)
476
976
1,670
730
2,592
6,445
6,732
321
3,494
1,928
5,742
(127)
3,701
708
827
1,804
919
2,382
6,639
6,555
276
2,760
807
3,842
(89)
(2,380)
(5)
(14)
(9)
(1)
20
(3)
480
(18)
(18)
(17)
(100)
(80)
(9)
11
27
(20)
86
(35)
5
74
26
(3)
15
10
14
(5)
(41)
(5)
(26)
(14)
50
1 Refer to Note 1b for more information. 2 Includes interest income on impaired loans and advances of CHF 21 million for 2016, CHF 16 million for 2015 and CHF 15 million for 2014. 3 Consists of interest income
from balances with central banks, amounts due from banks and loans, and negative interest on amounts due to banks and customers. 4 Includes interest income on securities borrowed and reverse repurchase
agreements and negative interest, including fees, on securities lent and repurchase agreements. 5 Includes dividend income. 6 Consists of interest expense on amounts due to banks and customers, and negative
interest on balances with central banks, amounts due from banks and loans. 7 Includes interest expense on securities lent and repurchase agreements and negative interest, including fees, on securities borrowed and
reverse repurchase agreements. 8 Includes expense related to dividend payment obligations on trading liabilities. 9 Excludes fair value changes of hedges related to financial liabilities designated at fair value and
foreign currency translation effects arising from translating foreign currency transactions into the respective functional currency, both of which are reported within net trading income.
350
Consolidated financial statements Note 4 Net fee and commission income
CHF million
Underwriting fees
of which: equity underwriting fees
of which: debt underwriting fees
M&A and corporate finance fees
Brokerage fees
Investment fund fees
Portfolio management and advisory fees
Other
Total fee and commission income
Brokerage fees paid
Other
Total fee and commission expense
Net fee and commission income
of which: net brokerage fees
Note 5 Other income
CHF million
Associates and subsidiaries
Net gains / (losses) from disposals of subsidiaries1
Net gains / (losses) from disposals of investments in associates
Share of net profits of associates
Total
Financial assets available for sale
Net gains / (losses) from disposals
Impairment charges
Total
Net income from properties (excluding net gains / (losses) from disposals)3
Net gains / (losses) from disposals of properties held for sale
Net gains / (losses) from disposals of loans and receivables
Other
Total other income
For the year ended
31.12.15
1,246
31.12.14
1,470
836
410
737
3,930
3,567
7,858
1,678
19,016
869
1,007
1,876
17,140
3,060
947
522
731
3,918
3,717
7,343
1,760
18,940
818
1,045
1,863
17,076
3,100
31.12.16
946
516
431
733
3,541
3,155
8,035
1,747
18,157
757
1,003
1,760
16,397
2,784
% change from
31.12.15
(24)
(38)
5
(1)
(10)
(12)
2
4
(5)
(13)
0
(6)
(4)
(9)
For the year ended
31.12.16
31.12.15
31.12.14
% change from
31.12.15
(150)2
0
106
(44)
346
(5)
342
25
125
(3)
154
599
2642
0
169
433
252
(1)
251
28
378
26
(9)4
1,107
56
69
94
219
219
(76)
143
30
44
39
157
632
(37)
37
400
36
(11)
(67)
(46)
1 Includes foreign exchange gains / (losses) reclassified from other comprehensive income related to disposed foreign subsidiaries and branches. 2 2016 includes a loss on sale of a subsidiary of CHF 23 million in Wealth
Management. 2015 includes a net gain on sale of subsidiaries of CHF 113 million in Wealth Management and a net gain on sale of subsidiaries of CHF 56 million in Asset Management. Refer to Note 30 for more
information. 3 Includes net rent received from third parties and net operating expenses. 4 Includes a net gain on sale of businesses of CHF 56 million in Wealth Management. Refer to Note 30 for more information.
351
Financial statements Note 6 Personnel expenses
CHF million
Salaries1
Variable compensation – performance awards2
of which: guarantees for new hires
Variable compensation – other2
of which: replacement payments3
of which: forfeiture credits
of which: severance payments4
of which: retention plan and other payments
Wealth Management Americas: Financial advisor compensation2, 5
Contractors
Social security
Pension and other post-employment benefit plans6
Other personnel expenses
Total personnel expenses7
For the year ended
31.12.16
31.12.15
31.12.14
% change from
31.12.15
6,230
2,972
30
418
86
(73)
217
188
6,282
3,210
38
346
76
(86)
157
198
6,269
2,820
48
466
81
(70)
162
292
3,697
3,552
3,385
420
747
670
565
365
820
808
600
234
791
711
605
15,720
15,981
15,280
(1)
(7)
(21)
21
13
(15)
38
(5)
4
15
(9)
(17)
(6)
(2)
1 Includes role-based allowances. 2 Refer to Note 27 for more information. 3 Replacement payments are payments made to compensate employees for deferred awards forfeited as a result of joining UBS. 4 Includes
legally obligated and standard severance payments. 5 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental
compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes expenses related to compensation commitments with financial advisors entered into at the time
of recruitment that are subject to vesting requirements. 6 Refer to Note 26 for more information. 7 Includes net restructuring expenses of CHF 751 million, CHF 460 million and CHF 327 million for the years ended
31 December 2016, 31 December 2015 and 31 December 2014, respectively. Refer to Note 30 for more information.
Note 7 General and administrative expenses
CHF million
Occupancy
Rent and maintenance of IT and other equipment
Communication and market data services
Administration
Marketing and public relations
Travel and entertainment
Professional fees
Outsourcing of IT and other services
Provisions for litigation, regulatory and similar matters1
Other
Total general and administrative expenses2
For the year ended
31.12.16
31.12.15
935
511
626
713
467
423
1,234
1,637
795
93
7,434
930
510
611
718
486
460
1,354
1,743
1,087
208
8,107
31.12.14
1,005
479
608
610
468
458
1,306
1,603
2,594
256
9,387
% change from
31.12.15
1
0
2
(1)
(4)
(8)
(9)
(6)
(27)
(55)
(8)
1 Reflects the net increase in provisions for litigation, regulatory and similar matters recognized in the income statement. Refer to Note 20 for more information. Also includes recoveries from third parties of CHF 13
million, CHF 10 million and CHF 10 million for the years ended 31 December 2016, 31 December 2015 and 31 December 2014, respectively. 2 Includes net restructuring expenses of CHF 695 million, CHF 761 million
and CHF 319 million for the years ended 31 December 2016, 31 December 2015 and 31 December 2014, respectively. Refer to Note 30 for more information.
352
Consolidated financial statements Note 8 Income taxes
CHF million
Tax expense / (benefit)
Swiss
Current
Deferred
Non-Swiss
Current
Deferred
Total income tax expense / (benefit) recognized in the income statement
For the year ended
31.12.16
31.12.15
31.12.14
459
635
353
(642)
805
239
330
476
(1,943)
(898)
46
1,348
409
(2,983)
(1,180)
Income tax recognized in the income statement
The Swiss current tax expense of CHF 459 million related to tax-
able profits, mainly earned by Swiss subsidiaries, against which no
losses were available to offset. The Swiss deferred tax expense of
CHF 635 million reflected a decrease of deferred tax assets previ-
ously recognized in relation to tax losses carried forward and tem-
porary differences.
The non-Swiss current tax expense of CHF 353 million related
to taxable profits earned by non-Swiss subsidiaries and branches,
against which no losses were available to offset. The non-Swiss
net deferred tax benefit of CHF 642 million was primarily due to
an increase in US deferred tax assets, reflecting updated profit
forecasts.
UBS considers the performance of its businesses and the accu-
racy of historical forecasts and other factors in evaluating the
recoverability of its deferred tax assets, including the remaining
tax loss carry-forward period, and its assessment of expected
future taxable profits in the forecast period used for recognizing
deferred tax assets. Estimating future profitability is inherently
subjective and is particularly sensitive to future economic, market
and other conditions, which are difficult to predict.
CHF million
Operating profit / (loss) before tax
of which: Swiss
of which: Non-Swiss
Income taxes at Swiss tax rate of 21%
Increase / (decrease) resulting from:
Non-Swiss tax rates differing from Swiss tax rate
Tax effects of losses not recognized
Previously unrecognized tax losses now utilized
Non-taxable and lower taxed income
Non-deductible expenses and additional taxable income
Adjustments related to prior years – current tax
Adjustments related to prior years – deferred tax
Change in deferred tax valuation allowances
Adjustments to deferred tax balances arising from changes in tax rates
Other items
Income tax expense / (benefit)
For the year ended
31.12.16
31.12.15
31.12.14
4,090
2,629
1,461
859
74
185
(39)
(353)
950
22
2
(986)
19
72
805
5,489
3,753
1,736
1,153
(73)
107
(107)
(297)
541
29
(48)
(2,419)
190
27
(898)
2,461
1,173
1,288
517
70
325
(285)
(384)
1,069
5
(9)
(2,373)
(183)
69
(1,180)
353
Financial statements Note 8 Income taxes (continued)
The components of operating profit before tax, and the differ-
ences between income tax expense reflected in the financial
statements and the amounts calculated at the Swiss tax rate, are
provided in the table on the previous page and explained below.
expense arises in relation to those taxable profits. Therefore, the
tax expense calculated by applying the local rate on those profits
is reversed.
Non-Swiss tax rates differing from Swiss tax rate
To the extent that Group profits or losses arise outside Switzer-
land, the applicable local tax rate may differ from the Swiss tax
rate. This item reflects, for such profits or losses, an adjustment
from the tax expense / benefit that would arise at the Swiss tax
rate and the tax expense / benefit that would arise at the appli-
cable local tax rate. If an entity generates a profit, a tax expense
arises where the local tax rate is in excess of the Swiss tax rate
and a tax benefit arises where the local tax rate is below the
Swiss tax rate. Conversely, if an entity incurs a loss, a tax benefit
arises where the local tax rate is in excess of the Swiss tax rate
and a tax expense arises where the local tax rate is less than the
Swiss tax rate.
Tax effects of losses not recognized
This item relates to tax losses of entities arising in the year, which
are not recognized as deferred tax assets. Consequently, no tax
benefit arises in relation to those losses. Therefore, the tax benefit
calculated by applying the local tax rate to those losses as
described above is reversed.
Previously unrecognized tax losses now utilized
This item relates to taxable profits of the year, which are offset by
tax losses of previous years, for which no deferred tax assets were
previously recorded. Consequently, no current tax or deferred tax
Non-taxable and lower taxed income
This item relates to profits for the year, which are either perma-
nently not taxable or are taxable, but at a lower rate of tax than
the local tax rate. It also includes any permanent deductions
made for tax purposes, which are not reflected in the accounts,
thereby effectively ensuring that profits covered by the deduction
are not taxable.
Non-deductible expenses and additional taxable income
This item mainly relates to income for the year, which is imputed
for tax purposes for an entity, but is not included in its operating
profit. In addition, it includes expenses for the year that are per-
manently non-deductible.
Adjustments related to prior years – current tax
This item relates to adjustments to current tax expense for prior
years, for example, if the tax payable for a year agreed with the
tax authorities is expected to differ from the amount previously
reflected in the financial statements.
Adjustments related to prior years – deferred tax
This item relates to adjustments to deferred tax positions recog-
nized in prior years, for example, if a tax loss for a year is fully
recognized and the amount of the tax loss agreed with the tax
authorities is expected to differ from the amount previously rec-
ognized as deferred tax assets in the accounts.
354
Consolidated financial statements Note 8 Income taxes (continued)
Change in deferred tax valuation allowances
This item includes revaluations of deferred tax assets previously
recognized resulting from reassessments of expected future tax-
able profits. It also includes changes in temporary differences in
the year, for which deferred tax is not recognized. The amount
in the year mainly relates to the upward revaluation of deferred
tax assets.
Adjustments to deferred tax balances arising from changes in
tax rates
This item relates to remeasurements of deferred tax assets and
liabilities recognized due to changes in tax rates. These have the
effect of changing the future tax saving that is expected from tax
losses or deductible tax differences and therefore the amount of
deferred tax assets recognized or, alternatively, changing the tax
cost of additional taxable income from taxable temporary differ-
ences and therefore the deferred tax liability.
Other items
Other items include other differences between profits or losses at
the local tax rate and the actual local tax expense or benefit,
including increases in provisions for uncertain positions in relation
to the current year, interest accruals for such provisions in relation
to prior years and other items.
Income tax recognized directly in equity
Certain tax expenses and benefits were recognized directly in equity.
These included a tax benefit of CHF 170 million related to cash flow
hedges (2015: benefit of CHF 131 million), a tax benefit of CHF 28
million related to financial assets classified as available for sale
(2015: benefit of CHF 8 million), a tax expense of CHF 84 million
related to foreign currency translation gains and losses (2015:
expense of CHF 1 million), a tax benefit of CHF 52 million related to
defined benefit plans (2015: expense of CHF 19 million) and a tax
benefit of CHF 5 million (2015: CHF 0 million) related to own credit.
In addition, they included a tax benefit of CHF 28 million recognized
in share premium (2015: benefit of CHF 9 million). Furthermore,
there were net foreign currency translation movements related to
the effects of exchange rate changes on tax assets and liabilities
denominated in currencies other than Swiss francs.
Deferred tax assets and liabilities
The Group has deferred tax assets related to tax loss carry-for-
wards and other items as shown in the table below. As of
31 December 2016, deferred tax assets of CHF 1,689 million
(31 December 2015: CHF 2,094 million) were recognized by enti-
ties that incurred losses in either the current or preceding year
based on projections of future taxable profits. The valuation
allowance reflects deferred tax assets that were not recognized
because it was not considered probable that future taxable profits
will be available to utilize the related tax loss carry-forwards and
deductible temporary differences.
CHF million
Deferred tax assets1
Tax loss carry-forwards
Temporary differences
of which: related to compensation and benefits
of which: related to trading assets
of which: related to investments in subsidiaries and goodwill
of which: other
Total deferred tax assets
Deferred tax liabilities
Goodwill and intangible assets
Financial assets
Investments in associates and other
Total deferred tax liabilities
1 Less deferred tax liabilities as applicable.
Gross
24,627
6,346
1,420
935
2,059
1,932
30,973
31.12.16
Valuation
allowance
Recognized
(16,430)
(1,388)
(208)
(118)
0
(1,062)
(17,818)
8,197
4,958
1,211
817
2,059
870
31.12.15
Valuation
allowance
(18,378)
(1,284)
(267)
(77)
0
(940)
Gross
25,471
7,026
1,576
1,116
2,310
2,023
Recognized
7,093
5,742
1,310
1,038
2,310
1,084
13,155
32,497
(19,661)
12,835
24
2
18
44
28
1
27
56
355
Financial statements Note 8 Income taxes (continued)
As of 31 December 2016, tax loss carry-forwards totaling CHF 49,478 million (31 December 2015: CHF 56,973 million), which are not
recognized as deferred tax assets, were available to be offset against future taxable profits. These tax losses expire as outlined in the
table below.
Unrecognized tax loss carry-forwards
CHF million
Within 1 year
From 2 to 5 years
From 6 to 10 years
From 11 to 20 years
No expiry
Total
31.12.16
31.12.15
0
66
910
32,603
15,899
49,478
3,727
33
753
34,833
17,627
56,973
In general, Swiss tax losses can be carried forward for seven years,
US federal tax losses for 20 years and UK and Jersey tax losses for
an unlimited period.
The Group recognizes deferred tax liabilities on undistributed
earnings of subsidiaries, except to the extent that those earnings
are indefinitely invested. As of 31 December 2016, no such earn-
ings were considered indefinitely invested.
The financial statements have been prepared on the basis that
UBS Limited is able to offset part of its taxable profits against
losses transferred from UBS AG. During 2016, the UK tax author-
ities indicated that they do not agree with this tax return filing
position. If the authorities ultimately prevail on this point, UBS
Limited would incur a further reduction in recognized deferred tax
assets of approximately CHF 60 million, as well as additional cur-
rent tax expenses for periods from 2014 onward of approximately
CHF 70 million.
356
Consolidated financial statements Note 9 Earnings per share (EPS) and shares outstanding
Basic earnings (CHF million)
Net profit / (loss) attributable to shareholders
Diluted earnings (CHF million)
Net profit / (loss) attributable to shareholders
Less: (profit) / loss on own equity derivative contracts
Net profit / (loss) attributable to shareholders for diluted EPS
Weighted average shares outstanding
Weighted average shares outstanding for basic EPS
Effect of dilutive potential shares resulting from notional shares, in-the-money options and
warrants outstanding
Weighted average shares outstanding for diluted EPS
Earnings per share (CHF)
Basic
Diluted
Shares outstanding
Shares issued
Treasury shares
Shares outstanding
As of or for the year ended
% change from
31.12.16
31.12.15
31.12.14
31.12.15
3,204
6,203
3,466
3,204
0
3,204
6,203
0
6,203
3,466
0
3,466
3,719,764,322
3,690,375,879
3,720,188,713
104,244,665
90,898,386
85,325,322
3,824,008,987
3,781,274,265
3,805,514,035
0.86
0.84
1.68
1.64
0.93
0.91
3,850,766,389
3,849,731,535
3,717,128,324
138,441,772
98,706,275
87,871,737
3,712,324,617
3,751,025,260
3,629,256,587
(48)
(48)
(48)
1
15
1
(49)
(49)
0
40
(1)
The table below outlines the potential shares which could dilute basic earnings per share in the future, but were not dilutive for the
periods presented.
Number of shares
31.12.16
31.12.15
31.12.14
31.12.15
% change from
Potentially dilutive instruments
Employee share-based compensation awards
Other equity derivative contracts
Total
46,981,698
8,419,122
55,400,820
67,766,835
6,061,848
73,828,683
94,335,120
6,728,173
101,063,293
(31)
39
(25)
357
Financial statements Balance sheet notes: assets
Note 10 Due from banks and loans (held at amortized cost)
CHF million
By type of exposure
Due from banks, gross
Allowance for credit losses
Due from banks, net
Loans, gross
Residential mortgages
Commercial mortgages
Lombard loans
Other loans1
Finance lease receivables2
Securities
Subtotal
Allowance for credit losses
Loans, net
Total due from banks and loans, net3
1 Includes corporate loans. 2 Refer to Note 31 for more information. 3 Refer to Note 25b for more information on collateral and credit enhancements.
31.12.16
31.12.15
13,159
(3)
13,156
142,197
19,765
104,999
36,481
986
2,494
306,921
(596)
306,325
319,481
11,951
(3)
11,948
141,608
21,509
107,084
38,552
1,083
2,807
312,643
(689)
311,954
323,902
Note 11 Allowances and provisions for credit losses
CHF million
By movement
Balance at the beginning of the year
Write-offs / usage of provisions
Recoveries
Increase / (decrease) recognized in the income statement
Reclassifications
Foreign currency translation
Other
Balance at the end of the year
Specific
allowances
Collective
allowances
Total
allowances
686
(143)
21
21
(10)
(1)
12
587
6
(2)
0
6
0
0
0
12
692
(145)
22
28
(10)
0
12
599
Provisions1
35
0
0
9
10
0
0
54
Total
31.12.16
Total
31.12.15
727
(145)
22
37
0
0
12
653
735
(164)
48
117
0
(11)
2
727
1 Represents provisions for loan commitments and guarantees. Refer to Note 20 for more information. Refer to the “Treasury management” section of this report for the maximum irrevocable amount of loan commitments
and guarantees.
By balance sheet line
Due from banks
Loans
Provisions1
Balance at the end of the year
1 Represents provisions for loan commitments and guarantees.
Specific
allowances
Collective
allowances
Total
allowances
Provisions
Total
31.12.16
Total
31.12.15
3
585
587
0
12
12
3
596
599
3
596
54
653
3
689
35
727
54
54
358
Consolidated financial statements Note 12 Derivative instruments and hedge accounting
Derivatives: overview
A derivative is a financial instrument of which the value is derived
from one or more variables (underlyings). Underlyings may be
indices, foreign currency exchange or interest rates, or the value
of shares, commodities, bonds or other financial instruments. A
derivative commonly requires little or no initial net investment by
either counterparty to the trade.
The majority of derivative contracts are negotiated with respect
to notional amounts, tenor, price and settlement mechanisms, as
is customary with other financial instruments.
Over-the-counter (OTC) derivative contracts are usually traded
under a standardized International Swaps and Derivatives Asso-
ciation (ISDA) master agreement between UBS and its counter-
parties. Terms are negotiated directly with counterparties and the
contracts will have industry-standard settlement mechanisms
prescribed by ISDA. Recent rules, introduced by regulators in
various jurisdictions, require or will soon require the payment and
collection of initial and variation margin on certain OTC deriva-
tive contracts which may have a bearing on their price and other
relevant terms.
The industry continues to promote the use of central counter-
parties (CCPs) to clear OTC trades. The trend toward CCP clearing
and settlement will generally facilitate the reduction of systemic
credit exposures.
Other derivative contracts are standardized in terms of their
amounts and settlement dates, and are bought and sold on regu-
lated exchanges. These are commonly referred to as exchange-
traded derivatives (ETD) contracts. Exchanges offer the benefits of
pricing transparency, standardized daily settlement of changes in
value and consequently reduced credit risk.
For presentation purposes, the Group’s derivative contracts are
subject to IFRS netting provisions. Derivative instruments are mea-
sured at fair value and generally classified as Positive replacement
values and Negative replacement values on the balance sheet.
However, ETD that are economically settled on a daily basis and
OTC derivatives that are either legally settled or in substance net
settled on a daily basis are classified as Cash collateral receivables
on derivative instruments or Cash collateral payables on derivative
instruments. Changes in the replacement values of derivatives are
recorded in Net trading income unless the derivatives are desig-
nated and effective as hedging instruments in certain types of
hedge accounting relationships.
➔ Refer to Note 1a item 3j for more information
➔ Refer to Note 24 for more information on the values of positive
and negative replacement values after consideration of netting
potential allowed under enforceable netting arrangements
The Group uses various derivative instruments for both trading
and hedging purposes. Derivative product types as well as valua-
tion principles and techniques applied by the Group are described
in Note 22. Positive replacement values represent the estimated
amount the Group would receive if the derivative contract were
sold on the balance sheet date. Negative replacement values indi-
cate the estimated amount the Group would pay to transfer its
obligations in respect of the underlying contract were it required
or entitled to do so on the balance sheet date.
Derivatives embedded in other financial instruments are not
included in the “Derivative instruments” table within this Note.
Bifurcated embedded derivatives are presented on the same bal-
ance sheet line as the host contract. In cases where UBS applies
the fair value option to hybrid instruments, bifurcation of an
embedded derivative component is not required and as such this
component is also not included in the table “Derivative instru-
ments” table.
➔ Refer to Notes 18 and 22 for more information
Risks of derivative instruments
Derivative instruments are transacted in many trading portfolios,
which generally include several types of instruments, not just
derivatives. The market risk of derivatives is predominantly man-
aged and controlled as an integral part of the market risk of these
portfolios. The Group’s approach to market risk is described in the
audited sections of the “Risk management and control” section
of this report.
Derivative instruments are also transacted with many different
counterparties, most of whom are also counterparties for other
types of business. The credit risk of derivatives is managed and
controlled in the context of the Group’s overall credit exposure to
its counterparties. The Group’s approach to credit risk is described
in the audited portions of “Credit risk” in the “Risk management
and control” section of this report. It should be noted that,
although the positive replacement values shown on the balance
sheet can be an important component of the Group’s credit expo-
sure, the positive replacement values related to a respective coun-
terparty are rarely an adequate reflection of the Group’s credit
exposure in its derivatives business with that counterparty. This is
generally the case because, on the one hand, replacement values
can increase over time (potential future exposure), while on the
other hand, exposure may be mitigated by entering into master
netting agreements and bilateral collateral arrangements. Both
the exposure measures used internally by the Group to control
credit risk and the capital requirements imposed by regulators
reflect these additional factors.
359
Financial statements Note 12 Derivative instruments and hedge accounting (continued)
Derivative instruments1
31.12.16
31.12.15
Notional
values
related
to PRV3
NRV4
Notional
values
related
to NRV3
Other
notional
values3, 5
29.6
599.3
478.1
45.4
1,152.4
116.9
3.3
2.9
123.1
715.6
1,220.8
530.3
2.9
2,469.6
0.0
76.5
49.6
142.5
268.6
0.1
38.3
13.9
0.0
0.2
52.5
3.9
0.9
0.0
4.8
19.0
42.0
11.0
0.1
0.0
72.1
0.0
4.8
5.8
4.6
6.9
22.1
21.9
552.6
480.6
4.5
2,242.8
7,064.2
326.4
96.2
1,059.6
9,729.6
135.2
4.3
0.1
139.6
650.9
1,115.0
513.7
6.0
2,285.6
0.0
69.0
92.8
155.8
317.6
6.1
6.1
33.0
21.6
54.5
Notional
values
related
to PRV3
48.6
840.1
581.7
22.7
NRV4
0.2
48.2
19.1
0.0
0.1
Notional
values
related
to NRV3
Other
notional
values3, 5
51.9
782.0
549.8
15.5
2,351.4
5,904.7
346.0
169.4
1,493.1
67.6
1,399.3
8,771.4
152.7
5.0
4.2
161.9
727.6
1,429.9
496.8
3.4
6.0
0.6
0.0
6.7
16.6
37.6
9.3
0.0
0.0
165.7
4.1
0.1
169.8
673.9
1,330.1
478.0
4.6
8.1
2,657.7
63.5
2,486.6
8.1
0.0
64.1
59.1
107.2
0.0
4.3
6.7
5.2
4.9
0.0
87.0
92.6
126.0
230.3
21.2
305.6
30.0
13.4
43.3
PRV2
0.1
57.0
17.3
0.0
0.1
74.5
6.1
0.6
0.0
6.7
17.8
38.3
9.5
0.0
0.0
65.7
0.0
2.9
4.8
4.3
5.0
16.9
PRV2
0.1
45.2
12.6
0.0
0.2
58.0
3.7
0.2
0.0
3.9
21.8
43.2
11.1
0.0
0.0
76.1
0.0
3.6
3.7
3.8
6.9
18.0
CHF billion
Interest rate contracts
Over-the-counter (OTC) contracts
Forward contracts6
Swaps
Options
Exchange-traded contracts
Futures
Options
Agency transactions7
Total
Credit derivative contracts
Over-the-counter (OTC) contracts
Credit default swaps
Total return swaps
Options and warrants
Total
Foreign exchange contracts
Over-the-counter (OTC) contracts
Forward contracts
Interest and currency swaps
Options
Exchange-traded contracts
Futures
Options
Agency transactions7
Total
Equity / index contracts
Over-the-counter (OTC) contracts
Forward contracts
Swaps
Options
Exchange-traded contracts
Futures
Options
Agency transactions7
Total
Table continues on the next page.
360
Consolidated financial statements Note 12 Derivative instruments and hedge accounting (continued)
Derivative instruments (continued)1
Table continued from the previous page.
CHF billion
Commodity contracts
Over-the-counter (OTC) contracts
Forward contracts
Swaps
Options
Exchange-traded contracts
Futures
Forward contracts
Options
Agency transactions7
Total
Unsettled purchases of non-derivative
financial instruments8
Unsettled sales of non-derivative
financial instruments8
Total derivative instruments, based on
IFRS netting9
31.12.16
31.12.15
Notional
values
related
to PRV3
NRV4
Notional
values
related
to NRV3
PRV2
Other
notional
values3, 5
PRV2
Notional
values
related
to PRV3
NRV4
Notional
values
related
to NRV3
Other
notional
values3, 5
0.3
0.4
0.5
0.1
0.0
0.9
2.3
0.1
0.1
4.8
10.9
14.1
5.9
3.2
39.0
18.4
13.0
0.1
0.5
0.2
0.0
0.1
0.9
2.0
0.1
0.2
2.7
13.4
9.9
4.6
5.3
35.9
9.7
11.5
9.1
0.0
9.1
0.3
0.7
0.9
0.0
0.0
1.5
3.4
0.1
0.2
2.8
9.9
11.8
4.4
1.0
30.0
9.6
20.1
0.3
0.5
0.6
0.2
0.1
1.5
3.2
0.2
0.1
2.3
9.4
7.5
3.7
1.9
24.6
16.7
6.4
8.2
0.1
8.3
158.4
4,084.0
153.8
3,859.6
9,799.3
167.4
4,602.7
162.4
4,409.0
8,831.1
1 Bifurcated embedded derivatives are presented on the same balance sheet lines as their host contracts and are excluded from this table. As of 31 December 2016, these derivatives amounted to a PRV of CHF 0.1 billion
(related notional values of CHF 1.9 billion) and an NRV of CHF 0.0 billion (related notional values of CHF 3.1 billion). As of 31 December 2015, these derivatives amounted to a PRV of CHF 0.1 billion (related notional
values of CHF 0.6 billion) and an NRV of CHF 0.2 billion (related notional values of CHF 3.4 billion). 2 PRV: Positive replacement value. 3 In cases where replacement values are presented on a net basis on the balance
sheet, the respective notional values of the netted replacement values are still presented on a gross basis. 4 NRV: Negative replacement value. 5 Other notional values relate to derivatives that are cleared through
either a central clearing counterparty or an exchange. The fair value of these derivatives is presented on the balance sheet net of the corresponding cash margin under Cash collateral receivables on derivative instruments
and Cash collateral payables on derivative instruments and was not material for the periods presented. 6 Negative replacement values as of 31 December 2016 include CHF 0.1 billion related to derivative loan
commitments (31 December 2015: CHF 0.1 billion). No notional amounts related to these replacement values are included the table. The maximum irrevocable amount related to these commitments was CHF 14.3 billion
as of 31 December 2016 (31 December 2015: CHF 15.8 billion). 7 Notional values of exchange-traded agency transactions and OTC cleared transactions entered into on behalf of clients are not disclosed due to their
significantly different risk profile. 8 Changes in the fair value of purchased and sold non-derivative financial instruments between trade date and settlement date are recognized as replacement values. 9 Refer to
Note 24 for more information on netting arrangements.
The notional amount of a derivative is generally the quantity of
the underlying instrument on which the derivative contract is
based and is the reference against which changes in the value of
the derivative are measured. Notional values in themselves are
generally not a direct indication of the values that are exchanged
between parties, and are therefore not a direct measure of risk or
financial exposure but are viewed as an indication of the scale of
the different types of derivatives entered into by the Group.
The maturity profile of OTC interest rate contracts held as of
31 December 2016, based on notional values, was: approximately
52% (31 December 2015: 53%) mature within one year, 29%
(31 December 2015: 29%) within one to five years and 19%
(31 December 2015: 18%) after five years. Notional values of
interest rate contracts cleared with a clearing house that qualify
for IFRS balance sheet netting or are legally settled on a daily basis
are presented under Other notional values and are categorized
into maturity buckets on the basis of contractual maturities of the
cleared underlying derivative contracts.
Derivatives transacted for trading purposes
Most of the Group’s derivative transactions relate to sales and
trading activities. Sales activities include the structuring and mar-
keting of derivative products to customers to enable them to take,
transfer, modify or reduce current or expected risks. Trading activ-
ities include market-making to directly support the facilitation and
execution of client activity. Market-making involves quoting bid
and offer prices to other market participants with the intention of
generating revenues based on spread and volume.
Credit derivatives
UBS is an active dealer in the fixed income market, including
credit default swaps (CDS) and related products, with respect to a
large number of issuers’ securities. The primary purposes of these
activities are market-making, primarily on behalf of clients, and
ongoing hedging of trading book exposures.
361
Financial statements Note 12 Derivative instruments and hedge accounting (continued)
Market-making activity, which is undertaken within the Invest-
ment Bank, consists of buying and selling single-name CDS, index
CDS, loan CDS and related referenced cash instruments to facili-
tate client trading activity. UBS also actively utilizes CDS to eco-
nomically hedge specific counterparty credit risks in its accrual
and traded loan portfolios (including off-balance sheet loan com-
mitments) with the aim of reducing concentrations in individual
names, sectors or specific portfolios.
In addition, UBS actively utilizes CDS to economically hedge
specific counterparty credit risks in its OTC derivative portfolios,
including financial instruments that are designated at fair value
through profit or loss.
The tables below provide more information on credit protec-
tion bought and sold, including replacement and notional value
information by instrument type and counterparty type. The value
of protection bought and sold is not, in isolation, a measure of
UBS’s credit risk. Counterparty relationships are viewed in terms
of the total outstanding credit risk, which relates to other instru-
ments in addition to CDS, and in connection with collateral
arrangements in place. On a notional value basis, approximately
29% of credit protection bought and sold as of 31 December
2016 matures within one year (31 December 2015: 22%),
approximately 61% within one to five years (31 December 2015:
68%) and approximately 10% after five years (31 December
2015: 10%).
Credit derivatives by type of instrument
CHF billion
Single-name credit default swaps
Multi-name index-linked credit default swaps
Multi-name other credit default swaps
Total rate of return swaps
Options and warrants
Total 31 December 2016
of which: credit derivatives related to economic hedges
of which: credit derivatives related to market-making
CHF billion
Single-name credit default swaps
Multi-name index-linked credit default swaps
Multi-name other credit default swaps
Total rate of return swaps
Options and warrants
Total 31 December 2015
of which: credit derivatives related to economic hedges
of which: credit derivatives related to market-making
Protection bought
Protection sold
PRV
1.6
0.2
0.0
0.1
0.0
2.0
1.4
0.5
PRV
3.1
0.3
0.1
0.5
0.0
4.0
2.7
1.4
NRV Notional values
1.3
0.8
0.0
0.7
0.0
2.8
2.4
0.3
91.4
38.4
1.5
5.5
2.9
139.7
111.7
28.0
Protection bought
NRV
Notional values
1.9
0.6
0.1
0.2
0.0
2.8
2.4
0.4
115.5
48.0
2.4
6.3
4.2
176.4
152.8
23.6
PRV
1.3
0.5
0.0
0.0
0.0
1.9
1.5
0.4
PRV
1.9
0.6
0.0
0.1
0.0
2.6
2.2
0.4
NRV Notional values
1.4
0.4
0.0
0.2
0.0
2.0
1.5
0.5
81.3
38.3
1.1
2.1
0.1
122.9
96.2
26.7
Protection sold
NRV
Notional values
2.9
0.5
0.1
0.4
0.0
3.9
2.5
1.3
105.1
45.6
1.8
2.8
0.1
155.3
132.8
22.5
362
Consolidated financial statements Note 12 Derivative instruments and hedge accounting (continued)
Credit derivatives by counterparty
CHF billion
Broker-dealers
Banks
Central clearing counterparties
Other
Total 31 December 2016
CHF billion
Broker-dealers
Banks
Central clearing counterparties
Other
Total 31 December 2015
Protection bought
Protection sold
PRV
0.4
0.9
0.3
0.4
2.0
PRV
0.8
1.9
0.4
0.8
4.0
NRV Notional values
0.2
1.0
0.9
0.8
2.8
20.9
60.8
47.2
10.9
139.7
Protection bought
NRV
Notional values
0.3
1.3
0.8
0.4
2.8
27.3
78.0
55.3
15.8
176.4
PRV
0.2
0.8
0.8
0.2
1.9
PRV
0.2
1.2
0.9
0.3
2.6
NRV Notional values
0.3
1.0
0.4
0.3
2.0
16.1
52.6
47.1
7.1
122.9
Protection sold
NRV
Notional values
0.6
1.6
0.9
0.8
3.9
19.5
68.3
58.9
8.7
155.3
UBS’s CDS trades are documented using industry standard forms
of documentation or equivalent terms documented in a bespoke
agreement. The agreements that govern CDS generally do not
contain recourse provisions that would enable UBS to recover
from third parties any amounts paid out by UBS.
The types of credit events that would require UBS to perform
under a CDS contract are subject to agreement between the par-
ties at the time of the transaction. However, nearly all transactions
are traded using credit events that are applicable under certain
market conventions based on the type of reference entity to
which the transaction relates. Applicable credit events by market
conventions include bankruptcy, failure to pay, restructuring, obli-
gation acceleration and repudiation / moratorium.
Contingent collateral features of derivative liabilities
Certain derivative instruments contain contingent collateral or
termination features triggered upon a downgrade of the pub-
lished credit ratings of the Group in the normal course of busi-
ness. Based on UBS’s credit ratings as of 31 December 2016, CHF
0.1 billion, CHF 0.3 billion and CHF 1.1 billion would have been
required for contractual obligations related to OTC derivatives in
the event of a one-notch, two-notch and three-notch reduction in
long-term credit ratings, respectively. In evaluating UBS’s liquidity
requirements, UBS considers additional collateral or termination
payments that would be required in the event of a reduction in
UBS’s long-term credit ratings, and a corresponding reduction in
UBS’s short-term ratings.
Derivatives transacted for hedging purposes
The Group enters into derivative transactions for the purposes of
hedging risks inherent in assets, liabilities and forecasted transac-
tions. The accounting treatment of hedge transactions varies
according to the nature of the instrument hedged and whether
the hedge qualifies as such for accounting purposes.
Derivative transactions that qualify and are designated as
hedges for accounting purposes are described under the corre-
sponding headings in this Note (fair value hedges, cash flow
hedges and hedges of net investments in foreign operations). The
Group’s accounting policies for derivatives designated and
accounted for as hedging instruments are described in Note 1a
item 3k, where terms used in the following sections are explained.
The Group has also entered into various hedging strategies uti-
lizing derivatives for which hedge accounting has not been
applied. These include interest rate swaps and other interest rate
derivatives (e.g., futures) for day-to-day economic interest rate
risk management purposes. In addition, the Group has used
equity futures, options and, to a lesser extent, swaps for eco-
nomic hedging in a variety of equity trading strategies to offset
underlying equity and equity volatility exposure. The Group has
also entered into CDS that provide economic hedges for credit
risk exposures (refer to “Credit derivatives” in this Note). Fair
value changes of derivatives that are part of economic relation-
ships, but do not qualify for hedge accounting treatment, are
reported in Net trading income, except for the forward points on
certain short duration foreign exchange contracts, which are
reported in Interest income.
Effective 30 June 2016, UBS elected to convert its interest rate
swaps transacted with the London Clearing House from the previ-
ous collateral model to a settlement model. As a result, the fair
value of outstanding derivatives designated as hedging instruments
decreased significantly compared with the prior-year comparatives.
363
Financial statements Note 12 Derivative instruments and hedge accounting (continued)
Fair value hedges: interest rate risk related to debt instruments
The Group’s fair value hedges principally consist of interest rate
swaps that are used to protect against changes in the fair value of
fixed-rate debt instruments, such as non-structured fixed-rate
bonds, covered bonds and subordinated debt, due to movements
in market interest rates. The fair values of outstanding interest
rate derivatives designated as fair value hedges were assets of
CHF 152 million and liabilities of CHF 1 million as of 31 December
2016 and assets of CHF 1,656 million and liabilities of CHF 11
million as of 31 December 2015.
Fair value hedges of interest rate risk
CHF million
Gains / (losses) on hedging instruments
Gains / (losses) on hedged items attributable to the hedged risk
Net gains / (losses) representing ineffective portions of fair value hedges
For the year ended
31.12.16
31.12.15
31.12.14
140
(144)
(4)
554
(552)
2
1,113
(1,111)
2
Fair value hedges: portfolio interest rate risk related to loans
The Group also applies fair value hedge accounting to mortgage
loan portfolio interest rate risk. The change in fair value of the
hedged items is recorded separately from the hedged item and is
included within Other assets on the balance sheet. The fair values of
outstanding interest rate derivatives designated for these hedges as
of 31 December 2016 were liabilities of CHF 44 million (31 Decem-
ber 2015: assets of CHF 7 million and liabilities of CHF 327 million).
Fair value hedges of portfolio interest rate risk
CHF million
Gains / (losses) on hedging instruments
Gains / (losses) on hedged items attributable to the hedged risk
Net gains / (losses) representing ineffective portions of fair value hedges
For the year ended
31.12.16
31.12.15
31.12.14
(128)
116
(12)
(176)
147
(29)
(694)
676
(18)
Cash flow hedges of forecasted transactions
The Group is exposed to variability in future interest cash flows on
non-trading financial assets and liabilities that bear interest at
variable rates or are expected to be refinanced or reinvested in the
future. The amounts and timing of future cash flows, representing
both principal and interest flows, are projected on the basis of
contractual terms and other relevant factors, including estimates
of prepayments and defaults. The aggregate principal balances
and interest cash flows across all portfolios over time form the
basis for identifying the non-trading interest rate risk of the
Group, which is hedged with interest rate swaps, the maximum
maturity of which is 12 years. The table on the following page
shows forecasted principal balances on which expected interest
cash flows arise as of 31 December 2016. Amounts shown repre-
sent, by time bucket, average assets and liabilities subject to fore-
casted cash flows designated as hedged items in cash flow hedge
accounting relationships.
As of 31 December 2016, the fair values of outstanding deriva-
tives designated as cash flow hedges of forecasted transactions
were CHF 68 million assets and CHF 5 million liabilities (31 Decem-
ber 2015: CHF 2,176 million assets and CHF 195 million liabilities).
In 2016, a gain of CHF 11 million was recognized in Net trad-
ing income due to hedge ineffectiveness, compared with a gain of
CHF 150 million in 2015 and a gain of CHF 87 million in 2014.
364
Consolidated financial statements
Note 12 Derivative instruments and hedge accounting (continued)
Principal balances subject to cash flow forecasts
CHF billion
Assets
Liabilities
Net balance
Within 1 year
1–3 years
3–5 years
5–10 years
Over 10 years
57
4
53
75
5
70
48
3
45
51
4
47
0
0
0
Hedges of net investments in foreign operations
The Group applies hedge accounting for certain net investments
in foreign operations. As of 31 December 2016, the positive
replacement values and negative replacement values of FX deriva-
tives (mainly FX swaps) designated as hedging instruments in net
investment hedge accounting relationships were CHF 122 million
and CHF 79 million, respectively (31 December 2015: positive
replacement values of CHF 170 million and negative replacement
values of CHF 79 million). As of 31 December 2016, the underly-
ing hedged structural exposures in several currencies amounted
to CHF 7.5 billion (31 December 2015: CHF 5.5 billion).
Hedges of structural FX exposures in currencies other than the
US dollar may be comprised of two jointly designated derivatives as
the foreign currency risk may be hedged against the US dollar first
and then converted into Swiss francs, the presentation currency of
the Group, as part of a separate FX derivative transaction. The
aggregated notional amount of designated hedging derivatives as
of 31 December 2016 was CHF 12.5 billion in total (31 December
2015: CHF 11.2 billion), including CHF 7.5 billion notional values
related to US dollar versus Swiss franc swaps and CHF 5.0 billion
notional values related to derivatives hedging foreign currencies
(other than the US dollar) versus the US dollar. The effective portion
of gains and losses of these FX swaps is transferred directly to OCI
to offset foreign currency translation (FCT) gains and losses on the
net investments in foreign branches and subsidiaries. As such,
these FX swaps hedge the structural FX exposure resulting in the
accumulation of FCT on the level of individual foreign branches and
subsidiaries and hence on the total FCT OCI of the Group.
UBS designates certain non-derivative foreign currency finan-
cial assets and liabilities of foreign branches or subsidiaries as
hedging instruments in net investment hedge accounting arrange-
ments. The FX translation difference recorded in FCT OCI of the
non-derivative hedging instrument of one foreign entity offsets
the structural FX exposure of another foreign entity. Therefore,
the aggregated FCT OCI of the Group is unchanged from this
hedge designation. As of 31 December 2016, the nominal
amount of non-derivative financial assets and liabilities desig-
nated as hedging instruments in such net investment hedges was
CHF 1.5 billion and CHF 1.5 billion, respectively (31 December
2015: CHF 3.1 billion non-derivative financial assets and CHF 3.1
billion non-derivative financial liabilities).
Ineffectiveness of hedges of net investments in foreign opera-
tions was not material in 2016, 2015 and 2014.
Undiscounted cash flows
The table below provides undiscounted cash flow information
for derivative instruments designated in hedge accounting
relationships.
Derivatives designated in hedge accounting relationships (undiscounted cash flows)
CHF billion
Interest rate swaps1
FX swaps / forwards
Cash inflows
Cash outflows
Net cash flows
On demand
Due within
1 month
Due between
1 and 3 months
Due between
3 and 12 months
Due between
1 and 5 years
Due after
5 years
0
0
0
2
2
0
10
10
0
0
0
0
0
0
0
0
0
0
Total
11
11
0
1 Undiscounted cash inflows and cash outflows of interest rate swaps as of 31 December 2016 were not material as the majority of interest rate swaps designated in hedge accounting relationships are legally settled
on a daily basis.
365
Financial statements Note 13 Financial assets available for sale and held to maturity
a) Financial assets available for sale
CHF million
Financial assets available for sale by issuer type1
Debt instruments
Government and government agencies
of which: US
of which: Germany
of which: UK
of which: France
of which: Netherlands
Banks
Corporates and other
Total debt instruments
Equity instruments
Total financial assets available for sale
Unrealized gains – before tax
Unrealized (losses) – before tax
Net unrealized gains / (losses) – before tax
Net unrealized gains / (losses) – after tax
1 Refer to Note 22c for more information on product type and fair value hierarchy categorization.
b) Financial assets held to maturity
CHF million
Financial assets held to maturity by issuer type
Debt instruments
Government and government agencies
of which: US
of which: Germany
of which: France
Banks
Total financial assets held to maturity
Note 14 Property, equipment and software
At historical cost less accumulated depreciation
31.12.16
31.12.15
11,650
7,779
1,774
373
355
319
1,845
1,554
15,048
628
15,676
309
(117)
193
96
47,245
21,424
8,583
2,782
3,566
2,934
12,268
2,385
61,898
645
62,543
462
(171)
291
167
31.12.16
31.12.15
7,416
4,688
1,708
867
1,873
9,289
0
0
0
0
0
0
Own-used
properties
Leasehold
improvements
IT hardware and
communication
Internally
generated
software
Purchased
software
Other
machines and
equipment
Projects
in progress
31.12.16 31.12.15
3,183
38
(277)
535
(10)
3,469
7,863
58
(71)
(103)
(15)
7,732
2,375
3
(16)
711
(36)
3,037
1,878
201
(568)
58
(48)
1,521
CHF million
Historical cost
Balance at the beginning of the year
Additions
Disposals / write-offs1
Reclassifications
Foreign currency translation
Balance at the end of the year
Accumulated depreciation
Balance at the beginning of the year
Depreciation
Impairment2
Disposals / write-offs1
Reclassifications
Foreign currency translation
Balance at the end of the year
Net book value at the end of the year3, 4
1 Includes write-offs of fully depreciated assets. 2 Impairment charges recorded in 2016 relate to assets for which the recoverable amount was determined based on value-in-use (recoverable amount of the impaired
assets: CHF 31 million Own-used properties, CHF 2 million Leasehold improvements, CHF 28 million Internally generated software, CHF 3 million Purchased software). 3 As of 31 December 2016, contractual
commitments to purchase property in the future amounted to approximately CHF 0.3 billion. 4 Includes CHF 21 million related to leased assets, mainly IT hardware and communication. 5 Includes CHF 994 million
related to Internally generated software, CHF 110 million related to Own-used properties and CHF 19 million related to Leasehold improvements. 6 Reflects reclassifications to Properties held for sale (CHF 54 million
on a net basis) reported within Other assets.
10,153
959
26
(1,090)
(146)6
(75)
9,828
8,331
0
0
0
0
0
0
0
1,1255
10,593
903
18
(1,260)
(23)
(78)
10,153
7,695
1,275
286
9
(16)
0
(13)
1,542
1,495
2,211
193
1
(264)
6
(15)
2,132
1,337
4,356
164
11
(71)
(152)
(8)
4,300
3,432
17,847
1,788
(1,104)
(200)6
(172)
18,159
1,425
202
1
(568)
0
(32)
1,027
495
17,442
1,853
(1,306)
(32)
(109)
17,847
1,270
1,355
0
(1,447)
(53)
1,125
609
65
0
(83)
1
1
594
272
276
49
5
(89)
0
(9)
233
175
866
35
(83)
45
3
866
412
99
(89)
0
(14)
408
366
Consolidated financial statements Note 15 Goodwill and intangible assets
Introduction
UBS performs an impairment test on its goodwill assets on an
annual basis or when indicators of impairment exist. UBS consid-
ers the segments, as reported in Note 2a, as separate cash-gener-
ating units (CGUs). The impairment test is performed for each
segment to which goodwill is allocated by comparing the recover-
able amount, based on its value-in-use, with the carrying amount
of the respective segment. An impairment charge is recognized if
the carrying amount exceeds the recoverable amount. As of
31 December 2016, total goodwill recognized on the balance
sheet was CHF 6.3 billion, of which CHF 1.3 billion, CHF 3.6 bil-
lion and CHF 1.4 billion was carried by Wealth Management,
Wealth Management Americas and Asset Management, respec-
tively. Based on the impairment testing methodology described
below, UBS concluded that the goodwill balances as of 31 Decem-
ber 2016 allocated to these segments remain recoverable and
thus were not impaired.
Methodology for goodwill impairment testing
The recoverable amounts are determined using a discounted cash
flow model, which has been adapted to use inputs that consider
features of the banking business and its regulatory environment.
The recoverable amount of a segment is the sum of the dis-
counted earnings attributable to shareholders from the first three
forecasted years and the terminal value. The terminal value, which
covers all periods beyond the third year, is calculated on the basis
of the forecast of third-year profit, the discount rate and the long-
term growth rate and is adjusted for the effect of the capital
assumed to be needed to support the perpetual growth implied
by the long-term growth rate.
The carrying amount for each segment is determined by refer-
ence to the Group’s equity attribution framework. Within this
framework, which is described in the “Capital management” sec-
tion of this report, we attribute equity to the businesses on the
basis of their risk-weighted assets and leverage ratio denomina-
tor, their goodwill and intangible assets as well as equity directly
associated with activity that Group ALM manages centrally on
behalf of the business divisions. The total amount of equity attrib-
uted to CGUs can differ from equity attributable to shareholders.
The framework is primarily used for purposes of measuring the
performance of the businesses and includes certain management
assumptions. Attributed equity equals the capital that a segment
requires to conduct its business and is considered an appropriate
starting point from which to determine the carrying value of the
segments. The attributed equity methodology is aligned with the
business planning process, the inputs from which are used in cal-
culating the recoverable amounts of the respective CGU. The revi-
sion of the equity attribution methodology effective as of 1 Janu-
ary 2017 would have no impact on the outcome of the goodwill
impairment test as of 31 December 2016.
➔ Refer to the “Capital management” section of this report for
more information on the equity attribution framework
Assumptions
Valuation parameters used within the Group’s impairment test
model are linked to external market information, where applica-
ble. The model used to determine the recoverable amount is most
sensitive to changes in the forecast earnings available to share-
holders in years one to three, to changes in the discount rates and
to changes in the long-term growth rate. The applied long-term
growth rate is based on long-term economic growth rates for dif-
ferent regions worldwide. Earnings available to shareholders are
estimated on the basis of forecast results, which are part of the
business plan approved by the BoD.
The discount rates are determined by applying a capital asset
pricing model-based approach, as well as considering quantitative
and qualitative inputs from both internal and external analysts
and the view of management. The discount rates were unchanged
between 2015 and 2016.
Key assumptions used to determine the recoverable amounts
of each segment are tested for sensitivity by applying a reasonably
possible change to those assumptions. Forecast earnings available
to shareholders were changed by 20%, the discount rates were
changed by 1.5 percentage points and the long-term growth
rates were changed by 0.75 percentage points, reflecting the cur-
rent market environment. Under all scenarios, the recoverable
amounts for each segment exceeded the respective carrying
amount, such that the reasonably possible changes in key assump-
tions would not result in impairment.
If the estimated earnings and other assumptions in future peri-
ods deviate from the current outlook, the value of goodwill may
become impaired in the future, giving rise to losses in the income
statement. Recognition of any impairment of goodwill would
reduce IFRS equity and net profit. It would not affect cash flows
and, as goodwill is required to be deducted from capital under the
Basel III capital framework, no effect would be expected on the
Group total capital ratios.
367
Financial statements Note 15 Goodwill and intangible assets (continued)
Discount and growth rates
In %
Wealth Management
Wealth Management Americas
Asset Management
Investment Bank
CHF million
Historical cost
Balance at the beginning of the year
Additions
Disposals
Write-offs
Foreign currency translation
Balance at the end of the year
Accumulated amortization and impairment
Balance at the beginning of the year
Amortization
Impairment1
Disposals
Write-offs
Foreign currency translation
Balance at the end of the year
Discount rates
Growth rates
31.12.16
31.12.15
31.12.16
31.12.15
9.0
9.0
9.0
11.0
9.0
9.0
9.0
11.0
1.7
2.4
2.4
2.4
1.7
2.4
2.4
2.4
Goodwill
Total
Infrastructure
Intangible assets
Customer
relationships,
contractual
rights and other
6,240
16
(2)
57
6,311
761
12
773
578
38
10
626
147
820
8
(2)
(75)
(12)
739
675
53
0
(1)
(75)
(11)
641
98
Total
31.12.16
31.12.15
1,581
7,821
7,957
8
(2)
(75)
0
1,512
1,253
91
0
(1)
(75)
(1)
1,267
245
24
(3)
(75)
57
7,823
30
(32)
(20)
(114)
7,821
1,253
1,171
91
0
(1)
(75)
(1)
1,267
6,556
94
13
(1)
(20)
(5)
1,253
6,568
Net book value at the end of the year
6,311
1 Impairment charges recorded in 2016 and 2015 relate to assets for which the recoverable amount was determined based on value-in-use (recoverable amount of the impaired assets: CHF 3 million for 2016 and
CHF 4 million for 2015).
The table below presents goodwill and intangible assets by segment for the year ended 31 December 2016.
CHF million
Goodwill
Wealth
Management
Wealth
Management
Americas
Investment
Bank
Asset
Management
Corporate
Center –
Services
Balance at the beginning of the year
1,312
3,514
Additions
Disposals
Foreign currency translation
Balance at the end of the year
Intangible assets
Balance at the beginning of the year
Additions / transfers
Disposals
Amortization
Impairment
Foreign currency translation
Balance at the end of the year
368
16
(2)
(23)
1,303
38
8
(4)
(1)
40
57
3,571
199
0
(49)
0
2
152
29
7
36
53
0
(12)
41
1,385
17
1,401
8
(4)
4
30
(21)
9
Total
6,240
16
(2)
57
6,311
328
8
0
(91)
0
1
245
Consolidated financial statements Note 15 Goodwill and intangible assets (continued)
The table below presents estimated, aggregated amortization expenses for intangible assets.
CHF million
Estimated, aggregated amortization expenses for:
Intangible assets
2017
2018
2019
2020
2021
Thereafter
Not amortized due to indefinite useful life
Total
Note 16 Other assets
CHF million
Prime brokerage receivables1
Recruitment loans to financial advisors
Other loans to financial advisors
Bail deposit2
Accrued interest income
Accrued income – other
Prepaid expenses
Net defined benefit pension and post-employment assets3
Settlement and clearing accounts
VAT and other tax receivables
Properties and other non-current assets held for sale
Assets of disposal group held for sale4
Other
Total other assets
68
58
47
38
6
19
9
245
31.12.15
11,341
3,184
418
1,221
462
844
1,033
50
402
398
134
279
2,393
22,160
31.12.16
9,828
3,087
471
1,213
526
818
1,010
0
516
292
111
5,137
2,427
25,436
1 Prime brokerage services include clearance, settlement, custody, financing and portfolio reporting services for corporate clients trading across multiple asset classes. Prime brokerage receivables are mainly comprised of
margin lending receivables. 2 Refer to Note 20b item 1 for more information. 3 Refer to Note 26 for more information. 4 Refer to Note 30 for more information.
369
Financial statements Balance sheet notes: liabilities
Note 17 Due to banks and customers
CHF million
Due to banks
Due to customers
of which: demand deposits
of which: retail savings / deposits
of which: time deposits
of which: fiduciary deposits
Total due to banks and customers
Note 18 Financial liabilities designated at fair value
CHF million
Issued debt instruments
Equity-linked1
Rates-linked
Credit-linked
Fixed-rate
Other
Total issued debt instruments
of which: issued by UBS AG with original maturity greater than one year2, 3
Over-the-counter debt instruments
Equity-linked1
Other
Total over-the-counter debt instruments
of which: issued by UBS AG with original maturity greater than one year2, 4
Repurchase agreements
Loan commitments and guarantees5
Total
of which: life-to-date own credit (gain) / loss
31.12.16
31.12.15
10,645
423,672
194,044
170,729
52,716
6,184
434,317
11,836
390,185
172,778
161,848
49,421
6,139
402,021
31.12.16
31.12.15
29,831
10,150
4,101
2,972
2,875
49,930
36,347
1,992
2,671
4,663
4,210
395
29
55,017
(141)
30,965
16,587
3,652
4,098
1,231
56,534
40,081
2,885
2,608
5,493
4,497
849
119
62,995
(287)
1 Includes investment fund unit-linked instruments issued. 2 Issued by the standalone legal entity UBS AG. Based on original contractual maturity without considering any early redemption features. 3 More than 99%
of the balance as of 31 December 2016 was unsecured (31 December 2015: more than 98% of the balance was unsecured). 4 More than 35% of the balance as of 31 December 2016 was unsecured (31 December
2015: more than 35% of the balance was unsecured). 5 Loan commitments recognized as Financial liabilities designated at fair value until drawn and recognized as Loans. See Note 1a item 3o for more information.
As of 31 December 2016 and 31 December 2015, the contractual
redemption amount at maturity of financial liabilities designated
at fair value through profit or loss was not materially different
from the carrying value.
The table on the following page shows the residual contractual
maturity of the carrying value of financial liabilities designated at
fair value, split between fixed-rate and floating-rate instruments
based on the contractual terms, and does not consider any early
redemption features. Interest rate ranges for future interest pay-
ments related to these financial liabilities designated at fair value
have not been included in the table on the following page as a
majority of these liabilities are structured products, and therefore
the future interest payments are highly dependent upon the
embedded derivative and prevailing market conditions at the time
each interest payment is made.
➔ Refer to Note 25d for maturity information on an undiscounted
cash flow basis
370
Consolidated financial statements Note 18 Financial liabilities designated at fair value (continued)
Contractual maturity of carrying value
CHF million
UBS AG1
Non-subordinated debt
Fixed-rate
Floating-rate
Subtotal
Other subsidiaries2
Non-subordinated debt
Fixed-rate
Floating-rate
Subtotal
Total
2017
2018
2019
2020
2021
2022–2026
Thereafter
Total
31.12.16
Total
31.12.15
3,979
17,904
21,884
197
495
692
984
4,136
5,120
171
136
307
644
3,739
4,383
842
119
961
262
3,363
3,625
31
0
31
400
1,653
2,053
67
0
67
22,576
5,427
5,345
3,656
2,121
807
4,156
4,963
68
87
155
5,118
2,429
7,805
10,234
9,505
42,757
52,262
390
150
540
1,768
987
2,755
10,702
49,824
60,526
993
1,475
2,469
10,774
55,017
62,995
1 Comprises instruments issued by the standalone legal entity UBS AG. 2 Comprises instruments issued by subsidiaries of UBS AG.
Note 19 Debt issued held at amortized cost
CHF million
Certificates of deposit
Commercial paper
Other short-term debt
Short-term debt1
Senior fixed-rate bonds
of which: issued by UBS AG with original maturity greater than one year2
Senior unsecured debt that contributes to total loss-absorbing capacity3
Covered bonds
Subordinated debt
of which: high-trigger loss-absorbing additional tier 1 capital instruments
of which: low-trigger loss-absorbing additional tier 1 capital instruments
of which: low-trigger loss-absorbing tier 2 capital instruments
of which: non-Basel III-compliant tier 2 capital instruments
Debt issued through the central bond institutions of the Swiss regional or cantonal banks
Other long-term debt
of which: issued by UBS AG with original maturity greater than one year2
Long-term debt4
Total debt issued held at amortized cost5
31.12.16
20,207
31.12.15
11,967
1,653
4,318
26,178
27,008
26,850
16,890
5,836
19,325
5,429
2,342
10,429
1,125
8,302
112
94
77,472
103,649
3,824
5,424
21,215
31,240
31,078
5,633
8,490
17,763
2,837
2,326
10,346
2,254
8,237
570
278
71,932
93,147
1 Debt with an original maturity of less than one year. 2 Issued by the standalone legal entity UBS AG. Based on original contractual maturity without considering any early redemption features. 100% of the balance
as of 31 December 2016 was unsecured (31 December 2015: 100% of the balance was unsecured). 3 Issued by UBS Group Funding (Jersey) Ltd., a funding subsidiary directly held and guaranteed by UBS Group
AG. 4 Debt with original maturity greater than or equal to one year. The classification of debt issued into short-term and long-term does not consider any early redemption features. 5 Net of bifurcated embedded
derivatives with a net positive fair value of CHF 38 million as of 31 December 2016 (31 December 2015: net negative fair value of CHF 130 million).
The Group uses interest rate and foreign exchange derivatives to
manage the risks inherent in certain debt instruments held at
amortized cost. In certain cases, the Group applies hedge account-
ing for interest rate risk as discussed in Note 1a item 3k and
Note 12. As a result of applying hedge accounting, the carrying
value of debt issued increased by CHF 490 million and by CHF
1,037 million as of 31 December 2016 and 2015, respectively,
reflecting changes in fair value due to interest rate movements.
371
Financial statements Note 19 Debt issued held at amortized cost (continued)
Subordinated debt consists of unsecured debt obligations that
are contractually subordinated in right of payment to all other
present and future non-subordinated obligations of the respective
issuing entity. All of the subordinated debt instruments outstand-
ing as of 31 December 2016 pay a fixed rate of interest.
ing-rate based on the contractual terms, and does not consider
any early redemption features. The effects from interest rate
swaps, which are used to hedge various fixed-rate debt issuances
by changing the repricing characteristics into those similar to
floating-rate debt, are also not considered in the table below.
The table below shows the residual contractual maturity of the
carrying value of debt issued, split between fixed-rate and float-
➔ Refer to Note 25d for maturity information on an undiscounted
cash flow basis
Contractual maturity of carrying value
CHF million, except where indicated
UBS Group AG1
Subordinated debt
Fixed-rate
Interest rates (range in %)
Subtotal
UBS AG2
Non-subordinated debt
Fixed-rate
Interest rates (range in %)
Floating-rate
Subordinated debt
Fixed-rate
Interest rates (range in %)
Subtotal
Other subsidiaries3
Non-subordinated debt
Fixed-rate
Interest rates (range in %)
Floating-rate
Subtotal
Total
2017
2018
2019
2020
2021
2022–2026
Thereafter
Total
31.12.16
Total
31.12.15
0
0
0
0
0
0
0
0
0
0
0
0
7,771
5.8–7.1
7,771
7,771
5,163
7,771
5,163
22,624
0–5.9
12,113
418
4.1–7.4
35,154
736
0–8.1
0
736
35,890
7,662
0.5–6.6
1,017
4,026
2.4–4.0
1,017
4,342
0–4.9
254
0
0
0
2,729
1.3–1.4
0
0
8,679
5,043
4,597
2,729
793
0–3.8
1
793
9,473
745
0–2.9
0
745
5,788
2,248
0–3.2
303
2,551
7,148
2,980
0–3.0
1,008
3,987
6,717
1,338
4.0–4.0
0
11,136
4.8–8.8
12,474
15,352
0–4.1
508
15,860
28,334
42,724
40,153
3
0
1,536
15,937
17,907
0
11,554
12,600
1,539
70,215
70,659
23,843
17,020
990
0–2.8
0
990
1,820
25,663
306
17,325
93,147
10,300
103,649
1 Comprises debt issued by the standalone legal entity UBS Group AG. 2 Comprises debt issued by the standalone legal entity UBS AG. 3 Comprises debt issued by other direct subsidiaries of UBS Group AG and by
subsidiaries of UBS AG.
372
Consolidated financial statements Note 20 Provisions and contingent liabilities
a) Provisions
CHF million
Balance at the beginning of the year
Increase in provisions recognized in the income statement
Release of provisions recognized in the income statement
Provisions used in conformity with designated purpose
Capitalized reinstatement costs
Reclassifications
Foreign currency translation / unwind of discount
Balance at the end of the year
Litigation,
regulatory
and similar
matters2
2,983
Operational
risks1
47
34
(3)
(26)
0
0
(1)
50
906
(98)
(554)
0
0
25
3,261
Loan com-
mitments
and
guarantees
Restruc-
turing
624
409
(113)
(415)
(1)
0
(5)
4983
35
18
(9)
0
0
10
0
54
Real
estate
157
Employee
benefits5
198
14
(5)
(23)
(1)
0
1
1424
5
(30)
(85)
0
0
(11)
77
Other
120
48
(29)
(49)
0
0
2
Total
31.12.16
Total
31.12.15
4,164
1,433
(288)
4,366
1,778
(337)
(1,152)
(1,660)
(2)
10
10
5
9
3
91
4,174
4,164
1 Comprises provisions for losses resulting from security risks and transaction processing risks. 2 Comprises provisions for losses resulting from legal, liability and compliance risks. 3 Includes personnel-related
restructuring provisions of CHF 150 million as of 31 December 2016 (31 December 2015: CHF 110 million) and provisions for onerous lease contracts of CHF 348 million as of 31 December 2016 (31 December 2015:
CHF 514 million). 4 Includes reinstatement costs for leasehold improvements of CHF 87 million as of 31 December 2016 (31 December 2015: CHF 95 million) and provisions for onerous lease contracts of CHF 55
million as of 31 December 2016 (31 December 2015: CHF 62 million). 5 Includes provisions for sabbatical and anniversary awards as well as provisions for severance that are not part of restructuring provisions.
Restructuring provisions primarily relate to onerous lease con-
tracts and severance payments. The use of onerous lease provi-
sions is driven by the maturities of the underlying lease con-
tracts. Severance-related provisions are used within a short time
period, usually within six months, but potential changes in
amount may be triggered when natural staff attrition reduces
the number of people affected by a restructuring and therefore
the estimated costs.
Information on provisions and contingent liabilities in respect
of litigation, regulatory and similar matters, as a class, is included
in Note 20b. There are no material contingent liabilities associated
with the other classes of provisions.
373
Financial statements Note 20 Provisions and contingent liabilities (continued)
b) Litigation, regulatory and similar matters
The Group operates in a legal and regulatory environment that
exposes it to significant litigation and similar risks arising from
disputes and regulatory proceedings. As a result, UBS (which for
purposes of this Note may refer to UBS Group AG and / or one or
more of its subsidiaries, as applicable) is involved in various dis-
putes and legal proceedings, including litigation, arbitration, and
regulatory and criminal investigations.
Such matters are subject to many uncertainties, and the out-
come and the timing of resolution are often difficult to predict,
particularly in the earlier stages of a case. There are also situations
where the Group may enter into a settlement agreement. This
may occur in order to avoid the expense, management distraction
or reputational implications of continuing to contest liability, even
for those matters for which the Group believes it should be exon-
erated. The uncertainties inherent in all such matters affect the
amount and timing of any potential outflows for both matters
with respect to which provisions have been established and other
contingent liabilities. The Group makes provisions for such mat-
ters brought against it when, in the opinion of management after
seeking legal advice, it is more likely than not that the Group has
a present legal or constructive obligation as a result of past events,
it is probable that an outflow of resources will be required, and
the amount can be reliably estimated. Where these factors are
otherwise satisfied, a provision may be established for claims that
have not yet been asserted against the Group, but are neverthe-
less expected to be, based on the Group’s experience with similar
asserted claims. If any of those conditions is not met, such matters
result in contingent liabilities. If the amount of an obligation can-
not be reliably estimated, a liability exists that is not recognized
even if an outflow of resources is probable. Accordingly, no provi-
sion is established even if the potential outflow of resources with
respect to select matters could be significant.
Specific litigation, regulatory and other matters are described
below, including all such matters that management considers to
be material and others that management believes to be of sig-
nificance due to potential financial, reputational and other
effects. The amount of damages claimed, the size of a transac-
tion or other information is provided where available and appro-
priate in order to assist users in considering the magnitude of
potential exposures.
In the case of certain matters below, we state that we have
established a provision, and for the other matters, we make no
such statement. When we make this statement and we expect
disclosure of the amount of a provision to prejudice seriously our
position with other parties in the matter because it would reveal
what UBS believes to be the probable and reliably estimable out-
flow, we do not disclose that amount. In some cases we are sub-
ject to confidentiality obligations that preclude such disclosure.
With respect to the matters for which we do not state whether
we have established a provision, either (a) we have not estab-
lished a provision, in which case the matter is treated as a contin-
gent liability under the applicable accounting standard or (b) we
have established a provision but expect disclosure of that fact to
prejudice seriously our position with other parties in the matter
because it would reveal the fact that UBS believes an outflow of
resources to be probable and reliably estimable.
With respect to certain litigation, regulatory and similar mat-
ters for which we have established provisions, we are able to
estimate the expected timing of outflows. However, the aggre-
gate amount of the expected outflows for those matters for
which we are able to estimate expected timing is immaterial rela-
tive to our current and expected levels of liquidity over the rele-
vant time periods.
374
Consolidated financial statements Note 20 Provisions and contingent liabilities (continued)
The aggregate amount provisioned for litigation, regulatory
and similar matters as a class is disclosed in Note 20a above. It is
not practicable to provide an aggregate estimate of liability for
our litigation, regulatory and similar matters as a class of contin-
gent liabilities. Doing so would require us to provide speculative
legal assessments as to claims and proceedings that involve
unique fact patterns or novel legal theories, that have not yet
been initiated or are at early stages of adjudication, or as to which
alleged damages have not been quantified by the claimants.
Although we therefore cannot provide a numerical estimate of
the future losses that could arise from litigation, regulatory and
similar matters, we believe that the aggregate amount of possible
future losses from this class that are more than remote substan-
tially exceeds the level of current provisions. Litigation, regulatory
and similar matters may also result in non-monetary penalties and
consequences. For example, the Non-Prosecution Agreement
(NPA) described in item 5 of this Note, which we entered into with
the US Department of Justice (DOJ), Criminal Division, Fraud Sec-
tion in connection with our submissions of benchmark interest
rates, including, among others, the British Bankers’ Association
London Interbank Offered Rate (LIBOR), was terminated by the
DOJ based on its determination that we had committed a US
crime in relation to foreign exchange matters. As a consequence,
UBS AG pleaded guilty to one count of wire fraud for conduct in
the LIBOR matter, paid a USD 203 million fine and is subject to a
three-year term of probation. A guilty plea to, or conviction of, a
crime (including as a result of termination of the NPA) could have
material consequences for UBS. Resolution of regulatory proceed-
ings may require us to obtain waivers of regulatory disqualifica-
tions to maintain certain operations, may entitle regulatory
authorities to limit, suspend or terminate licenses and regulatory
authorizations and may permit financial market utilities to limit,
suspend or terminate our participation in such utilities. Failure to
obtain such waivers, or any limitation, suspension or termination
of licenses, authorizations or participations, could have material
consequences for UBS.
The risk of loss associated with litigation, regulatory and similar
matters is a component of operational risk for purposes of deter-
mining our capital requirements. Information concerning our
capital requirements and the calculation of operational risk for
this purpose is included in the “Capital management” section of
this report.
Provisions for litigation, regulatory and similar matters by business division and Corporate Center unit1, 2
CHF million
Balance at the beginning of the year
Increase in provisions recognized in the income statement
Release of provisions recognized in the income statement
Provisions used in conformity with designated purpose
Foreign currency translation / unwind of discount
Balance at the end of the year
Wealth
Manage-
ment
Wealth
Manage-
ment
Americas
Personal &
Corporate
Banking
Asset
Manage-
ment
Investment
Bank
CC –
Services
CC –
Group ALM
CC –
Non-core
and Legacy
Portfolio
Total
31.12.16
Total
31.12.15
245
76
(6)
(19)
(4)
292
459
113
(15)
(137)
6
425
83
7
(4)
(9)
0
78
16
5
(6)
(9)
0
5
585
43
(2)
(13)
3
616
310
5
(3)
(49)
(4)
259
0
0
0
0
0
0
1,284
2,983
606
(11)
(318)
24
3,053
1,263
(166)
856
(48)
(554)
(1,174)
25
7
1,585
3,261
2,983
1 Provisions, if any, for the matters described in this disclosure are recorded in Wealth Management (item 3), Wealth Management Americas (item 4), the Investment Bank (item 8), CC – Services (item 7) and CC – Non-
core and Legacy Portfolio (item 2). Provisions, if any, for the matters described in this disclosure in items 1 and 6 are allocated between Wealth Management and Personal & Corporate Banking, and provisions, if any, for
the matters described in this disclosure in item 5 are allocated between the Investment Bank, CC – Services and CC – Non-core and Legacy Portfolio. 2 Provision movements are grouped by item for purposes of this
table and may therefore differ from those shown in the table in Note 20a.
375
Financial statements Note 20 Provisions and contingent liabilities (continued)
1. Inquiries regarding cross-border wealth management businesses
Tax and regulatory authorities in a number of countries have
made inquiries, served requests for information or examined
employees located in their respective jurisdictions relating to the
cross-border wealth management services provided by UBS and
other financial institutions. It is possible that implementation of
automatic tax information exchange and other measures relating
to cross-border provision of financial services could give rise to
further inquiries in the future. UBS has received disclosure orders
from the Swiss Federal Tax Administration (FTA) to transfer infor-
mation based on requests for international administrative assis-
tance in tax matters. The requests concern a number of UBS
account numbers pertaining to current and former clients and are
based on data from 2006 and 2008. UBS has taken steps to
inform affected clients about the administrative assistance pro-
ceedings and their procedural rights, including the right to appeal.
The requests are based on data received from the German author-
ities, who seized certain data related to UBS clients booked in
Switzerland during their investigations and have apparently
shared this data with other European countries. UBS expects addi-
tional countries to file similar requests. In addition, the Swiss
Federal Supreme Court ruled in September 2016 that the double
taxation agreement between the Netherlands and Switzerland
provides a sufficient legal basis for an administrative assistance
group request without specifying the names of the targeted tax-
payers, which makes it more likely that similar requests for admin-
istrative assistance will be granted by the FTA.
In 2013, as a result of investigations in France, UBS (France)
S.A. and UBS AG were put under formal examination (“mise en
examen”) for complicity in having illicitly solicited clients on
French territory and were declared witness with legal assistance
(“témoin assisté”) regarding the laundering of proceeds of tax
fraud and of banking and financial solicitation by unauthorized
persons. In 2014, UBS AG was placed under formal examination
with respect to the potential charges of laundering of proceeds of
tax fraud, and the investigating judges ordered UBS AG to provide
bail (“caution”) of EUR 1.1 billion. UBS AG appealed the determi-
nation of the bail amount, but both the appeal court (“Cour
d’Appel”) and the French Supreme Court (“Cour de Cassation”)
upheld the bail amount and rejected the appeal in full in late
2014. UBS AG filed an application to the European Court of
Human Rights (ECHR) to challenge various aspects of the French
court’s decision. In January 2017, the ECHR denied UBS’s applica-
tion. The Swiss Federal Administrative Court ruled in October
2016 that in the administrative assistance proceedings related to
the French bulk request, UBS has the right to appeal all final FTA
client data disclosure orders. In September 2015, the former CEO
of UBS Wealth Management was placed under formal examina-
tion in connection with these proceedings. In addition, the inves-
tigating judges have sought to issue arrest warrants against three
Swiss-based former employees of UBS AG who did not appear
when summoned by the investigating judge.
In 2015, UBS (France) S.A. was placed under formal examina-
tion for complicity regarding the laundering of proceeds of tax
fraud and of banking and financial solicitation by unauthorized
persons for the years 2004 until 2008 and declared witness with
legal assistance for the years 2009 to 2012. A bail of EUR 40 mil-
lion was imposed and subsequently reduced by the Court of
Appeals to EUR 10 million.
In February 2016, the investigating judge notified UBS AG and
UBS (France) S.A. that he has closed his investigation. In July
2016, UBS AG and UBS (France) S.A. received the National Finan-
cial Prosecutor’s recommendation (“réquisitoire”). As permitted,
the parties have commented on the recommendation. The next
procedural step will be for the judge to issue his final decree
(“ordonnance de renvoi en correctionnelle”), which would set
out any charges for which UBS AG and UBS (France) S.A. will be
tried, both legally and factually, and transfer the case to court.
UBS has been notified by the Belgian investigating judge that
it is under formal investigation (“inculpé”) regarding the launder-
ing of proceeds of tax fraud and of banking, financial solicitation
by unauthorized persons and serious tax fraud.
In 2015, UBS received inquiries from the US Attorney’s Office
for the Eastern District of New York and from the US Securities
and Exchange Commission (SEC), which are investigating poten-
tial sales to US persons of bearer bonds and other unregistered
securities in possible violation of the Tax Equity and Fiscal Respon-
sibility Act of 1982 (TEFRA) and the registration requirements of
the US securities laws. UBS is cooperating with the authorities in
these investigations.
UBS has, and reportedly numerous other financial institutions
have, received inquiries from authorities concerning accounts relat-
ing to the Fédération Internationale de Football Association (FIFA)
and other constituent soccer associations and related persons and
entities. UBS is cooperating with authorities in these inquiries.
Our balance sheet at 31 December 2016 reflected provisions
with respect to matters described in this item 1 in an amount that
UBS believes to be appropriate under the applicable accounting
standard. As in the case of other matters for which we have
established provisions, the future outflow of resources in respect
of such matters cannot be determined with certainty based on
currently available information and accordingly may ultimately
prove to be substantially greater (or may be less) than the provi-
sion that we have recognized.
376
Consolidated financial statements Note 20 Provisions and contingent liabilities (continued)
2. Claims related to sales of residential mortgage-backed
securities and mortgages
From 2002 through 2007, prior to the crisis in the US residential
loan market, UBS was a substantial issuer and underwriter of US
residential mortgage-backed securities (RMBS) and was a pur-
chaser and seller of US residential mortgages. A subsidiary of UBS,
UBS Real Estate Securities Inc. (UBS RESI), acquired pools of resi-
dential mortgage loans from originators and (through an affiliate)
deposited them into securitization trusts. In this manner, from
2004 through 2007, UBS RESI sponsored approximately USD 80
billion in RMBS, based on the original principal balances of the
securities issued.
UBS RESI also sold pools of loans acquired from originators to
third-party purchasers. These whole loan sales during the period
2004 through 2007 totaled approximately USD 19 billion in origi-
nal principal balance.
We were not a significant originator of US residential loans. A
subsidiary of UBS originated approximately USD 1.5 billion in US
residential mortgage loans during the period in which it was active
from 2006 to 2008 and securitized less than half of these loans.
RMBS-related lawsuits concerning disclosures: UBS is named as
a defendant relating to its role as underwriter and issuer of RMBS
in lawsuits related to approximately USD 2.5 billion in original face
amount of RMBS underwritten or issued by UBS. Of the USD 2.5
billion in original face amount of RMBS that remains at issue in
these cases, approximately USD 1.2 billion was issued in offerings
in which a UBS subsidiary transferred underlying loans (the major-
ity of which were purchased from third-party originators) into a
securitization trust and made representations and warranties
about those loans (UBS-sponsored RMBS). The remaining USD 1.3
billion of RMBS to which these cases relate was issued by third
parties in securitizations in which UBS acted as underwriter (third-
party RMBS).
In connection with certain of these lawsuits, UBS has indemni-
fication rights against surviving third-party issuers or originators
for losses or liabilities incurred by UBS, but UBS cannot predict the
extent to which it will succeed in enforcing those rights.
UBS is a defendant in a lawsuit brought by the National Credit
Union Administration (NCUA) as conservator for certain failed
credit unions, asserting misstatements and omissions in the offer-
ing documents for RMBS purchased by the credit unions. The law-
suit was filed in the US District Court for the District of Kansas.
The original principal balance at issue in the case is approximately
USD 1.15 billion. In March 2017, UBS and NCUA reached an
agreement in principle to resolve this matter. In the second quarter
of 2016, UBS resolved a similar case brought by the NCUA in the
US District Court for the Southern District of New York (SDNY)
relating to RMBS with an original principal balance of approxi-
mately USD 400 million, for a total of approximately USD
69.8 million, in addition to reasonable attorneys’ fees incurred by
NCUA.
Lawsuits related to contractual representations and warranties
concerning mortgages and RMBS: When UBS acted as an RMBS
sponsor or mortgage seller, we generally made certain representa-
tions relating to the characteristics of the underlying loans. In the
event of a material breach of these representations, we were in
certain circumstances contractually obligated to repurchase the
loans to which the representations related or to indemnify certain
parties against losses. UBS has received demands to repurchase
US residential mortgage loans as to which UBS made certain rep-
resentations at the time the loans were transferred to the securi-
tization trust aggregating approximately USD 4.1 billion in origi-
nal principal balance. Of this amount, UBS considers claims
relating to approximately USD 2 billion in original principal bal-
ance to be resolved, including claims barred by the statute of
limitations. Substantially all of the remaining claims are in litiga-
tion, including the matters described in the next paragraph. UBS
believes that new demands to repurchase US residential mort-
gage loans are time-barred under a decision rendered by the New
York Court of Appeals.
In 2012, certain RMBS trusts filed an action (Trustee Suit) in the
SDNY seeking to enforce UBS RESI’s obligation to repurchase
loans in the collateral pools for three RMBS securitizations with an
original principal balance of approximately USD 2 billion, for
which Assured Guaranty Municipal Corp., a financial guaranty
insurance company, had previously demanded repurchase. A
bench trial in the SDNY adjourned in May 2016. Approximately
9,000 loans were at issue in the trial. In September 2016, the
court issued an order ruling on numerous legal and factual issues
and applying those rulings to 20 exemplar loans. The court fur-
ther ordered that a lead master be appointed to apply the court’s
rulings to the loans that remain at issue following the trial. With
respect to the loans subject to the Trustee Suit that were origi-
nated by institutions still in existence, UBS intends to enforce its
indemnity rights against those institutions.
We also have tolling agreements with certain institutional pur-
chasers of RMBS concerning their potential claims related to sub-
stantial purchases of UBS-sponsored or third-party RMBS.
377
Financial statements Note 20 Provisions and contingent liabilities (continued)
Provision for claims related to sales of residential mortgage-backed securities and mortgages
USD million
Balance at the beginning of the year
Increase in provision recognized in the income statement
Release of provision recognized in the income statement
Provision used in conformity with designated purpose
Balance at the end of the year
31.12.16
31.12.15
1,218
589
0
(307)
1,500
849
662
(94)
(199)
1,218
Mortgage-related regulatory matters: In 2014, UBS received a
subpoena from the US Attorney’s Office for the Eastern District of
New York issued pursuant to the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA), which seeks
documents and information related to UBS’s RMBS business from
2005 through 2007. In 2015, the Eastern District of New York
identified a number of transactions that are the focus of their
inquiry, and has subsequently provided a revised list of transac-
tions. We have provided and continue to provide information.
UBS continues to respond to the FIRREA subpoena and to subpoe-
nas from the New York State Attorney General and other state
attorneys general relating to its RMBS business. In addition, UBS
has also been responding to inquiries from both the Special
Inspector General for the Troubled Asset Relief Program (SIGTARP)
(who is working in conjunction with the US Attorney’s Office for
Connecticut and the DOJ) and the SEC relating to trading prac-
tices in connection with purchases and sales of mortgage-backed
securities in the secondary market from 2009 through 2014. We
are cooperating with the authorities in these matters.
As reflected in the table “Provision for claims related to sales of
residential mortgage-backed securities and mortgages,” our bal-
ance sheet at 31 December 2016 reflected a provision of USD
1,500 million with respect to matters described in this item 2. As in
the case of other matters for which we have established provisions,
the future outflow of resources in respect of this matter cannot be
determined with certainty based on currently available information
and accordingly may ultimately prove to be substantially greater (or
may be less) than the provision that we have recognized.
378
Consolidated financial statements
Note 20 Provisions and contingent liabilities (continued)
3. Madoff
In relation to the Bernard L. Madoff Investment Securities LLC
(BMIS) investment fraud, UBS AG, UBS (Luxembourg) S.A. and
certain other UBS subsidiaries have been subject to inquiries by a
number of regulators, including the Swiss Financial Market
Supervisory Authority (FINMA) and the Luxembourg Commission
de Surveillance du Secteur Financier (CSSF). Those inquiries con-
cerned two third-party funds established under Luxembourg law,
substantially all assets of which were with BMIS, as well as certain
funds established in offshore jurisdictions with either direct or
indirect exposure to BMIS. These funds now face severe losses,
and the Luxembourg funds are in liquidation. The last reported
net asset value of the two Luxembourg funds before revelation of
the Madoff scheme was approximately USD 1.7 billion in the
aggregate although that figure likely includes fictitious profit
reported by BMIS. The documentation establishing both funds
identifies UBS entities in various roles, including custodian,
administrator, manager, distributor and promoter, and indicates
that UBS employees serve as board members. UBS (Luxembourg)
S.A. and certain other UBS subsidiaries are responding to inqui-
ries by Luxembourg investigating authorities, without, however,
being named as parties in those investigations. In 2009 and
2010, the liquidators of the two Luxembourg funds filed claims
on behalf of the funds against UBS entities, non-UBS entities and
certain individuals, including current and former UBS employees.
The amounts claimed are approximately EUR 890 million and EUR
305 million, respectively. The liquidators have filed supplemen-
tary claims for amounts that the funds may possibly be held liable
to pay the BMIS Trustee. These amounts claimed by the liquidator
are approximately EUR 564 million and EUR 370 million, respec-
tively. In addition, a large number of alleged beneficiaries have
filed claims against UBS entities (and non-UBS entities) for pur-
ported losses relating to the Madoff scheme. The majority of
these cases are pending in Luxembourg, where appeals were
filed by the claimants against the 2010 decisions of the court in
which the claims in a number of test cases were held to be inad-
missible. In 2014, the Luxembourg Court of Appeal dismissed
one test case appeal in its entirety, which decision was appealed
by the investor. In 2015, the Luxembourg Supreme Court found
in favor of UBS and dismissed the investor’s appeal. In June 2016,
the Luxembourg Court of Appeal dismissed the remaining test
cases in their entirety. In the US, the BMIS Trustee filed claims in
2010 against UBS entities, among others, in relation to the two
Luxembourg funds and one of the offshore funds. The total
amount claimed against all defendants in these actions was not
less than USD 2 billion. Following a motion by UBS, in 2011, the
SDNY dismissed all of the BMIS Trustee’s claims other than claims
for recovery of fraudulent conveyances and preference payments
that were allegedly transferred to UBS on the ground that the
BMIS Trustee lacks standing to bring such claims. In 2013, the
Second Circuit affirmed the District Court’s decision and, in 2014,
the US Supreme Court denied the BMIS Trustee’s petition seeking
review of the Second Circuit ruling. In November 2016, the bank-
ruptcy court issued an opinion dismissing the remaining claims
for recovery of subsequent transfers of fraudulent conveyances
and preference payments on the ground that the US Bankruptcy
Code does not apply to transfers that occurred outside the US.
The BMIS Trustee has indicated that he will appeal. In 2014, sev-
eral claims, including a purported class action, were filed in the
US by BMIS customers against UBS entities, asserting claims sim-
ilar to the ones made by the BMIS Trustee, seeking unspecified
damages. One claim was voluntarily withdrawn by the plaintiff.
In 2015, following a motion by UBS, the SDNY dismissed the two
remaining claims on the basis that the New York courts did not
have jurisdiction to hear the claims against the UBS entities. The
plaintiff in one of those claims has appealed the dismissal. In Ger-
many, certain clients of UBS are exposed to Madoff-managed
positions through third-party funds and funds administered by
UBS entities in Germany. A small number of claims have been
filed with respect to such funds. In 2015, a court of appeal
ordered UBS to pay EUR 49 million, plus interest of approximately
EUR 15.3 million.
379
Financial statements Note 20 Provisions and contingent liabilities (continued)
4. Puerto Rico
Declines since August 2013 in the market prices of Puerto Rico
municipal bonds and of closed-end funds (the funds) that are
sole-managed and co-managed by UBS Trust Company of Puerto
Rico and distributed by UBS Financial Services Incorporated of
Puerto Rico (UBS PR) have led to multiple regulatory inquiries, as
well as customer complaints and arbitrations with aggregate
claimed damages of approximately USD 2.0 billion, of which
claims with aggregate claimed damages of approximately USD
861 million have been resolved through settlements, arbitration
or withdrawal of the claim. The claims are filed by clients in
Puerto Rico who own the funds or Puerto Rico municipal bonds
and / or who used their UBS account assets as collateral for UBS
non-purpose loans; customer complaint and arbitration allega-
tions include fraud, misrepresentation and unsuitability of the
funds and of the loans. A shareholder derivative action was filed
in 2014 against various UBS entities and current and certain for-
mer directors of the funds, alleging hundreds of millions of US
dollars in losses in the funds. In 2015, defendants’ motion to
dismiss was denied. Defendants’ requests for permission to
appeal that ruling were denied by the Puerto Rico Court of
Appeals and the Puerto Rico Supreme Court. In 2014, a federal
class action complaint also was filed against various UBS entities,
certain members of UBS PR senior management, and the co-
manager of certain of the funds seeking damages for investor
losses in the funds during the period from May 2008 through
May 2014. Defendants had moved to dismiss that complaint,
and in December 2016, defendants’ motion to dismiss was
granted in part and denied in part. In 2015, a class action was
filed in Puerto Rico state court against UBS PR seeking equitable
relief in the form of a stay of any effort by UBS PR to collect on
non-purpose loans it acquired from UBS Bank USA in December
2013 based on plaintiffs’ allegation that the loans are not valid.
The trial court denied defendants’ motion to dismiss the action
based on a forum selection clause in the loan agreements; the
Puerto Rico Supreme Court has stayed the action pending its
review of defendants’ appeal from that ruling.
In 2014, UBS reached a settlement with the Office of the
Commissioner of Financial Institutions for the Commonwealth of
Puerto Rico (OCFI) in connection with OCFI’s examination of UBS’s
operations from January 2006 through September 2013, pursu-
ant to which UBS is paying up to an aggregate of USD 7.7 million
in investor education contributions and restitution.
In 2015, the SEC and the Financial Industry Regulatory Author-
ity (FINRA) announced settlements with UBS PR of their separate
investigations stemming from the 2013 market events. Without
admitting or denying the findings in either matter, UBS PR agreed
in the SEC settlement to pay USD 15 million and USD 18.5 million
in the FINRA matter. We also understand that the DOJ is conduct-
ing a criminal inquiry into the impermissible reinvestment of non-
purpose loan proceeds. We are cooperating with the authorities
in this inquiry.
In 2011, a purported derivative action was filed on behalf of
the Employee Retirement System of the Commonwealth of Puerto
Rico (System) against over 40 defendants, including UBS PR,
which was named in connection with its underwriting and con-
sulting services. Plaintiffs alleged that defendants violated their
purported fiduciary duties and contractual obligations in connec-
tion with the issuance and underwriting of approximately USD 3
billion of bonds by the System in 2008 and sought damages of
over USD 800 million. Defendants’ motion to dismiss is pending.
In September 2016, the System announced its intention to join
the action as a plaintiff, and the court has since ordered that
plaintiffs must file an amended complaint.
Also, in 2013, an SEC Administrative Law Judge dismissed a case
brought by the SEC against two UBS executives, finding no viola-
tions. The charges had stemmed from the SEC’s investigation of
UBS’s sale of closed-end funds in 2008 and 2009, which UBS settled
in 2012. Beginning in 2012, two federal class action complaints,
which were subsequently consolidated, were filed against various
UBS entities, certain of the funds, and certain members of UBS PR
senior management, seeking damages for investor losses in the
funds during the period from January 2008 through May 2012
based on allegations similar to those in the SEC action. In Septem-
ber 2016, the court denied plaintiffs’ motion for class certification.
In October 2016, plaintiffs filed a petition with the US Court of
Appeals for the First Circuit seeking permission to bring an inter-
locutory appeal challenging the denial of their motion for class cer-
tification. Defendants have filed an opposition to plaintiffs’ petition.
Beginning in 2015, agencies and public corporations of the
Commonwealth have defaulted on certain interest payments, and
in July 2016, the Commonwealth defaulted on payments on its
general obligation debt. Executive orders of the Governor that have
diverted funds to pay for essential services instead of debt payments
and stayed any action to enforce creditors’ rights on the Puerto Rico
bonds continue to be in effect. In June 2016, US federal legislation
created an oversight board with power to oversee Puerto Rico’s
finances and to restructure its debt. The oversight board is autho-
rized to impose, and has imposed, a stay on exercise of creditors’
rights. These events, further defaults, any further legislative action
to create a legal means of restructuring Commonwealth obligations
or to impose additional oversight on the Commonwealth’s finances,
or any restructuring of the Commonwealth’s obligations, may
increase the number of claims against UBS concerning Puerto Rico
securities, as well as potential damages sought.
Our balance sheet at 31 December 2016 reflected provisions
with respect to matters described in this item 4 in amounts that
UBS believes to be appropriate under the applicable accounting
standard. As in the case of other matters for which we have
established provisions, the future outflow of resources in respect
of such matters cannot be determined with certainty based on
currently available information and accordingly may ultimately
prove to be substantially greater (or may be less) than the provi-
sions that we have recognized.
380
Consolidated financial statements Note 20 Provisions and contingent liabilities (continued)
5. Foreign exchange, LIBOR, and benchmark rates, and other
trading practices
Foreign exchange-related regulatory matters: Following an initial
media report in 2013 of widespread irregularities in the foreign
exchange markets, UBS immediately commenced an internal
review of its foreign exchange business, which includes our pre-
cious metals and related structured products businesses. Since
then, various authorities have commenced investigations con-
cerning possible manipulation of foreign exchange markets,
including FINMA, the Swiss Competition Commission (WEKO),
the DOJ, the SEC, the US Commodity Futures Trading Commis-
sion (CFTC), the Board of Governors of the Federal Reserve Sys-
tem (Federal Reserve Board), the California State Attorney Gen-
eral, the UK Financial Conduct Authority (FCA) (to which certain
responsibilities of the UK Financial Services Authority (FSA) have
passed), the UK Serious Fraud Office (SFO), the Australian Securi-
ties and Investments Commission (ASIC), the Hong Kong Mone-
tary Authority (HKMA), the Korea Fair Trade Commission (KFTC)
and the Brazil Competition Authority (CADE). In addition, WEKO
is, and a number of other authorities reportedly are, investigating
potential manipulation of precious metals prices. UBS has taken
and will continue to take appropriate action with respect to cer-
tain personnel as a result of its ongoing review.
In 2014, UBS reached settlements with the FCA and the CFTC
in connection with their foreign exchange investigations, and
FINMA issued an order concluding its formal proceedings with
respect to UBS relating to its foreign exchange and precious metals
businesses. UBS has paid a total of approximately CHF 774 million
to these authorities, including GBP 234 million in fines to the FCA,
USD 290 million in fines to the CFTC, and CHF 134 million to
FINMA representing confiscation of costs avoided and profits. In
2015, the Federal Reserve Board and the Connecticut Department
of Banking issued an Order to Cease and Desist and Order of
Assessment of a Civil Monetary Penalty Issued upon Consent (Fed-
eral Reserve Order) to UBS AG. As part of the Federal Reserve
Order, UBS AG paid a USD 342 million civil monetary penalty.
In 2015, the DOJ’s Criminal Division (Criminal Division) termi-
nated the December 2012 Non-Prosecution Agreement (NPA)
with UBS AG related to UBS’s submissions of benchmark interest
rates. As a result, UBS AG entered into a plea agreement with the
Criminal Division pursuant to which UBS AG pleaded guilty to a
one-count criminal information filed in the US District Court for
the District of Connecticut charging UBS AG with one count of
wire fraud in violation of 18 USC Sections 1343 and 2. Sentencing
occurred on 5 January 2017. Under the plea agreement, UBS AG
has paid a USD 203 million fine and is subject to a three-year term
of probation starting on the sentencing date. The criminal infor-
mation charges that, between approximately 2001 and 2010,
UBS AG engaged in a scheme to defraud counterparties to inter-
est rate derivatives transactions by manipulating benchmark inter-
est rates, including Yen LIBOR. The Criminal Division terminated
the NPA based on its determination, in its sole discretion, that
certain UBS AG employees committed criminal conduct that vio-
lated the NPA, including fraudulent and deceptive currency trad-
ing and sales practices in conducting certain foreign exchange
market transactions with clients and collusion with other partici-
pants in certain foreign exchange markets.
We have ongoing obligations to cooperate with these authori-
ties and to undertake certain remediation, including actions to
improve UBS’s processes and controls.
UBS has been granted conditional leniency or conditional immu-
nity by the Antitrust Division of the DOJ (Antitrust Division) from
prosecution for EUR / USD collusion and entered into a non-prose-
cution agreement covering other currency pairs. As a result, UBS
AG will not be subject to prosecutions, fines or other sanctions for
antitrust law violations by the Antitrust Division, subject to UBS
AG’s continuing cooperation. However, the conditional leniency
and conditional immunity grant does not bar government agencies
from asserting other claims and imposing sanctions against UBS
AG, as evidenced by the settlements and ongoing investigations
referred to above. UBS has also been granted conditional immunity
by authorities in certain jurisdictions, including WEKO, in connec-
tion with potential competition law violations relating to foreign
exchange and precious metals businesses and, as a result, will not
be subject to prosecutions, fines or other sanctions for antitrust or
competition law violations in those jurisdictions, subject to UBS
AG’s continuing cooperation as the leniency applicant.
Investigations relating to foreign exchange and precious metals
matters by numerous authorities, including the CFTC, remain
ongoing notwithstanding these resolutions.
Foreign exchange-related civil litigation: Putative class actions
have been filed since November 2013 in US federal courts and in
other jurisdictions against UBS and other banks on behalf of puta-
tive classes of persons who engaged in foreign currency transac-
tions with any of the defendant banks. They allege collusion by
the defendants and assert claims under the antitrust laws and for
unjust enrichment. In 2015, additional putative class actions were
filed in federal court in New York against UBS and other banks on
behalf of a putative class of persons who entered into or held any
foreign exchange futures contracts and options on foreign
exchange futures contracts since 1 January 2003. The complaints
assert claims under the Commodity Exchange Act (CEA) and the
US antitrust laws. In 2015, a consolidated complaint was filed on
behalf of both putative classes of persons covered by the US fed-
eral court class actions described above. UBS has entered into a
settlement agreement that would resolve all of these US federal
court class actions. The agreement, which has been preliminarily
approved by the court and is subject to final court approval,
requires, among other things, that UBS pay an aggregate of USD
141 million and provide cooperation to the settlement classes.
381
Financial statements Note 20 Provisions and contingent liabilities (continued)
A putative class action has been filed in federal court in New
York against UBS and other banks on behalf of participants, ben-
eficiaries, and named fiduciaries of plans qualified under the
Employee Retirement Income Security Act of 1974 (ERISA) for
whom a defendant bank provided foreign currency exchange
transactional services, exercised discretionary authority or discre-
tionary control over management of such ERISA plan, or autho-
rized or permitted the execution of any foreign currency exchange
transactional services involving such plan’s assets. The complaint
asserts claims under ERISA. The parties filed a stipulation to dis-
miss the case with prejudice. The plaintiffs have appealed the
dismissal.
In 2015, a putative class action was filed in federal court
against UBS and numerous other banks on behalf of a putative
class of persons and businesses in the US who directly purchased
foreign currency from the defendants and their co-conspirators
for their own end use. That action has been transferred to federal
court in New York. Motions to dismiss are pending.
In 2016, a putative class action was filed in federal court in
New York against UBS and numerous other banks on behalf of a
putative class of persons and entities who had indirectly pur-
chased FX instruments from a defendant or co-conspirator in the
US. The complaint asserts claims under federal and state antitrust
laws. Motions to dismiss will be filed.
In 2015, UBS was added to putative class actions pending
against other banks in federal court in New York and other juris-
dictions on behalf of putative classes of persons who had bought
or sold physical precious metals and various precious metal prod-
ucts and derivatives. The complaints in these lawsuits assert claims
under the antitrust laws and the CEA, and other claims. In Octo-
ber 2016, the court in New York granted UBS’s motions to dismiss
the putative class actions relating to gold and silver. Plaintiffs in
those cases are seeking to amend their complaints to add new
allegations about UBS. UBS’s motion to dismiss the putative class
action relating to platinum and palladium remains pending.
LIBOR and other benchmark-related regulatory matters:
Numerous government agencies, including the SEC, the CFTC,
the DOJ, the FCA, the SFO, the Monetary Authority of Singapore
(MAS), the HKMA, FINMA, the various state attorneys general in
the US and competition authorities in various jurisdictions have
conducted or are continuing to conduct investigations regarding
submissions with respect to LIBOR and other benchmark rates.
These investigations focus on whether there were improper
attempts by UBS, among others, either acting on our own or
together with others, to manipulate LIBOR and other benchmark
rates at certain times.
In 2012, UBS reached settlements with the FSA, the CFTC and
the Criminal Division of the DOJ in connection with their investi-
gations of benchmark interest rates. At the same time, FINMA
issued an order concluding its formal proceedings with respect to
UBS relating to benchmark interest rates. UBS has paid a total of
approximately CHF 1.4 billion in fines and disgorgement, includ-
ing GBP 160 million in fines to the FSA, USD 700 million in fines
to the CFTC, USD 500 million in fines to the DOJ, and CHF 59
million in disgorgement to FINMA. UBS Securities Japan Co. Ltd.
(UBSSJ) entered into a plea agreement with the DOJ under which
it entered a plea to one count of wire fraud relating to the manip-
ulation of certain benchmark interest rates, including Yen LIBOR.
UBS entered into an NPA with the DOJ, which (along with the plea
agreement) covered conduct beyond the scope of the conditional
leniency / immunity grants described below, required UBS to pay
the USD 500 million fine to the DOJ after the sentencing of UBSSJ
and provided that any criminal penalties imposed on UBSSJ at
sentencing be deducted from the USD 500 million fine. Under the
NPA, we agreed, among other things, that for two years from
18 December 2012 UBS would not commit any US crime and we
would advise DOJ of any potentially criminal conduct by UBS or
any of its employees relating to violations of US laws concerning
fraud or securities and commodities markets. The term of the NPA
was extended by one year to 18 December 2015. In 2015, the
Criminal Division terminated the NPA based on its determination,
in its sole discretion, that certain UBS AG employees committed
criminal conduct that violated the NPA.
In 2014, UBS reached a settlement with the European Com-
mission (EC) regarding its investigation of bid-ask spreads in con-
nection with Swiss franc interest rate derivatives and paid a EUR
12.7 million fine, which was reduced to this level based in part on
UBS’s cooperation with the EC. In December 2016, UBS reached a
settlement with WEKO regarding its investigation of bid-ask
spreads in connection with Swiss franc interest rate derivatives
and received full immunity from fines. The MAS, HKMA and the
Japan Financial Services Agency have also resolved investigations
of UBS (and in some cases, other banks). We have ongoing obli-
gations to cooperate with the authorities with whom we have
reached resolutions and to undertake certain remediation with
respect to benchmark interest rate submissions.
Investigations by the CFTC, ASIC and other governmental
authorities remain ongoing notwithstanding these resolutions.
382
Consolidated financial statements Note 20 Provisions and contingent liabilities (continued)
UBS has been granted conditional leniency or conditional
immunity from authorities in certain jurisdictions, including the
Antitrust Division of the DOJ and WEKO, in connection with
potential antitrust or competition law violations related to submis-
sions for Yen LIBOR and Euroyen TIBOR. As a result of these con-
ditional grants, UBS will not be subject to prosecutions, fines or
other sanctions for antitrust or competition law violations in the
jurisdictions where we have conditional immunity in connection
with the matters covered by the conditional grants, subject to our
continuing cooperation as leniency applicant. However, since the
Secretariat of WEKO has asserted that UBS does not qualify for
full immunity, UBS has been unable to reach a settlement with
WEKO, and therefore the investigation will continue. Further-
more, the conditional leniency and conditional immunity grants
we have received do not bar government agencies from asserting
other claims and imposing sanctions against us, as evidenced by
the settlements and ongoing investigations referred to above. In
addition, as a result of the conditional leniency agreement with
the DOJ, we are eligible for a limit on liability to actual rather than
treble damages were damages to be awarded in any civil antitrust
action under US law based on conduct covered by the agreement
and for relief from potential joint and several liability in connec-
tion with such civil antitrust action, subject to our satisfying the
DOJ and the court presiding over the civil litigation of our coop-
eration. The conditional leniency and conditional immunity grants
do not otherwise affect the ability of private parties to assert civil
claims against us.
LIBOR and other benchmark-related civil litigation: A number
of putative class actions and other actions are pending in the fed-
eral courts in New York against UBS and numerous other banks
on behalf of parties who transacted in certain interest rate bench-
mark-based derivatives. Also pending in the US and in other juris-
dictions are actions asserting losses related to various products
whose interest rates were linked to LIBOR and other benchmarks,
including adjustable rate mortgages, preferred and debt securi-
ties, bonds pledged as collateral, loans, depository accounts,
investments and other interest-bearing instruments. All of the
complaints allege manipulation, through various means, of vari-
ous benchmark interest rates, including USD LIBOR, Euroyen
TIBOR, Yen LIBOR, EURIBOR, CHF LIBOR, GBP LIBOR, USD ISDAFIX
rates and other benchmark rates, and seek unspecified compen-
satory and other damages under varying legal theories.
In 2013, the US district court in the USD LIBOR action dismissed
the federal antitrust and racketeering claims of certain USD LIBOR
plaintiffs and a portion of their claims brought under the CEA and
state common law. Certain plaintiffs appealed the decision to the
Second Circuit, which, in May 2016, vacated the district court’s
ruling finding no antitrust injury and remanded the case back to
the district court for a further determination on whether plaintiffs
have antitrust standing. In December 2016, the district court
again dismissed plaintiffs’ antitrust claims, this time for lack of
personal jurisdiction over UBS and other foreign banks. In 2014,
the court in one of the Euroyen TIBOR lawsuits dismissed certain
of the plaintiff’s claims, including federal antitrust claims. In 2015,
the same court dismissed plaintiff’s federal racketeering claims
and affirmed its previous dismissal of plaintiff’s antitrust claims.
UBS and other defendants in other lawsuits including those
related to EURIBOR, CHF LIBOR, GBP LIBOR and SIBOR have filed
motions to dismiss. UBS has entered into an agreement with rep-
resentatives of a class of bondholders to settle their USD LIBOR
class action. The agreement is subject to court approval.
Since September 2014, putative class actions have been filed in
federal court in New York and New Jersey against UBS and other
financial institutions, among others, on behalf of parties who
entered into interest rate derivative transactions linked to ISDAFIX.
The complaints, which have since been consolidated into an
amended complaint, allege that the defendants conspired to
manipulate ISDAFIX rates from 1 January 2006 through January
2014, in violation of US antitrust laws and certain state laws, and
seek unspecified compensatory damages, including treble dam-
ages. In March 2016, the court in the ISDAFIX action denied in
substantial part defendants’ motion to dismiss, holding that plain-
tiffs have stated Sherman Act, breach-of-contract and unjust-
enrichment claims against defendants, including UBS AG.
Government bonds: Putative class actions have been filed in US
federal courts against UBS and other banks on behalf of persons
who participated in markets for US Treasury securities since 2007.
The complaints generally allege that the banks colluded with
respect to, and manipulated prices of, US Treasury securities sold
at auction. They assert claims under the antitrust laws and the
CEA and for unjust enrichment. The cases have been consolidated
in the SDNY. Following filing of these complaints, UBS and report-
edly other banks are responding to investigations and requests for
information from various authorities regarding US Treasury securi-
ties and other government bond trading practices. As a result of
its review to date, UBS has taken appropriate action.
With respect to additional matters and jurisdictions not encom-
passed by the settlements and order referred to above, our bal-
ance sheet at 31 December 2016 reflected a provision in an
amount that UBS believes to be appropriate under the applicable
accounting standard. As in the case of other matters for which we
have established provisions, the future outflow of resources in
respect of such matters cannot be determined with certainty
based on currently available information and accordingly may ulti-
mately prove to be substantially greater (or may be less) than the
provision that we have recognized.
383
Financial statements Note 20 Provisions and contingent liabilities (continued)
6. Swiss retrocessions
The Federal Supreme Court of Switzerland ruled in 2012, in a test
case against UBS, that distribution fees paid to a firm for distribut-
ing third-party and intra-group investment funds and structured
products must be disclosed and surrendered to clients who have
entered into a discretionary mandate agreement with the firm,
absent a valid waiver.
FINMA has issued a supervisory note to all Swiss banks in
response to the Supreme Court decision. UBS has met the FINMA
requirements and has notified all potentially affected clients.
The Supreme Court decision has resulted, and may continue to
result, in a number of client requests for UBS to disclose and
potentially surrender retrocessions. Client requests are assessed
on a case-by-case basis. Considerations taken into account when
assessing these cases include, among others, the existence of a
discretionary mandate and whether or not the client documenta-
tion contained a valid waiver with respect to distribution fees.
Our balance sheet at 31 December 2016 reflected a provision
with respect to matters described in this item 6 in an amount that
UBS believes to be appropriate under the applicable accounting
standard. The ultimate exposure will depend on client requests
and the resolution thereof, factors that are difficult to predict and
assess. Hence, as in the case of other matters for which we have
established provisions, the future outflow of resources in respect
of such matters cannot be determined with certainty based on
currently available information and accordingly may ultimately
prove to be substantially greater (or may be less) than the provi-
sion that we have recognized.
7. Banco UBS Pactual tax indemnity
Pursuant to the 2009 sale of Banco UBS Pactual S.A. (Pactual) by
UBS to BTG Investments, LP (BTG), BTG has submitted contractual
indemnification claims that UBS estimates amount to approxi-
mately BRL 2.6 billion, including interest and penalties, which is
net of liabilities retained by BTG. The claims pertain principally to
several tax assessments issued by the Brazilian tax authorities
against Pactual relating to the period from December 2006
through March 2009, when UBS owned Pactual. These assess-
ments are being challenged in administrative and judicial proceed-
ings. The majority of these assessments relate to the deductibility
of goodwill amortization in connection with UBS’s 2006 acquisi-
tion of Pactual and payments made to Pactual employees through
various profit-sharing plans. In 2015, an intermediate administra-
tive court issued a decision that was largely in favor of the tax
authority with respect to the goodwill amortization assessment. In
May 2016, the highest level of the administrative court agreed to
review this decision on a number of the significant issues.
8. Investigation of UBS’s role in initial public offerings in
Hong Kong
The Hong Kong Securities and Futures Commission (SFC) has
been conducting investigations into UBS’s role as a sponsor of
certain initial public offerings listed on the Hong Kong Stock
Exchange. In October 2016, the SFC informed UBS that it intends
to commence action against UBS and certain UBS employees with
respect to sponsorship work in those offerings. If such action is
taken, there may be financial ramifications for UBS, including
fines and obligations to pay investor compensation, and suspen-
sion of UBS’s ability to provide corporate finance advisory services
in Hong Kong for a period of time. On 16 January 2017, a writ
was filed by the SFC with Hong Kong’s High Court in which UBS
is named as one of six defendants from whom the SFC is seeking
compensation in an unspecified amount for losses incurred by
certain shareholders of China Forestry Holdings Company Lim-
ited, for whom UBS acted as a sponsor in connection with their
2009 listing application.
384
Consolidated financial statements Note 21 Other liabilities
CHF million
Prime brokerage payables1
Amounts due under unit-linked investment contracts
Compensation-related liabilities
of which: accrued expenses
of which: Deferred Contingent Capital Plan
of which: other deferred compensation plans
of which: net defined benefit pension and post-employment liabilities2
Third-party interest in consolidated investment funds
Settlement and clearing accounts
Current and deferred tax liabilities3
VAT and other tax payables
Deferred income
Accrued interest expenses
Other accrued expenses
Liabilities of disposal group held for sale4
Other
Total other liabilities
31.12.16
31,973
9,286
7,421
2,423
1,625
2,107
1,266
701
1,012
949
503
168
1,553
2,448
5,213
793
62,020
31.12.15
45,306
15,718
6,839
2,885
1,181
2,038
736
536
894
819
447
210
1,431
2,500
235
718
75,652
1 Prime brokerage services include clearance, settlement, custody, financing and portfolio reporting services for corporate clients trading across multiple asset classes. Prime brokerage payables are mainly comprised of
client securities financing and deposits. 2 Refer to Note 26 for more information. 3 Refer to Note 8 for more information. 4 Refer to Note 30 for more information.
385
Financial statements Additional information
Note 22 Fair value measurement
This Note provides fair value measurement information for both
financial and non-financial instruments and is structured as follows:
a) Valuation principles
b) Valuation governance
c) Fair value hierarchy
d) Valuation adjustments
e) Transfers between Level 1 and Level 2
f) Level 3 instruments: valuation techniques and inputs
g) Level 3 instruments: sensitivity to changes in unobservable
input assumptions
h) Level 3 instruments: movements during the period
i) Financial instruments not measured at fair value
a) Valuation principles
Fair value is defined as the price that would be received for the
sale of an asset or paid to transfer a liability in an orderly transac-
tion between market participants in the principal market (or most
advantageous market, in the absence of a principal market) as of
the measurement date. In measuring fair value, the Group uses
various valuation approaches and applies a hierarchy for prices
and inputs that maximizes the use of observable market data, if
available.
All financial and non-financial assets and liabilities measured or
disclosed at fair value are categorized into one of three fair value
hierarchy levels. In certain cases, the inputs used to measure fair
value may fall within different levels of the fair value hierarchy. For
disclosure purposes, the level in the hierarchy within which the
instrument is classified in its entirety is based on the lowest level
input that is significant to the position’s fair value measurement:
– Level 1 – quoted prices (unadjusted) in active markets for iden-
tical assets and liabilities;
– Level 2 – valuation techniques for which all significant inputs
are, or are based on, observable market data; or
– Level 3 – valuation techniques for which significant inputs are
not based on observable market data.
If available, fair values are determined using quoted prices in
active markets for identical assets or liabilities. An active market is
one in which transactions for the asset or liability take place with
sufficient frequency and volume to provide pricing data on an
ongoing basis. Assets and liabilities that are quoted and traded in
an active market are valued at the currently quoted price multi-
plied by the number of units of the instrument held.
Where the market for a financial instrument or non-financial
asset or liability is not active, fair value is established using a valu-
ation technique, including pricing models. Valuation techniques
involve the use of estimates, the extent of which depends on the
complexity of the instrument and the availability of market-based
data. Valuation adjustments may be made to allow for additional
factors, including model, liquidity, credit and funding risks, which
are not explicitly captured within the valuation technique, but
which would nevertheless be considered by market participants
when establishing a price. The limitations inherent in a particular
valuation technique are considered in the determination of an
asset or liability’s classification within the fair value hierarchy.
Many cash instruments and over-the-counter (OTC) derivative
contracts have bid and offer prices that can be observed in the
marketplace. Bid prices reflect the highest price that a party is will-
ing to pay for an asset. Offer prices represent the lowest price that
a party is willing to accept for an asset. In general, long positions
are measured at a bid price and short positions at an offer price,
reflecting the prices at which the instruments could be transferred
under normal market conditions. Offsetting positions in the same
financial instrument are marked at the mid-price within the bid-
offer spread.
Generally, the unit of account for a financial instrument is the
individual instrument, and UBS applies valuation adjustments at
an individual instrument level, consistent with that unit of account.
However, if certain conditions are met, UBS may estimate the fair
value of a portfolio of financial assets and liabilities with substan-
tially similar and offsetting risk exposures on the basis of the net
open risks.
For transactions where the valuation technique used to mea-
sure fair value requires significant inputs that are not based on
observable market data, the financial instrument is initially recog-
nized at the transaction price. This initial recognition amount may
differ from the fair value obtained using the valuation technique.
Any such difference is deferred and not recognized in the income
statement and referred to as deferred day-1 profit or loss.
➔ Refer to Note 22d for more information
386
Consolidated financial statements Note 22 Fair value measurement (continued)
b) Valuation governance
UBS’s fair value measurement and model governance framework
includes numerous controls and other procedural safeguards that
are intended to maximize the quality of fair value measurements
reported in the financial statements. New products and valuation
techniques must be reviewed and approved by key stakeholders
from risk and finance control functions. Responsibility for the
ongoing measurement of financial and non-financial instruments
at fair value resides with the business divisions. In carrying out
their valuation responsibilities, the businesses are required to con-
sider the availability and quality of external market data and to
provide justification and rationale for their fair value estimates.
Fair value estimates are validated by risk and finance control
functions, which are independent of the business divisions. Inde-
pendent price verification is performed by finance through bench-
marking the business divisions’ fair value estimates with observ-
able market prices and other independent sources. Controls and
governance are in place to ensure the quality of third-party pricing
sources where used. For instruments where valuation models are
used to determine fair value, independent valuation and model
control groups within finance and risk evaluate UBS’s models on a
regular basis, including valuation and model input parameters as
well as pricing. As a result of the valuation controls employed,
valuation adjustments may be made to the business divisions’
estimates of fair value to align with independent market data and
the relevant accounting standard.
➔ Refer to Note 22d for more information
387
Financial statements Note 22 Fair value measurement (continued)
c) Fair value hierarchy
The table below provides the fair value hierarchy classification of
financial and non-financial assets and liabilities measured at fair
value. The narrative that follows describes the different product
types, valuation techniques used in measuring their fair value,
including significant valuation inputs and assumptions used,
and the factors determining their classification within the fair
value hierarchy.
Determination of fair values from quoted market prices or valuation techniques1
CHF million
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
31.12.16
31.12.15
Assets measured at fair value on a recurring basis
Financial assets held for trading2
of which:
Government bills / bonds
Corporate and municipal bonds
Loans
Investment fund units
Asset-backed securities
Equity instruments
Financial assets for unit-linked investment contracts
Positive replacement values
of which:
Interest rate contracts
Credit derivative contracts
Foreign exchange contracts
Equity / index contracts
Commodity contracts
76,044
14,292
1,689
92,025
96,388
21,934
2,070
120,393
10,500
58
0
6,114
0
50,913
8,459
1,319
6,638
1,356
3,521
470
397
591
0
591
681
63
215
65
74
11,820
12,911
7,287
2,037
9,698
685
51,375
9,123
232
0
6,062
0
62,420
14,764
3,277
8,096
1,769
5,697
958
1,475
663
5
16,193
698
816
168
201
89
93
9,026
2,585
11,928
1,159
63,984
15,519
434
155,428
2,549
158,411
545
164,025
2,865
167,435
8
0
263
1
0
57,703
2,562
75,607
17,274
2,269
278
1,313
222
729
8
57,988
3,875
76,092
18,003
2,277
1
0
304
2
0
74,443
5,384
64,886
15,938
3,363
88
74,531
1,272
484
996
25
6,656
65,675
16,936
3,388
Financial assets designated at fair value
39,641
23,632
2,079
65,353
170
2,675
3,301
6,146
of which:
Government bills / bonds
Corporate and municipal bonds
Loans (including structured loans)
Structured reverse repurchase and securities
borrowing agreements
Other
Financial assets available for sale
of which:
Government bills / bonds
Corporate and municipal bonds
Investment fund units
Asset-backed securities
Equity instruments
Non-financial assets
39,439
15
0
0
187
4,361
16,860
2,043
40
329
0
0
1,195
644
240
43,799
16,875
3,238
684
756
4
0
0
0
165
0
0
0
0
4
0
2,310
1,678
3,988
40
325
1,510
113
1,550
603
6,299
8,891
486
15,676
34,204
27,653
686
62,543
5,444
646
0
0
204
450
4,939
51
3,381
71
0
12
126
0
336
5,894
5,596
177
3,381
611
31,108
1,986
2,992
22,186
0
0
103
64
3,396
21
0
27
139
0
517
33,094
25,205
202
3,396
641
Precious metals and other physical commodities
4,583
0
0
4,583
3,670
0
0
3,670
Assets measured at fair value on a non-recurring basis
Other assets3
Total assets measured at fair value
5,060
131
56
5,248
266
69
78
413
132,062
202,377
6,860
341,298
135,242
216,362
9,001
360,605
388
Consolidated financial statements Note 22 Fair value measurement (continued)
Determination of fair values from quoted market prices or valuation techniques (continued)1
31.12.16
31.12.15
CHF million
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Liabilities measured at fair value on a recurring basis
Trading portfolio liabilities
of which:
Government bills / bonds
Corporate and municipal bonds
Investment fund units
Asset-backed securities
Equity instruments
Negative replacement values
of which:
Interest rate contracts
Credit derivative contracts
Foreign exchange contracts
Equity / index contracts
Commodity contracts
Financial liabilities designated at fair value
of which:
Issued debt instruments
Over-the-counter debt instruments
Structured repurchase agreements
Loan commitments and guarantees
Other liabilities – amounts due under unit-linked investment contracts
Liabilities measured at fair value on a non-recurring basis
Other liabilities3
Total liabilities measured at fair value
18,807
3,898
119
22,824
25,476
3,504
158
29,137
5,573
12
484
0
12,738
648
2,927
91
5
227
0
37
20
0
62
6,221
2,976
595
5
5,997
12
666
0
13,026
18,802
845
2,370
52
2
235
0
90
20
0
47
6,842
2,471
738
2
19,084
539
149,255
4,016
153,810
640
158,494
3,296
162,430
12
0
274
1
0
2
0
2
0
0
0
0
51,990
3,269
71,668
20,254
2,040
475
1,538
148
1,854
1
52,476
4,807
72,089
22,109
2,041
44,007
11,008
55,017
40,242
3,611
130
25
9,286
5,213
9,688
1,050
266
5
0
0
49,930
4,663
395
29
9,286
5,213
2
0
286
1
0
1
0
2
0
0
0
0
67,225
5,350
62,965
19,722
3,222
326
67,553
1,303
233
1,433
0
6,653
63,484
21,156
3,222
52,321
10,673
62,995
47,197
4,719
293
113
15,718
235
9,337
56,534
773
556
7
0
0
5,493
849
119
15,718
235
19,347
211,660
15,143
246,150
26,117
230,272
14,127
270,515
1 Bifurcated embedded derivatives are presented on the same balance sheet lines as their host contracts and are excluded from this table. As of 31 December 2016, net bifurcated embedded derivative assets held at fair
value, totaling CHF 50 million (of which CHF 58 million were net Level 2 assets and CHF 8 million net Level 2 liabilities), were recognized on the balance sheet within Due to customers and Debt issued. As of 31 December
2015, net bifurcated embedded derivative liabilities held at fair value, totaling CHF 130 million (of which CHF 106 million were net Level 2 assets and CHF 236 million net Level 2 liabilities), were recognized on the
balance sheet within Debt issued. 2 Financial assets held for trading do not include precious metals and other physical commodities. 3 Other assets and other liabilities primarily consist of assets held for sale as well
as assets and liabilities of a disposal group held for sale, which are measured at the lower of their net carrying amount or fair value less costs to sell. Refer to Note 30 for more information.
389
Financial statements Note 22 Fair value measurement (continued)
Valuation techniques
Valuation techniques are used to value positions for which a mar-
ket price is not available from market sources. This includes certain
less liquid debt and equity instruments, certain exchange-traded
derivatives and all derivatives transacted in the OTC market. UBS
uses widely recognized valuation techniques for determining the
fair value of financial and non-financial instruments that are not
actively traded and quoted. The most frequently applied valuation
techniques include discounted value of expected cash flows, rela-
tive value and option pricing methodologies.
Discounted value of expected cash flows is a valuation technique
that measures fair value using estimated expected future cash flows
from assets or liabilities and then discounts these cash flows using a
discount rate or discount margin that reflects the credit and / or
funding spreads required by the market for instruments with similar
risk and liquidity profiles to produce a present value. When using
such valuation techniques, expected future cash flows are estimated
using an observed or implied market price for the future cash flows
or by using industry standard cash flow projection models. The dis-
count factors within the calculation are generated using industry
standard yield curve modeling techniques and models.
Relative value models measure fair value based on the market
prices of equivalent or comparable assets or liabilities, making
adjustments for differences between the characteristics of the
observed instrument and the instrument being valued.
Option pricing models incorporate assumptions regarding the
behavior of future price movements of an underlying referenced
asset or assets to generate a probability-weighted future expected
payoff for the option. The resulting probability-weighted expected
payoff is then discounted using discount factors generated from
industry standard yield curve modeling techniques and models.
The option pricing model may be implemented using a closed-
form analytical formula or other mathematical techniques (e.g.,
binomial tree or Monte Carlo simulation).
Where available, valuation techniques use market-observable
assumptions and inputs. If such data is not available, inputs may
be derived by reference to similar assets in active markets, from
recent prices for comparable transactions or from other observ-
able market data. In such cases, the inputs selected are based on
historical experience and practice for similar or analogous instru-
ments, derivation of input levels based on similar products with
observable price levels and knowledge of current market condi-
tions and valuation approaches.
For more complex instruments and instruments not traded in
an active market, fair values may be estimated using a combina-
tion of observed transaction prices, consensus pricing services and
relevant quotes. Consideration is given to the nature of the quotes
(e.g., indicative or firm) and the relationship of recently evidenced
market activity to the prices provided by consensus pricing services.
UBS also uses internally developed models, which are typically
based on valuation methods and techniques recognized as stan-
dard within the industry.
Assumptions and inputs used in valuation techniques include
benchmark interest rate curves, credit and funding spreads used
in estimating discount rates, bond and equity prices, equity index
prices, foreign exchange rates, levels of market volatility and cor-
relation. Refer to Note 22f for more information. The discount
curves used by the Group incorporate the funding and credit
characteristics of the instruments to which they are applied.
Financial instruments excluding derivatives: product
description, valuation and classification in the fair value
hierarchy
Government bills and bonds
Product description: government bills and bonds include fixed-
rate, floating-rate and inflation-linked bills and bonds issued by
sovereign governments.
Valuation: these instruments are generally valued using prices
obtained directly from the market. Instruments that cannot be
priced directly using active market data are valued using dis-
counted cash flow valuation techniques that incorporate market
data for similar government instruments.
Fair value hierarchy: government bills and bonds are generally
traded in active markets with prices that can be obtained directly
from these markets, resulting in classification as Level 1, while the
remaining positions are classified as Level 2.
Corporate and municipal bonds
Product description: corporate bonds include senior, junior and
subordinated debt issued by corporate entities. Municipal bonds
are issued by state and local governments. While most instru-
ments are standard fixed- or floating-rate securities, some may
have more complex coupon or embedded option features.
Valuation: corporate and municipal bonds are generally valued
using prices obtained directly from the market for the security, or
similar securities, adjusted for seniority, maturity and liquidity.
When prices are not available, instruments are valued using dis-
counted cash flow valuation techniques incorporating the credit
spread of the issuer or similar issuers. For convertible bonds where
no directly comparable price is available, issuances may be priced
using a convertible bond model.
Fair value hierarchy: corporate and municipal bonds are gener-
ally classified as Level 1 or Level 2 depending on the depth of
trading activity behind price sources. Level 3 instruments have no
suitable pricing information available and also cannot be refer-
enced to other securities issued by the same issuer. Therefore,
such instruments are measured based on price levels for similar
issuers adjusted for relative tenor and issuer quality.
390
Consolidated financial statements Note 22 Fair value measurement (continued)
Traded loans and loans designated at fair value
Product description: these instruments include fixed-rate loans,
corporate loans, recently originated commercial real estate loans
and contingent lending transactions.
incorporating price data for instruments or indices with similar
risk profiles. Inputs to discounted expected cash flow techniques
include asset prepayment rates, discount margin or discount
yields, asset default rates and asset loss on default severity.
Valuation: loans are valued directly using market prices that
reflect recent transactions or quoted dealer prices where avail-
able. Where no market price data are available, loans are valued
using relative value benchmarking using pricing derived from debt
instruments in comparable entities or different products in the
same entity, or by using a credit default swap valuation technique,
which requires inputs for credit spreads, credit recovery rates and
interest rates. Recently originated commercial real estate loans are
measured using a securitization approach based on rating agency
guidelines. The valuation of the contingent lending transactions is
dependent on actuarial mortality levels and actuarial life insur-
ance policy lapse rates. Mortality and lapse rate assumptions are
based on external actuarial estimations for large homogeneous
pools, and contingencies are derived from a range relative to the
actuarially expected amount.
Fair value hierarchy: instruments with suitably deep and liquid
pricing information are classified as Level 2, while any positions
requiring the use of valuation techniques, or for which the price
sources have insufficient trading depth, are classified as Level 3.
Investment fund units
Product description: investment fund units are pools of assets,
generally equity instruments and bonds, broken down to redeem-
able units.
Valuation: investment fund units are predominantly exchange-
traded, with readily available quoted prices in liquid markets.
Where market prices are not available, fair value may be mea-
sured using net asset values (NAV), taking into account any restric-
tions imposed upon redemption.
Fair value hierarchy: listed units are classified as Level 1, pro-
vided there is sufficient trading activity to justify active market
classification, while other positions are classified as Level 2. Posi-
tions for which NAV is not available or which are not redeemable
at the measurement date or shortly thereafter are classified as
Level 3.
Asset-backed securities (ABS)
Product description: ABS include residential mortgage-backed
securities (RMBS), commercial mortgage-backed securities (CMBS),
other asset-backed securities (ABS) and collateralized debt obliga-
tions (CDO) and are instruments generally issued through the pro-
cess of securitization of underlying interest-bearing assets.
Fair value hierarchy: RMBS, CMBS and ABS are generally classi-
fied as Level 2. However, if significant inputs are unobservable, or
if market or fundamental data are not available, they are classified
as Level 3.
Equity instruments
Product description: equity instruments include stocks and shares,
private equity positions and units held in hedge funds.
Valuation: listed equity instruments are generally valued using
prices obtained directly from the market. Unlisted equity holdings,
including private equity positions, are initially marked at their
transaction price and are revalued when reliable evidence of price
movement becomes available or when the position is deemed to
be impaired. Fair value for units held in hedge funds is measured
based on their published NAV, taking into account any restrictions
imposed upon redemption.
Fair value hierarchy: the majority of equity securities are actively
traded on public stock exchanges where quoted prices are readily
and regularly available, resulting in Level 1 classification. Units
held in hedge funds are classified as Level 2, except for positions
for which published NAV is not available or which are not redeem-
able at the measurement date or shortly thereafter, in which case
such positions are classified as Level 3.
Financial assets for unit-linked investment contracts
Product description: unit-linked investment contracts allow inves-
tors to invest in a pool of assets through issued investment units.
Valuation: the majority of assets are listed on exchanges and
fair values are determined using quoted prices.
Fair value hierarchy: most assets are classified as Level 1 if
actively traded, or Level 2 if trading is not active. However, instru-
ments for which prices are not readily available are classified as
Level 3.
Structured (reverse) repurchase agreements
Product description: structured (reverse) repurchase agreements
are securities purchased under resale agreements and securities
sold under repurchase agreements.
Valuation: these instruments are valued using discounted
expected cash flow techniques. The discount rate applied is based
on funding curves that are specific to the collateral eligibility terms
for the contract in question.
Valuation: for liquid securities, the valuation process will use
trade and price data, updated for movements in market levels
between the time of trading and the time of valuation. Less liquid
instruments are measured using discounted expected cash flows
Fair value hierarchy: collateral terms for these positions are not
standard and therefore funding spread levels used for valuation
purposes cannot be observed in the market. As a result, these
positions are mostly classified as Level 3.
391
Financial statements Note 22 Fair value measurement (continued)
Financial liabilities designated at fair value
Product description: debt instruments, primarily comprised of
equity-, rates- and credit-linked issued notes, which are held at
fair value under the fair value option. These instruments are tai-
lored specifically to the holder’s risk or investment appetite with
structured coupons or payoffs.
Valuation: the risk management and the valuation approaches
for these instruments are closely aligned with the equivalent
derivatives business and the underlying risk, and the valuation
techniques used for this component are the same as the relevant
valuation techniques described below. For example, equity-linked
notes should be referenced to equity / index contracts and credit-
linked notes should be referenced to credit derivative contacts.
Fair value hierarchy: observability is closely aligned with the
equivalent derivatives business and the underlying risk.
➔ Refer to Note 18 for more information on financial liabilities
designated at fair value
➔ Refer to Note 22d for more information on own credit adjust-
ments related to financial liabilities designated at fair value
Amounts due under unit-linked investment contracts
Product description: the financial liability represents the amounts
due to unit holders.
Valuation: the fair values of investment contract liabilities are
determined by reference to the fair value of the corresponding
assets.
Fair value hierarchy: the liabilities themselves are not actively
traded, but are mainly referenced to instruments that are actively
traded and are therefore classified as Level 2.
Derivative instruments: product description, valuation and
classification in the fair value hierarchy
The curves used for discounting expected cash flows in the valua-
tion of collateralized derivatives reflect the funding terms associ-
ated with the relevant collateral arrangement for the instrument
being valued. These collateral arrangements differ across counter-
parties with respect to the eligible currency and interest terms of
the collateral. The majority of collateralized derivatives are mea-
sured using a discount curve that is based on funding rates derived
from overnight interest in the cheapest eligible currency for the
respective counterparty collateral agreement.
Uncollateralized and partially collateralized derivatives are dis-
counted using the LIBOR (or equivalent) curve for the currency of
the instrument. As described in Note 22d, the fair value of uncol-
lateralized and partially collateralized derivatives is then adjusted
by CVA, DVA and FVA as applicable, to reflect an estimation of
the effect of counterparty credit risk, UBS’s own credit risk and
funding costs and benefits.
Interest rate contracts
Product description: interest rate swap contracts include interest
rate swaps, basis swaps, cross-currency swaps, inflation swaps
and interest rate forwards, often referred to as forward-rate
agreements (FRA). Interest rate option contracts include caps and
floors, swaptions, swaps with complex payoff profiles and other
more complex interest rate options.
Valuation: interest rate swap contracts are valued by estimat-
ing future interest cash flows and discounting those cash flows
using a rate that reflects the appropriate funding rate for the posi-
tion being measured. The yield curves used to estimate future
index levels and discount rates are generated using market stan-
dard yield curve models using interest rates associated with cur-
rent market activity. The key inputs to the models are interest rate
swap rates, FRA rates, short-term interest rate futures prices, basis
swap spreads and inflation swap rates. Interest rate option con-
tracts are valued using various market standard option models,
using inputs that include interest rate yield curves, inflation curves,
volatilities and correlations. The volatility and correlation inputs
within the models are implied from market data based on market
observed prices for standard option instruments trading within
the market. Option models used to value more exotic products
have a number of model parameter inputs that require calibration
to enable the exotic model to price standard option instruments
to the price levels observed in the market. When the maturity of
the interest rate swap or option contract exceeds the term for
which standard market quotes are observable for a significant
input parameter, the contracts are valued by extrapolation from
the last observable point using standard assumptions or by refer-
ence to another observable comparable input parameter to repre-
sent a suitable proxy for that portion of the term.
Fair value hierarchy: the majority of interest rate swaps are
classified as Level 2 as the standard market contracts that form
the inputs for yield curve models are generally traded in active
and observable markets. Options are generally treated as Level 2
as the calibration process enables the model output to be vali-
dated to active market levels. Models calibrated in this way are
then used to revalue the portfolio of both standard options as
well as more exotic products. In most cases, there are active and
observable markets for the standard market instruments that
form the inputs for yield curve models as well as the financial
instruments from which volatility and correlation inputs are
derived. Exotic options for which appropriate volatility or correla-
tion input levels cannot be implied from observable market data
are classified as Level 3. Interest rate swap or option contracts are
classified as Level 3 when the term exceeds standard market
observable quotes.
392
Consolidated financial statements Note 22 Fair value measurement (continued)
Credit derivative contracts
Product description: a credit derivative is a financial instrument
that transfers credit risk related to a single underlying entity, a
portfolio of underlying entities or a pool of securitized referenced
assets. Credit derivative products include credit default swaps
(CDS) on single names, indices, bespoke portfolios and securi-
tized products, plus first to default swaps and certain total return
swaps (TRS).
Valuation: credit derivative contracts are valued using industry
standard models based primarily on market credit spreads, upfront
pricing points and implied recovery rates. Where a derivative
credit spread is not directly available it may be derived from the
price of the reference cash bond. Correlation is an additional
input for certain portfolio credit derivatives. Asset-backed credit
derivatives are valued using a similar valuation technique to the
underlying security with an adjustment to reflect the funding dif-
ferences between cash and synthetic form. Inputs include prepay-
ment rates, default rates, loss severity, discount margin / rate.
Fair value hierarchy classification: single entity and portfolio
credit derivative contracts are classified as Level 2 when credit
spreads, recovery rates and correlations are determined from
actively traded observable market data. Where the underlying ref-
erence name(s) are not actively traded and the correlation cannot
be directly mapped to actively traded tranche instruments, these
contracts are classified as Level 3. Asset-backed credit derivatives
follow the characteristics of the underlying security and are there-
fore distributed across Level 2 and Level 3.
Foreign exchange contracts
Product description: this includes open spot and forward foreign
exchange (FX) contracts and OTC FX option contracts. OTC FX
option contracts include standard call and put options, options
with multiple exercise dates, path-dependent options, options
with averaging features, options with discontinuous payoff char-
acteristics, options on a number of underlying FX rates and multi-
dimensional FX option contracts, which have a dependency on
multiple FX pairs.
Valuation: open spot FX contracts are valued using the FX spot
rate observed in the market. Forward FX contracts are valued
using the FX spot rate adjusted for forward pricing points observed
from standard market-based sources. OTC FX option contracts are
valued using market standard option valuation models. The mod-
els used for shorter-dated options (i.e., maturities of five years or
less) tend to be different than those used for longer-dated options
because the models needed for longer-dated OTC FX contracts
require additional consideration of interest rate and FX rate inter-
dependency. Inputs to the option valuation models include spot
FX rates, FX forward points, FX volatilities, interest rate yield
curves, interest rate volatilities and correlations. The inputs for
volatility and correlation are implied through the calibration of
observed prices for standard option contracts trading within the
market. The valuation for multiple-dimensional FX options uses a
multi-local volatility model, which is calibrated to the observed FX
volatilities for all relevant FX pairs.
Fair value hierarchy: the markets for both FX spot and FX for-
ward pricing points are both actively traded and observable and
therefore such FX contracts are generally classified as Level 2. A
significant proportion of OTC FX option contracts are classified as
Level 2 as inputs are derived mostly from standard market con-
tracts traded in active and observable markets. OTC FX option
contracts classified as Level 3 include multiple-dimensional FX
options and long-dated FX exotic option contracts where there is
no active market from which to derive volatility or correlation
inputs. The inputs used to value these OTC FX option contracts
are calculated using consensus pricing services without an under-
lying principal market, historical asset prices or by extrapolation.
Equity / index contracts
Product description: equity / index contracts are equity forward
contracts and equity option contracts. Equity option contracts
include market standard single or basket stock or index call and
put options as well as equity option contracts with more complex
features.
Valuation: equity forward contracts have a single stock or
index underlying and are valued using market standard models.
The key inputs to the models are stock prices, estimated dividend
rates and equity funding rates (which are implied from prices of
forward contracts observed in the market). Estimated cash flows
are then discounted using market standard discounted cash flow
models using a rate that reflects the appropriate funding rate for
that portion of the portfolio. When no market data is available for
the instrument maturity, they are valued by extrapolation of avail-
able data, use of historical dividend data, or use of data for a
related equity. Equity option contracts are valued using market
standard models that estimate the equity forward level as
described for equity forward contracts and incorporate inputs for
stock volatility and for correlation between stocks within a basket.
The probability-weighted expected option payoff generated is
then discounted using market standard discounted cash flow
models using a rate that reflects the appropriate funding rate for
that portion of the portfolio. When volatility, forward or correla-
tion inputs are not available, they are valued using extrapolation
of available data, historical dividend, correlation or volatility data,
or the equivalent data for a related equity.
393
Financial statements Note 22 Fair value measurement (continued)
Fair value hierarchy: as inputs are derived mostly from standard
market contracts traded in active and observable markets, a sig-
nificant proportion of equity forward contracts are classified as
Level 2. Equity option positions for which inputs are derived from
standard market contracts traded in active and observable mar-
kets are also classified as Level 2. Level 3 positions are those for
which volatility, forward or correlation inputs are not observable.
Commodity contracts
Product description: commodity derivative contracts include for-
ward, swap and option contracts on individual commodities and
on commodity indices.
Valuation: commodity forward and swap contracts are mea-
sured using market standard models that use market forward lev-
els on standard instruments. Commodity option contracts are
measured using market standard option models that estimate the
commodity forward level as described for commodity forward
and swap contracts, incorporating inputs for the volatility of the
underlying index or commodity. For commodity options on bas-
kets of commodities or bespoke commodity indices, the valuation
technique also incorporates inputs for the correlation between
different commodities or commodity indices.
Fair value hierarchy: individual commodity contracts are typi-
cally classified as Level 2 because active forward and volatility
market data are available.
➔ Refer to Note 12 for more information on derivative instruments
d) Valuation adjustments
The output of a valuation technique is always an estimate of a fair
value that cannot be measured with complete certainty. As a
result, valuations are adjusted, where appropriate and when such
factors would be considered by market participants in estimating
fair value, to reflect close-out costs, credit exposure, model-driven
valuation uncertainty, funding costs and benefits, trading restric-
tions and other factors. Valuation adjustments are an important
component of fair value for assets and liabilities that are mea-
sured using valuation techniques. Such adjustments are applied to
reflect uncertainties within the fair value measurement process, to
adjust for an identified model simplification or to incorporate an
aspect of fair value that requires an overall portfolio assessment
rather than an evaluation based on an individual instrument level
characteristic.
Day-1 reserves
For new transactions where the valuation technique used to mea-
sure fair value requires significant inputs that are not based on
observable market data, the financial instrument is initially recog-
nized at the transaction price. The transaction price may differ
from the fair value obtained using a valuation technique where
any such difference is deferred and not initially recognized in the
income statement. These day-1 profit or loss reserves are reflected,
where appropriate, as valuation adjustments.
The table below summarizes the changes in deferred day-1
profit or loss reserves during the respective period.
Deferred day-1 profit or loss related to financial instruments
other than financial assets available for sale is released into Net
trading income when pricing of equivalent products or the under-
lying parameters become observable or when the transaction is
closed out.
Deferred day-1 profit or loss related to financial assets avail-
able for sale is released into Other comprehensive income when
pricing of equivalent products or the underlying parameters
become observable and is released into Other income when the
assets are sold.
Deferred day-1 profit or loss
CHF million
Balance at the beginning of the year
Profit / (loss) deferred on new transactions
(Profit) / loss recognized in the income statement
(Profit) / loss recognized in other comprehensive income
Foreign currency translation
Balance at the end of the year
394
For the year ended
31.12.16
31.12.15
31.12.14
421
254
(290)
(23)
9
371
480
268
(321)
(6)
421
486
344
(384)
35
480
Consolidated financial statements Note 22 Fair value measurement (continued)
Own credit
In addition to considering the valuation of the derivative risk com-
ponent, the valuation of financial liabilities designated at fair
value also requires consideration of the funded component and
specifically the own credit component of fair value. Own credit
risk is reflected in the valuation of UBS’s fair value option liabilities
where this component is considered relevant for valuation pur-
poses by UBS’s counterparties and other market participants.
However, own credit risk is not reflected in the valuation of UBS’s
liabilities that are fully collateralized or for other obligations for
which it is established market practice not to include an own
credit component.
The own credit presentation requirements of IFRS 9, Financial
Instruments, were adopted as of 1 January 2016. From this date
onward, changes in the fair value of financial liabilities designated
at fair value through profit or loss related to own credit are recog-
nized in Other comprehensive income directly within Retained
Earnings. As the Group does not hedge changes in own credit
arising on financial liabilities designated at fair value, presenting
own credit within Other comprehensive income does not create
or increase an accounting mismatch in the income statement. The
unrealized and any realized own credit recognized in Other com-
prehensive income will not be reclassified to the income state-
ment in future periods. Comparative period information was not
restated.
Own credit is estimated using an own credit adjustment curve
(OCA), which incorporates observable market data, including
market-observed secondary prices for UBS senior debt, UBS credit
default swap (CDS) spreads and senior debt curves of peers. The
table below summarizes the effects of own credit adjustments
related to financial liabilities designated at fair value. The change
in unrealized own credit for the period ended consists of changes
in fair value that are attributable to the change in UBS’s credit
spreads, as well as the effect of changes in fair values attributable
to factors other than credit spreads, such as redemptions, effects
from time decay and changes in interest and other market rates.
Realized own credit is recognized when an instrument with an
associated unrealized own credit adjustment is repurchased prior
to the contractual maturity date. Life-to-date amounts reflect the
cumulative unrealized change since initial recognition.
➔ Refer to Note 18 for more information on financial liabilities
designated at fair value
Own credit adjustments on financial liabilities designated at fair value
CHF million
Recognized during the year:
Realized gain / (loss)
Unrealized gain / (loss)
Total gain / (loss), before tax
CHF million
Recognized on the balance sheet as of the end of the year:
Unrealized life-to-date gain / (loss)
For the year ended
Included in Other
comprehensive
income
Included in Net trading income
31.12.16
31.12.15
31.12.14
18
(138)
(120)
553
292
As of
31.12.16
31.12.15
31.12.14
141
287
(302)
395
Financial statements Note 22 Fair value measurement (continued)
Credit valuation adjustments
In order to measure the fair value of OTC derivative instruments,
including funded derivative instruments which are classified as
Financial assets designated at fair value, credit valuation adjust-
ments (CVA) are necessary to reflect the credit risk of the counter-
party inherent in these instruments. This amount represents the
estimated fair value of protection required to hedge the counter-
party credit risk of such instruments. A CVA is determined for each
counterparty, considering all exposures to that counterparty, and is
dependent on the expected future value of exposures, default
probabilities and recovery rates, applicable collateral or netting
arrangements, break clauses and other contractual factors.
Funding valuation adjustments
Funding valuation adjustments (FVA) reflect the costs and benefits
of funding associated with uncollateralized and partially collater-
alized derivative receivables and payables and are calculated as
the valuation effect from moving the discounting of the uncol-
lateralized derivative cash flows from LIBOR to OCA using the
CVA framework.
An FVA is also applied to collateralized derivative assets in
cases where the collateral cannot be sold or repledged.
Other valuation adjustments
Instruments that are measured as part of a portfolio of combined
long and short positions are valued at mid-market levels to ensure
consistent valuation of the long and short component risks. A
liquidity valuation adjustment is then made to the overall net long
or short exposure to move the fair value to bid or offer as appro-
priate, reflecting current levels of market liquidity. The bid-offer
spreads used in the calculation of this valuation adjustment are
obtained from market transactions and other relevant sources
and are updated periodically.
Uncertainties associated with the use of model-based valua-
tions are incorporated into the measurement of fair value through
the use of model reserves. These reserves reflect the amounts that
the Group estimates should be deducted from valuations pro-
duced directly by models to incorporate uncertainties in the rele-
vant modeling assumptions, in the model and market inputs used,
or in the calibration of the model output to adjust for known
model deficiencies. In arriving at these estimates, the Group con-
siders a range of market practices, including how it believes mar-
ket participants would assess these uncertainties. Model reserves
are reassessed periodically in light of data from market transac-
tions, consensus pricing services and other relevant sources.
Debit valuation adjustments
A debit valuation adjustment (DVA) is estimated to incorporate
own credit in the valuation of derivatives, effectively consistent
with the CVA framework. DVA is determined for each counter-
party, considering all exposures with that counterparty and taking
into account collateral netting agreements, expected future mark-
to-market movements and UBS’s credit default spreads.
Valuation adjustments on financial instruments
Life-to-date gain / (loss), CHF million
Credit valuation adjustments1
Funding valuation adjustments
Debit valuation adjustments
Other valuation adjustments
of which: liquidity
of which: model uncertainty
1 Amounts do not include reserves against defaulted counterparties.
396
As of
31.12.16
31.12.15
(216)
(106)
5
(713)
(439)
(274)
(309)
(160)
47
(810)
(491)
(319)
Consolidated financial statements Note 22 Fair value measurement (continued)
e) Transfers between Level 1 and Level 2
The amounts provided below reflect transfers between Level 1
and Level 2 for instruments that were held for the entire reporting
period.
Assets totaling approximately CHF 0.2 billion, which were
mainly comprised of financial assets held for trading, and liabili-
ties totaling approximately CHF 0.1 billion, which were primarily
comprised of financial liabilities held for trading, were transferred
from Level 2 to Level 1 during 2016, generally due to increased
levels of trading activity observed within the market.
Assets totaling approximately CHF 0.4 billion, which were
mainly comprised of financial assets available for sale, largely cor-
porate and municipal bonds, and financial assets held for trading,
predominantly equity instruments and corporate and municipal
bonds, were transferred from Level 1 to Level 2 during 2016, gen-
erally due to diminished levels of trading activity observed within
the market. Transfers of financial liabilities from Level 1 to Level 2
during 2016 were not significant.
f) Level 3 instruments: valuation techniques and inputs
The table below presents material Level 3 assets and liabilities
together with the valuation techniques used to measure fair
value, the significant inputs used in the valuation technique that
are considered unobservable and a range of values for those
unobservable inputs.
The range of values represents the highest and lowest level
input used in the valuation techniques. Therefore, the range does
not reflect the level of uncertainty regarding a particular input, but
rather the different underlying characteristics of the relevant assets
and liabilities. The ranges will therefore vary from period to period
and parameter to parameter based on characteristics of the instru-
ments held at each balance sheet date. Further, the ranges of
unobservable inputs may differ across other financial institutions
due to the diversity of the products in each firm’s inventory.
Valuation techniques and inputs used in the fair value measurement of Level 3 assets and liabilities
Fair value
Assets
Liabilities
CHF billion
31.12.16 31.12.15
31.12.16 31.12.15
Valuation
technique(s)
Significant
unobservable
input(s)1
Range of inputs
31.12.16
31.12.15
low high
weighted
average2
low
high
weighted
average2
unit1
Financial assets held for trading / Trading portfolio liabilities, Financial assets / liabilities designated at fair value and Financial assets available for sale
0.6
0.7
0.0
0.1
Relative value to
market comparable
Bond price
equivalent
0
128
88
0
134
94 points
2.0
2.6
0.0
0.0
Relative value to
market comparable
Loan price
equivalent
39
103
94
Credit spread
71
554
65
30
100
252
93 points
basis
points
Corporate and municipal
bonds
Traded loans, loans
designated at fair value,
loan commitments and
guarantees
Discounted expected
cash flows
Market comparable
and securitization
model
Relative value to
market comparable
Discounted expected
cash flows
Equity instruments3
Structured (reverse)
repurchase agreements
Issued and OTC debt
instruments4
0.4
0.6
0.6
1.5
0.1
0.3
0.0
0.6
10.7
10.1
Discount margin
0
16
2
1
14
2
%
Price
Funding spread
15
195
18
183
basis
points
397
Financial statements Note 22 Fair value measurement (continued)
Valuation techniques and inputs used in the fair value measurement of Level 3 assets and liabilities (continued)
Fair value
Assets
Liabilities
CHF billion
31.12.16 31.12.15 31.12.16 31.12.15
Replacement values
Valuation
technique(s)
Significant
unobservable
input(s)1
Range of inputs
31.12.16
31.12.15
low high
weighted
average2
low
high
weighted
average2
unit1
Interest rate contracts
0.3
0.1
0.5
0.3 Option model
Volatility of interest
rates
Rate-to-rate correlation
Intra-curve correlation
26
84
36
176
94
94
Credit derivative contracts
1.3
1.3
1.5
1.3
Discounted expected
cash flows
Constant prepayment
rate5
Discounted expected
cash flow based on
modeled defaults and
recoveries
Discounted cash flow
projection on
underlying bond
Credit spreads
Upfront price points
Recovery rates
Credit index correlation
Discount margin
Credit pair correlation
Constant prepayment
rate
Constant default rate
Loss severity
Discount margin
Bond price equivalent
Equity / index contracts
0.7
1.0
1.9
1.4 Option model
Equity dividend yields
Volatility of equity
stocks, equity and other
indices
0
1
0
10
(1)
59
1
1
40
0
3
0
0
Equity-to-FX correlation
(45)
791
13
50
85
68
100
15
8
100
11
100
15
150
82
16
84
36
0
130
94
94
3
%
%
%
%
1 1,163
basis
points
8
0
10
1
57
0
0
0
1
0
0
0
(44)
25
95
85
72
94
15
9
100
15
104
57
143
82
%
%
%
%
%
%
%
%
%
points
%
%
%
%
Equity-to-equity
correlation
12
98
3
99
1 The ranges of significant unobservable inputs are represented in points, percentages and basis points. Points are a percentage of par. For example, 100 points would be 100% of par. 2 Weighted averages are provided
for non-derivative financial instruments and were calculated by weighting inputs based on the fair values of the respective instruments. Weighted averages are not provided for inputs related to derivative contracts as
this would not be meaningful. 3 The range of inputs is not disclosed due to the dispersion of possible values given the diverse nature of the investments. 4 Valuation techniques, significant unobservable inputs and
the respective input ranges for issued debt instruments and OTC debt instruments are the same as the equivalent derivative or structured financing instruments presented elsewhere in this table. 5 The range of inputs
is not disclosed as of 31 December 2016 because this unobservable input parameter was not significant to the respective valuation technique as of that date.
398
Consolidated financial statements Note 22 Fair value measurement (continued)
Significant unobservable inputs in Level 3 positions
This section discusses the significant unobservable inputs used in
the valuation of Level 3 instruments and assesses the potential
effect that a change in each unobservable input in isolation may
have on a fair value measurement, including information to facili-
tate an understanding of factors that give rise to the input ranges
shown. Relationships between observable and unobservable
inputs have not been included in the summary below.
Bond price equivalent
Where market prices are not available for a bond, fair value is
measured by comparison with observable pricing data from simi-
lar instruments. Factors considered when selecting comparable
instruments include credit quality, maturity and industry of the
issuer. Fair value may be measured either by a direct price com-
parison or by conversion of an instrument price into a yield (either
as an outright yield or as a spread to LIBOR). Bond prices are
expressed as points of the nominal, where 100 represents a fair
value equal to the nominal value (i.e., par).
For corporate and municipal bonds, the range represents the
range of prices from reference issuances used in determining fair
value. Bonds priced at 0 are distressed to the point that no
recovery is expected, while prices significantly in excess of 100 or
par relate to inflation-linked or structured issuances that pay a
coupon in excess of the market benchmark as of the measure-
ment date.
For credit derivatives, the bond price range represents the
range of prices used for reference instruments that are typically
converted to an equivalent yield or credit spread as part of the
valuation process.
Loan price equivalent
Where market prices are not available for a traded loan, fair value
is measured by comparison with observable pricing data for simi-
lar instruments. Factors considered when selecting comparable
instruments include industry segment, collateral quality, maturity
and issuer-specific covenants. Fair value may be measured either
by a direct price comparison or by conversion of an instrument
price into a yield. The range represents the range of prices derived
from reference issuances of a similar credit quality used in mea-
suring fair value for loans classified as Level 3. Loans priced at 0
are distressed to the point that no recovery is expected, while a
current price of 100 represents a loan that is expected to be
repaid in full.
Credit spread
Valuation models for many credit derivatives require an input for
the credit spread, which is a reflection of the credit quality of the
associated referenced underlying. The credit spread of a particular
security is quoted in relation to the yield on a benchmark security
or reference rate, typically either US Treasury or LIBOR, and is gen-
erally expressed in terms of basis points. An increase / (decrease) in
credit spread will increase / (decrease) the value of credit protec-
tion offered by CDS and other credit derivative products. The
income statement effect from such changes depends on the
nature and direction of the positions held. Credit spreads may be
negative where the asset is more creditworthy than the bench-
mark against which the spread is calculated. A wider credit spread
represents decreasing creditworthiness. The ranges represents a
diverse set of underlyings, with the lower end of the range repre-
senting credits of the highest quality (e.g., approximating the risk
of LIBOR) and the upper end of the range representing greater
levels of credit risk.
Discount margin (DM)
The DM spread represents the discount rates used to present
value cash flows of an asset to reflect the market return required
for uncertainty in the estimated cash flows. DM spreads are a rate
or rates applied on top of a floating index (e.g., LIBOR) to discount
expected cash flows. Generally, a decrease / (increase) in the unob-
servable input in isolation would result in a significantly
higher / (lower) fair value.
The different ranges represent the different discount rates
across loans and credit derivatives. The high end of the range
relates to securities that are priced very low within the market
relative to the expected cash flow schedule. This indicates that the
market is pricing an increased risk of credit loss into the security
that is greater than what is being captured by the expected cash
flow generation process. The low ends of the ranges are typical of
funding rates on better quality instruments.
Funding spread
Structured financing transactions are valued using synthetic fund-
ing curves that best represent the assets that are pledged as col-
lateral for the transactions. They are not representative of where
UBS can fund itself on an unsecured basis, but provide an esti-
mate of where UBS can source and deploy secured funding with
counterparties for a given type of collateral. The funding spreads
are expressed in terms of basis points over or under LIBOR, and if
funding spreads widen, this increases the effect of discounting.
A small proportion of structured debt instruments and non-
structured fixed-rate bonds within financial liabilities designated
at fair value had an exposure to funding spreads that was longer
in duration than the actively traded market.
399
Financial statements Note 22 Fair value measurement (continued)
Volatility
Volatility measures the variability of future prices for a particular
instrument and is generally expressed as a percentage, where a
higher number reflects a more volatile instrument for which
future price movements are more likely to occur. The minimum
level of volatility is 0% and there is no theoretical maximum.
Volatility is a key input into option models, where it is used to
derive a probability-based distribution of future prices for the
underlying instrument. The effect of volatility on individual posi-
tions within the portfolio is driven primarily by whether the
option contract is a long or short position. In most cases, the fair
value of an option increases as a result of an increase in volatility
and is reduced by a decrease in volatility. Generally, volatility used
in the measurement of fair value is derived from active market
option prices (referred to as implied volatility). A key feature of
implied volatility is the volatility “smile” or “skew,” which repre-
sents the effect of pricing options of different option strikes at
different implied volatility levels.
Correlation
Correlation measures the inter-relationship between the move-
ments of two variables. It is expressed as a percentage between
–100% and +100%, where +100% represents perfectly corre-
lated variables (meaning a movement of one variable is associated
with a movement of the other variable in the same direction), and
–100% implies the variables are inversely correlated (meaning a
movement of one variable is associated with a movement of the
other variable in the opposite direction). The effect of correlation
on the measurement of fair value depends on the specific terms
of the instruments being valued, due to the range of different
payoff features within such instruments.
Rate-to-rate correlation is the correlation between interest
rates of two separate currencies. Intra-curve correlation repre-
sents the correlation between different tenor points of the same
yield curve. Credit index correlation reflects the implied correla-
tion derived from different indices across different parts of the
benchmark index capital structure. The input is particularly impor-
tant for bespoke index tranches. Credit pair correlation is particu-
larly important for first to default credit structures. Equity-to-FX
correlation is important for equity options based on a currency
different than the currency of the underlying stock. Equity-to-
equity correlation is particularly important for complex options
that incorporate, in some manner, different equities in the pro-
jected payoff. The closer the correlation is to 100%, the more
related one equity is to another. For example, equities with a very
high correlation could be from different parts of the same corpo-
rate structure.
Constant prepayment rate
A prepayment rate represents the amount of unscheduled princi-
pal repayment for a pool of loans. The prepayment estimate is
based on a number of factors, such as historical prepayment
rates for repaid and existing loans with similar characteristics and
the future economic outlook, considering factors including, but
not limited to, future interest rates. In general, a significant
increase / (decrease) in this unobservable input in isolation would
result in a significantly higher / (lower) fair value for bonds trading
at a discount. For bonds trading at a premium the reverse would
apply, with a decrease in fair value when the constant prepay-
ment rate increases. However, in certain cases the effect of a
change in prepayment speed on instrument price is more compli-
cated and depends on both the precise terms of the securitiza-
tion and the position of the instrument within the securitization
capital structure.
The range represents the input assumption for credit deriva-
tives on asset-backed securities. Securities with an input of 0%
typically reflect no current prepayment behavior with respect to
the underlying collateral, and with no expectation of this chang-
ing in the immediate future, while the high range relates to secu-
rities that are currently experiencing high prepayments. Different
classes of asset-backed securities typically show different ranges
of prepayment characteristics depending on a combination of fac-
tors, including the borrowers’ ability to refinance, prevailing refi-
nancing rates, and the quality or characteristics of the underlying
loan collateral pools.
Upfront price points
These are a component in the price quotation of credit derivative
contracts, whereby the overall fair value price level is split between
the credit spread and a component that is quoted and settled
upfront on transacting a new contract. This latter component is
referred to as upfront price points and represents the difference
between the credit spread paid as protection premium on a cur-
rent contract versus a small number of standard contracts defined
by the market. Distressed credit names frequently trade and quote
CDS protection only in upfront points rather than as a running
credit spread. An increase / (decrease) in upfront points will
increase / (decrease) the value of credit protection offered by CDS
and other credit derivative products. The effect of increases or
decreases in upfront price points depends on the nature and
direction of the positions held. Upfront price points may be nega-
tive where a contract is quoting for a narrower premium than the
market standard, but are generally positive, reflecting an increase
in credit premium required by the market as creditworthiness
deteriorates.
.
400
Consolidated financial statements Note 22 Fair value measurement (continued)
Loss severity / recovery rate
The projected loss severity / recovery rate reflects the estimated loss
that will be realized given expected defaults. Loss severity is gener-
ally applied to collateral within asset-backed securities while the
recovery rate is the analogous pricing input for corporate or sover-
eign credits. Recovery is the reverse of loss severity, so a 100%
recovery rate is the equivalent of a 0% loss severity. Increases in
loss severity levels / decreases in recovery rates will result in lower
expected cash flows into the structure upon the default of the
instruments. In general, a significant decrease / (increase) in the
loss severity in isolation would result in significantly higher / (lower)
fair value for the respective asset-backed securities. The effect of a
change in recovery rate on a credit derivative position will depend
on whether credit protection has been bought or sold.
Loss severity is ultimately driven by the value recoverable from
collateral held after foreclosure occurs relative to the loan princi-
pal and possibly unpaid interest accrued at that point. For credit
derivatives, the loss severity range applies to derivatives on asset-
backed securities. The recovery rate range represents the range of
expected recovery levels on credit derivative contracts within the
Level 3 portfolio.
The volatility of interest rates reflects the range of unobserv-
able volatilities across different currencies and related underlying
interest rate levels. Volatilities of low interest rates tend to be
much higher than volatilities of high interest rates. In addition,
different currencies may have significantly different implied vola-
tilities. The volatility of equity stocks, equity and other indices
reflects the range of underlying stock volatilities.
in
input
Constant default rate (CDR)
The CDR represents the percentage of outstanding principal bal-
ances in the pool that are projected to default and liquidate and
is the annualized rate of default for a group of mortgages or
loans. The CDR estimate is based on a number of factors, such as
collateral delinquency rates in the pool and the future economic
outlook. In general, a significant increase / (decrease) in this unob-
servable
in significantly
lower / (higher) cash flows for the deal (and thus lower / (higher)
valuations). However, different instruments within the capital
structure can react differently to changes in the CDR. Generally,
subordinated bonds will decrease in value as CDR increases, but
for well protected senior bonds an increase in CDR may cause an
increase in price. In addition, the presence of a guarantor wrap on
the collateral pool of a security may result in notes at the junior
end of the capital structure experiencing a price increase with an
increase in the default rate.
isolation would
result
The range represents the expected default percentage across
the individual instruments’ underlying collateral pools.
Equity dividend yields
The derivation of a forward price for an individual stock or index
is important for measuring fair value for forward or swap con-
tracts and for measuring fair value using option pricing models.
The relationship between the current stock price and the forward
price is based on a combination of expected future dividend levels
and payment timings, and, to a lesser extent, the relevant funding
rates applicable to the stock in question. Dividend yields are gen-
erally expressed as an annualized percentage of the share price
with the lowest limit of 0% representing a stock that is not
expected to pay any dividend. The dividend yield and timing rep-
resents the most significant parameter in determining fair value
for instruments that are sensitive to an equity forward price.
401
Financial statements Note 22 Fair value measurement (continued)
g) Level 3 instruments: sensitivity to changes in unobservable input assumptions
The table below summarizes those financial assets and liabilities
classified as Level 3 for which a change in one or more of the
unobservable inputs to reflect reasonably possible alternative
assumptions would change fair value significantly, and the esti-
mated effect thereof.
ably possible changes to assumptions used within the fair value
measurement process. The sensitivity ranges are not always sym-
metrical around the fair values as the inputs used in valuations
are not always precisely in the middle of the favorable and unfa-
vorable range.
The table shown presents the favorable and unfavorable
effects for each class of financial assets and liabilities for which
the potential change in fair value is considered significant. The
sensitivity data presented represent an estimation of valuation
uncertainty based on reasonably possible alternative values for
Level 3 inputs at the balance sheet date and do not represent the
estimated effect of stress scenarios. Typically, these financial assets
and liabilities are sensitive to a combination of inputs from Levels
1–3. Although well-defined interdependencies may exist between
Levels 1–2 and Level 3 parameters (e.g., between interest rates,
which are generally Level 1 or Level 2, and prepayments, which
are generally Level 3), these have not been incorporated in the
table. Further, direct inter-relationships between the Level 3
parameters discussed below are not a significant element of the
valuation uncertainty.
Sensitivity data are estimated using a number of techniques,
including the estimation of price dispersion among different mar-
ket participants, variation in modeling approaches and reason-
Sensitivity data are determined at a product or parameter level
and then aggregated assuming no diversification benefit. The
calculated sensitivity is applied to both the outright position and
any related Level 3 hedge. The main interdependencies across
different Level 3 products to a single unobservable input param-
eter have been included in the basis of netting exposures within
the calculation. Aggregation without allowing for diversification
involves the simple summation of individual results with the total
sensitivity, therefore representing the effect of all unobservable
inputs which, if moved to a reasonably possible favorable or
unfavorable level at the same time, would result in a significant
change in the valuation. Diversification would incorporate esti-
mated correlations across different sensitivity results and, as such,
would result in an overall sensitivity that would be less than the
sum of the individual component sensitivities. The Group believes
that, while there are diversification benefits within the portfolios
representing these sensitivity numbers, they are not significant to
this analysis.
Sensitivity of fair value measurements to changes in unobservable input assumptions
CHF million
Corporate and municipal bonds
Traded loans, loans designated at fair value, loan commitments and guarantees
Equity instruments
Interest rate derivative contracts, net
Credit derivative contracts, net
Foreign exchange derivative contracts, net
Equity / index derivative contracts, net
Issued debt instruments
Other
Total
31.12.16
31.12.15
Favorable
changes1
34
Unfavorable
changes1
(39)
Favorable
changes1
24
Unfavorable
changes1
(25)
82
67
41
131
17
63
96
29
560
(10)
(47)
(42)
(183)
(8)
(63)
(93)
(31)
(517)
88
166
107
174
33
61
136
20
809
(28)
(74)
(67)
(196)
(28)
(57)
(146)
(20)
(640)
1 Of the total favorable changes, CHF 75 million as of 31 December 2016 (31 December 2015: CHF 164 million) related to financial assets available for sale. Of the total unfavorable changes, CHF 55 million as of
31 December 2016 (31 December 2015: CHF 71 million) related to financial assets available for sale.
402
Consolidated financial statements Note 22 Fair value measurement (continued)
h) Level 3 instruments: movements during the period
Significant changes in Level 3 instruments
The table on the following pages presents additional information
about Level 3 assets and liabilities measured at fair value on a
recurring basis. Level 3 assets and liabilities may be hedged with
instruments classified as Level 1 or Level 2 in the fair value hierar-
chy and, as a result, realized and unrealized gains and losses
included in the table may not include the effect of related hedg-
ing activity. Furthermore, the realized and unrealized gains and
losses presented within the table are not limited solely to those
arising from Level 3 inputs, as valuations are generally derived
from both observable and unobservable parameters.
Assets and liabilities transferred into or out of Level 3 are pre-
sented as if those assets or liabilities had been transferred at the
beginning of the year.
Assets transferred into and out of Level 3 totaled CHF 3.5 bil-
lion and CHF 0.8 billion, respectively. Transfers into Level 3 were
primarily comprised of traded loans and interest rate contracts,
due to decreased observability of the respective credit spread and
rates volatility inputs. Transfers out of Level 3 were primarily com-
prised of traded loans and equity / index contracts, reflecting
increased observability of the respective credit spread and equity
volatility inputs.
Liabilities transferred into and out of Level 3 totaled CHF 2.2
billion and CHF 3.5 billion, respectively. Transfers into Level 3 were
primarily comprised of equity-linked issued debt instruments and
interest rate contracts, due to decreased observability of the
respective equity and rates volatility inputs used to determine the
fair value of the options embedded in these structures. Transfers
out of Level 3 were primarily comprised of equity-linked issued
debt instruments and fixed-rate issued debt instruments resulting
from changes in the availability of the observable equity and rates
volatility inputs used to determine the fair value of the options
embedded in these structures.
403
Financial statements Note 22 Fair value measurement (continued)
Movements of Level 3 instruments
Total gains / losses included in
comprehensive income
Balance as of
31 December
2014
Net interest
income,
net trading
income and
other income
of which:
related to
Level 3
instruments
held at the
end of the
reporting
period
Other
compre-
hensive
income Purchases
Sales
Issuances Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Foreign
currency
translation
3.5
1.4
1.1
0.6
0.5
3.5
1.0
2.4
0.1
0.6
4.4
1.7
0.6
1.9
0.3
5.0
1.7
0.3
2.4
0.6
11.9
9.5
1.5
0.9
(0.2)
(0.4)
0.7
(7.6)
5.4
0.0
0.9
(0.5)
(0.1)
0.0
(0.1)
0.0
(0.1)
0.0
(0.3)
0.0
(0.1)
0.5
0.1
0.1
0.1
(1.0)
(5.5)
(0.6)
(0.5)
0.0
0.0
0.0
0.0
(0.1)
(0.1)
0.1
0.0
0.0
0.1
0.0
0.0
(0.4)
(0.1)
0.0
(0.1)
(0.1)
0.0
(0.1)
(0.4)
0.3
0.0
(0.4)
(0.2)
0.6
0.4
0.2
0.0
0.2
0.0
(0.3)
(0.1)
0.0
0.6
(0.1)
(0.5)
(0.1)
0.0
0.1
(0.1)
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(0.1)
(0.1)
0.0
0.0
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
5.4
0.0
0.0
0.8
0.7
0.1
0.0
0.0
1.7
0.9
0.1
0.7
0.0
1.0
0.0
0.0
0.9
0.1
6.1
4.9
1.2
0.0
0.0
0.0
0.0
0.0
0.1
0.2
0.2
0.4
(0.1)
(0.3)
(0.1)
0.0
(0.1)
0.0
0.0
0.0
(1.3)
0.8
(0.4)
(0.1)
(0.2)
(1.0)
0.0
0.0
(2.9)
(1.1)
(0.1)
(1.4)
(0.3)
0.8
0.0
0.0
0.0
0.7
0.1
0.0
0.2
0.4
(0.4)
0.0
0.0
0.0
0.0
(0.1)
0.0
0.0
(0.5)
(0.1)
(0.1)
0.0
(0.3)
(0.1)
(0.1)
0.0
0.0
0.0
(2.2)
0.5
(0.5)
(0.1)
(0.9)
(0.1)
(1.2)
0.0
0.3
0.0
0.1
0.1
(0.1)
0.0
(0.4)
0.0
0.0
0.0
(0.1)
(0.1)
(6.7)
1.3
(2.2)
(0.3)
(4.4)
(2.0)
(0.3)
1.3
0.0
0.0
(2.2)
0.0
0.0
(0.2)
(0.1)
0.0
CHF billion
Financial assets held for trading
of which:
Corporate and municipal bonds
Loans
Asset-backed securities
Other
Financial assets designated
at fair value
of which:
Loans (including structured loans)
Structured reverse repurchase and
securities borrowing agreements
Other
Financial assets available for sale
Positive replacement values
of which:
Credit derivative contracts
Foreign exchange contracts
Equity / index contracts
Other
Negative replacement values
of which:
Credit derivative contracts
Foreign exchange contracts
Equity / index contracts
Other
Financial liabilities designated
at fair value
of which:
Issued debt instruments
Over-the-counter debt instruments
Structured repurchase agreements
1 Total Level 3 assets as of 31 December 2016 were CHF 6.9 billion (31 December 2015: CHF 9.0 billion). Total Level 3 liabilities as of 31 December 2016 were CHF 15.1 billion (31 December 2015: CHF 14.1 billion).
404
Total gains / losses included in
comprehensive income
of which:
related to
Level 3
Balance as of
31 December
Net interest
instruments
income,
net trading
income and
held at the
end of the
reporting
period
Other
compre-
hensive
income
2015
other income
2.1
0.7
0.8
0.2
0.4
3.3
1.7
1.5
0.1
0.7
2.9
1.3
0.5
1.0
0.1
3.3
1.3
0.2
1.4
0.3
10.7
9.3
0.8
0.6
(0.4)
(0.1)
(0.4)
(0.1)
(0.4)
(0.5)
0.1
0.2
(0.1)
0.0
0.0
0.0
0.0
0.0
(0.2)
0.0
(0.1)
(0.1)
0.6
0.5
0.0
0.3
(0.2)
1.0
0.9
0.1
0.0
0.0
0.1
(0.1)
0.0
0.0
0.0
0.0
0.0
(0.1)
0.0
0.0
(0.2)
0.5
0.6
0.0
0.1
(0.1)
0.6
0.6
0.0
0.0
0.0
(0.1)
Purchases
Sales
Issuances
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Foreign
currency
Balance as of
31 December
translation
20161
(0.3)
(0.1)
0.9
0.6
0.1
0.0
0.2
0.1
0.0
0.0
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(6.8)
(0.8)
(5.2)
(0.1)
(0.7)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
4.1
0.0
4.1
0.0
0.0
0.7
0.6
0.0
0.0
0.0
1.0
0.6
0.1
0.4
0.0
1.5
0.2
0.0
1.0
0.2
5.0
4.1
0.8
0.1
0.0
0.0
0.0
0.0
0.0
(1.9)
(1.0)
(0.9)
0.0
0.0
(1.9)
(0.7)
(0.2)
(0.6)
(0.4)
(2.1)
(0.7)
(0.2)
(0.8)
(0.4)
(3.5)
(2.5)
(0.6)
(0.4)
1.7
0.1
1.1
0.2
0.4
0.5
0.4
0.0
0.0
0.0
1.3
0.4
0.0
0.2
0.7
1.2
0.3
0.1
0.2
0.7
0.9
0.8
0.1
0.0
(0.1)
(0.2)
0.0
0.0
(0.1)
(0.1)
0.0
0.0
(0.1)
(0.4)
(0.1)
(0.1)
(0.2)
0.0
(0.6)
(0.1)
0.0
(0.3)
(0.1)
(2.9)
0.0
0.0
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(0.1)
0.0
0.0
1.7
0.6
0.7
0.2
0.2
2.1
1.2
0.6
0.2
0.5
2.5
1.3
0.2
0.7
0.3
4.0
1.5
0.1
1.9
0.5
9.7
1.1
0.3
(2.9)
(0.1)
11.0
Consolidated financial statements Note 22 Fair value measurement (continued)
Movements of Level 3 instruments
Total gains / losses included in
comprehensive income
of which:
related to
Level 3
Balance as of
31 December
Net interest
instruments
income,
net trading
income and
held at the
end of the
reporting
Other
compre-
hensive
CHF billion
2014
other income
period
income Purchases
Sales
Issuances Settlements
Level 3
Level 3
translation
Financial assets held for trading
(0.2)
(0.4)
0.7
(7.6)
5.4
0.0
0.9
(0.5)
(0.1)
Transfers
Transfers
into
out of
Foreign
currency
0.0
0.0
0.0
0.0
(1.3)
0.8
(0.4)
(0.1)
(0.1)
(0.1)
(0.4)
0.0
Financial assets available for sale
0.0
Positive replacement values
(0.4)
(0.1)
(0.5)
(0.1)
of which:
Loans
Other
Corporate and municipal bonds
Asset-backed securities
Financial assets designated
at fair value
of which:
Loans (including structured loans)
Structured reverse repurchase and
securities borrowing agreements
Other
of which:
Credit derivative contracts
Foreign exchange contracts
Equity / index contracts
Other
Negative replacement values
of which:
Credit derivative contracts
Foreign exchange contracts
Equity / index contracts
Other
Financial liabilities designated
at fair value
of which:
Issued debt instruments
Over-the-counter debt instruments
Structured repurchase agreements
3.5
1.4
1.1
0.6
0.5
3.5
1.0
2.4
0.1
0.6
4.4
1.7
0.6
1.9
0.3
5.0
1.7
0.3
2.4
0.6
11.9
9.5
1.5
0.9
0.0
(0.1)
0.0
(0.1)
0.1
0.0
0.0
(0.1)
(0.1)
0.0
(0.1)
(0.4)
0.3
0.0
(0.4)
(0.2)
0.6
0.4
0.2
0.0
0.0
(0.3)
0.0
(0.1)
0.1
0.0
0.0
0.2
0.0
(0.3)
(0.1)
0.0
0.6
(0.1)
(0.5)
(0.1)
0.0
0.1
(0.1)
0.0
0.5
0.1
0.1
0.1
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(1.0)
(5.5)
(0.6)
(0.5)
0.0
0.0
0.0
(0.1)
(0.1)
0.0
0.0
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
5.4
0.0
0.0
0.8
0.7
0.1
0.0
0.0
1.7
0.9
0.1
0.7
0.0
1.0
0.0
0.0
0.9
0.1
6.1
4.9
1.2
0.0
0.0
0.0
0.0
0.0
(0.2)
(1.0)
0.0
0.0
(2.9)
(1.1)
(0.1)
(1.4)
(0.3)
(0.9)
(0.1)
(1.2)
0.0
(4.4)
(2.0)
(0.3)
0.1
0.2
0.2
0.4
0.8
0.0
0.0
0.0
0.7
0.1
0.0
0.2
0.4
0.3
0.0
0.1
0.1
1.3
0.0
0.0
(0.1)
(0.3)
(0.1)
0.0
0.0
0.0
0.0
(0.1)
0.0
(0.3)
(0.1)
(0.1)
0.0
(0.4)
0.0
(2.2)
0.0
0.0
(0.1)
0.0
0.0
0.0
(0.1)
0.0
0.0
(0.1)
0.0
0.0
0.0
0.0
0.0
(0.1)
(0.1)
(0.2)
(0.1)
0.0
0.0
0.0
(6.7)
1.3
(2.2)
(0.3)
0.0
0.0
(2.2)
0.5
(0.5)
(0.1)
1 Total Level 3 assets as of 31 December 2016 were CHF 6.9 billion (31 December 2015: CHF 9.0 billion). Total Level 3 liabilities as of 31 December 2016 were CHF 15.1 billion (31 December 2015: CHF 14.1 billion).
Total gains / losses included in
comprehensive income
Net interest
income,
net trading
income and
other income
Balance as of
31 December
2015
of which:
related to
Level 3
instruments
held at the
end of the
reporting
period
Other
compre-
hensive
income
0.0
2.1
0.7
0.8
0.2
0.4
3.3
1.7
1.5
0.1
0.7
2.9
1.3
0.5
1.0
0.1
3.3
1.3
0.2
1.4
0.3
10.7
9.3
0.8
0.6
0.1
0.2
(0.1)
0.0
0.0
0.0
0.1
(0.1)
0.0
0.0
(0.4)
(0.1)
(0.4)
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
(0.4)
(0.5)
(0.2)
0.0
(0.1)
(0.1)
0.6
0.5
0.0
0.3
(0.2)
1.0
0.9
0.1
0.0
(0.1)
0.0
0.0
(0.2)
0.5
0.6
0.0
0.1
(0.1)
0.6
0.6
0.0
0.0
Purchases
Sales
Issuances
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Foreign
currency
translation
Balance as of
31 December
20161
0.9
0.6
0.1
0.0
0.2
0.1
0.0
0.0
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(6.8)
(0.8)
(5.2)
(0.1)
(0.7)
0.0
0.0
0.0
0.0
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
4.1
0.0
4.1
0.0
0.0
0.7
0.6
0.0
0.0
0.0
1.0
0.6
0.1
0.4
0.0
1.5
0.2
0.0
1.0
0.2
5.0
4.1
0.8
0.1
0.0
0.0
0.0
0.0
0.0
(1.9)
(1.0)
(0.9)
0.0
0.0
(1.9)
(0.7)
(0.2)
(0.6)
(0.4)
(2.1)
(0.7)
(0.2)
(0.8)
(0.4)
(3.5)
(2.5)
(0.6)
(0.4)
1.7
0.1
1.1
0.2
0.4
0.5
0.4
0.0
0.0
0.0
1.3
0.4
0.0
0.2
0.7
1.2
0.3
0.1
0.2
0.7
0.9
0.8
0.1
0.0
(0.3)
(0.1)
(0.1)
(0.2)
0.0
0.0
(0.1)
(0.1)
0.0
0.0
(0.1)
(0.4)
(0.1)
(0.1)
(0.2)
0.0
(0.6)
(0.1)
0.0
(0.3)
(0.1)
(0.1)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.7
0.6
0.7
0.2
0.2
2.1
1.2
0.6
0.2
0.5
2.5
1.3
0.2
0.7
0.3
4.0
1.5
0.1
1.9
0.5
(2.9)
(0.1)
11.0
(2.9)
0.0
0.0
(0.1)
0.0
0.0
9.7
1.1
0.3
405
Financial statements Note 22 Fair value measurement (continued)
i) Financial instruments not measured at fair value
The table below provides the estimated fair values of financial instruments not measured at fair value.
Financial instruments not measured at fair value
CHF billion
Assets
Carrying
value
31.12.16
Fair value
Carrying
value
31.12.15
Fair value
Total
Total
Level 1
Level 2
Level 3
Total
Total
Level 1
Level 2
Level 3
Cash and balances with central banks
107.8
107.8
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Cash collateral receivables on derivative instruments
Loans
Financial assets held to maturity
Other assets
Liabilities
Due to banks
Cash collateral on securities lent
Repurchase agreements
Cash collateral payables on derivative instruments
Due to customers
Debt issued
Other liabilities
13.2
15.1
66.2
26.7
306.3
9.3
18.5
10.6
2.8
6.6
35.5
423.7
103.7
38.3
13.2
15.1
66.2
26.7
309.7
9.1
18.5
10.6
2.8
6.6
35.5
423.7
106.1
38.4
107.8
12.5
0.0
0.0
0.0
0.0
6.3
0.0
8.8
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.7
15.1
62.5
26.7
0.0
0.0
0.0
3.7
0.0
91.3
11.9
25.6
67.9
23.8
91.3
11.9
25.6
67.9
23.8
169.3
140.4
312.0
314.1
91.3
11.5
0.0
0.0
0.0
0.0
0.0
0.5
25.6
65.8
23.8
0.0
0.0
0.0
2.1
0.0
170.2
143.9
2.8
18.5
1.9
2.8
6.6
35.5
423.7
103.5
38.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2.6
0.0
20.0
20.0
0.0
20.0
11.8
8.0
9.7
38.3
390.2
93.0
51.4
11.8
8.0
9.7
38.3
390.2
95.5
51.4
10.4
0.0
0.0
0.0
0.0
0.0
0.0
1.4
8.0
9.6
38.3
390.2
89.5
51.4
0.0
0.0
0.0
0.0
0.0
0.0
6.0
0.0
The fair values included in the table above were calculated for
disclosure purposes only. The valuation techniques and assump-
tions described below relate only to the fair value of UBS’s finan-
cial instruments not measured at fair value. Other institutions may
use different methods and assumptions for their fair value estima-
tion, and therefore such fair value disclosures cannot necessarily
be compared from one financial institution to another. The fol-
lowing principles were applied when determining fair value esti-
mates for financial instruments not measured at fair value:
– For financial instruments with remaining maturities greater
than three months, the fair value was determined from quoted
market prices, if available.
– Where quoted market prices were not available, the fair values
were estimated by discounting contractual cash flows using
current market interest rates or appropriate yield curves for
instruments with similar credit risk and maturity. These esti-
mates generally include adjustments for counterparty credit
risk or UBS’s own credit.
– For short-term financial instruments with remaining maturities
of three months or less, the carrying amount, which is net of
credit loss allowances, is generally considered a reasonable
estimate of fair value. The following financial instruments not
measured at fair value had remaining maturities of three
months or less as of 31 December 2016: 100% of cash and
balances with central banks, 95% of amounts due from banks,
100% of cash collateral on securities borrowed, 83% of
reverse repurchase agreements, 100% of cash collateral receiv-
ables on derivative instruments, 51% of loans, 4% of financial
assets held to maturity, 82% of amounts due to banks, 100%
of cash collateral on securities lent, 87% of repurchase agree-
ments, 100% of cash collateral payables on derivative instru-
ments, 99% of amounts due to customers and 15% of debt
issued.
– The fair value estimates for repurchase and reverse repurchase
agreements with variable and fixed interest rates, for all matur-
ities, include the valuation of the interest rate component of
these instruments. Credit and debit valuation adjustments
have not been included in the valuation due to the short-term
nature of these instruments.
406
Consolidated financial statements Note 23 Restricted and transferred financial assets
This Note provides information on restricted financial assets (Note 23a), transfers of financial assets (Note 23b and 23c) and financial
assets that are received as collateral with the right to resell or repledge these assets (Note 23d).
a) Restricted financial assets
Restricted financial assets consist of assets pledged as collateral
against an existing liability or contingent liability and other assets
that are otherwise explicitly restricted such that they cannot be
used to secure funding.
Financial assets are mainly pledged as collateral in securities
lending transactions, in repurchase transactions, against loans
from Swiss mortgage institutions and in connection with the issu-
ance of covered bonds. The Group generally enters into repur-
chase and securities lending arrangements under standard market
agreements, with a market-based haircut applied to the collateral,
which results in the associated liabilities having a carrying value
below the carrying value of the assets. Pledged mortgage loans
serve as collateral for existing liabilities against Swiss central
mortgage institutions and for existing covered bond issuances of
CHF 14,137 million as of 31 December 2016 (31 December 2015:
CHF 16,727 million).
Other restricted financial assets include assets protected under
client asset segregation rules, assets held by the Group’s insurance
entities to back related liabilities to the policy holders, assets held
in certain jurisdictions to comply with explicit minimum local asset
maintenance requirements and assets held in consolidated bank-
ruptcy remote entities such as certain investment funds and other
structured entities. The carrying value of the liabilities associated
with these other restricted financial assets is generally equal to the
carrying value of the assets, with the exception of assets held to
comply with local asset maintenance requirements for which the
associated liabilities are greater.
UBS Group AG and its subsidiaries are generally not subject to
significant restrictions that would prevent the transfer of divi-
dends and capital within the Group. However, certain regulated
subsidiaries are required to maintain capital and / or liquidity to
comply with local regulations and may be subject to prudential
limitations by regulators that limit the amount of funds that they
can distribute or otherwise transfer. Non-regulated subsidiaries
are generally not subject to such requirements and transfer restric-
tions. However, restrictions can also be the result of different
legal, regulatory, contractual, entity or country-specific arrange-
ments and / or requirements.
Restricted financial assets
CHF million
Financial assets pledged as collateral
Trading portfolio assets
of which: assets pledged as collateral which may be sold or repledged by counterparties
Loans1
Financial assets designated at fair value
of which: assets pledged as collateral which may be sold or repledged by counterparties
Financial assets available for sale
of which: assets pledged as collateral which may be sold or repledged by counterparties
Total financial assets pledged as collateral2
Other restricted financial assets
Due from banks
Reverse repurchase agreements
Trading portfolio assets
Cash collateral receivables on derivative instruments
Loans
Financial assets designated at fair value
Financial assets available for sale
Other
Total other restricted financial assets
Total financial assets pledged and other restricted financial assets
31.12.16
31.12.15
36,549
30,260
19,887
776
636
0
0
57,023
51,943
24,980
0
0
632
6
57,213
82,635
2,625
658
12,129
4,329
958
328
247
5,195
26,470
83,683
3,285
1,099
24,388
7,104
0
337
502
480
37,196
119,830
1 All related to mortgage loans that serve as collateral for existing liabilities against Swiss central mortgage institutions and for existing covered bond issuances. Of these pledged mortgage loans, approximately CHF 1.9
billion for 31 December 2016 (31 December 2015: approximately CHF 4.4 billion) could be withdrawn or used for future liabilities or covered bond issuances without breaching existing collateral requirements. 2 Does
not include assets placed with central banks related to undrawn credit lines and for payment, clearing and settlement purposes (31 December 2016: CHF 4.7 billion; 31 December 2015: CHF 4.9 billion).
407
Financial statements Note 23 Restricted and transferred financial assets (continued)
b) Transferred financial assets that are not derecognized in their entirety
The table below presents information for financial assets that have been transferred but are subject to continued recognition in full, as
well as recognized liabilities associated with those transferred assets.
Transferred financial assets subject to continued recognition in full
CHF million
31.12.16
31.12.15
Carrying value
of transferred
assets
Carrying value of
associated liabilities
recognized
on-balance sheet
Carrying value of
transferred
assets
Carrying value of
associated liabilities
recognized
on-balance sheet
Trading portfolio assets which may be sold or repledged by counterparties
relating to securities lending and repurchase agreements in exchange for cash received
relating to securities lending agreements in exchange for securities received
relating to other financial asset transfers
Financial assets designated at fair value which may be sold or repledged by counterparties
Financial assets available for sale which may be sold or repledged by counterparties
Total financial assets transferred
30,260
11,410
17,341
1,509
636
0
30,896
11,260
11,260
0
0
630
0
51,943
13,406
37,097
1,440
0
6
13,146
13,146
0
0
0
6
11,890
51,950
13,152
Transactions in which financial assets are transferred, but con-
tinue to be recognized in their entirety on UBS’s balance sheet
include securities lending and repurchase agreements as well as
other financial asset transfers. Repurchase and securities lending
arrangements are, for the most part, conducted under standard
market agreements and are undertaken with counterparties sub-
ject to UBS’s normal credit risk control processes.
➔ Refer to Note 1a item 3e for more information on repurchase
agreements and securities lending agreements
As of 31 December 2016, approximately one-third of the
transferred financial assets were trading portfolio assets trans-
ferred in exchange for cash, in which case the associated recog-
nized liability represents the amount to be repaid to counterpar-
ties. For securities lending and repurchase agreements, a haircut
between 0% and 15% is generally applied to the transferred
assets, which results in associated liabilities having a carrying
value below the carrying value of the transferred assets. The
counterparties to the associated liabilities presented in the table
above have full recourse to UBS.
In securities lending arrangements entered into in exchange
for the receipt of other securities as collateral, neither the securi-
ties received nor the obligation to return them are recognized on
UBS’s balance sheet, as the risks and rewards of ownership are
not transferred to UBS. In cases where such financial assets
received are subsequently sold or repledged in another transac-
tion, this is not considered to be a transfer of financial assets.
Other financial asset transfers primarily include securities trans-
ferred to collateralize derivative transactions, for which the carry-
ing value of associated liabilities is not provided in the table above
because those replacement values are managed on a portfolio
basis across counterparties and product types, and therefore there
is no direct relationship between the specific collateral pledged
and the associated liability.
Transferred financial assets that are not subject to derecogni-
tion in full, but which remain on the balance sheet to the extent
of the Group’s continuing involvement, were not material as of
31 December 2016 and as of 31 December 2015.
408
Consolidated financial statements Note 23 Restricted and transferred financial assets (continued)
c) Transferred financial assets that are derecognized in their entirety with continuing involvement
Continuing involvement in a transferred and fully derecognized
financial asset may result from contractual provisions in the trans-
fer agreement or from a separate agreement with the counter-
party or a third party entered into in connection with the transfer.
Purchased and retained interests in securitization vehicles
In cases where UBS has transferred assets into a securitization
vehicle and retained or purchased interests therein, UBS has a
continuing involvement in those transferred assets.
As of 31 December 2016, the majority of the retained continu-
ing involvement related to securitization positions held in the
trading portfolio, primarily collateralized debt obligations, US
commercial mortgage-backed securities and residential mort-
gage-backed securities. The fair value and carrying amount of
UBS’s continuing involvement related to these purchased and
retained interests was CHF 5 million as of 31 December 2016, and
UBS recognized gains of CHF 11 million in 2016 related to these
positions. As of 31 December 2016, life-to-date losses of CHF
1,173 million have been recorded related to the positions held as
of 31 December 2016.
As of 31 December 2015, the fair value and carrying amount
of UBS’s continuing involvement related to purchased and retained
interests in securitization vehicles was CHF 15 million, and UBS
recognized gains of CHF 16 million in 2015 related to these posi-
tions. As of 31 December 2015, life-to-date losses of CHF 1,566
million were recorded related to the positions held as of 31 Decem-
ber 2015.
The maximum exposure to loss related to purchased and
retained interests in securitization structures was CHF 28 million
as of 31 December 2016 compared with CHF 55 million as of
31 December 2015.
Undiscounted cash outflows of CHF 23 million may be payable
to the transferee in future periods as a consequence of holding
the purchased and retained interests. The earliest period in which
payment may be required is less than one month.
d) Off-balance sheet assets received
The table below presents assets received from third parties that can be sold or repledged, that are not recognized on the balance sheet,
but that are held as collateral, including amounts that have been sold or repledged.
Off-balance sheet assets received
CHF million
Fair value of assets received which can be sold or repledged
received as collateral under reverse repurchase, securities borrowing and lending arrangements, derivative transactions and other transactions1
received in unsecured borrowings
Thereof sold or repledged2
in connection with financing activities
to satisfy commitments under short sale transactions
in connection with derivative and other transactions1
31.12.16
429,327
423,524
5,803
316,323
277,341
22,824
16,158
31.12.15
401,511
393,839
7,672
286,757
241,992
29,137
15,628
1 Includes securities received as initial margin from its clients that UBS is required to remit to CCPs, brokers and deposit banks through its exchange-traded derivative (ETD) clearing and execution services. 2 Does not
include off-balance sheet securities (31 December 2016: CHF 30.9 billion; 31 December 2015: CHF 47.3 billion) placed with central banks related to undrawn credit lines and for payment, clearing and settlement
purposes for which there are no associated liabilities or contingent liabilities.
409
Financial statements Note 24 Offsetting financial assets and financial liabilities
UBS enters into netting agreements with counterparties to man-
age the credit risks associated primarily with repurchase and
reverse repurchase transactions, securities borrowing and lending,
and over-the-counter (OTC) and exchange-traded derivatives
(ETD). These netting agreements and similar arrangements gener-
ally enable the counterparties to set off liabilities against available
assets received in the ordinary course of business and / or in the
event that the counterparty to the transaction is unable to fulfill
its contractual obligations. The right of setoff is a legal right to
settle or otherwise eliminate all or a portion of an amount due by
applying an amount receivable from the same counterparty
against it, thus reducing credit exposure.
The table below provides a summary of financial assets subject
to offsetting, enforceable master netting arrangements and similar
agreements, as well as financial collateral received to mitigate
credit exposures for these financial assets. The gross financial assets
of the Group that are subject to offsetting, enforceable netting
arrangements and similar agreements are reconciled to the net
amounts presented within the associated balance sheet line, after
giving effect to financial liabilities with the same counterparties
that have been offset on the balance sheet and other financial
assets not subject to an enforceable netting arrangement or similar
agreement. Further, related amounts for financial liabilities and col-
lateral received that are not offset on the balance sheet are shown
to arrive at financial assets after consideration of netting potential.
The Group engages in a variety of counterparty credit mitiga-
tion strategies in addition to netting and collateral arrangements.
Therefore, the net amounts presented in the tables on this and on
the next page do not purport to represent the Group’s actual
credit exposure.
Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements
Assets subject to netting arrangements
Netting recognized on the balance sheet
Netting potential not recognized
on the balance sheet4
Net assets
recognized
on the
balance
sheet
Assets after
consider-
ation of
netting
potential
Financial
liabilities
Collateral
received
As of 31.12.16, CHF billion
Cash collateral on securities borrowed
Reverse repurchase agreements
Positive replacement values
Cash collateral receivables on
derivative instruments1
Financial assets designated at fair value
Total assets
As of 31.12.15, CHF billion
Cash collateral on securities borrowed2
Reverse repurchase agreements
Positive replacement values
Cash collateral receivables on
derivative instruments1
Financial assets designated at fair value
Total assets
Gross assets
before
netting
4.2
128.4
152.3
37.2
1.7
323.8
8.2
117.9
161.9
85.9
2.4
376.4
Netting with
gross liabilities3
0.0
(71.5)
(2.5)
(15.1)
0.0
(89.1)
0.0
(62.1)
(2.5)
(66.3)
0.0
4.2
56.9
(0.9)
(2.1)
149.8
(113.1)
22.1
1.7
(14.2)
0.0
(3.3)
(54.8)
(26.7)
(1.0)
(0.6)
234.7
(130.3)
(86.3)
8.2
55.8
(3.1)
(4.4)
159.3
(123.0)
19.6
2.4
(10.9)
0.0
(5.2)
(51.4)
(25.5)
(1.5)
(1.8)
Assets not
subject to
netting
arrangements5
Assets
recognized
on the
balance
sheet
Total assets
Total assets
after consid-
eration of
netting
potential
Total assets
recognized
on the
balance
sheet
10.9
9.3
8.6
4.5
63.7
97.1
17.3
12.1
8.1
4.1
3.7
45.4
10.9
9.3
18.6
11.5
64.7
115.2
17.3
12.1
18.9
11.3
4.4
64.1
15.1
66.2
158.4
26.7
65.4
331.8
25.6
67.9
167.4
23.8
6.1
290.8
0.0
0.0
10.0
7.0
1.1
18.1
0.0
0.0
10.8
7.2
0.6
18.7
(131.0)
245.4
(141.3)
(85.4)
1 The net amount of Cash collateral receivables on derivative instruments recognized on the balance sheet includes certain OTC derivatives that are net settled on a daily basis either legally or in substance under IAS 32
principles and ETD that are economically settled on a daily basis. In 2016 UBS elected to convert its IRS transacted with the London Clearing House and Japan Securities Clearing Corporation from the previous collateral
model to a settlement model. As a result, gross assets and liabilities and corresponding netting decreased by CHF 64 billion as of 31 December 2016, with no change to net assets and liabilities recognized on the balance
sheet. Refer to Note 1b for more information. 2 In 2016, balances as of 31 December 2015 were revised to conform to the presentation for balances as of 31 December 2016. This resulted in a CHF 16 billion decrease
in Assets subject to netting arrangements with a corresponding increase in Assets not subject to netting arrangements. This change did not impact amounts recognized on the balance sheet since IAS 32 netting was not
applied under either presentation as the relevant netting criteria were not met. Furthermore, the level of collateralization for these assets did not change as result of this presentational change. 3 The logic of the table
results in amounts presented in the “Netting with gross liabilities” column corresponding directly to the amounts presented in the “Netting with gross assets” column in the liabilities table presented on the following
page. 4 For the purpose of this disclosure, the amounts of financial instruments and cash collateral presented have been capped by the relevant netting agreement so as not to exceed the net amount of financial assets
presented on the balance sheet; i.e., over-collateralization, where it exists, is not reflected in the table. 5 Includes assets not subject to enforceable netting arrangements and other out-of-scope items.
410
Consolidated financial statements Note 24 Offsetting financial assets and financial liabilities (continued)
The table below provides a summary of financial liabilities subject
to offsetting, enforceable master netting arrangements and simi-
lar agreements, as well as financial collateral pledged to mitigate
credit exposures for these financial liabilities. The gross financial
liabilities of UBS that are subject to offsetting, enforceable net-
ting arrangements and similar agreements are reconciled to the
net amounts presented within the associated balance sheet line,
after giving effect to financial assets with the same counterpar-
ties that have been offset on the balance sheet and other finan-
cial liabilities not subject to an enforceable netting arrangement
or similar agreement. Further, related amounts for financial assets
and collateral pledged that are not offset on the balance sheet
are shown to arrive at financial liabilities after consideration of
netting potential.
Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements
Liabilities subject to netting arrangements
Netting recognized on the balance sheet
Netting potential not recognized
on the balance sheet3
Liabilities not
subject
to netting
arrangements4
Total liabilities
As of 31.12.16, CHF billion
Cash collateral on securities lent
Repurchase agreements
Negative replacement values
Cash collateral payables on
derivative instruments1
Financial liabilities designated
at fair value
Total liabilities
As of 31.12.15, CHF billion
Cash collateral on securities lent
Repurchase agreements
Negative replacement values
Cash collateral payables on
derivative instruments1
Financial liabilities designated
at fair value
Total liabilities
Gross
liabilities
before
netting
2.6
76.7
146.3
48.5
2.8
276.9
7.9
69.0
154.2
99.9
3.9
334.9
Netting with
gross assets2
0.0
(71.5)
(2.5)
(15.1)
0.0
(89.1)
0.0
(62.1)
(2.5)
(66.3)
Net
liabilities
recognized
on the
balance
sheet
Liabilities
after consid-
eration of
netting
potential
Liabilities
recognized
on the
balance
sheet
Total
liabilities
after consid-
eration of
netting
potential
Total
liabilities
recognized
on the
balance
sheet
Financial
assets
Collateral
pledged
2.6
5.2
(0.9)
(2.1)
143.9
(113.1)
(1.7)
(3.1)
(16.6)
33.4
(20.8)
(1.4)
2.8
187.9
0.0
(137.0)
(0.2)
(22.9)
7.9
6.9
(3.1)
(4.4)
151.7
(123.0)
(4.8)
(2.5)
(17.4)
33.6
(19.0)
(2.5)
0.0
0.0
14.2
11.2
2.6
28.0
0.0
0.0
11.3
12.1
3.1
26.5
0.2
1.4
10.0
2.1
52.2
65.9
0.1
2.8
10.7
4.7
59.1
77.4
0.2
1.4
24.2
13.3
54.8
93.9
0.1
2.8
22.1
16.8
62.3
104.0
2.8
6.6
153.8
35.5
55.0
253.7
8.0
9.7
162.4
38.3
63.0
281.4
0.0
(131.0)
3.9
203.9
0.0
(149.4)
(0.7)
(28.0)
1 The net amount of Cash collateral payables on derivative instruments recognized on the balance sheet includes certain OTC derivatives that are net settled on a daily basis either legally or in substance under IAS 32
principles and ETD that are economically settled on a daily basis. In 2016 UBS elected to convert its IRS transacted with the London Clearing House and Japan Securities Clearing Corporation from the previous collateral
model to a settlement model. As a result, gross assets and liabilities and corresponding netting decreased by CHF 64 billion as of 31 December 2016, with no change to net assets and liabilities recognized on the balance
sheet. Refer to Note 1b for more information. 2 The logic of the table results in amounts presented in the “Netting with gross assets” column corresponding directly to the amounts presented in the “Netting with gross
liabilities” column in the assets table presented on the previous page. 3 For the purpose of this disclosure, the amounts of financial instruments and cash collateral presented have been capped by the relevant netting
agreement so as not to exceed the net amount of financial liabilities presented on the balance sheet; i.e., over-collateralization, where it exists, is not reflected in the table. 4 Includes liabilities not subject to enforceable
netting arrangements and other out-of-scope items.
411
Financial statements Note 25 Measurement categories, credit risk and maturity analysis of financial instruments
a) Measurement categories of financial assets and liabilities
The table below provides information about the carrying amounts
of individual classes of financial instruments within the measure-
ment categories of financial assets and liabilities as defined in
IAS 39 Financial Instruments: Recognition and Measurement.
Only those assets and liabilities that are financial instruments as
defined in IAS 32 Financial Instruments: Presentation are included
in the table below, which causes certain balances to differ from
those presented on the balance sheet.
➔ Refer to Note 22 for more information on how the fair value of
financial instruments is determined
Measurement categories of financial assets and financial liabilities
CHF million
Financial assets1
Held for trading
Trading portfolio assets
Due to customers2
Debt issued2
Positive replacement values
Total
Fair value through profit or loss
Financial assets designated at fair value
Other assets
Total
Financial assets at amortized cost
Cash and balances with central banks
Due from banks
Cash collateral on securities borrowed
Reverse repurchase agreements
Cash collateral receivables on derivative instruments
Loans3
Financial assets held to maturity
Other assets
Total
Available for sale
Financial assets available for sale
Total financial assets
Financial liabilities
Held for trading
Trading portfolio liabilities
Debt issued2
Negative replacement values
Total
Fair value through profit or loss
Financial liabilities designated at fair value
Amounts due under unit-linked investment contracts
Other liabilities
Total
Financial liabilities at amortized cost
Due to banks
Cash collateral on securities lent
Repurchase agreements
Cash collateral payables on derivative instruments
Due to customers
Debt issued
Other liabilities
Total
Total financial liabilities
31.12.16
31.12.15
92,025
12
38
158,411
250,486
65,353
131
65,483
107,767
13,156
15,111
66,246
26,664
306,325
9,289
18,504
563,063
15,676
894,709
22,824
0
153,810
176,634
55,017
9,286
131
64,434
10,645
2,818
6,612
35,472
423,684
103,687
38,349
621,267
862,335
120,393
0
106
167,435
287,934
6,146
0
6,146
91,306
11,948
25,584
67,893
23,763
311,954
0
20,048
552,496
62,543
909,119
29,137
236
162,430
191,803
62,995
15,718
0
78,713
11,836
8,029
9,653
38,282
390,185
93,018
51,384
602,387
872,903
1 As of 31 December 2016, CHF 126 billion of Loans, CHF 0 billion of Due from banks, CHF 1 billion of Reverse repurchase agreements, CHF 10 billion of Financial assets available for sale, CHF 29 billion of Financial
assets designated at fair value and CHF 8 billion of Financial assets held to maturity are expected to be recovered or settled after 12 months. As of 31 December 2015, CHF 123 billion of Loans, CHF 0 billion of Due from
banks, CHF 1 billion of Reverse repurchase agreements, CHF 30 billion of Financial assets available for sale and CHF 3 billion of Financial assets designated at fair value are expected to be recovered or settled after 12
months. 2 Represents the embedded derivative component of structured financial instruments for which the fair value option has not been applied and that is presented within Due to customers and Debt issued on
the balance sheet. 3 Includes finance lease receivables of CHF 1.0 billion as of 31 December 2016 (31 December 2015: CHF 1.1 billion). Refer to Notes 10 and 31 for more information.
412
Consolidated financial statements Note 25 Measurement categories, credit risk and maturity analysis of financial instruments (continued)
b) Maximum exposure to credit risk
The tables on the following pages provide the Group’s maximum
exposure to credit risk by class of financial instrument and the
respective collateral and other credit enhancements mitigating
credit risk for these classes of financial instruments.
The maximum exposure to credit risk includes the carrying
amounts of financial instruments recognized on the balance sheet
subject to credit risk and the notional amounts for off-balance
sheet arrangements. Where information is available, collateral is
presented at fair value. For other collateral such as real estate, a
reasonable alternative value is used. Credit enhancements, such
as credit derivative contracts and guarantees, are included at their
notional amounts. Both are capped at the maximum exposure to
credit risk for which they serve as security.
Maximum exposure to credit risk
CHF billion
Financial assets measured at amortized cost on the
balance sheet
Balances with central banks
Due from banks2
Cash collateral on securities borrowed
Reverse repurchase agreements
Cash collateral receivables on derivative instruments3, 4
Loans5
Financial assets held to maturity
Other assets
Total financial assets measured at amortized cost
Financial assets measured at fair value on the balance
sheet
Positive replacement values4
Trading portfolio assets – debt instruments6, 7
Financial assets designated at fair value – debt instruments8
Financial assets available for sale – debt instruments8
Total financial assets measured at fair value
Total maximum exposure to credit risk reflected on
the balance sheet
Guarantees9
Loan commitments9
Forward starting transactions, reverse repurchase and
securities borrowing agreements
Total maximum exposure to credit risk not reflected
on the balance sheet
Total
31.12.16
Collateral
Credit enhancements
Maximum
exposure to
credit risk
Cash
collateral
received
Collateral-
ized by
securities
Secured by
real estate
Other
collateral1
Netting
Credit
derivative
contracts Guarantees
107.1
13.2
15.1
66.2
26.7
306.3
9.3
18.6
562.5
158.4
21.8
64.8
14.9
259.9
822.4
16.7
54.4
10.2
81.3
903.7
14.8
62.5
3.2
15.1
17.4
99.6
158.2
14.6
0.1
1.8
17.4
10.0
186.9
158.2
17.7
15.1
0.1
1.8
5.3
2.6
7.9
134.5
0.0
0.0
134.5
194.9
158.2
2.0
3.9
10.2
16.1
210.9
0.2
1.0
1.1
159.4
17.7
1.2
9.5
10.6
28.4
149.6
0.0
149.6
0.0
17.4
1.4
0.1
1.5
18.9
0.6
0.6
0.7
0.1
4.8
4.9
5.7
0.0
1.8
3.0
2.0
5.1
6.8
413
Financial statements
Note 25 Measurement categories, credit risk and maturity analysis of financial instruments (continued)
Maximum exposure to credit risk (continued)
CHF billion
Financial assets measured at amortized cost on the
balance sheet
Balances with central banks
Due from banks2
Cash collateral on securities borrowed
Reverse repurchase agreements
Cash collateral receivables on derivative instruments3, 4
Loans
Other assets
Total financial assets measured at amortized cost
Financial assets measured at fair value on the balance
sheet
Positive replacement values4
Trading portfolio assets – debt instruments6, 7
Financial assets designated at fair value – debt instruments8
Financial assets available for sale – debt instruments8
Total financial assets measured at fair value
Total maximum exposure to credit risk reflected on
the balance sheet
Guarantees9
Loan commitments9
Forward starting transactions, reverse repurchase and
securities borrowing agreements
Total maximum exposure to credit risk not reflected
on the balance sheet
Total
31.12.15
Collateral
Credit enhancements
Maximum
exposure to
credit risk
Cash
collateral
received
Collateral-
ized by
securities
Secured by
real estate
Other
collateral1
Netting
Credit
derivative
contracts
Guarantees
89.8
11.9
25.6
67.9
23.8
312.0
20.0
550.9
167.4
29.0
5.6
61.7
263.7
814.7
16.0
56.1
6.6
78.6
893.3
0.2
25.1
62.8
101.0
11.1
200.1
5.8
3.5
164.4
164.4
9.3
0.0
209.4
164.4
2.1
1.8
6.6
10.5
220.0
0.2
1.7
1.9
166.3
13.1
13.1
0.0
13.1
1.2
1.2
14.3
4.6
15.2
19.8
0.1
0.1
19.8
1.5
8.7
10.2
30.1
12.4
12.4
142.7
142.7
155.2
0.0
155.2
0.4
0.4
0.6
0.6
1.0
0.1
6.9
7.0
8.1
0.1
2.9
3.0
0.0
3.0
3.0
2.0
5.0
8.0
1 Includes but not limited to life insurance contracts, inventory, accounts receivable, mortgage loans, patents, and copyrights. 2 Due from banks includes amounts held with third-party banks on behalf of clients. The
credit risk associated with these balances may be borne by those clients. 3 Included within Cash collateral receivables on derivative instruments are margin balances due from exchanges or clearing houses. Some of
these margin balances reflect amounts transferred on behalf of clients who retain the associated credit risk. 4 The amount shown in the netting column represents the netting potential not recognized on the balance
sheet. Refer to Note 24 for more information. 5 In 2016, UBS aligned its collateral allocation processes across business divisions with a risk-based approach which prioritizes collateral mainly according to its liquidity
profile. This resulted in increases in loans collateralized by cash of CHF 3.3 billion and increases in loans collateralized by securities of CHF 3.1 billion, while loans secured by real estate decreased by CHF 5.2 billion and
loans secured by guarantees decreased by CHF 1.2 billion. 6 These positions are generally managed under the market risk framework. For the purpose of this disclosure, collateral and credit enhancements were not
considered. 7 Does not include debt instruments held for unit-linked investment contracts and investment fund units. 8 Does not include investment fund units. Financial assets designated at fair value collateralized
by securities consisted of structured loans and reverse repurchase and securities borrowing agreements. 9 The amount shown in the “Guarantees” column largely relates to sub-participations. Refer to the “Treasury
management” section of this report for more information.
Maximum exposure to credit risk for financial assets designated
at fair value
The maximum exposure to credit risk of loans, but not structured
loans, designated at fair value is generally mitigated by credit
derivatives or similar instruments. As of 31 December 2016, the
credit risk of such loans with a total notional amount of CHF 609
million (31 December 2015: CHF 687 million) was mitigated by
credit derivatives with a total notional amount of CHF 578 million
(31 December 2015: CHF 630 million) and a fair value of negative
CHF 7 million (31 December 2015: positive CHF 4 million).
Changes in the fair value of loans designated at fair value
attributable to changes in credit risk were not material for the
years ended 31 December 2016 and 31 December 2015 and from
inception until 31 December 2016 and 31 December 2015.
Similarly, changes in the fair value of credit derivatives mitigating
the credit risk of loans designated at fair value were not material for
the years ended 31 December 2016 and 31 December 2015 and
from inception until 31 December 2016 and 31 December 2015.
➔ Refer to Note 22 for more information on financial assets
designated at fair value
414
Consolidated financial statements
Note 25 Measurement categories, credit risk and maturity analysis of financial instruments (continued)
c) Financial assets subject to credit risk by rating category
Financial assets subject to credit risk by rating category
CHF billion
Rating category1
Balances with central banks
Due from banks
Cash collateral on securities borrowed and reverse repurchase agreements
Positive replacement values
Cash collateral receivables on derivative instruments
Trading portfolio assets – debt instruments2
Loans
Financial assets designated at fair value – debt instruments3
Financial assets available for sale – debt instruments3
Financial assets held to maturity
Other assets
Guarantees, commitments and forward starting transactions
Guarantees
Loan commitments
Forward starting transactions, reverse repurchase and securities borrowing agreements
0–1
106.2
0.6
29.2
19.6
6.4
9.0
31.7
48.4
12.7
8.4
0.1
2.0
2.4
0.6
2–3
0.9
9.7
24.5
96.9
12.2
6.8
127.2
12.6
1.8
0.9
2.0
6.4
19.5
9.4
31.12.16
4–5
6–8
9–13
Defaulted
0.5
6.9
7.4
1.6
1.7
63.6
1.6
0.1
7.7
3.6
8.7
2.0
20.1
34.2
6.4
2.9
63.1
1.0
0.2
6.2
3.7
17.1
0.3
0.3
0.7
0.4
0.2
1.3
19.1
1.3
2.2
0.7
6.5
Total
107.1
13.2
81.4
158.4
26.7
21.8
1.6
306.3
64.8
14.9
9.3
18.6
16.7
54.4
10.2
0.3
0.3
0.1
Total
277.4
330.9
157.1
103.5
32.7
2.2
903.7
Rating category1
Balances with central banks
Due from banks
Cash collateral on securities borrowed and reverse repurchase agreements
Positive replacement values
Cash collateral receivables on derivative instruments
Trading portfolio assets – debt instruments2
Loans
Financial assets designated at fair value – debt instruments3
Financial assets available for sale – debt instruments3
Other assets
Guarantees, commitments and forward starting transactions
Guarantees
Loan commitments
Forward starting transactions, reverse repurchase and securities borrowing agreements
0–1
87.9
1.3
21.7
20.7
8.4
14.2
31.9
0.0
52.4
0.2
2.2
1.8
2–3
1.3
8.8
40.2
116.9
10.2
8.6
132.1
0.5
9.2
2.2
7.1
22.4
6.5
4–5
0.6
1.1
20.1
23.2
4.7
3.1
67.5
1.0
7.5
3.6
19.6
31.12.15
6–8
9–13
Defaulted
0.7
11.2
5.9
0.4
1.9
61.4
3.0
8.0
2.2
6.1
0.0
0.4
0.7
0.1
1.2
17.7
0.9
1.7
0.7
6.2
1.4
0.1
0.4
0.3
0.0
Total
89.8
11.9
93.5
167.4
23.8
29.0
312.0
5.6
61.7
20.0
16.0
56.1
6.6
Total
242.6
366.0
152.1
100.8
29.6
2.2
893.3
1 Refer to the “Internal UBS rating scale and mapping of external ratings” table in the “Risk management and control” section of this report for more information on rating categories. 2 Does not include debt
instruments held for unit-linked investment contracts and investment fund units. 3 Does not include investment fund units.
415
Financial statements
Note 25 Measurement categories, credit risk and maturity analysis of financial instruments (continued)
d) Maturity analysis of financial liabilities
The contractual maturities for non-derivative and non-trading
financial liabilities as of 31 December 2016 are based on the earli-
est date on which UBS could be contractually required to pay. The
total amounts that contractually mature in each time band are
also shown for 31 December 2015. Derivative positions and trad-
ing liabilities, predominantly made up of short sale transactions,
are assigned to the column Due within 1 month, as this provides
a conservative reflection of the nature of these trading activities.
The contractual maturities may extend over significantly longer
periods.
Maturity analysis of financial liabilities1
CHF billion
Financial liabilities recognized on balance sheet2
Due to banks
Cash collateral on securities lent
Repurchase agreements
Trading portfolio liabilities3, 4
Negative replacement values3
Cash collateral payables on derivative instruments
Due to customers
Financial liabilities designated at fair value5
Debt issued6
Other liabilities
Total 31.12.16
Total 31.12.15
Guarantees, commitments and forward starting transactions7
Loan commitments
Guarantees
Forward starting transactions
Reverse repurchase agreements
Securities borrowing agreements
Total 31.12.16
Total 31.12.15
Due within
1 month
Due between
1 and 3 months
Due between
3 and 12 months
Due between
1 and 5 years
Due after
5 years
7.4
2.2
4.7
22.8
153.8
35.5
406.8
16.8
7.8
46.4
704.3
710.3
54.0
16.7
10.2
0.0
81.0
78.1
1.4
0.6
1.0
13.3
14.7
8.3
39.2
44.3
1.8
0.7
2.9
11.1
23.8
40.4
36.4
0.1
0.1
0.7
8.4
37.3
46.6
53.6
0.0
0.0
0.1
5.9
40.0
46.0
44.6
0.2
0.2
0.0
0.2
0.2
0.2
0.2
0.0
0.1
0.0
0.0
Total
10.7
2.8
6.6
22.8
153.8
35.5
423.7
57.0
117.2
46.4
876.6
889.2
54.4
16.7
10.2
0.0
81.4
78.7
1 Non-financial liabilities such as deferred income, deferred tax liabilities, provisions and liabilities on employee compensation plans are not included in this analysis. 2 Except for trading portfolio liabilities and negative
replacement values (see footnote 3), the amounts presented generally represent undiscounted cash flows of future interest and principal payments. 3 Carrying value is fair value. Management believes that this best
represents the cash flows that would have to be paid if these positions had to be settled or closed out. Refer to Note 12 for undiscounted cash flows of derivatives designated in hedge accounting relationships. 4 Contractual
maturities of trading portfolio liabilities are: CHF 21.8 billion due within one month (2015: CHF 27.2 billion), CHF 1.0 billion due between one month and one year (2015: CHF 1.2 billion) and CHF 0.1 billion due between
1 and 5 years (2015: CHF 0.8 billion). 5 Future interest payments on variable rate liabilities are determined by reference to the applicable interest rate prevailing as of the reporting date. Future principal payments that
are variable are determined by reference to the conditions existing at the reporting date. 6 The time bucket Due after 5 years includes perpetual loss-absorbing additional tier 1 capital instruments. 7 Comprises the
maximum irrevocable amount of guarantees, commitments and forward starting transactions.
e) Reclassification of financial assets
In 2008 and 2009, certain financial assets were reclassified from
Trading portfolio assets to Loans. On their reclassification date,
these assets had fair values of CHF 26 billion and CHF 0.6 billion,
respectively.
The reclassification of financial assets reflected UBS’s change in
intent and ability to hold these financial assets for the foreseeable
future rather than for trading in the near term. The financial
assets were reclassified using their fair value on the date of the
reclassification, which became their new cost basis at that date.
As of 31 December 2016, the carrying value of the remaining
reclassified financial assets, which were entirely comprised of
416
municipal auction rate securities, was CHF 0.2 billion (31 Decem-
ber 2015: CHF 0.2 billion), which was approximately equal to the
fair value of these assets.
The overall effect on operating profit before tax from reclassi-
fied financial assets for the year ended 31 December 2016 was a
profit of CHF 1 million (2015: CHF 23 million). If the financial
assets had not been reclassified, the impact on operating profit
before tax for the year ended 31 December 2016 would have
been a profit of CHF 10 million.
Consolidated financial statements
Note 26 Pension and other post-employment benefit plans
The table below provides information about expenses for pension and other post-employment benefit plans. These expenses are part
of Personnel expenses.
Income statement – expenses related to pension and other post-employment benefit plans
CHF million
Net periodic expenses for defined benefit plans
of which: related to major pension plans1
of which: Swiss plan2
of which: UK plan
of which: US and German plans
of which: related to post-employment medical and life insurance plans3
of which: UK plan
of which: US plans
of which: related to remaining plans and other expenses4
Expenses for defined contribution plans5
of which: UK plans
of which: US plan
of which: remaining plans
Total pension and other post-employment benefit plan expenses6
31.12.16
31.12.15
31.12.14
435
412
381
(2)
33
4
1
3
19
236
77
106
53
670
569
546
515
18
12
4
1
2
19
239
86
100
53
808
467
508
458
17
33
(36)
2
(37)
(5)
244
91
91
62
711
1 Refer to Note 26a for more information. 2 The reduction in net periodic pension expenses for the Swiss pension plan between 2016 and 2015 related primarily to changes in demographic and financial
assumptions. 3 Refer to Note 26b for more information. The US post-employment life insurance policy was terminated in 2014. Only the amounts disclosed for 2014 include expenses with regard to life insurance
benefits. 4 Other expenses include differences between actual and estimated performance award accruals and net accrued pension expenses related to restructuring. 5 Refer to Note 26c for more information. 6 Refer
to Note 6.
The table below provides information relating to amounts recognized in Other comprehensive income for defined benefit plans.
Other comprehensive income – gains / (losses) on defined benefit plans
CHF million
Major pension plans1
of which: Swiss plan
of which: UK plan
of which: US and German plans
Post-employment medical and life insurance plans2
of which: UK plan
of which: US plans
Remaining plans
Gains / (losses) recognized in other comprehensive income, before tax
Tax (expense) / benefit relating to defined benefit plans recognized in other comprehensive income
Gains / (losses) recognized in other comprehensive income, net of tax3
of which: attributable to shareholders
of which: attributable to non-controlling interests
31.12.16
31.12.15
31.12.14
(837)
(105)
(610)
(122)
(13)
(6)
(7)
(26)
(876)
52
(824)
(824)
0
339
58
317
(35)
(3)
6
(9)
(14)
322
(19)
303
298
5
(1,456)
(1,032)
(168)
(256)
(5)
(3)
(2)
7
(1,454)
247
(1,208)
(1,172)
(36)
1 Refer to Note 26a for more information. 2 Refer to Note 26b for more information. The US post-employment life insurance policy was terminated in 2014. Amounts with regard to life insurance benefits are included
only in the year ended on 31 December 2014. 3 Refer to the “Statement of comprehensive income”.
417
Financial statements Note 26 Pension and other post-employment benefit plans (continued)
UBS recognizes assets and liabilities with respect to defined ben-
efit plans within Other assets and Other liabilities.
As of 31 December 2016 and 31 December 2015, the Swiss
pension plan was in a surplus situation. However, a surplus is only
recognized on the balance sheet to the extent that it does not
exceed the estimated future economic benefit. Since the esti-
mated future economic benefit was zero as of 31 December 2016
and 31 December 2015, no net defined benefit pension asset was
recognized on the balance sheet.
The tables below provide information on UBS’s assets and liabilities with respect to defined benefit plans.
Balance sheet – net defined benefit pension and post-employment asset
CHF million
Major pension plans1
of which: Swiss plan
of which: UK plan
Total net defined benefit pension and post-employment asset2
1 Refer to Note 26a for more information. 2 Refer to Note 16.
Balance sheet – net defined benefit pension and post-employment liability
CHF million
Major pension plans1
of which: Swiss plan
of which: UK plan
of which: US and German plans2
Post-employment medical insurance plans3
of which: UK plan
of which: US plans
Remaining plans
Total net defined benefit pension and post-employment liability4
31.12.16
31.12.15
0
0
0
0
31.12.16
1,140
0
529
611
91
26
65
35
1,266
50
0
50
50
31.12.15
622
0
0
622
84
25
59
30
736
1 Refer to Note 26a for more information. 2 Of the total liability as of 31 December 2016, CHF 265 million related to US plans and CHF 346 million related to German plans (31 December 2015: CHF 315 million related
to US plans and CHF 307 million related to German plans). 3 Refer to Note 26b for more information. 4 Refer to Note 21.
418
Consolidated financial statements Note 26 Pension and other post-employment benefit plans (continued)
a) Defined benefit pension plans
UBS has established defined benefit pension plans for its employ-
ees in various jurisdictions, with the major plans located in Swit-
zerland, the UK, the US and Germany.
The overall investment policy and strategy for UBS’s defined
benefit pension plans is guided by the objective of achieving an
investment return which, together with contributions, ensures
that there will be sufficient assets to pay pension benefits as they
fall due while also mitigating various risks. For the plans with
assets (i.e., funded plans), the investment strategies are managed
under local laws and regulations in each jurisdiction. The asset
allocation is determined by the governance body with reference
to the prevailing current and expected economic and market con-
ditions and in consideration of specific asset class risk in the risk
profile. Within this framework, UBS ensures that the fiduciaries
consider how the asset investment strategy correlates with the
maturity profile of the plan liabilities and the respective potential
effect on the funded status of the plans, including potential short-
term liquidity requirements.
The defined benefit obligations (DBOs) for all of UBS’s defined
benefit pension plans are directly affected by changes in yields of
high-quality corporate bonds quoted in an active market in the
currency of the respective pension plan, as the applicable discount
rate used to determine the DBO is based on these yields. For the
funded plans, the pension assets are invested in a diversified port-
folio of financial assets, including real estate, bonds, investment
funds and cash across geographic regions to ensure a balance of
risk and return. Under IAS 19, volatility arises in each pension
plan’s net asset / liability position because the fair value of the
plan’s financial assets is not fully correlated to movements in the
value of the plan’s DBO. Specific asset-liability matching strategies
for each pension plan are independently determined by the
responsible governance body. The net asset / liability volatility for
each plan is dependent on the specific financial assets chosen by
each plan’s governance body. For certain pension plans, a liability-
driven investment approach is applied to a portion of the plan
assets to reduce potential volatility.
Swiss pension plan
The Swiss pension plan covers employees of UBS AG and
employees of companies having close economic or financial ties
with UBS and exceeds the minimum benefit requirements under
Swiss pension law.
Contributions to the pension plan are paid by both the
employer and the employees. The Swiss pension plan allows
employees to choose the level of contributions paid by them.
Employee contributions are calculated as a percentage of the con-
tributory salary and are deducted monthly. The percentages
deducted from salary depend on age and choice of contribution
category and vary between 1% and 13.5% of contributory base
salary and between 0% and 9% of contributory variable compen-
sation. Depending on the age of the employee, UBS pays a con-
tribution that ranges between 6.5% and 27.5% of contributory
base salary and between 3.6% and 9% of contributory variable
compensation. UBS also pays risk contributions which are used to
finance benefits paid out in the event of death and disability, as
well as to finance bridging pensions.
The plan benefits include retirement benefits and disability,
death and survivor pensions. The pension plan offers to members
at the normal retirement age of 64 a choice between a lifetime
pension with or without full restitution and a partial or full lump
sum payment. Members can draw early retirement benefits start-
ing from the age of 58. Since 2015, employees have the possibil-
ity to make additional purchases of benefits to fund early retire-
ment benefits (Plan 58+).
The pension amount payable is a result of the conversion rate
applied on the accumulated balance of the individual plan par-
ticipant’s pension account at the retirement date. The accumu-
lated balance of each individual plan participant’s pension account
is based on credited vested benefits transferred from previous
employers, purchases of benefits and the employee and employer
contributions that have been made to the pension account of
each individual plan participant, as well as the interest accrued on
the accumulated balance. The interest rate accrued is defined
annually by the Pension Foundation Board.
Although the Swiss pension plan is based on a defined contri-
bution promise under Swiss pension law, it is accounted for as a
defined benefit plan under IAS 19, primarily because of the obli-
gation to accrue interest on the pension accounts and the pay-
ment of lifetime pension benefits.
419
Financial statements Note 26 Pension and other post-employment benefit plans (continued)
The Swiss pension plan is governed by a Pension Foundation
Board as required by Swiss pension law. The responsibilities of this
board are defined by Swiss pension law and by the plan rules. An
actuarial valuation under Swiss pension law is performed regu-
larly. According to Swiss pension law, a temporary limited under-
funding is permitted. However, should an underfunded situation
occur, the Pension Foundation Board is required to take the neces-
sary measures to ensure that full funding can be expected to be
restored within a maximum period of 10 years. If a Swiss pension
plan were to become significantly underfunded on a Swiss pen-
sion law basis, additional employer and employee contributions
could be required. In these situations, the risk is shared between
employer and employees, and the employer is not legally obliged
to cover more than 50% of the additional contributions required.
As of 31 December 2016, the Swiss pension plan had a technical
funding ratio under Swiss pension law of 125.4% (31 December
2015: 123.3%).
The investment strategy of the Swiss plan is implemented on
the basis of a multi-level investment and risk management pro-
cess and is in line with Swiss pension law, including the rules and
regulations relating to diversification of plan assets. These rules,
among others, specify restrictions to the composition of plan
assets, e.g., there is a limit of 50% for investments in equities. The
investment strategy of the Swiss plan is aligned with the defined
risk budget set out by the Pension Foundation Board. The risk
budget is determined on the basis of regularly performed asset
and liability management analyses. In order to implement the risk
budget, the Swiss plan may use direct investments, investment
funds and derivatives. To mitigate foreign currency risk, a specific
currency hedging strategy is in place. The Pension Foundation
Board strives for a medium- and long-term balance between
assets and liabilities.
As of 31 December 2016, the Swiss pension plan was in a
surplus situation on an International Financial Reporting Stan-
dards (IFRS) measurement basis, as the fair value of plan assets
exceeded the DBO by CHF 1,749 million (31 December 2015: sur-
plus of CHF 1,283 million). However, a surplus is only recognized
on the balance sheet to the extent that it does not exceed the
estimated future economic benefit, which equals the difference
between the present value of the estimated future net service cost
and the present value of the estimated future employer contribu-
tions. The maximum future economic benefit is highly variable
based on changes in the discount rate. Both as of 31 December
2016 and 31 December 2015, the estimated future economic
benefit was zero and hence no net defined benefit asset was rec-
ognized on the balance sheet. As of 31 December 2016, the dif-
ference between the pension plan surplus and the estimated
future economic benefit, i.e., the asset ceiling effect, was CHF
1,749 million (31 December 2015: CHF 1,283 million). CHF 452
million out of the total movement of CHF 466 million was recog-
nized in Other comprehensive income and CHF 14 million related
to interest expense on the asset ceiling effect was recognized in
the income statement. As of 31 December 2015, the total asset
ceiling effect of CHF 1,283 million was recognized in Other com-
prehensive income. The employer contributions expected to be
made to the Swiss pension plan in 2017 are estimated to be CHF
478 million.
Non-Swiss pension plans
UBS locations outside of Switzerland offer various defined benefit
pension plans in accordance with local regulations and practices.
The non-Swiss locations with major defined benefit pension plans
are the UK, the US and Germany. Defined benefit pension plans in
other locations are not material to the financial results of UBS and
hence not separately disclosed.
The non-Swiss plans provide benefits in the event of retire-
ment, death or disability. The level of benefits provided depends
on the specific rate of benefit accrual and the level of employee
compensation. UBS’s general principle is to ensure that the plans
are adequately funded on the basis of actuarial valuations. Local
pension regulations and tax requirements are the primary drivers
for determining when contributions are required.
UK pension plan
The UK plan is a career-average revalued earnings scheme, and
benefits increase automatically based on UK price inflation. Nor-
mal retirement age for participants in the UK plan is 60. The UK
defined benefit pension plan participants are no longer accruing
benefits for current or future service. Active employees instead
participate in the UK defined contribution plan.
The governance responsibility for the UK plan lies jointly with
the Pension Trustee Board, which is required under local pension
laws, and UBS. The employer contributions to the pension fund
reflect agreed-upon deficit-funding contributions, which are
determined on the basis of the most recent actuarial valuation
using assumptions agreed by the Pension Trustee Board and UBS.
In the event of underfunding, UBS and the Pension Trustee Board
must agree on a deficit recovery plan within statutory deadlines.
In 2016, UBS did not make any deficit-funding contributions
(2015: CHF 316 million).
The plan assets are invested in a diversified portfolio of finan-
cial assets. A liability-driven investment approach is applied, as a
portion of the plan assets is invested in inflation-indexed bonds
which provide a partial hedge against price inflation. If price infla-
tion increases, the DBO will likely increase more significantly than
the change in the fair value of plan assets, which would result in
an increase in the net defined benefit liability. Plan rules and local
pension legislation cap the level of inflationary increase that can
be applied to plan benefits.
As the plan is obligated to provide guaranteed lifetime pension
benefits to plan participants upon retirement, increases in life
expectancy will result in an increase in the plan’s liabilities. The
sensitivity to changes in life expectancy is particularly high in the
UK plan as the pension benefits are indexed to price inflation.
420
Consolidated financial statements Note 26 Pension and other post-employment benefit plans (continued)
As of 31 December 2016, the UK plan was in a deficit situation
on an IFRS measurement basis as the DBO exceeded the fair value
of plan assets by CHF 529 million (31 December 2015: surplus of
CHF 50 million).
No employer contributions are currently scheduled to be made
to the UK defined benefit pension plan in 2017.
US pension plans
There are two distinct major defined benefit pension plans in the
US. Normal retirement age for participants in both US plans is 65.
The plans are closed to new entrants, who instead can participate
in defined contribution plans.
One of the major defined benefit pension plans is a contribu-
tion-based plan in which each participant accrues a percentage of
salary in a pension account. The pension account is credited annu-
ally with interest based on a rate that is linked to the average yield
on one-year US government bonds. For the other major defined
benefit pension plan, retirement benefits accrue based on the
career-average earnings of each individual plan participant. Upon
retirement, the plans allow participants a choice between a lump
sum payment and a lifetime pension.
As required under local state pension laws, both plans have
fiduciaries who, together with UBS, are responsible for the gover-
nance of the plans. UBS regularly reviews the contribution strat-
egy for these plans. In determining the contribution strategy, UBS
considers the minimum funding requirements (i.e., 80% funded
ratio on a basis determined under local pension regulations) and
the cost of any premiums that must be paid to the Pension Ben-
efit Guaranty Corporation for having an underfunded plan. In
2016, the contributions made by UBS were CHF 172 million
(2015: CHF 50 million).
The plan assets for both plans are invested in a diversified port-
folio of financial assets. Each pension plan’s fiduciaries are respon-
sible for the investment decisions with respect to the plan assets.
A liability-driven investment approach is applied for one of the US
plans to support the volatility management in the net asset / liabil-
ity position. Derivative instruments may also be employed to man-
age volatility.
In 2015, the US pension plan rules were amended to the effect
that former UBS employees with vested benefits in the US defined
benefit pension plans have the option to receive a lump sum pay-
ment (or early annuity payments) instead of a lifetime pension
commencing at retirement age. This resulted in a reduction in the
DBO of CHF 24 million and a corresponding gain recognized in
the income statement in 2015, of which CHF 21 million was
recorded in Wealth Management Americas.
The employer contributions expected to be made to the US
defined benefit pension plans in 2017 are estimated to be CHF 20
million.
German pension plans
There are two different defined benefit pension plans in Germany,
and both are contribution-based plans. No plan assets are set
aside to fund these plans, and benefits are directly paid by UBS.
Normal retirement age for the participants in the German plans is
65. Within the larger of the two pension plans, each participant
accrues a percentage of salary in a pension account. The accumu-
lated account balance of the plan participant is credited on an
annual basis with guaranteed interest at a rate of 5%. In the other
plan, amounts are accrued annually based on employee elections.
For this plan, the accumulated account balance is credited on an
annual basis with a guaranteed interest rate of 4% for amounts
accrued after 2009. Both German plans are regulated under Ger-
man pension law, under which the responsibility to pay pension
benefits when they are due rests entirely with UBS. For the Ger-
man plans, a portion of the pension payments is directly increased
in line with price inflation.
The benefits expected to be paid by UBS to the participants of
the German plans in 2017 are estimated to be CHF 9 million.
Financial information by plan
The table on the following pages provides an analysis of the
movement in the net asset / liability recognized on the balance
sheet for defined benefit pension plans, as well as an analysis of
amounts recognized in net profit and in Other comprehensive
income.
421
Financial statements Note 26 Pension and other post-employment benefit plans (continued)
Defined benefit pension plans
CHF million
For the year ended
Defined benefit obligation at the beginning of the year
Current service cost
Interest expense
Plan participant contributions
Remeasurements
of which: actuarial (gains) / losses due to changes in demographic assumptions
of which: actuarial (gains) / losses due to changes in financial assumptions
of which: experience (gains) / losses1
Past service cost related to plan amendments
Curtailments
Benefit payments
Termination benefits
Other movements
Foreign currency translation
Defined benefit obligation at the end of the year
of which: amounts owing to active members
of which: amounts owing to deferred members
of which: amounts owing to retirees
Fair value of plan assets at the beginning of the year
Return on plan assets excluding amounts included in interest income
Interest income
Employer contributions – excluding termination benefits
Employer contributions – termination benefits
Plan participant contributions
Benefit payments
Administration expenses, taxes and premiums paid
Foreign currency translation
Fair value of plan assets at the end of the year
Asset ceiling effect at the beginning of the year
Interest expense on asset ceiling effect
Asset ceiling effect excluding interest expense on asset ceiling effect
Asset ceiling effect at the end of the year
Net defined benefit asset / (liability)
Movement in the net asset / (liability) recognized on the balance sheet
Net asset / (liability) recognized on the balance sheet at the beginning of
the year
Net periodic expenses
Amounts recognized in other comprehensive income
Employer contributions – excluding termination benefits
Employer contributions – termination benefits
Other movements
Foreign currency translation
Net asset / (liability) recognized on the balance sheet at the end of the year
Funded and unfunded plans
Defined benefit obligation from funded plans
Defined benefit obligation from unfunded plans
Plan assets
Surplus / (deficit)
Asset ceiling effect
Net defined benefit asset / (liability)
Swiss plan
UK plan
US and German plans
Total
31.12.16 31.12.15
23,956
589
270
205
(1,231)
(1,038)
(237)
44
0
(81)
(1,071)
1
0
0
22,636
10,359
0
12,278
23,931
109
273
482
1
205
(1,071)
(10)
0
23,919
0
0
1,283
1,283
0
22,636
471
240
210
477
(659)
698
438
0
(96)
(1,074)
0
0
0
22,865
10,419
0
12,446
23,919
824
258
486
0
210
(1,074)
(10)
0
24,614
1,283
14
452
1,749
0
31.12.16 31.12.15
3,949
0
137
0
(441)
(122)
(201)
(119)
0
0
(128)
0
0
(166)
3,350
255
1,864
1,230
3,381
(124)
118
316
0
0
(128)
0
(163)
3,400
0
0
0
0
50
3,350
0
116
0
922
(63)
1,022
(37)
0
0
(135)
0
0
(549)
3,704
290
2,210
1,204
3,400
312
118
0
0
0
(135)
0
(520)
3,175
0
0
0
0
(529)
31.12.16 31.12.15
1,693
10
57
0
(8)
34
(71)
28
(24)
0
(83)
0
0
(26)
1,619
267
523
829
1,029
(44)
39
57
0
0
(83)
(8)
7
997
0
0
0
0
(622)
1,619
9
62
0
125
3
107
15
0
0
(98)
0
19
20
1,755
258
584
913
997
2
44
179
0
0
(98)
(6)
26
1,144
0
0
0
0
(611)
31.12.16 31.12.15
29,598
599
463
205
(1,681)
(1,125)
(509)
(47)
(24)
(81)
(1,283)
1
0
(192)
27,605
10,881
2,388
14,336
28,341
(59)
430
855
1
205
(1,283)
(18)
(156)
28,316
0
0
1,283
1,283
(572)
27,605
480
419
210
1,524
(719)
1,827
416
0
(96)
(1,307)
0
19
(529)
28,325
10,967
2,794
14,563
28,316
1,139
420
665
0
210
(1,307)
(16)
(494)
28,934
1,283
14
452
1,749
(1,140)
0
(381)
(105)
486
0
0
0
0
(25)
(515)
58
482
1
0
0
0
50
2
(610)
0
0
0
29
(529)
(568)
(18)
317
316
0
0
3
50
(622)
(33)
(122)
179
0
(19)
6
(664)
(12)
(35)
57
0
0
33
(572)
(412)
(837)
665
0
(19)
35
(1,256)
(546)
339
855
1
0
36
(611)
(622)
(1,140)
(572)
22,865
22,636
3,704
3,350
0
0
0
0
24,614
23,919
3,175
3,400
1,749
1,749
0
1,283
1,283
0
(529)
0
(529)
50
0
50
1,316
440
1,144
(611)
0
1,288
27,885
27,274
331
997
(622)
0
440
331
28,934
28,316
609
1,749
711
1,283
(611)
(622)
(1,140)
(572)
1 Experience (gains) / losses are a component of actuarial remeasurements of the defined benefit obligation that reflect the effects of differences between the previous actuarial assumptions and what has actually occurred.
422
Consolidated financial statements Note 26 Pension and other post-employment benefit plans (continued)
Analysis of amounts recognized in net profit
CHF million
For the year ended
Current service cost
Interest expense related to defined benefit obligation
Interest income related to plan assets
Interest expense on asset ceiling effect
Administration expenses, taxes and premiums paid
Plan amendments
Curtailments
Termination benefits
Net periodic expenses
Swiss plan
UK plan
US and German plans
Total
31.12.16 31.12.15
31.12.16 31.12.15
31.12.16 31.12.15
31.12.16 31.12.15
471
240
589
270
(258)
(273)
0
116
(118)
0
137
(118)
9
62
(44)
0
6
0
0
0
10
57
(39)
0
8
(24)
0
0
12
480
419
(420)
14
16
0
(96)
0
412
599
463
(430)
0
18
(24)
(81)
1
546
0
0
0
0
0
0
0
0
0
0
(2)
18
33
14
10
0
(96)
0
381
0
10
0
(81)
1
515
Analysis of amounts recognized in other comprehensive income (OCI)
CHF million
For the year ended
Remeasurement of defined benefit obligation
Return on plan assets excluding amounts included in interest income
Asset ceiling effect excluding interest expense on asset ceiling effect
Total gains / (losses) recognized in other comprehensive income, before tax
of which: attributable to shareholders
of which: attributable to non-controlling interests
Swiss plan
UK plan
US and German plans
Total
31.12.16 31.12.15
31.12.16 31.12.15
31.12.16 31.12.15
31.12.16 31.12.15
(477)
1,231
824
(452)
(105)
(105)
0
109
(1,283)
58
53
5
(922)
312
0
(610)
(610)
0
441
(124)
0
317
315
2
(125)
2
0
(122)
(122)
0
8
(44)
0
(35)
(35)
0
(1,524)
1,681
1,139
(452)
(837)
(837)
0
(59)
(1,283)
339
333
7
The table below provides information on the duration of the DBO and the timing for expected benefit payments.
Duration of the defined benefit obligation (in years)
Maturity analysis of benefits expected to be paid
CHF million
Benefits expected to be paid within 12 months
Benefits expected to be paid between 1 and 3 years
Benefits expected to be paid between 3 and 6 years
Benefits expected to be paid between 6 and 11 years
Benefits expected to be paid between 11 and 16 years
Benefits expected to be paid in more than 16 years
1 The duration of the defined benefit obligation represents a weighted average across US and German plans.
Swiss plan
UK plan
31.12.16
31.12.15
31.12.16
31.12.15
US and German plans1
31.12.15
31.12.16
15.1
15.1
22.6
19.7
10.6
11.3
1,140
2,204
3,394
5,439
5,041
1,146
2,218
3,403
5,526
5,173
72
164
315
710
856
80
177
338
785
981
17,162
18,892
6,064
7,348
103
213
328
562
514
958
92
185
291
509
510
1,172
423
Financial statements Note 26 Pension and other post-employment benefit plans (continued)
Actuarial assumptions
The measurement of each pension plan’s DBO considers different
actuarial assumptions. Changes in those assumptions lead to vol-
atility in the DBO. The following principal actuarial assumptions
are applied:
– Discount rate: the discount rate is based on the yield of high-
quality corporate bonds quoted in an active market in the cur-
rency of the respective pension plan. Consequently, a decrease
in the yield of high-quality corporate bonds increases the DBO.
Conversely, an increase in the yield of high-quality corporate
bonds decreases the DBO.
– Rate of salary increase: an increase in the salary of plan partici-
pants generally increases the DBO, specifically for the Swiss
and German plans. For the UK plan as the plan is closed for
future service, UBS employees no longer accrue future service
benefits and thus salary increases have no effect on the DBO.
For the US plans, only a small percentage of the total popula-
tion continues to accrue benefits for future service, therefore
the effect of a salary increase on the DBO is minimal.
– Rate of pension increase: for the Swiss plan, there is no auto-
matic indexing of pensions. Any increase would be decided by
the Pension Foundation Board. For the US plans, there is also
no automatic indexing of pensions. For the UK plan, pensions
are automatically indexed to price inflation as per plan rules
and local pension legislation. The German plans are also auto-
matically indexed and a portion of the pensions are directly
increased by price inflation. An increase in price inflation in the
UK and Germany increases the respective plan’s DBO.
– Rate of interest credit on retirement savings: the Swiss plan
and one of the US plans have retirement saving balances that
are increased annually by an interest credit rate. For these
plans, an increase in the interest credit rate increases the
respective plan’s DBO.
– Life expectancy: for most of UBS’s defined benefit pension
plans, the respective plan is obligated to provide guaranteed
lifetime pension benefits. The DBO for all plans is calculated
using an underlying best estimate of the life expectancy of plan
participants. An increase in the life expectancy of plan partici-
pants increases the plan’s DBO.
The actuarial assumptions used for the pension plans are based
on the economic conditions prevailing in the jurisdiction in which
they operate.
➔ Refer to Note 1a item 7 for a description of the accounting policy
for defined benefit pension plans
Changes in actuarial assumptions
UBS regularly reviews the actuarial assumptions used in calculat-
ing its DBO to determine their continuing relevance.
Swiss pension plan
In 2016, UBS continued to enhance its methodology for estimat-
ing the discount rate by improving the construction of the yield
curve from Swiss high-quality corporate bonds. Furthermore, UBS
refined its approach for estimating the life expectancy, the rate of
employee disability and the rate of salary increases. These changes
in estimates decreased the DBO of the Swiss pension plan by CHF
319 million, of which changes in demographic assumptions
decreased the DBO by CHF 659 million and changes in financial
assumptions increased the DBO by CHF 339 million. However, the
effect from these changes in estimates was more than offset by
experience losses and market-driven changes in the discount rate,
resulting in a total upward remeasurement of the Swiss plan DBO
of CHF 477 million, which was recognized in Other comprehen-
sive income.
In 2015, the effect from an enhancement in methodology for
estimating the discount rate and from the refinement of the
approach to estimate the rate of salary increases, the rate of inter-
est credit on retirement savings, the employee turnover rate, the
rate of employee disabilities and the rate of marriage was a net
decrease in the DBO of the Swiss pension plan of CHF 2,055 mil-
lion, of which CHF 1,038 million related to demographic assump-
tions and CHF 1,017 million related to financial assumptions. The
effect from these changes in estimates was partly offset by mar-
ket-driven discount rate changes, resulting in an overall down-
ward remeasurement of the Swiss plan DBO of CHF 1,231 million,
which was recognized in Other comprehensive income.
Non-Swiss pension plans
In both 2016 and 2015, UBS also enhanced methodologies and
refined approaches used to estimate various actuarial assump-
tions for its non-Swiss pension plans.
In 2016, these changes in estimates resulted in a total net
decrease in the DBO of the UK pension plan of CHF 63 million, all
related to demographic assumptions. However, the effect from
these changes in estimates was more than offset mainly by mar-
ket-driven discount rate changes, resulting in a total upward
remeasurement of the UK plan DBO of CHF 922 million, which
was recognized in Other comprehensive income.
In 2015, the changes in estimates resulted in a total net
decrease in the DBO of the UK pension plan of CHF 192 million,
of which CHF 122 million related to demographic assumptions
and CHF 71 million related to financial assumptions. In addition,
mainly market-driven discount rate changes reduced the DBO fur-
ther, resulting in an overall downward remeasurement of the UK
plan DBO of CHF 441 million, which was recognized in Other
comprehensive income.
424
Consolidated financial statements Note 26 Pension and other post-employment benefit plans (continued)
The tables below show the principal actuarial assumptions used in calculating the DBO at the end of the year.
Principal actuarial assumptions used
In %
Discount rate
Rate of salary increase
Rate of pension increase
Rate of interest credit on retirement savings
1 Represents weighted average assumptions across US and German plans.
Mortality tables and life expectancies for major plans
Country
Switzerland
UK
US
Germany
Country
Switzerland
UK
US
Germany
Mortality table
BVG 2015 G CMI_20161
S2PA CMI_2015, with projections
RP2014 WCHA, with MP2016 projection scale2
Dr. K. Heubeck 2005 G
Mortality table
BVG 2015 G CMI_20161
S2PA CMI_2015, with projections
RP2014 WCHA, with MP2016 projection scale2
Dr. K. Heubeck 2005 G
Swiss plan
UK plan
31.12.16
31.12.15
31.12.16
31.12.15
US and German plans1
31.12.15
31.12.16
0.73
1.30
0.00
0.73
1.09
1.75
0.00
1.09
2.69
0.00
3.18
0.00
3.90
0.00
3.02
0.00
3.58
2.86
1.50
1.74
4.01
2.89
1.50
1.48
Life expectancy at age 65 for a male member currently
aged 65
aged 45
31.12.16
31.12.15
31.12.16
31.12.15
21.5
23.7
22.9
20.1
21.5
23.9
23.0
20.0
22.9
25.0
24.4
22.8
23.2
25.6
24.5
22.6
Life expectancy at age 65 for a female member currently
aged 65
aged 45
31.12.16
31.12.15
31.12.16
31.12.15
23.4
25.6
24.5
24.2
24.0
25.8
24.6
24.1
24.9
27.4
26.1
26.7
25.7
28.0
26.2
26.6
1 In 2015, the mortality table BVG 2010 G was used. 2 In 2015, the mortality table RP2014 WCHA, with MP2015 projection scale was used.
Sensitivity analysis of significant actuarial assumptions
The table below presents a sensitivity analysis for each signifi-
cant actuarial assumption, showing how the DBO would have
been affected by changes in the relevant actuarial assumption
that were reasonably possible at the balance sheet date. Unfore-
seen circumstances may arise, which could result in variations
that are outside the range of alternatives deemed reasonably
possible. Caution should be used in extrapolating the sensitivi-
ties below to the overall impact on the DBO as the sensitivities
may not be linear.
Sensitivity analysis of significant actuarial assumptions1
Increase / (decrease) in defined benefit obligation
CHF million
Discount rate
Increase by 50 basis points
Decrease by 50 basis points
Rate of salary increase
Increase by 50 basis points
Decrease by 50 basis points
Rate of pension increase
Increase by 50 basis points
Decrease by 50 basis points
Rate of interest credit on retirement savings
Increase by 50 basis points
Decrease by 50 basis points
Life expectancy
Increase in longevity by one additional year
Swiss plan
UK plan
US and German plans
31.12.16
31.12.15
31.12.16
31.12.15
31.12.16
31.12.15
(1,435)
1,630
86
(79)
1,178
–3
264
(250)
796
(1,416)
1,609
82
(86)
1,163
–3
263
(249)
719
(388)
452
–2
–2
435
(377)
–4
–4
136
(308)
354
–2
–2
343
(300)
–4
–4
97
(86)
94
1
(1)
6
(6)
9
(8)
44
(84)
92
1
(1)
6
(5)
8
(8)
42
1 The sensitivity analyses are based on a change in one assumption while holding all other assumptions constant, so that interdependencies between the assumptions are excluded. 2 As the plan is closed for future
service, a change in assumption is not applicable. 3 As the assumed rate of pension increase was 0% as of 31 December 2016 and as of 31 December 2015, a downward change in assumption is not applicable. 4 As
the plan does not provide interest credits on retirement savings, a change in assumption is not applicable.
425
Financial statements Note 26 Pension and other post-employment benefit plans (continued)
Fair value of plan assets
The table below provides information on the composition and fair value of plan assets of the Swiss, the UK and the US pension plans.
Composition and fair value of plan assets
Swiss plan
CHF million
Cash and cash equivalents
Real estate / property
Domestic
Investment funds
Equity
Domestic
Foreign
Bonds1
Domestic, AAA to BBB–
Foreign, AAA to BBB–
Foreign, below BBB–
Real estate
Foreign
Other
Other investments
Total
31.12.16
31.12.15
Fair value
Plan asset
allocation %
Fair value
Plan asset
allocation %
Quoted
in an active
market
869
Other
0
Total
869
0
2,689
2,689
938
6,558
2,222
5,877
1,176
0
283
0
0
1,170
0
0
0
42
2,776
15
938
7,728
2,222
5,877
1,176
42
3,059
15
Quoted
in an active
market
517
Other
0
Total
517
0
2,647
2,647
699
6,948
2,112
6,109
1,056
0
1,085
0
0
0
0
63
1,064
1,605
0
15
699
8,033
2,112
6,109
1,056
63
2,669
15
4
11
4
31
9
24
5
0
12
0
2
11
3
34
9
26
4
0
11
0
17,923
6,691
24,614
100
18,505
5,414
23,919
100
Total fair value of plan assets
of which:2
Bank accounts at UBS
UBS debt instruments
UBS shares
Securities lent to UBS3
Property occupied by UBS
Derivative financial instruments, counterparty UBS3
31.12.16
24,614
432
5
47
1,855
83
(220)
31.12.15
23,919
517
5
38
962
82
(170)
1 The bond credit ratings are primarily based on Standard & Poor’s credit ratings. Ratings AAA to BBB– and below BBB– represent investment grade and non-investment grade ratings, respectively. In cases where credit
ratings from other rating agencies were used, these were converted to the equivalent rating in the Standard & Poor’s rating classification. 2 Bank accounts at UBS encompass accounts in the name of the Swiss pension
fund. The other positions disclosed in the table encompass both direct investments in UBS instruments and indirect investments, i.e., those made through funds that the pension fund invests in. 3 Securities lent to UBS
and derivative financial instruments are presented gross of any collateral. Securities lent to UBS were fully covered by collateral as of 31 December 2016 and 31 December 2015. Net of collateral, derivative financial
instruments amounted to CHF 76 million as of 31 December 2016 (31 December 2015: negative CHF 90 million).
426
Consolidated financial statements Note 26 Pension and other post-employment benefit plans (continued)
Composition and fair value of plan assets (continued)
UK plan
CHF million
Cash and cash equivalents
Bonds1
Domestic, AAA to BBB–
Domestic, below BBB–
Investment funds
Equity
Domestic
Foreign
Bonds1
Domestic, AAA to BBB–
Domestic, below BBB–
Foreign, AAA to BBB–
Foreign, below BBB–
Real estate
Domestic
Other
Other investments
Total fair value of plan assets
31.12.16
31.12.15
Fair value
Quoted
in an active
market
Other
133
1,131
1
39
984
500
23
245
39
39
(35)
(144)
2,955
0
0
0
0
0
28
0
0
0
72
111
10
221
Plan asset
allocation %
4
36
0
1
31
17
1
8
1
4
2
Total
133
1,131
1
39
984
528
23
245
39
111
76
(134)
3,175
(4)
100
Quoted
in an active
market
426
0
0
98
1,080
1,305
53
189
31
46
(32)
6
3,202
Fair value
Other
0
0
0
0
0
0
0
0
0
68
123
7
198
Plan asset
allocation %
13
0
0
3
32
38
2
6
1
3
3
0
Total
426
0
0
98
1,080
1,305
53
189
31
115
91
13
3,400
100
1 The bond credit ratings are primarily based on Standard & Poor’s credit ratings. Ratings AAA to BBB– and below BBB– represent investment grade and non-investment grade ratings, respectively. In cases where credit
ratings from other rating agencies were used, these were converted to the equivalent rating in the Standard & Poor’s rating classification.
427
Financial statements Note 26 Pension and other post-employment benefit plans (continued)
Composition and fair value of plan assets (continued)
US plans
31.12.16
31.12.15
Fair value
Quoted
in an active
market
Other
Weighted
average
plan asset
allocation %
Fair value
Quoted
in an active
market
Other
Weighted
average
plan asset
allocation %
5
6
6
2
1
24
24
13
1
3
0
1
10
2
1
0
Total
52
56
60
17
6
240
240
134
13
31
3
12
98
17
14
5
997
100
7
14
1
4
0
23
22
19
2
4
0
1
2
2
1
0
52
56
60
17
6
240
240
134
13
31
3
0
56
0
14
5
0
0
0
0
0
0
0
0
0
0
0
12
42
17
0
0
70
75
158
13
42
1
264
248
218
18
42
5
0
19
0
8
3
Total
75
158
13
42
1
264
248
218
18
42
5
11
19
18
8
3
0
0
0
0
0
0
0
0
0
0
0
11
0
18
0
0
29
CHF million
Cash and cash equivalents
Bonds1
Domestic, AAA to BBB–
Domestic, below BBB–
Foreign, AAA to BBB–
Foreign, below BBB–
Investment funds
Equity
Domestic
Foreign
Bonds1
Domestic, AAA to BBB–
Domestic, below BBB–
Foreign, AAA to BBB–
Foreign, below BBB–
Real estate
Domestic
Other
Insurance contracts
Asset-backed securities
Other investments
Total fair value of plan assets
1,115
1,144
100
926
1 The bond credit ratings are primarily based on Standard & Poor’s credit ratings. Ratings AAA to BBB– and below BBB– represent investment grade and non-investment grade ratings, respectively. In cases where credit
ratings from other rating agencies were used, these were converted to the equivalent rating in the Standard & Poor’s rating classification.
428
Consolidated financial statements Note 26 Pension and other post-employment benefit plans (continued)
b) Post-employment medical insurance plans
In the US and the UK, UBS offers post-employment medical ben-
efits that contribute to the health care coverage of certain employ-
ees and their beneficiaries after retirement.
The benefits expected to be paid by UBS to the post-employ-
ment medical insurance plans in 2017 are estimated to be CHF 6
million.
The UK post-employment medical plan is closed to new
entrants. The post-employment medical benefits in the UK and
the US cover all types of medical expenses. These plans are not
prefunded plans, and costs are recognized as incurred. In the US,
the retirees also contribute to the cost of the post-employment
medical benefits.
The table below provides an analysis of the movement in the
net asset / liability recognized on the balance sheet for post-
employment medical plans, as well as an analysis of amounts rec-
ognized in net profit and in Other comprehensive income.
Post-employment medical insurance plans
CHF million
For the year ended
Post-employment benefit obligation at the beginning of the year
Current service cost
Interest expense
Plan participant contributions
Remeasurements
of which: actuarial (gains) / losses due to changes in demographic assumptions
of which: actuarial (gains) / losses due to changes in financial assumptions
of which: experience (gains) / losses1
Benefit payments2
Foreign currency translation
Post-employment benefit obligation at the end of the year
of which: amounts owing to active members
of which: amounts owing to deferred members
of which: amounts owing to retirees
Fair value of plan assets at the end of the year
Net post-employment benefit asset / (liability)
Analysis of amounts recognized in net profit
Current service cost
Interest expense related to post-employment benefit obligation
Net periodic expenses
Analysis of amounts recognized in other comprehensive income (OCI)
Remeasurement of post-employment benefit obligation
Total gains / (losses) recognized in other comprehensive income, before tax
of which: attributable to shareholders
of which: attributable to non-controlling interests
UK plan
US plans
Total
31.12.16
31.12.15
31.12.16
31.12.15
31.12.16
31.12.15
25
0
1
0
6
1
5
0
(1)
(4)
26
6
0
21
0
32
0
1
0
(6)
2
(1)
(7)
(1)
(2)
25
5
0
20
0
59
0
3
2
7
(1)
1
6
(7)
1
65
0
0
65
0
53
0
2
2
9
2
(2)
9
(8)
1
59
0
0
59
0
84
0
3
2
13
0
6
6
(8)
(3)
91
6
0
86
0
85
0
3
2
3
4
(3)
2
(10)
(1)
84
5
0
79
0
(26)
(25)
(65)
(59)
(91)
(84)
0
1
1
(6)
(6)
(6)
0
0
1
1
6
6
6
0
0
3
3
(7)
(7)
(7)
0
0
2
2
(9)
(9)
(9)
0
0
3
4
(13)
(13)
(13)
0
0
3
4
(3)
(3)
(3)
0
1 Experience (gains) / losses are a component of actuarial remeasurements of the post-employment benefit obligation that reflect the effects of differences between the previous actuarial assumptions and what has
actually occurred. 2 Benefit payments are funded by employer contributions and plan participant contributions.
429
Financial statements Note 26 Pension and other post-employment benefit plans (continued)
Actuarial assumptions
The measurement of each medical insurance plan’s post-employ-
ment benefit obligation considers different actuarial assumptions.
On a country-by-country basis, the same discount rate is used for
the calculation of the post-employment benefit obligation from
medical insurance plans as for the DBO arising from pension
plans. Changes in assumptions lead to volatility in the post-
employment benefit obligation. The following principal actuarial
assumptions are applied:
– Discount rate: similar to defined benefit pension plans, a
decrease in the yield of high-quality corporate bonds increases
the post-employment benefit obligation. Conversely, an
increase in the yield of high-quality corporate bonds decreases
the post-employment benefit obligation.
– Average health care cost trend rate: an increase in health
care costs generally increases the post-employment benefit
obligation.
– Life expectancy: as some plan participants have lifetime bene-
fits under these plans, an increase in life expectancy increases
the post-employment benefit obligation.
Changes in actuarial assumptions
UBS regularly reviews the actuarial assumptions used in calculat-
ing its post-employment benefit obligations to determine their
continuing relevance. In 2016 and in 2015, UBS enhanced meth-
odologies and refined approaches used to estimate several actu-
arial assumptions. These improvements in estimates resulted in a
net increase in the post-employment benefit obligation.
Principal actuarial assumptions used to determine post-
employment benefit obligations at the end of the year were:
Principal actuarial assumptions used1
In %
Discount rate
Average health care cost trend rate – initial
Average health care cost trend rate – ultimate
UK plan
US plans2
31.12.16
31.12.15
31.12.16
31.12.15
2.69
5.10
5.10
3.90
5.10
5.10
3.97
7.03
4.50
4.23
6.75
5.00
1 The assumptions for life expectancies are provided within Note 26a. 2 Represents weighted average assumptions across US plans.
Sensitivity analysis of significant actuarial assumptions
The table below presents a sensitivity analysis for each significant
actuarial assumption showing how the post-employment benefit
obligation would have been affected by changes in the relevant
actuarial assumption that were reasonably possible at the balance
sheet date. Unforeseen circumstances may arise, which could result
in variations that are outside the range of alternatives deemed rea-
sonably possible. Caution should be used in extrapolating the sen-
sitivities below to the overall impact on the post-employment ben-
efit obligation, as the sensitivities may not be linear.
Sensitivity analysis of significant actuarial assumptions1
Increase / (decrease) in post-employment benefit obligation
CHF million
Discount rate
Increase by 50 basis points
Decrease by 50 basis points
Average health care cost trend rate
Increase by 100 basis points
Decrease by 100 basis points
Life expectancy
Increase in longevity by one additional year
UK plan
US plans
31.12.16
31.12.15
31.12.16
31.12.15
(2)
2
4
(3)
2
(1)
2
3
(3)
2
(3)
3
2
(1)
5
(3)
3
1
(1)
5
1 The sensitivity analyses are based on a change in one assumption while holding all other assumptions constant, so that interdependencies between the assumptions are excluded.
c) Defined contribution plans
UBS sponsors a number of defined contribution plans in locations
outside Switzerland. The locations with significant defined contri-
bution plans are the US and the UK. Certain plans allow employ-
ees to make contributions and earn matching or other contribu-
tions from UBS. Employer contributions to defined contribution
plans are recognized as an expense, which, for the years ended
31 December 2016, 2015 and 2014, amounted to CHF 236 mil-
lion, CHF 239 million and CHF 244 million, respectively.
430
Consolidated financial statements Note 26 Pension and other post-employment benefit plans (continued)
d) Related-party disclosure
UBS is the principal provider of banking services for the pension
fund of UBS in Switzerland. In this function, UBS is engaged to
execute most of the pension fund’s banking activities. These
activities can include, but are not limited to, trading, securities
lending and borrowing and derivative transactions. The non-
Swiss UBS pension funds do not have a similar banking relation-
ship with UBS.
The bank leases certain properties that are owned by the
Swiss pension fund. As of 31 December 2016, the minimum
commitment toward the Swiss pension fund under the related
leases is approximately CHF 11 million (31 December 2015: CHF
11 million).
➔ Refer to the “Composition and fair value of plan assets” table in
Note 26a for more information on fair value of investments in
UBS instruments held by the Swiss pension fund
The following amounts have been received or paid by UBS
from and to the pension and other post-employment benefit
plans located in Switzerland, the UK and the US in respect of
these banking activities and arrangements.
Related-party disclosure
CHF million
Received by UBS
Fees
Paid by UBS
Rent
Interest
Dividends and capital repayments
For the year ended
31.12.16
31.12.15
31.12.14
36
4
(1)
15
33
5
(1)
14
33
6
0
4
The transaction volumes in UBS shares and UBS debt instruments and the balances of UBS shares held as of 31 December were:
Transaction volumes – UBS shares and UBS debt instruments
Financial instruments bought by pension funds
UBS shares (in thousands of shares)
UBS debt instruments (par values, CHF million)
Financial instruments sold by pension funds or matured
UBS shares (in thousands of shares)
UBS debt instruments (par values, CHF million)
UBS shares held by pension and other post-employment benefit plans
Number of shares (in thousands of shares)
Fair value (CHF million)
For the year ended
31.12.16
31.12.15
2,427
0
1,618
0
1,544
3
2,255
4
31.12.16
18,363
293
31.12.15
17,737
344
431
Financial statements Note 27 Equity participation and other compensation plans
a) Plans offered
The UBS Group has several equity participation and other com-
pensation plans to align the interests of Group Executive Board
(GEB) members, Key Risk Takers and other employees with the
interests of investors while continuously meeting regulatory
requirements. This Note provides a description of the most sig-
nificant plans offered by the Group which relate to the perfor-
mance year 2016 (awards granted in 2017) and those from prior
years that were partly expensed in 2016.
➔ Refer to Note 1a item 6 for a description of the accounting policy
related to equity participation and other compensation plans
Mandatory share-based compensation plans
Equity Ownership Plan (EOP):
The EOP is a mandatory share-based compensation plan for all
employees with total compensation greater than CHF / USD
300,000. These employees receive a portion of their annual per-
formance-related compensation above the threshold in the form
of notional shares. Furthermore, notional shares granted to GEB
members, Key Risk Takers, Group Managing Directors (GMDs) or
employees whose incentive awards exceed a certain threshold are
subject to performance conditions. These performance conditions
are based on the Group’s return on tangible equity and the divi-
sional return on attributed equity (for Corporate Center employ-
ees, the combined return on attributed equity of all business divi-
sions). Certain awards, such as replacement awards issued outside
the normal performance year cycle, may take the form of deferred
cash under the EOP plan rules.
Notional shares represent a promise to receive UBS shares at
vesting and do not carry voting rights during the vesting period.
Notional shares granted before February 2014 have no rights to
dividends, whereas awards granted since February 2014 carry a
dividend equivalent which may be paid in notional shares or cash
and which vests on the same terms and conditions as the awards.
Awards are settled by delivering UBS shares at vesting, except in
jurisdictions where this is not permitted for legal or tax reasons.
EOP awards generally vest in equal installments after two and
three years following grant (for GEB members, generally after
three, four and five years). The awards are generally forfeitable
upon, among other circumstances, voluntary termination of
employment with UBS.
Senior Executive Equity Ownership Plan (SEEOP):
Up to February 2012, GEB members and selected senior execu-
tives received a portion of their mandatory deferral in UBS shares
or notional shares, which vested in equal installments over a five-
year vesting period and were forfeitable if certain conditions had
not been met. The employee’s business division or the Group as a
whole had to be profitable in the financial year preceding sched-
uled vesting. Awards granted under SEEOP are settled by deliver-
ing UBS shares at vesting. No SEEOP awards have been granted
since 2012.
Role-based allowances (RBAs):
Certain employees of EU regulated entities may receive an RBA in
addition to their base salary. This allowance reflects the market
value of a specific role and is only paid as long as the employee is
within such a role. RBAs are offered in line with market practice
and are generally paid in cash. In the UK, RBAs are partially
awarded in cash and above a threshold in blocked UBS shares.
Such shares will be unblocked in equal installments after two and
three years. The compensation expense is recognized in the year
of grant.
Mandatory deferred cash compensation plans
Deferred Contingent Capital Plan (DCCP):
The DCCP is a mandatory deferred cash compensation plan for all
employees with total compensation greater than CHF / USD
300,000. DCCP awards granted up to January 2015 represent a
right to receive a cash payment at vesting. For awards granted
since February 2015, DCCP takes the form of notional additional
tier 1 (AT1) capital instruments, which may be settled at the dis-
cretion of UBS in the form of a cash payment or a marketable AT1
capital instrument. Awards vest in full after five years unless there
is a trigger or viability event. Awards granted under the DCCP are
written down if UBS’s common equity tier 1 capital ratio falls
below 10% for GEB members and below 7% for all other employ-
ees. DCCP awards are also forfeited if a viability event occurs, that
is, if FINMA provides a written notice to UBS that the DCCP
awards must be written down to prevent an insolvency, bank-
ruptcy or failure of UBS, or if UBS receives a commitment of
extraordinary support from the public sector that is necessary to
prevent such an event. Additionally, GEB members forfeit 20% of
their award for each year during the vesting period in which UBS
does not achieve an adjusted profit before tax. For awards granted
up to January 2015, interest on the awards is paid annually, pro-
vided that UBS achieved an adjusted profit before tax in the pre-
ceding year. For awards granted since February 2015, interest
payments are discretionary. The awards are generally forfeitable
upon, among other circumstances, voluntary termination of
employment with UBS.
432
Consolidated financial statements Note 27 Equity participation and other compensation plans (continued)
Long-Term Deferred Retention Senior Incentive Scheme
(LTDRSIS):
Awards under the LTDRSIS were granted to employees in Australia
up to and including 2014 and represent a profit share amount
based on the profitability of the Australian business. Awards vest
after three years and include an arrangement which allows for
unpaid installments to be reduced if the business records a loss for
the calendar year preceding vesting. The awards are generally for-
feitable upon voluntary termination of employment with UBS.
Asset Management EOP:
In order to align deferred compensation of certain Asset Manage-
ment employees with the performance of the funds they manage,
EOP awards are granted to such employees in the form of cash-
settled notional funds. The amount delivered depends on the
value of the underlying investment funds at the time of vesting.
The awards are generally forfeitable upon, among other circum-
stances, voluntary termination of employment with UBS.
Wealth Management Americas financial advisor
compensation
Financial advisor compensation plans generally provide for cash
payments and deferred awards that are formula driven and fluc-
tuate in proportion to the level of business activity.
UBS also may enter into compensation commitments with cer-
tain new financial advisors, primarily as a recruitment incentive
and to incentivize certain eligible active financial advisors to
achieve specified revenue production and other performance con-
ditions. The compensation may be earned and paid to the
employee during a period of continued employment and may be
forfeited under certain circumstances.
GrowthPlus:
GrowthPlus is a program for selected financial advisors whose rev-
enue production and length of service exceed defined thresholds
from 2010 through 2017. Compensation arrangements were
granted in 2010, 2011 and 2015, with additional arrangements
expected to be issued in 2018. The awards are distributed over
seven years, with the exception of 2018 arrangements which will
be distributed over five years.
contributions and voluntary contributions are credited with inter-
est in accordance with the terms of the plan. Rather than being
credited with interest, a participant may elect to have voluntary
contributions, along with vested company contributions, credited
with notional earnings based on the performance of various
mutual funds. Company contributions and interest on both com-
pany and voluntary contributions ratably vest in 20% installments
six to ten years following grant date. Company contributions and
interest on notional earnings on both company and voluntary
contributions are forfeitable under certain circumstances.
Other share-based compensation plans
Equity Plus Plan (Equity Plus):
Equity Plus is a voluntary plan that provides eligible employees
with the opportunity to purchase UBS shares at market value and
receive one notional share for every three shares purchased, up to
a maximum annual limit. Share purchases may be made annually
from the performance award and / or monthly through deductions
from salary. If the shares purchased are held for three years and,
in general, if the employee remains in employment, the notional
shares vest. For notional shares granted since April 2014, employ-
ees are entitled to receive a dividend equivalent, which may be
paid in notional shares and / or cash.
Key Employee Stock Appreciation Rights Plan (KESAP) and
Key Employee Stock Option Plan (KESOP):
Until 2009, key and high-potential employees were granted dis-
cretionary share-settled stock appreciation rights (SARs) or options
on UBS shares with a strike price not less than the market value of
a UBS share on the date of grant. A SAR gives employees the right
to receive a number of UBS shares equal to the value of any mar-
ket price increase of a UBS share between the grant date and the
exercise date. One option entitles the holder to acquire one regis-
tered UBS share at the option’s strike price. SARs and options are
settled by delivering UBS shares, except in jurisdictions where this
is not permitted for legal reasons. These awards are generally for-
feitable upon termination of employment with UBS. No options
or SARs awards have been granted since 2009.
Share delivery obligations
PartnerPlus:
PartnerPlus is a mandatory deferred cash compensation plan for
certain eligible financial advisors. Awards (UBS company contribu-
tions) are based on a predefined formula during the performance
year. Participants are also allowed to voluntarily contribute addi-
tional amounts otherwise payable during the year, up to a certain
percentage of their pay, which vest upon contribution. Company
Share delivery obligations related to employee share-based
compensation awards increased to 166 million shares as of
31 December 2016 compared with 138 million shares as of
31 December 2015. Share delivery obligations are calculated on
the basis of unvested notional share awards, options and stock
appreciation rights, taking applicable performance conditions
into account.
433
Financial statements Note 27 Equity participation and other compensation plans (continued)
As of 31 December 2016, UBS held 138 million treasury shares
(31 December 2015: 98 million) which were available to satisfy
share delivery obligations. Treasury shares held are delivered to
employees at exercise or vesting. However, share delivery obliga-
tions related to certain options and stock appreciation rights can
also be satisfied by shares issued out of conditional capital. As of
31 December 2016, the number of UBS Group AG shares that
could have been issued out of conditional capital for this purpose
was 130 million (31 December 2015: 131 million).
b) Effect on the income statement
Effect on the income statement for the financial year and
future periods
The table below provides information on compensation expenses
related to performance awards and other variable compensation,
including financial advisor compensation in Wealth Management
Americas, recognized for the financial year ended 31 December
2016 and deferred compensation expense that will be recognized
in the income statement for 2017 and later. The deferred com-
pensation expense in the table also includes vested and unvested
awards, which relate to the performance year 2016. The majority
of them were granted in February 2017. The total compensation
expense for unvested share-based awards granted up to
31 December 2016 will be recognized in future periods over a
weighted average period of 2.0 years.
Personnel expenses – recognized and deferred1
Personnel expenses for the year ended 2016
Personnel expenses deferred to 2017 and later
CHF million
Performance awards
Cash performance awards
Deferred Contingent Capital Plan
Deferred cash plans
Equity Ownership Plan – UBS shares
Equity Ownership Plan – notional funds
Total performance awards
Variable compensation
Variable compensation – other
Financial advisor compensation – cash payments
Compensation commitments with recruited financial advisors
GrowthPlus and other deferral plans
UBS share plans
Wealth Management Americas: Financial advisor compensation5
Total
Expenses
relating to
awards for
2016
Expenses
relating to
awards for
prior years
1,817
133
0
214
26
2,191
266
2,506
43
112
33
2,695
5,152
(42)
295
6
485
39
781
151
0
756
199
48
1,002
1,935
Relating to
awards for
2016
Relating to
awards for
prior years
0
266
0
372
34
671
1623
0
607
139
57
804
1,637
0
468
5
356
27
856
3014
0
2,120
773
120
3,013
4,169
Total
1,775
428
6
699
65
2,972
4182
2,506
799
311
81
3,697
7,087
Total
0
735
5
727
60
1,527
463
0
2,727
912
177
3,816
5,806
1 In 2016, total personnel expenses related to share-based compensation were CHF 910 million, which related to performance awards (CHF 699 million), other variable compensation (CHF 40 million), role-based
allowances (CHF 39 million), Wealth Management Americas financial advisor compensation (CHF 81 million), the Equity Plus Plan (CHF 24 million) and social security costs (CHF 27 million). Total personnel expenses
related to share-based equity-settled compensation excluding social security were CHF 861 million. 2 Includes replacement payments of CHF 86 million (of which CHF 62 million related to prior years), forfeiture credits
of CHF 73 million (all related to prior years), severance payments of CHF 217 million (all related to 2016) and retention plan and other payments of CHF 188 million (of which CHF 163 million related to prior years).
3 Includes DCCP interest expense of CHF 98 million for DCCP awards 2016 (granted in 2017). 4 Includes DCCP interest expense of CHF 243 million for DCCP awards 2015, 2014 and 2013 (granted in 2016, 2015 and
2014, respectively). 5 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based
on financial advisor productivity, firm tenure, assets and other variables. It also includes charges related to compensation commitments with financial advisors entered into at the time of recruitment that are subject to
vesting requirements. Amounts reflected as deferred expenses represent the maximum deferred exposure as of the balance sheet date.
434
Consolidated financial statements Note 27 Equity participation and other compensation plans (continued)
Personnel expenses – recognized and deferred1
CHF million
Performance awards
Cash performance awards
Deferred Contingent Capital Plan
Deferred cash plans
Equity Ownership Plan – UBS shares
Equity Ownership Plan – notional funds
Total performance awards
Variable compensation
Variable compensation – other
Financial advisor compensation – cash payments
Compensation commitments with recruited financial advisors
GrowthPlus and other deferral plans
UBS share plans
Wealth Management Americas: Financial advisor compensation5
Total
Personnel expenses for the year ended 2015
Personnel expenses deferred to 2016 and later
Expenses
relating to
awards for
2015
Expenses
relating to
awards for
prior years
2,073
172
0
261
28
2,535
184
2,460
43
132
37
2,673
5,391
(94)
258
12
461
38
675
162
0
692
142
45
879
1,716
Relating to
awards for
2015
Relating to
awards for
prior years
0
343
0
524
34
900
2483
0
940
710
66
1,716
2,864
0
446
3
338
35
822
2934
0
1,899
456
115
2,470
3,585
Total
1,980
429
12
722
67
3,210
3462
2,460
735
275
82
3,552
7,108
Total
0
789
3
861
69
1,722
541
0
2,839
1,166
182
4,186
6,449
1 In 2015, total personnel expenses related to share-based compensation were CHF 966 million, which related to performance awards (CHF 722 million), other variable compensation (CHF 54 million), role-based
allowances (CHF 26 million), Wealth Management Americas financial advisor compensation (CHF 82 million), the Equity Plus Plan (CHF 21 million) and social security costs (CHF 61 million). Total personnel expenses
related to share-based equity-settled compensation excluding social security were CHF 858 million. 2 Includes replacement payments of CHF 76 million (of which CHF 65 million related to prior years), forfeiture credits
of CHF 86 million (all related to prior years), severance payments of CHF 157 million (all related to 2015) and retention plan and other payments of CHF 198 million (of which CHF 183 million related to prior years).
3 Includes DCCP interest expense of CHF 160 million for DCCP awards 2015 (granted in 2016). 4 Includes DCCP interest expense of CHF 200 million for DCCP awards 2014, 2013 and 2012 (granted in 2015, 2014
and 2013, respectively). 5 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated
based on financial advisor productivity, firm tenure, assets and other variables. It also includes charges related to compensation commitments with financial advisors entered into at the time of recruitment that are subject
to vesting requirements. Amounts reflected as deferred expenses represent the maximum deferred exposure as of the balance sheet date.
435
Financial statements Note 27 Equity participation and other compensation plans (continued)
Personnel expenses – recognized and deferred1
CHF million
Performance awards
Cash performance awards
Deferred Contingent Capital Plan
Deferred cash plans
Equity Ownership Plan – UBS shares
Incentive Performance Plan
Total UBS share plans
Equity Ownership Plan – notional funds
Total performance awards
Variable compensation
Variable compensation – other
Financial advisor compensation – cash payments
Compensation commitments with recruited financial advisors
GrowthPlus and other deferral plans
UBS share plans
Wealth Management Americas: Financial advisor compensation5
Total
Personnel expenses for the year ended 2014
Personnel expenses deferred to 2015 and later
Expenses
relating to
awards for
2014
Expenses
relating to
awards for
prior years
Relating to
awards for
2014
Relating to
awards for
prior years
Total
1,822
(108)
1,714
155
0
215
0
215
24
2,216
260
2,396
39
81
23
2,539
5,015
194
12
444
21
465
41
604
206
0
636
153
57
846
1,656
349
12
659
21
680
65
2,820
4662
2,396
675
234
80
3,385
6,671
0
312
0
459
0
459
36
807
3073
0
524
189
41
754
1,868
0
386
8
367
0
367
33
794
3404
0
2,058
528
143
2,729
3,863
Total
0
698
8
826
0
826
69
1,601
647
0
2,582
717
184
3,483
5,731
1 In 2014, total personnel expenses related to share-based compensation were CHF 942 million, which related to performance awards (CHF 680 million), other variable compensation (CHF 113 million), role-based
allowances (CHF 9 million), Wealth Management Americas financial advisor compensation (CHF 80 million), the Equity Plus Plan (CHF 19 million) and social security costs (CHF 42 million). Total personnel expenses related
to share-based equity-settled compensation excluding social security were CHF 909 million. 2 Includes replacement payments of CHF 81 million (of which CHF 70 million related to prior years), forfeiture credits of
CHF 70 million (all related to prior years), severance payments of CHF 162 million (all related to 2014) and retention plan and other payments of CHF 292 million (of which CHF 206 million related to prior years).
3 Includes DCCP interest expense of CHF 121 million for DCCP awards 2014 (granted in 2015). 4 Includes DCCP interest expense of CHF 161 million for DCCP awards 2013 and 2012 (granted in 2014 and 2013,
respectively). 5 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on
financial advisor productivity, firm tenure, assets and other variables. It also includes charges related to compensation commitments with financial advisors entered into at the time of recruitment that are subject to vesting
requirements. Amounts reflected as deferred expenses represent the maximum deferred exposure as of the balance sheet date.
436
Consolidated financial statements Note 27 Equity participation and other compensation plans (continued)
c) Movements during the year
UBS share and performance share awards
Movements in UBS share and notional share awards were:
UBS share awards
Outstanding, at the beginning of the year
Shares awarded during the year
Distributions during the year
Forfeited during the year
Outstanding, at the end of the year
of which: shares vested for accounting purposes
Number of shares
2016
144,185,104
82,473,059
(56,018,881)
(5,013,194)
165,626,088
73,913,272
Weighted
average grant
date fair
value (CHF)
Number of shares
2015
Weighted
average grant
date fair
value (CHF)
17
14
16
15
15
168,778,334
66,444,272
(84,411,907)
(6,625,596)
144,185,104
58,920,339
15
16
14
16
17
The fair value of shares that became legally vested, as all conditions had been met, and were distributed during the years ended 2016
and 2015 was CHF 829 million and CHF 1,443 million, respectively.
Movements in performance shares granted under the IPP and PEP were:
Incentive Performance Plan / Performance Equity Plan
Forfeitable, as of 31 December 2014
Vested during 20152
Forfeited during 2015
Forfeitable, as of 31 December 2015
Vested during 20162
Forfeited 2016
Forfeitable, as of 31 December 20163
Number of performance shares
IPP
12,742,168
(12,017,543)
(673,468)
51,157
(13,609)
(10,365)
27,183
PEP
767,531
(337,718)
(429,813)
0
0
0
0
Weighted average fair value of
performance shares at grant date (CHF)1
PEP
IPP
22
22
22
22
22
22
22
13
13
13
0
0
0
0
1 The weighted average fair value takes into account the applicable performance conditions and the range of possible outcomes. 2 The corresponding number of UBS shares distributed in 2016 was 13,609 for IPP and
0 for PEP. In 2015, it amounted to 12,017,543 for IPP and 337,718 for PEP. 3 As of 31 December 2016 and 31 December 2015, the number of deliverable UBS shares was equal to the number of forfeitable performance
shares.
437
Financial statements Note 27 Equity participation and other compensation plans (continued)
UBS option awards
No option awards have been granted since 2009. Movements in option awards were:
UBS option awards
Outstanding, at the beginning of the year
Exercised during the year
Forfeited during the year
Expired unexercised
Outstanding, at the end of the year
Exercisable, at the end of the year
Number of
options 2016
80,848,217
(624,554)
(51,065)
(24,259,307)
55,913,291
55,913,291
Weighted average
exercise price (CHF)
45
12
43
61
39
39
Number of
options 2015
108,396,107
(2,971,211)
(113,015)
(24,463,664)
80,848,217
80,848,217
Weighted average
exercise price (CHF)1
45
13
47
48
45
45
1 Some of the options in this table have exercise prices denominated in USD that have been converted into CHF at the year-end spot exchange rate for the purposes of this table.
The table below provides additional information about options exercised and their intrinsic values:
For the year ended
Weighted average share price of options exercised (CHF)
Intrinsic value of options exercised during the year (CHF million)
31.12.16
31.12.15
16
2.6
19
19.5
438
Consolidated financial statements
Note 27 Equity participation and other compensation plans (continued)
The table below provides additional information about options outstanding and options exercisable as of 31 December 2016:
Options outstanding
Options exercisable
Number of
options
outstanding
Weighted
average
exercise price
(CHF)
Aggregate
intrinsic value
(CHF million)
Weighted
average
remaining
contractual
term (years)
Number of
options
exercisable
Weighted
average
exercise price
(CHF)
Aggregate
intrinsic value
(CHF million)
Weighted
average
remaining
contractual
term (years)
7,685,565
7,445,524
20,626,900
1,270,431
1,519,763
1,757,134
15,607,974
55,913,291
11.38
19.06
31.45
35.67
53.65
58.91
68.05
35.1
0.8
0.0
0.0
0.0
0.0
0.0
36.0
2.0
2.1
1.2
1.1
0.9
0.7
0.2
7,685,565
7,445,524
20,626,900
1,270,431
1,519,763
1,757,134
15,607,974
55,913,291
11.38
19.06
31.45
35.67
53.65
58.91
68.05
35.1
0.8
0.0
0.0
0.0
0.0
0.0
36.0
2.0
2.1
1.2
1.1
0.9
0.7
0.2
Range of exercise prices
CHF awards
10.21–15.00
15.01–25.00
25.01–35.00
35.01–45.00
45.01–55.00
55.01–65.00
65.01–75.00
10.21–75.00
UBS SAR awards
No SAR awards have been granted since 2009. Movements in SAR awards were:
UBS SARs awards
Outstanding, at the beginning of the year
Exercised during the year
Forfeited during the year
Expired unexercised
Outstanding, at the end of the year
Exercisable, at the end of the year
Number of SARs
2016
Weighted average
exercise price (CHF)
Number of
SARs 2015
Weighted average
exercise price (CHF)
12,519,765
(1,579,449)
(6,000)
(127,001)
10,807,315
10,807,315
12
11
11
12
12
12
17,689,089
(4,917,534)
(14,500)
(237,290)
12,519,765
12,519,765
12
11
12
12
12
12
The table below provides additional information about SARs exercised and their intrinsic values:
For the year ended
Weighted average share price of SARs exercised (CHF)
Intrinsic value of SARs exercised during the year (CHF million)
31.12.16
31.12.15
15
6.3
19
38.9
439
Financial statements
Note 27 Equity participation and other compensation plans (continued)
The table below provides additional information about SARs outstanding as of 31 December 2016:
SARs outstanding
SARs exercisable
Number of
SARs
outstanding
Weighted
average
exercise
price (CHF)
Aggregate
intrinsic value
(CHF million)
Weighted
average
remaining
contractual
term (years)
Number of
SARs
exercisable
Weighted
average
exercise
price (CHF)
Aggregate
intrinsic value
(CHF million)
10,457,315
4,000
42,000
304,000
10,807,315
11.34
14.22
16.80
19.25
48.2
0.0
0.0
0.0
48.2
2.1
2.5
2.4
2.7
10,457,315
4,000
42,000
304,000
10,807,315
11.34
14.22
16.80
19.25
48.2
0.0
0.0
0.0
48.2
Weighted
average
remaining
contractual
term (years)
2.1
2.5
2.4
2.7
Range of exercise prices
CHF
9.35–12.50
12.51–15.00
15.01–17.50
17.51–20.00
9.35–20.00
d) Valuation
UBS share awards
UBS measures compensation expense based on the average mar-
ket price of the UBS share on the grant date as quoted on the SIX
Swiss Exchange, taking into consideration post-vesting sale and
hedge restrictions, non-vesting conditions and market conditions,
where applicable. The fair value of the share awards subject to
post-vesting sale and hedge restrictions is discounted on the basis
of the duration of the post-vesting restriction and is referenced to
the cost of purchasing an at-the-money European put option for
the term of the transfer restriction. The weighted average dis-
count for share and performance share awards granted during
2016 is approximately 18.1% (2015: 16.7%) of the market price
of the UBS share. The grant date fair value of notional shares
without dividend entitlements also includes a deduction for the
present value of future expected dividends to be paid between
the grant date and distribution.
UBS options and SARs awards
The fair values of options and SARs have been determined using
a standard closed-formula option valuation model. The expected
term of each instrument is calculated on the basis of historical
employee exercise behavior patterns, taking into account the
share price, strike price, vesting period and the contractual life of
the instrument. The term structure of volatility is derived from the
implied volatilities of traded options on UBS shares in combination
with the observed long-term historical share price volatility.
Expected future dividends are derived from traded UBS options or
from the historical dividend pattern.
440
Consolidated financial statements
Note 28 Interests in subsidiaries and other entities
a) Interests in subsidiaries
UBS defines its significant subsidiaries as those entities that, either
individually or in aggregate, contribute significantly to the Group’s
financial position or results of operations, based on a number of
criteria, including the subsidiaries’ equity and their contribution to
the Group’s total assets and profit or loss before tax, in accor-
dance with the requirements set by IFRS 12, Swiss regulations and
the rules of the US Securities and Exchange Commission (SEC).
Individually significant subsidiaries
The two tables below list the Group’s individually significant sub-
sidiaries as of 31 December 2016. Unless otherwise stated, the
subsidiaries listed below have share capital consisting solely of
ordinary shares, which are held fully by the Group, and the pro-
portion of ownership interest held is equal to the voting rights
held by the Group.
The country where the respective registered office is located is
also the principal place of business. UBS AG operates through a
global network of branches and a significant proportion of its
business activity is conducted outside Switzerland in the UK, US,
Singapore, Hong Kong and other countries. UBS Europe SE has
branches and offices in a number of EU member states, including
branches in Germany, Italy, Luxembourg and Spain.
Subsidiaries of UBS Group AG as of 31 December 2016
Company
UBS AG
Registered office
Zurich and Basel, Switzerland
UBS Business Solutions AG
Zurich, Switzerland
UBS Group Funding (Jersey) Ltd.
St. Helier, Jersey
UBS Group Funding (Switzerland) AG
Zurich, Switzerland
Share capital in million
Equity interest accumulated in %
CHF
CHF
CHF
CHF
385.8
1.0
0.0
0.1
100.0
100.0
100.0
100.0
Individually significant subsidiaries of UBS AG as of 31 December 2016
Company
Registered office
Primary business division
UBS Americas Holding LLC
Wilmington, Delaware, USA
UBS Asset Management AG
Zurich, Switzerland
Corporate Center
Asset Management
UBS Bank USA
UBS Europe SE
Salt Lake City, Utah, USA
Wealth Management Americas
Frankfurt, Germany
Wealth Management
UBS Financial Services Inc.
Wilmington, Delaware, USA
Wealth Management Americas
UBS Limited
UBS Securities LLC
UBS Switzerland AG
London, United Kingdom
Wilmington, Delaware, USA
Zurich, Switzerland
Investment Bank
Investment Bank
Personal & Corporate Banking
Share capital in million
2,250.01
43.2
USD
CHF
USD
EUR
USD
GBP
USD
CHF
0.0
176.0
0.0
226.6
1,283.12
10.0
Equity interest accumulated in %
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1 Comprised of common share capital of USD 1,000 and non-voting preferred share capital of USD 2,250,000,000. 2 Comprised of common share capital of USD 100,000 and non-voting preferred share capital of
USD 1,283,000,000.
During 2016, the majority of the operating subsidiaries of Asset
Management were transferred to UBS Asset Management AG to
create a holding structure spanning the division’s global activities
outside the US. Also in 2016, UBS AG’s direct Wealth Manage-
ment subsidiaries UBS (Italia) SpA, UBS (Luxembourg) S.A. (includ-
ing its branches in Austria, Denmark and Sweden), UBS Bank S.A.
(Madrid) and UBS Bank (Netherlands) B.V. were merged into UBS
Deutschland AG, which was renamed to UBS Europe SE and is
headquartered in Frankfurt, Germany.
UBS Americas Holding LLC, UBS Asset Management AG, UBS
Europe SE, UBS Limited and UBS Switzerland AG are fully held by
UBS AG. UBS Bank USA, UBS Financial Services Inc. and UBS
Securities LLC are fully held, directly or indirectly, by UBS Americas
Holding LLC.
441
Financial statements Note 28 Interests in subsidiaries and other entities (continued)
Other subsidiaries
The table below lists other subsidiaries of UBS AG that are not individually significant but that contribute to the Group’s total assets
and aggregated profit before tax thresholds and are thereby disclosed in accordance with the requirements set by the SEC.
Other subsidiaries of UBS AG as of 31 December 2016
Company
UBS Americas Inc.
Registered office
Primary business division
Share capital in million
Equity interest
accumulated in %
Wilmington, Delaware, USA
Corporate Center
UBS Asset Management (Americas) Inc.
Wilmington, Delaware, USA
UBS Asset Management (Australia) Ltd
UBS Asset Management (Deutschland) GmbH
Sydney, Australia
Frankfurt, Germany
UBS Asset Management (Hong Kong) Limited
Hong Kong, Hong Kong
UBS Asset Management (Japan) Ltd
Tokyo, Japan
UBS Asset Management (Singapore) Ltd
UBS Asset Management (UK) Ltd
UBS Business Solutions US LLC
UBS Card Center AG
UBS Credit Corp.
UBS Fund Advisor, L.L.C.
Singapore, Singapore
London, United Kingdom
Wilmington, Delaware, USA
Corporate Center
Glattbrugg, Switzerland
Personal & Corporate Banking
Wilmington, Delaware, USA
Wealth Management Americas
Wilmington, Delaware, USA
Wealth Management Americas
UBS Fund Management (Luxembourg) S.A.
Luxembourg, Luxembourg
UBS Fund Management (Switzerland) AG
Basel, Switzerland
Asset Management
Asset Management
Asset Management
Asset Management
Asset Management
Asset Management
Asset Management
Asset Management
Asset Management
Asset Management
Asset Management
UBS Hedge Fund Solutions LLC
UBS O’Connor LLC
UBS Real Estate Securities Inc.
UBS Realty Investors LLC
UBS Securities (Thailand) Ltd
UBS Securities Australia Ltd
UBS Securities India Private Limited
UBS Securities Japan Co., Ltd.
UBS Securities Pte. Ltd.
UBS Services LLC
UBS South Africa (Proprietary) Limited
UBS UK Properties Limited
OOO UBS Bank
Topcard Service AG
Wilmington, Delaware, USA
Dover, Delaware, USA
Wilmington, Delaware, USA
Investment Bank
Boston, Massachusetts, USA
Asset Management
Bangkok, Thailand
Sydney, Australia
Mumbai, India
Tokyo, Japan
Singapore, Singapore
Wilmington, Delaware, USA
Sandton, South Africa
London, United Kingdom
Moscow, Russia
Investment Bank
Investment Bank
Investment Bank
Investment Bank
Investment Bank
Corporate Center
Investment Bank
Corporate Center
Investment Bank
Glattbrugg, Switzerland
Personal & Corporate Banking
USD
USD
AUD
EUR
HKD
JPY
SGD
GBP
USD
CHF
USD
USD
EUR
CHF
USD
USD
USD
USD
THB
AUD
INR
JPY
SGD
USD
ZAR
GBP
RUB
CHF
0.0
0.0
20.11
7.7
150.0
2,200.0
4.0
125.0
0.0
0.1
0.0
0.0
13.0
1.0
0.1
1.0
0.0
9.0
500.0
0.31
140.0
56,450.0
420.4
0.0
0.0
132.0
3,450.0
0.2
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1 Includes a nominal amount relating to redeemable preference shares.
In 2016, UBS Italia SIM SpA, a subsidiary conducting activities of the Investment Bank, was converted to a branch of UBS Limited,
London, via a cross-border merger transaction.
442
Consolidated financial statements Note 28 Interests in subsidiaries and other entities (continued)
Changes in consolidation scope
In 2016, no significant subsidiaries were added to or removed
from the scope of consolidation as a result of acquisitions or dis-
posals.
Non-controlling interests
As of 31 December 2016 and 31 December 2015, non-controlling
interests mainly comprised preferred notes issued by UBS AG. Apart
from this, non-controlling interests were not material to the Group.
As of 31 December 2016 and 31 December 2015, there were
no significant restrictions on UBS’s ability to access or use the
assets and settle the liabilities of the Group resulting from protec-
tive rights of non-controlling interests.
Consolidated structured entities
UBS consolidates a structured entity (SE) if it has power over the
relevant activities of the entity, exposure to variable returns and
the ability to use its power to affect its returns. Consolidated SEs
include certain investment funds, securitization vehicles and client
investment vehicles. UBS has no individually significant subsidiar-
ies that are SEs.
Investment fund SEs are generally consolidated when the
Group’s aggregate exposure combined with its decision-making
rights indicate the ability to use such power in a principal capacity.
Typically the Group will have decision-making rights as fund man-
ager, earning a management fee, and will provide seed capital at
the inception of the fund or hold a significant percentage of the
fund units. Where other investors do not have the substantive
ability to remove UBS as decision maker, the Group is deemed to
have control and therefore consolidates the fund.
Securitization SEs are generally consolidated when the Group
holds a significant percentage of the asset-backed securities
issued by the SE and has the power to remove without cause the
servicer of the asset portfolio.
Client investment SEs are generally consolidated when the
Group has a substantive liquidation right over the SE or a decision
right over the assets held by the SE and has exposure to variable
returns through derivatives traded with the SE or holding notes
issued by the SE.
In 2016 and 2015, the Group has not entered into any con-
tractual obligation that could require the Group to provide finan-
cial support to consolidated SEs. In addition, the Group did not
provide support, financial or otherwise, to a consolidated SE
when the Group was not contractually obligated to do so, nor has
the Group an intention to do so in the future. Further, the Group
did not provide support, financial or otherwise, to a previously
unconsolidated SE that resulted in the Group controlling the SE
during the reporting period.
443
Financial statements Note 28 Interests in subsidiaries and other entities (continued)
b) Interests in associates and joint ventures
As of 31 December 2016 and 2015, no associate or joint venture
was individually material to the Group. In addition, there were no
significant restrictions on the ability of associates or joint ventures
to transfer funds to UBS Group AG or its subsidiaries in the form
of cash dividends or to repay loans or advances made. There were
no quoted market prices for any associates or joint ventures of the
Group.
Investments in associates and joint ventures
CHF million
Carrying amount at the beginning of the year
Additions
Disposals
Share of comprehensive income
of which: share of net profit1, 2
of which: share of other comprehensive income3
Dividends received
Foreign currency translation
Carrying amount at the end of the year
of which: associates
of which: UBS Securities Co. Limited, Beijing4
of which: SIX Group AG, Zurich5
of which: other associates
of which: joint ventures
31.12.16
31.12.15
954
3
(2)
82
106
(24)
(50)
(23)
963
934
392
426
116
29
927
12
(2)
151
169
(18)
(114)
(20)
954
925
411
413
102
29
1 For 2016, consists of CHF 94 million from associates and CHF 12 million from joint ventures. For 2015, consists of CHF 158 million from associates and CHF 11 million from joint ventures. 2 In 2015, the SIX Group
sold its stake in STOXX Ltd and Indexium Ltd. The UBS share of the resulting gain on sale was CHF 81 million. 3 For 2016, consists of negative CHF 25 million from associates and CHF 0 million from joint ventures. For
2015, consists of negative CHF 18 million from associates and CHF 0 million from joint ventures. 4 UBS AG’s equity interest amounts to 24.99%. 5 UBS AG’s equity interest amounts to 17.31%. UBS AG is represented
on the Board of Directors.
444
Consolidated financial statements Note 28 Interests in subsidiaries and other entities (continued)
c) Interests in unconsolidated structured entities
During 2016, the Group sponsored the creation of various SEs
and interacted with a number of non-sponsored SEs, including
securitization vehicles, client vehicles as well as certain investment
funds, which UBS did not consolidate as of 31 December 2016
because it did not control these entities.
The table below presents the Group’s interests in and maximum
exposure to loss from unconsolidated SEs as well as the total assets
held by the SEs in which UBS had an interest as of year-end, except
for investment funds sponsored by third parties, for which the car-
rying value of UBS’s interest as of year-end has been disclosed.
Interests in unconsolidated structured entities
CHF million, except where indicated
Trading portfolio assets
Positive replacement values
Loans
Financial assets designated at fair value
Financial assets available for sale
Other assets
Total assets
Negative replacement values
Total liabilities
Securitization
vehicles
Client
vehicles
31.12.16
Investment
funds
634
40
0
103
0
289
1,0663
334
33
394
76
0
832
3,381
372
3,971
346
346
6,215
101
79
98
58
0
6,552
67
67
Assets held by the unconsolidated structured entities in which UBS
had an interest (CHF billion)
725
1026
3347
CHF million, except where indicated
Trading portfolio assets
Positive replacement values
Loans
Financial assets designated at fair value
Financial assets available for sale
Other assets
Total assets
Negative replacement values
Total liabilities
Assets held by the unconsolidated structured entities in which UBS
had an interest (CHF billion)
Securitization
vehicles
Client
vehicles
1,060
41
0
0
0
0
1,1013
304
30
1415
463
101
0
972
3,396
452
4,102
631
631
436
31.12.15
Investment
funds
6,102
57
101
95
102
0
6,457
0
0
3207
Maximum
exposure to loss1
7,243
217
79
1,863
3,439
1,490
90
Maximum
exposure to loss1
7,624
200
101
1,730
3,498
937
19
Total
7,243
217
79
284
3,439
327
11,589
446
446
Total
7,624
200
101
191
3,498
45
11,660
661
661
1 For purposes of this disclosure, maximum exposure to loss amounts do not consider the risk-reducing effects of collateral or other credit enhancements. 2 Represents the carrying value of loan commitments, both
designated at fair value and held at amortized cost. The maximum exposure to loss for these instruments is equal to the notional amount. 3 As of 31 December 2016, CHF 1.0 billion of the CHF 1.1 billion (31 December
2015: CHF 0.9 billion of the CHF 1.1 billion) was held in Corporate Center – Non-core and Legacy Portfolio. 4 Comprised of credit default swap (CDS) liabilities and other swap liabilities. The maximum exposure to loss
for CDS is equal to the sum of the negative carrying value and the notional amount. For other swap liabilities, no maximum exposure to loss is reported. 5 Represents principal amount outstanding. 6 Represents the
market value of total assets. 7 Represents the net asset value of the investment funds sponsored by UBS and the carrying value of UBS’s interests in the investment funds not sponsored by UBS.
445
Financial statements Note 28 Interests in subsidiaries and other entities (continued)
The Group retains or purchases interests in unconsolidated SEs
in the form of direct investments, financing, guarantees, letters of
credit, derivatives and through management contracts.
The Group’s maximum exposure to loss is generally equal to
the carrying value of the Group’s interest in the SE, with the
exception of guarantees, letters of credit and credit derivatives for
which the contract’s notional amount, adjusted for losses already
incurred, represents the maximum loss that the Group is exposed
to. In addition, the current fair value of derivative swap instru-
ments with a positive replacement value only, such as total return
swaps, is presented as the maximum exposure to loss. Risk expo-
sure for these swap instruments could change over time with
market movements.
The maximum exposure to loss disclosed in the table on the pre-
vious page does not reflect the Group’s risk management activities,
including effects from financial instruments that may be used to
economically hedge the risks inherent in the unconsolidated SE or
the risk-reducing effects of collateral or other credit enhancements.
In 2016 and 2015, the Group did not provide support, finan-
cial or otherwise, to an unconsolidated SE when not contractually
obligated to do so, nor has the Group an intention to do so in the
future.
In 2016 and 2015, income and expenses from interests in
unconsolidated SEs primarily resulted from mark-to-market move-
ments recognized in net trading income, which have generally
been hedged with other financial instruments, as well as fee and
commission income received from UBS sponsored funds.
Interests in securitization vehicles
As of 31 December 2016 and 31 December 2015, the Group held
interests, both retained and acquired, in various securitization
vehicles. As of 31 December 2016, a majority of the Group’s inter-
ests in securitization vehicles related to a portfolio of asset-backed
securities (ABS), which are held within Corporate Center – Non-
core and Legacy Portfolio. The Investment Bank also retained
interests in securitization vehicles related to financing, underwrit-
ing, secondary market and derivative trading activities. In some
cases the Group may be required to absorb losses from an uncon-
solidated SE before other parties because the Group’s interest is
subordinated to others in the ownership structure.
An overview of the Group’s interests in unconsolidated securi-
tization vehicles and the relative ranking and external credit rating
of those interests is presented in the table on the following page.
The numbers outlined in this table differ from the securitization
positions presented in the Basel III Pillar 3 UBS Group AG
2016 report, under “Pillar 3, SEC filings & other disclosures” at
www.ubs.com/investors, primarily due to: (i) exclusion from the
table on the following page of synthetic securitizations transacted
with entities that are not SEs and transactions in which the Group
did not have an interest because it did not absorb any risk, (ii) a
different measurement basis in certain cases (e.g., IFRS carrying
value within the table above compared with net exposure amount
at default for Basel III Pillar 3 disclosures) and (iii) different classi-
fication of vehicles viewed as sponsored by the Group versus
sponsored by third parties.
➔ Refer to Note 1a item 1 for more information on Group’s
accounting policies regarding consolidation and sponsorship of
securitization vehicles and other structured entities
➔ Refer to the Basel III Pillar 3 UBS Group AG 2016 report under
“Pillar 3, SEC filings & other disclosures” at www.ubs.com/
investors for more information
Interests in client vehicles
As of 31 December 2016 and 31 December 2015, the Group
retained interests in client vehicles sponsored by UBS and third
parties that relate to financing and derivative activities and to
hedge structured product offerings. Included within these invest-
ments are securities guaranteed by US government agencies.
Interests in investment funds
The Group holds interests in a number of investment funds, pri-
marily resulting from seed investments or to hedge structured
product offerings. In addition to the interests disclosed in the
table on the previous page, the Group manages the assets of
various pooled investment funds and receives fees that are based,
in whole or part, on the net asset value of the fund and / or the
performance of the fund. The specific fee structure is determined
on the basis of various market factors and considers the nature of
the fund, the jurisdiction of incorporation as well as fee schedules
negotiated with clients. These fee contracts represent an interest
in the fund as they align the Group’s exposure with investors,
providing a variable return that is based on the performance of
the entity. Depending on the structure of the fund, these fees may
be collected directly from the fund assets and / or from the inves-
tors. Any amounts due are collected on a regular basis and are
generally backed by the assets of the fund. The Group did not
have any material exposure to loss from these interests as of
31 December 2016 or as of 31 December 2015.
446
Consolidated financial statements Note 28 Interests in subsidiaries and other entities (continued)
Interests in unconsolidated securitization vehicles1
Residential
mortgage-
backed
securities
Commercial
mortgage-
backed
securities
31.12.16
Other
asset-backed
securities2
Re-securiti-
zation3
Total
CHF million, except where indicated
Sponsored by UBS
Interests in senior tranches
of which: rated investment grade
of which: rated sub-investment grade
of which: defaulted
Interests in mezzanine tranches
of which: rated sub-investment grade
Total
of which: Trading portfolio assets
of which: Financial assets designated at fair value
Total assets held by the vehicles in which UBS had an interest (CHF billion)
Not sponsored by UBS
Interests in senior tranches
of which: rated investment grade
Interests in mezzanine tranches
of which: rated investment grade
of which: defaulted
Interests in junior tranches
of which: rated investment grade
of which: rated sub-investment grade
Total
of which: Trading portfolio assets
Total assets held by the vehicles in which UBS had an interest (CHF billion)
103
0
103
1
1
104
1
103
2
165
165
32
29
3
18
17
1
215
215
41
34
34
0
34
34
0
13
4
4
0
0
4
4
8
0
0
0
0
0
0
241
241
0
0
241
241
5
14
14
0
14
14
0
1
125
125
0
0
125
125
1
1 This table excludes receivables and derivative transactions with securitization vehicles. 2 Includes credit card, auto and student loan structures. 3 Includes collateralized debt obligations.
151
34
103
14
1
1
152
49
103
16
535
535
32
29
3
18
17
1
585
585
56
447
Financial statements Note 28 Interests in subsidiaries and other entities (continued)
Interests in unconsolidated securitization vehicles (continued)1
CHF million, except where indicated
Sponsored by UBS
Interests in senior tranches
of which: rated investment grade
of which: defaulted
Interests in mezzanine tranches
of which: rated investment grade
of which: rated sub-investment grade
of which: defaulted
Total
of which: Trading portfolio assets
Total assets held by the vehicles in which UBS had an interest (CHF billion)
Not sponsored by UBS
Interests in senior tranches
of which: rated investment grade
Interests in mezzanine tranches
of which: rated investment grade
of which: defaulted
Interests in junior tranches
of which: rated investment grade
of which: not rated
Total
of which: Trading portfolio assets
Total assets held by the vehicles in which UBS had an interest (CHF billion)
Residential
mortgage-
backed
securities
Commercial
mortgage-
backed
securities
31.12.15
Other
asset-backed
securities2
Re-securiti-
zation3
Total
0
3
2
1
3
3
0
284
284
61
58
3
11
11
0
356
356
64
54
54
7
7
61
61
28
66
65
17
17
3
0
3
86
86
37
0
0
0
0
0
0
383
383
17
17
0
400
400
6
13
13
0
13
13
1
140
140
0
0
0
140
140
2
66
54
13
10
7
2
1
77
77
29
873
872
95
92
3
14
11
3
983
983
109
1 This table excludes receivables and derivative transactions with securitization vehicles. 2 Includes credit card, auto and student loan structures. 3 Includes collateralized debt obligations.
448
Consolidated financial statements Note 28 Interests in subsidiaries and other entities (continued)
Sponsored unconsolidated structured entities in which UBS did
not have an interest
For several sponsored SEs, no interest was held by the Group at
year-end. However, during the respective reporting period the
Group transferred assets, provided services and held instruments
that did not qualify as an interest in these sponsored SEs, and
accordingly earned income or incurred expenses from these enti-
ties. The table below presents the income earned and expenses
incurred directly from these entities during the year as well as
corresponding asset information. The table does not include
income earned and expenses incurred from risk management
activities, including income and expenses from financial instru-
ments used to economically hedge instruments transacted with
the unconsolidated SEs.
The majority of the fee income arose from investment funds
that are sponsored and administrated by the Group, but managed
by third parties. As the Group does not provide any active man-
agement services, UBS was not exposed to risk from the perfor-
mance of these entities and was therefore deemed not to have an
interest in them. In certain structures, the fees receivable may be
collected directly from the investors and have therefore not been
included in the table below.
The Group also recorded net trading income from mark-to-
market movements arising primarily from derivatives, such as
interest rate and currency swaps as well as credit derivatives,
through which the Group purchases protection, and financial lia-
bilities designated at fair value, which do not qualify as interests
because the Group does not absorb variability from the perfor-
mance of the entity. Total income reported does not reflect eco-
nomic hedges or other mitigating effects from the Group’s risk
management activities.
During 2016, UBS and third parties transferred assets totaling
CHF 13 billion (2015: CHF 9 billion) into sponsored securitization
and client vehicles created in 2016. For sponsored investment
funds, transfers arose during the period as investors invested and
redeemed positions, thereby changing the overall size of the
funds, which, when combined with market movements, resulted
in a total closing net asset value of CHF 14 billion (31 December
2015: CHF 12 billion).
Sponsored unconsolidated structured entities in which UBS did not have an interest at year-end1
CHF million, except where indicated
Net interest income
Net fee and commission income
Net trading income
Total income
Asset information (CHF billion)
CHF million, except where indicated
Net interest income
Net fee and commission income
Net trading income
Total income
Asset information (CHF billion)
As of or for the year ended
31.12.16
Securitization
vehicles Client vehicles
Investment
funds
3
0
2
4
72
(6)
0
(158)
(165)
63
0
53
29
82
144
As of or for the year ended
31.12.15
Securitization
vehicles
Client vehicles
Investment
funds
2
0
18
20
82
(11)
0
208
197
13
0
57
48
104
124
Total
(3)
53
(128)
(78)
Total
(10)
57
274
321
1 These tables exclude profit attributable to non-controlling interests of CHF 78 million for the year ended 31 December 2016 and CHF 77 million for the year ended 31 December 2015. 2 Represents the amount of
assets transferred to the respective securitization vehicles. Of the total amount transferred, CHF 2 billion was transferred by UBS (31 December 2015: CHF 3 billion) and CHF 5 billion was transferred by third parties
(31 December 2015: CHF 5 billion). 3 Represents total assets transferred to the respective client vehicles. Of the total amount transferred, CHF 5 billion was transferred by UBS (31 December 2015: CHF 1 billion) and
CHF 1 billion was transferred by third parties (31 December 2015: CHF 1 billion). 4 Represents the total net asset value of the respective investment funds.
Note 29 Business combinations
In 2016 and 2015, UBS did not complete any significant business combinations.
449
Financial statements Note 30 Changes in organization and disposals
Measures to improve the resolvability of the Group in
response to too big to fail requirements in Switzerland
and other countries in which the Group operates
In December 2014, UBS Group AG completed an exchange offer
for the shares of UBS AG and became the holding company of the
Group. During 2015, UBS Group AG completed a court procedure
under article 33 of the Swiss Stock Exchange Act (SESTA proce-
dure) resulting in the cancelation of the shares of the remaining
minority shareholders of UBS AG. As a result, UBS Group AG
owns 100% of the outstanding shares of UBS AG.
In June 2015, UBS transferred its Personal & Corporate Bank-
ing and Wealth Management business booked in Switzerland
from UBS AG to UBS Switzerland AG.
Also in 2015, UBS implemented a more self-sufficient business
and operating model for UBS Limited and established UBS Busi-
ness Solutions AG as a direct subsidiary of UBS Group AG to act
as the Group service company. The purpose of the service com-
pany structure is to improve the resolvability of the Group by
enabling UBS to maintain operational continuity of critical services
should a recovery or resolution event occur.
In the second half of 2015, UBS transferred the ownership of
the majority of its existing service subsidiaries outside the US to
UBS Business Solutions AG. As of 1 January 2017, UBS completed
the transfer of the shared service employees in the US to its US
service company, UBS Business Solutions US LLC.
As of 1 July 2016, UBS Americas Holding LLC was designated
as UBS’s intermediate holding company for its US subsidiaries as
required under the enhanced prudential standards regulations
pursuant to the Dodd-Frank Act. UBS Americas Holding LLC holds
all of UBS’s US subsidiaries and is subject to US capital require-
ments, governance requirements and other prudential regulation.
In addition, UBS transferred the majority of the operating sub-
sidiaries of Asset Management to UBS Asset Management AG
during 2016. Furthermore, UBS merged its Wealth Management
subsidiaries in Italy, Luxembourg (including its branches in Austria,
Denmark and Sweden), the Netherlands and Spain into UBS
Deutschland AG, which was renamed to UBS Europe SE, to estab-
lish UBS’s new European legal entity which is headquartered in
Frankfurt, Germany.
UBS has established UBS Group Funding (Switzerland) AG, a
wholly owned direct subsidiary of UBS Group AG, to issue future
loss-absorbing additional tier 1 (AT1) capital instruments and total
loss-absorbing capacity- (TLAC)-eligible senior unsecured debt,
which will be guaranteed by UBS Group AG. UBS also intends to
substitute the issuer of outstanding TLAC-eligible senior unse-
cured debt, with UBS Group Funding (Switzerland) AG replacing
UBS Group Funding (Jersey) Limited as the issuer.
Sale of subsidiaries and businesses
In 2016, UBS agreed to sell a life insurance subsidiary within
Wealth Management, which resulted in the recognition of a loss
of CHF 23 million. This sale is currently expected to close in the
first half of 2017 subject to customary closing conditions. As of
31 December 2016, the assets and liabilities of this business are
presented as a disposal group held for sale within Other assets
and Other liabilities and amounted to CHF 5,137 million and CHF
5,213 million, respectively.
In 2015, UBS sold its Alternative Fund Services (AFS) business
to Mitsubishi UFJ Financial Group Investor Services. Upon comple-
tion of the sale, UBS recognized a gain on sale of CHF 56 million
and reclassified an associated net foreign currency translation
gain of CHF 119 million from Other comprehensive income to the
income statement. Also during 2015, UBS completed the sale of
certain subsidiaries and businesses within Wealth Management,
which resulted in the recognition of a combined net gain of CHF
169 million.
Restructuring expenses
Restructuring expenses arise from programs that materially
change either the scope of business that the Group engages in
or the manner in which such business is conducted. Restructur-
ing expenses are necessary to effect such programs and include
items such as severance and other personnel-related expenses,
duplicate headcount costs, impairment and accelerated depre-
ciation of assets, contract termination costs, consulting fees, and
related infrastructure and system costs. These costs are pre-
sented in the income statement according to the underlying
nature of the expense.
450
Consolidated financial statements Note 30 Changes in organization and disposals (continued)
Net restructuring expenses by business division and Corporate Center unit
CHF million
Wealth Management
Wealth Management Americas
Personal & Corporate Banking
Asset Management
Investment Bank
Corporate Center
of which: Services
of which: Non-core and Legacy Portfolio
Total net restructuring expenses
of which: personnel expenses
of which: general and administrative expenses
of which: depreciation and impairment of property, equipment and software
of which: amortization and impairment of intangible assets
Net restructuring expenses by personnel expense category
CHF million
Salaries
Variable compensation – performance awards
Variable compensation – other
Contractors
Social security
Pension and other post-employment benefit plans
Other personnel expenses
Total net restructuring expenses: personnel expenses
Net restructuring expenses by general and administrative expense category
CHF million
Occupancy
Rent and maintenance of IT and other equipment
Communication and market data services
Administration
Travel and entertainment
Professional fees
Outsourcing of IT and other services
Other1
Total net restructuring expenses: general and administrative expenses
1 Mainly comprised of onerous real estate lease contracts.
For the year ended
31.12.16
31.12.15
31.12.14
447
139
117
100
577
78
57
21
323
137
101
82
396
196
140
56
1,458
1,235
751
695
11
0
460
761
12
2
185
55
64
50
261
61
30
31
677
327
319
29
2
For the year ended
31.12.16
31.12.15
31.12.14
435
102
209
56
8
(75)
17
751
312
38
108
46
5
(65)
15
460
145
35
138
28
4
(29)
6
327
For the year ended
31.12.16
31.12.15
31.12.14
123
94
1
16
16
162
289
(5)
695
109
31
0
6
17
187
316
95
761
49
23
0
3
11
148
82
2
319
451
Financial statements Note 31 Operating leases and finance leases
Information on lease contracts classified as operating leases where UBS is the lessee is provided in Note 31a and information on finance
leases where UBS acts as a lessor is provided in Note 31b.
a) Operating lease commitments
As of 31 December 2016, UBS was obligated under a number of
non-cancelable operating leases for premises and equipment
used primarily for banking purposes. The significant premises
leases usually include renewal options and escalation clauses in
line with general office rental market conditions, as well as rent
adjustments based on price indices. However, the lease agree-
ments do not contain contingent rent payment clauses and pur-
chase options, nor do they impose any restrictions on UBS’s ability
to pay dividends, engage in debt financing transactions or enter
into further lease agreements.
CHF million
Expenses for operating leases to be recognized in:
2017
2018
2019
2020
2021
2022 and thereafter
Subtotal commitments for minimum payments under operating leases
Less: Sublease rental income commitments
Net commitments for minimum payments under operating leases
CHF million
Gross operating lease expense recognized in the income statement
Sublease rental income
Net operating lease expense recognized in the income statement
31.12.16
715
603
520
450
387
2,360
5,034
329
4,705
31.12.16
31.12.15
31.12.14
749
78
671
743
70
673
759
73
686
b) Finance lease receivables
UBS leases a variety of assets to third parties under finance leases,
such as commercial vehicles, production lines, medical equip-
ment, construction equipment and aircraft. At the end of the
respective lease term, assets may be sold to third parties or further
leased. Lessees may participate in any sales proceeds achieved.
Lease expenses cover the cost of the assets less their residual value
as well as financing costs.
As of 31 December 2016, unguaranteed residual values of CHF
127 million had been accrued, and the accumulated allowance
for uncollectible minimum lease payments receivable amounted
to CHF 9 million. No contingent rents were received in 2016.
Lease receivables
CHF million
2017
2018–2021
Thereafter
Total
452
Total minimum lease
payments
Unearned finance
income
Present value
31.12.16
327
601
115
1,043
21
32
3
57
306
568
112
986
Consolidated financial statements Note 32 Related parties
UBS defines related parties as associates (entities which are sig-
nificantly influenced by UBS), joint ventures (entities in which UBS
shares control with another party), post-employment benefit
plans for UBS employees, key management personnel, close fam-
ily members of key management personnel and entities which
are, directly or indirectly, controlled or jointly controlled by key
management personnel or their close family members. Key
management personnel is defined as members of the Board of
Directors (BoD) and Group Executive Board (GEB).
a) Remuneration of key management personnel
The non-independent members of the BoD have top management employment contracts and receive pension benefits upon retire-
ment. Total remuneration of the non-independent members of the BoD and GEB members, including those who stepped down during
2016, is provided in the table below.
Remuneration of key management personnel
CHF million
Base salaries and other cash payments1
Incentive awards – cash2
Annual incentive award under DCCP
Employer’s contributions to retirement benefit plans
Benefits in kind, fringe benefits (at market value)
Equity-based compensation3
Total
31.12.16
31.12.15
31.12.14
25
11
22
3
2
41
104
23
10
21
2
2
42
99
22
8
18
2
1
35
86
1 Includes role-based allowances that have been made in line with market practice in response to the EU Capital Requirements Directive of 2013 (CRD IV). 2 Includes immediate and deferred cash. 3 Expenses for
shares granted are calculated at grant date of the respective award and allocated over the vesting period, generally for 5 years. Refer to Note 27 for more information. In 2016, 2015 and 2014, equity-based compensation
was entirely comprised of EOP awards.
The independent members of the BoD do not have employment or service contracts with UBS, and thus are not entitled to benefits
upon termination of their service on the BoD. Payments to these individuals for their services as external board members amounted to
CHF 7.2 million in 2016, CHF 6.7 million in 2015 and CHF 7.1 million in 2014.
b) Equity holdings of key management personnel
Equity holdings of key management personnel
Number of stock options from equity participation plans held by non-independent members of the BoD and the GEB members1
Number of shares held by members of the BoD, GEB and parties closely linked to them2
1 Refer to Note 27 for more information. 2 Excludes shares granted under variable compensation plans with forfeiture provisions.
31.12.16
620,950
3,267,911
31.12.15
1,401,686
3,326,165
Of the share totals above, 95,597 shares were held by close family
members of key management personnel on 31 December 2016
and 31 December 2015. No shares were held by entities that are
directly or indirectly controlled or jointly controlled by key manage-
ment personnel or their close family members on 31 December
2016 and 31 December 2015. Refer to Note 27 for more informa-
tion. As of 31 December 2016, no member of the BoD or GEB was
the beneficial owner of more than 1% of UBS Group AG’s shares.
453
Financial statements Note 32 Related parties (continued)
c) Loans, advances and mortgages to key management personnel
Non-independent members of the BoD and GEB members have
been granted loans, fixed advances and mortgages on substan-
tially the same terms and conditions that are available to other
employees, which are based on terms and conditions granted to
third parties but are adjusted for differing credit risk. Independent
BoD members are granted loans and mortgages under general
market conditions.
Movements in the loan, advances and mortgage balances are
as follows.
Loans, advances and mortgages to key management personnel1
CHF million
Balance at the beginning of the year
Additions
Reductions
Balance at the end of the year
1 All loans are secured loans. 2 Excludes CHF 2,684,498 of unused uncommitted credit facilities of one GEB and one BoD member.
2016
2015
33
21
(13)
412
27
6
(1)
33
d) Other related party transactions with entities controlled by key management personnel
In 2016 and 2015, UBS did not enter into transactions with enti-
ties which are directly or indirectly controlled or jointly controlled
by UBS’s key management personnel or their close family mem-
bers and as of 31 December 2016, 31 December 2015 and
31 December 2014, there were no outstanding balances related
to such transactions. Furthermore, in 2016 and 2015, entities
controlled by key management personnel did not sell any goods
or provide any services to UBS, and therefore did not receive any
fees from UBS. UBS also did not provide services to such entities
in 2015 and 2016, and therefore also received no fees.
.
454
Consolidated financial statements Note 32 Related parties (continued)
e) Transactions with associates and joint ventures
Loans and outstanding receivables to associates and joint ventures
CHF million
Carrying value at the beginning of the year
Additions
Reductions
Foreign currency translation
Carrying value at the end of the year
of which: unsecured loans
Other transactions with associates and joint ventures
CHF million
Payments to associates and joint ventures for goods and services received
Fees received for services provided to associates and joint ventures
Commitments and contingent liabilities to associates and joint ventures
➔ Refer to Note 28 for an overview of investments in associates and joint ventures
2016
476
4
(8)
0
472
461
2015
552
9
(85)
0
476
464
As of or for the year ended
31.12.16
31.12.15
153
3
4
149
7
4
455
Financial statements Note 33 Invested assets and net new money
Invested assets
Net new money
Invested assets include all client assets managed by or deposited
with UBS for investment purposes. Invested assets include man-
aged fund assets, managed institutional assets, discretionary
and advisory wealth management portfolios, fiduciary deposits,
time deposits, savings accounts and wealth management secu-
rities or brokerage accounts. All assets held for purely transac-
tional purposes and custody-only assets, including corporate
client assets held for cash management and transactional pur-
poses, are excluded from invested assets as the Group only
administers the assets and does not offer advice on how the
assets should be invested. Also excluded are non-bankable
assets (e.g., art collections) and deposits from third-party banks
for funding or trading purposes.
Discretionary assets are defined as client assets that UBS
decides how to invest. Other invested assets are those where the
client ultimately decides how the assets are invested. When a
single product is created in one business division and sold in
another, it is counted in both the business division that manages
the investment and the one that distributes it. This results in dou-
ble counting within UBS total invested assets, as both business
divisions are independently providing a service to their respective
clients, and both add value and generate revenue.
Net new money in a reporting period is the amount of invested
assets that are entrusted to UBS by new and existing clients, less
those withdrawn by existing clients and clients who terminated
their relationship with UBS.
Net new money is calculated using the direct method, under
which inflows and outflows to / from invested assets are deter-
mined at the client level based on transactions. Interest and divi-
dend income from invested assets are not counted as net new
money inflows. Market and currency movements as well as fees,
commissions and interest on loans charged are excluded from net
new money, as are the effects resulting from any acquisition or
divestment of a UBS subsidiary or business. Reclassifications
between invested assets and custody-only assets as a result of a
change in the service level delivered are generally treated as net
new money flows; however, where such change in service level
directly results from a new externally imposed regulation, the
one-time net effect of the implementation is reported as an asset
reclassification without net new money impact.
The Investment Bank does not track invested assets and net
new money. However, when a client is transferred from the Invest-
ment Bank to another business division, this produces net new
money even though client assets were already with UBS. There
were no such transfers between the Investment Bank and other
business divisions in 2016 and 2015.
Invested assets and net new money
CHF billion
Fund assets managed by UBS
Discretionary assets
Other invested assets
Total invested assets1
of which: double count
Net new money1
1 Includes double counts.
Development of invested assets
CHF billion
Total invested assets at the beginning of the year1
Net new money
Market movements2
Foreign currency translation
Other effects
of which: acquisitions / (divestments)
Total invested assets at the end of the year1
1 Includes double counts. 2 Includes interest and dividend income.
456
For the year ended
31.12.16
31.12.15
275
885
1,661
2,821
176
27.2
282
830
1,577
2,689
185
27.7
For the year ended
31.12.16
2,689
31.12.15
2,734
27
98
21
(14)
(14)
28
(24)
(31)
(16)
(16)
2,821
2,689
Consolidated financial statements Note 34 Currency translation rates
The following table shows the rates of the main currencies used to translate the financial information of foreign operations into Swiss
francs.
1 USD
1 EUR
1 GBP
100 JPY
Spot rate
As of
Average rate1
For the year ended
31.12.16
31.12.15
31.12.16
31.12.15
31.12.14
1.02
1.07
1.26
0.87
1.00
1.09
1.48
0.83
0.99
1.09
1.32
0.91
0.97
1.06
1.47
0.80
0.92
1.21
1.51
0.86
1 Monthly income statement items of foreign operations with a functional currency other than the Swiss franc are translated with month-end rates into Swiss francs. Disclosed average rates for a year represent an average
of 12 month-end rates, weighted according to the income and expense volumes of all foreign operations of the Group with the same functional currency for each month. Weighted average rates for individual business
divisions may deviate from the weighted average rates for the Group.
Note 35 Events after the reporting period
Adjusting event subsequent to the publication of the unaudited
fourth quarter 2016 report
The 2016 results and the balance sheet in this report differ from
those presented in the unaudited fourth quarter 2016 report pub-
lished on 27 January 2017 as a result of an adjusting event after the
reporting period. Provisions for litigation, regulatory and similar
matters increased reflecting an agreement in principle to resolve an
RMBS matter related to the National Credit Union Association. This
adjustment reduced 2016 net profit attributable to shareholders
by CHF 102 million, and basic and diluted earnings per share by
CHF 0.03 and CHF 0.02, respectively.
Sale of Fund Services units in Luxembourg and Switzerland
On 20 February 2017, UBS announced that it has entered into an
agreement to sell Asset Management’s fund administration servic-
ing units in Luxembourg and Switzerland to Northern Trust. The
transaction is expected to close in the second half of the year,
subject to relevant approvals and other customary conditions.
These units provide fund administration services for both UBS and
third party funds with approximately CHF 420 billion in assets
under administration.
457
Financial statements Note 36 Main differences between IFRS and Swiss GAAP
The consolidated financial statements of UBS Group AG are pre-
pared in accordance with International Financial Reporting Stan-
dards (IFRS). The Swiss Financial Market Supervisory Authority
(FINMA) requires financial groups that present their financial
statements under IFRS to provide a narrative explanation of the
main differences between IFRS and Swiss GAAP (FINMA Circular
2015 / 1 and the Banking Ordinance). Included in this Note are the
significant differences in the recognition and measurement
between IFRS and the provisions of the Banking Ordinance and
the guidelines of FINMA governing true and fair view financial
statement reporting pursuant to Article 25 through Article 42 of
the Banking Ordinance.
1. Consolidation
Under IFRS, all entities that are controlled by the holding entity are
consolidated.
Under Swiss GAAP, controlled entities that are deemed imma-
terial to the Group or that are held temporarily only are exempt
from consolidation, but instead are recorded as participations or
financial investments.
2. Financial assets available for sale
Under IFRS, financial assets available for sale are carried at fair
value. Changes in fair value are recorded directly in equity until an
asset is sold, collected or otherwise disposed of, or until an asset
is determined to be impaired. At the time an available-for-sale
asset is determined to be impaired, the cumulative unrealized loss
previously recognized in equity is included in net profit or loss for
the respective period. On disposal of a financial asset available for
sale, the cumulative unrealized gain or loss previously recognized
in equity is reclassified to the income statement.
Under Swiss GAAP, classification and measurement of financial
assets designated as available for sale depend on the nature of the
asset. Equity instruments with no permanent holding intent, as well
as debt instruments, are classified as Financial investments and
measured at the lower of (amortized) cost or market value. Market
value adjustments up to the original cost amount and realized gains
or losses upon disposal of the investment are recorded in the income
statement as Other income from ordinary activities. Equity instru-
ments with a permanent holding intent are classified as participa-
tions in Investments in subsidiaries and other participations and
measured at cost less impairment. Impairment losses are recorded in
the income statement as Impairment of investments in subsidiaries
and other participations. Reversal of impairments up to the original
cost amount as well as realized gains or losses upon disposal of the
investment are recorded as Extraordinary income / Extraordinary
expenses in the income statement.
3. Cash flow hedges
Under IFRS, when hedge accounting is applied, the fair value gain
or loss on the effective portion of the derivative designated as a
cash flow hedge is recognized in equity. When the hedged cash
flows materialize, the accumulated unrealized gain or loss is
reclassified to the income statement.
Under Swiss GAAP, the effective portion of the fair value
change of the derivative instrument used to hedge cash flow
exposures is deferred on the balance sheet as Other assets or
Other liabilities. The deferred amounts are released to the income
statement when the hedged cash flows materialize.
4. Fair value option
Under IFRS, UBS applies the fair value option to certain financial
assets and financial liabilities not held for trading. Instruments for
which the fair value option is applied are accounted for at fair
value with changes in fair value reflected in Net trading income.
The fair value option is applied primarily to structured debt instru-
ments, certain non-structured debt instruments, high-quality liq-
uid debt securities, structured reverse repurchase and repurchase
agreements and securities borrowing agreements, certain struc-
tured and non-structured loans as well as loan commitments.
Under Swiss GAAP, the fair value option can only be applied to
structured debt instruments that consist of a debt host contract
and one or more embedded derivatives that do not relate to own
equity. Furthermore, changes in fair value attributable to changes
in unrealized own credit are not recognized in the income state-
ment and the balance sheet.
458
Consolidated financial statements Note 36 Main differences between IFRS and Swiss GAAP (continued)
5. Goodwill and intangible assets
Under IFRS, goodwill acquired in a business combination is not
amortized but tested annually for impairment. Intangible assets
with an indefinite useful life are also not amortized but tested
annually for impairment.
Under Swiss GAAP, goodwill and intangible assets with indefi-
nite useful lives are amortized over a period not exceeding five
years, unless a longer useful life, which may not exceed 10 years,
can be justified.
6. Pension and other post-employment benefit plans
Swiss GAAP permits the use of IFRS or Swiss accounting standards
for pension and other post-employment benefit plans, with the
election made on a plan-by-plan basis.
UBS has elected to apply IFRS (IAS 19) for the non-Swiss
defined benefit plans in UBS AG standalone financial statements
and Swiss GAAP (FER 16) for the Swiss pension plan in the UBS
AG and the UBS Switzerland AG standalone financial statements.
The requirements of Swiss GAAP are better aligned with the spe-
cific nature of Swiss pension plans, which are hybrid in that they
combine elements of defined contribution and defined benefit
plans, but are treated as defined benefit plans under IFRS. Key
differences between Swiss GAAP and IFRS include the treatment
of dynamic elements, such as future salary increases and future
interest credits on retirement savings, which are not considered
under the static method used in accordance with Swiss GAAP.
Also, the discount rate used to determine the defined benefit
obligation in accordance with IFRS is based on the yield of high-
quality corporate bonds of the market in the respective pension
plan country. The discount rate used in accordance with Swiss
GAAP, i.e., the technical interest rate, is determined by the Pen-
sion Foundation Board based on the expected returns of the
Board’s investment strategy.
For defined benefit plans, IFRS requires the full defined benefit
obligation net of the plan assets to be recorded on the balance
sheet, with changes resulting from remeasurements recognized
directly in equity. However, for non-Swiss defined benefit plans
for which IFRS accounting is elected, changes due to remeasure-
ments are recognized in the income statement of UBS AG stand-
alone under Swiss GAAP.
Swiss GAAP requires that employer contributions to the pen-
sion fund are recognized as personnel expenses in the income
statement. Further, Swiss GAAP requires an assessment as to
whether, based on the financial statements of the pension fund
prepared in accordance with Swiss accounting standards (FER 26),
an economic benefit to, or obligation of, the employer arises from
the pension fund and is recognized in the balance sheet when
conditions are met. Conditions for recording a pension asset or
liability would be met if, for example, an employer contribution
reserve is available or the employer is required to contribute to the
reduction of a pension deficit (on an FER 26 basis).
7. Netting of replacement values
Under IFRS, replacement values and related cash collateral are
reported on a gross basis unless the restrictive IFRS netting require-
ments are met: i) existence of master netting agreements and
related collateral arrangements that are unconditional and legally
enforceable, both in the normal course of business and in the
event of default, bankruptcy or insolvency of UBS and its counter-
parties, and ii) UBS’s intention to either settle on a net basis or to
realize the asset and settle the liability simultaneously.
Under Swiss GAAP, replacement values and related cash col-
lateral are generally reported on a net basis, provided the master
netting and the related collateral agreements are legally enforce-
able in the event of default, bankruptcy or insolvency of UBS’s
counterparties.
8. Negative interest
Under IFRS, negative interest income arising on a financial asset
does not meet the definition of interest income and, therefore,
negative interest on financial assets and negative interest on
financial liabilities are presented within interest expense and inter-
est income, respectively.
Under Swiss GAAP, negative interest on financial assets is pre-
sented within interest income and negative interest on financial
liabilities is presented within interest expense.
9. Extraordinary income and expense
Certain non-recurring and non-operating income and expense
items, such as realized gains or losses from the disposal of participa-
tions, fixed and intangible assets, as well as reversals of impairments
of participations and fixed assets, are classified as extraordinary
items under Swiss GAAP. This distinction is not available under IFRS.
10. Other presentational differences
Under IFRS, financial statements are comprised of an Income
statement, Statement of comprehensive income, Balance sheet,
Statement of changes in equity, Statement of cash flows and
Notes to the financial statements. Under Swiss GAAP, the concept
of other comprehensive income does not exist and consequently
no Statement of comprehensive income is required. In addition,
various other presentational differences exist.
459
Financial statements Standalone
financial
statements
Table of contents
463 UBS Group AG standalone financial statements
463 Income statement
464 Balance sheet
465 Statement of appropriation of retained earnings
and proposed dividend distribution out of capital
contribution reserve
466 1
467 2
Corporate information
Accounting policies
469 Income statement notes
469 3
469 4
469 5
469 6
469 7
469 8
Dividend income from the investment in UBS AG
Other operating income
Financial income
Personnel expenses
Other operating expenses
Financial expenses
470 12
471 13
471 14
472 15
472 16
472 17
472 18
473 19
Accrued income and prepaid expenses
Investments in subsidiaries
Financial assets
Accrued expenses and deferred income
Long-term interest-bearing liabilities
Compensation-related long-term liabilities
Share capital
Treasury shares
474 Additional information
474 20 Guarantees
474 21
474 22
475 23
476 24
477 25
Assets pledged to secure own liabilities
Contingent liabilities
Significant shareholders
Share and option ownership of the members of
the Board of Directors, the Group Executive Board
and other employees
Related parties
470 Balance sheet notes
Liquid assets
470 9
470 10 Marketable securities
470 11 Other short-term receivables
478 Report of the statutory auditor on the financial statements
480 Independent auditor’s report related to the issue of new
shares from conditional capital
462
UBS Group AG standalone
financial statements
Audited |
Income statement
CHF million
Dividend income from the investment in UBS AG
Other operating income
Financial income
Operating income
Personnel expenses
Other operating expenses
Financial expenses
Operating expenses
Profit / (loss) before income taxes
Tax expense / (benefit)
Net profit / (loss)
For the year ended
% change from
Note
31.12.16
31.12.15
31.12.15
3
4
5
6
7
8
5,684
44
475
6,202
23
35
512
569
5,633
27
5,606
2,869
49
294
3,213
9
171
267
447
2,765
9
2,756
98
(11)
61
93
146
(80)
91
27
104
201
103
463
Financial statements Note
31.12.16
31.12.15
31.12.15
% change from
9
10
11
12
13
14
15
16
17
18
19
1,714
78
2,830
469
5,090
40,451
40,376
8,162
27
21
48,661
53,751
12,762
595
1,487
2,082
7,865
3,479
11,344
13,427
612
385
34,886
34,886
34,886
0
1,716
(2,271)
2
5,606
40,324
53,751
1,442
85
632
264
2,422
40,431
40,376
5,475
54
0
45,959
48,381
7,503
736
1,006
1,741
5,106
3,119
8,225
9,966
750
385
37,006
37,006
38,035
(1,029)
(10)
(1,724)
1
2,756
38,415
48,381
19
(8)
348
78
110
0
0
49
(49)
6
11
70
(19)
48
20
54
12
38
35
(18)
0
(6)
(6)
(8)
(100)
32
144
103
5
11
Balance sheet
CHF million
Assets
Liquid assets
Marketable securities
Other short-term receivables
Accrued income and prepaid expenses
Total current assets
Investments in subsidiaries
of which: investment in UBS AG
Financial assets
Prepaid assets
Other intangible assets
Total non-current assets
Total assets
of which: amounts due from subsidiaries
Liabilities
Current interest-bearing liabilities
Accrued expenses and deferred income
Total short-term liabilities
Long-term interest-bearing liabilities
Compensation-related long-term liabilities
Total long-term liabilities
Total liabilities
of which: amounts due to subsidiaries
Equity
Share capital
General reserves
of which: statutory capital reserve
of which: capital contribution reserve
of which: other capital reserve
Voluntary earnings reserve
Treasury shares
Reserve for own shares held by subsidiaries
Net profit / (loss)
Equity attributable to shareholders
Total liabilities and equity
464
UBS Group AG standalone financial statements Statement of appropriation of retained earnings and proposed dividend distribution out of capital contribution reserve
The Board of Directors proposes that the Annual General Meeting of Shareholders (AGM) on 4 May 2017 approves the following
appropriation of retained earnings.
Proposed appropriation of retained earnings
CHF million
Net profit for the period
Retained earnings carried forward
Total retained earnings available for appropriation
Proposed appropriation of retained earnings
Appropriation to voluntary earnings reserve
Retained earnings carried forward
For the year ended
31.12.16
5,606
0
5,606
(5,606)
0
Proposed dividend distribution out of capital contribution reserve
The Board of Directors proposes that the AGM on 4 May 2017
approves an ordinary dividend distribution of CHF 0.60 in cash per
share of CHF 0.10 par value payable out of the capital contribu-
tion reserve. Provided that the proposed dividend distribution out
of the capital contribution reserve is approved, the payment of
CHF 0.60 per share will be made on 10 May 2017 to holders of
shares on the record date 9 May 2017. The shares will be traded
ex-dividend as of 8 May 2017 and, accordingly, the last day on
which the shares may be traded with entitlement to receive the
dividend will be 5 May 2017.
CHF million, except where indicated
Total statutory capital reserve: capital contribution reserve before proposed distribution1
Proposed ordinary distribution of capital contribution reserve within statutory capital reserve: CHF 0.60 per dividend-bearing share2
Total statutory capital reserve: capital contribution reserve after proposed distribution
31.12.16
34,886
(2,310)
32,576
1 The Swiss Federal Tax Administration confirmed that UBS Group AG would be able to repay to shareholders a maximum amount of CHF 23.4 billion of the disclosed capital contribution reserve (status as of 31 December
2015) without being subject to the withholding tax deduction that applies to dividends paid out of retained earnings. As of 31 December 2016, the amount decreased by CHF 3.2 billion as a consequence of the dividend
distribution in 2016. 2 Dividend-bearing shares are all shares issued except for treasury shares held by UBS Group AG as of the record date. The amount of CHF 2,310 million presented is based on the total number of
shares issued as of 31 December 2016.
465
Financial statements Note 1 Corporate information
UBS Group AG is incorporated and domiciled in Switzerland and
its registered office is at Bahnhofstrasse 45, CH-8001 Zurich, Swit-
zerland. UBS Group AG operates under the Swiss Code of Obliga-
tions as a corporation limited by shares (Aktiengesellschaft), a cor-
poration that has issued shares of common stock to investors.
UBS Group AG is the ultimate holding company of the UBS
Group, the grantor of the majority of UBS’s deferred compensa-
tion plans, and also issues long-term capital instruments.
Establishment of UBS Group AG
UBS Group AG was incorporated on 10 June 2014 as a wholly
owned subsidiary of UBS AG and on 29 September 2014, UBS
Group AG launched an offer to acquire all issued ordinary shares
of UBS AG. Following the exchange offer and subsequent private
exchanges, UBS Group AG acquired 96.68% of UBS AG shares by
31 December 2014.
In March 2015, UBS Group AG initiated a procedure under
article 33 of the Swiss Stock Exchange Act (SESTA procedure).
After the successful completion of the SESTA procedure in August
2015, UBS Group AG owns 100% of the issued shares of UBS AG.
Transfer of deferred compensation plans
As part of the Group reorganization in 2014, UBS Group AG
assumed obligations of UBS AG as grantor in connection with
certain outstanding awards under employee share, option,
notional fund and deferred cash compensation plans. At the same
time, UBS Group AG acquired the beneficial ownership of the
financial assets and 90.5 million treasury shares of UBS Group AG
held to hedge the economic exposure arising from these plans. As
a result of the transfer, UBS Group AG assumed all responsibilities
and rights associated with the grantor role for these plans from
UBS AG, including the right of recharge to its subsidiaries employ-
ing the personnel.
Obligations relating to deferred compensation plans which are
required to be, and have been, granted by employing and / or
sponsoring subsidiaries have not been assumed by UBS Group AG
and continue on this basis. Furthermore, obligations related to
other compensation awards, such as defined benefit pension
plans and other local awards, have not been assumed by UBS
Group AG and are retained by the relevant employing and / or
sponsoring subsidiaries.
Issuance of additional tier 1 capital instruments
During 2016, UBS Group AG continued to issue perpetual capital
notes, which qualify as Basel III additional tier 1 (AT1) capital on a
consolidated UBS Group basis. The proceeds from the issuances of
those instruments were on-lent to UBS AG for funding purposes.
➔ Refer to Note 16 for more information on the main terms and
conditions of the perpetual capital notes issued during 2016 and
2015
Furthermore, UBS Group AG granted Deferred Contingent
Capital Plan (DCCP) awards to UBS Group employees during 2016
and 2015. These DCCP awards also qualify as Basel III AT1 capital
on a consolidated UBS Group basis.
As of 31 December 2016, UBS Group AG’s distributable items
for the purpose of additional tier 1 capital instruments were CHF
39.9 billion (31 December 2015: CHF 38.0 billion). For this pur-
pose, distributable items are defined in the terms and conditions
of the relevant instruments as the aggregate of (i) net profits car-
ried forward and (ii) freely distributable reserves, in each case, less
any amounts that must be contributed to legal reserves under
applicable law.
466
UBS Group AG standalone financial statements Note 2 Accounting policies
The UBS Group AG standalone financial statements are pre-
pared in accordance with the principles of the Swiss Law on
Accounting and Financial Reporting (32nd title of the Swiss
Code of Obligations).
The functional currency of UBS Group AG is the Swiss franc.
The significant accounting and valuation principles applied are
described below.
Foreign currency translation
Transactions denominated in foreign currency are translated into
Swiss francs at the spot exchange rate on the date of the transac-
tion. At the balance sheet date, all current assets and short-term
liabilities as well as Financial assets measured at fair value, which
are denominated in a foreign currency, are translated into Swiss
francs using the closing exchange rate. For other non-current
assets and long-term liabilities, where the asset mirrors the terms
of a corresponding liability or the asset and liability otherwise
form an economic hedge relationship, the asset and liability are
treated as one unit of account for foreign currency translation
purposes, with offsetting unrealized foreign currency translation
gains and losses based on the closing exchange rate presented
net in the income statement. Investments in subsidiaries mea-
sured at historic cost are translated at the spot exchange rate on
the date of the transaction. All currency translation effects are
recognized in the income statement.
vesting of the awards hedged by the AIV is more than 12 months
after the balance sheet date. These are equity instruments and are
measured at fair value based on their quoted market prices or
other observable market prices as of the balance sheet date.
Gains and losses resulting from fair value changes are recognized
in Financial income and Financial expenses, respectively.
Investments in AIVs that have no quoted market price or no
other observable market price are recognized as Financial assets
and are measured at their acquisition cost adjusted for impair-
ment losses.
Financial assets further include loans granted to UBS AG which
substantially mirror the terms of additional tier 1 perpetual capital
notes issued. The loans are measured at nominal value.
➔ Refer to Note 14 for more information
Investments in subsidiaries
Investments in subsidiaries are equity interests that are held to
carry on the business of UBS Group or for other strategic pur-
poses. They include all subsidiaries directly held by UBS Group AG
through which UBS conducts its business on a global basis. The
investments are measured individually and carried at cost less
impairment.
➔ Refer to Note 13 for more information
➔ Refer to Note 2 in the “Consolidated financial statements”
section of this report for a description of businesses of the
The main currency translation rates used by UBS Group AG are
UBS Group
provided in Note 34 to the consolidated financial statements.
Treasury shares
Marketable securities
Marketable securities include investments in alternative invest-
ment vehicles (AIVs) with a short-term holding period. The hold-
ing period is deemed short-term if the vesting of the awards
hedged by the AIV is within 12 months after the balance sheet
date. These are equity instruments and are measured at fair value
based on quoted market prices or other observable market prices
as of the balance sheet date. Gains and losses resulting from fair
value changes are recognized in Financial income and Financial
expenses, respectively.
Financial assets
Financial assets include investments in AIVs with a long-term
holding period. The holding period is deemed long-term if the
Treasury shares acquired by UBS Group AG are recognized at acqui-
sition cost and are presented as a deduction from shareholders’
equity. Upon disposal or settlement of related share awards, the
realized gain or loss is recognized through the income statement as
Financial income and Financial expenses, respectively. For settle-
ment of related share awards, the realized gains and losses on trea-
sury shares represent the difference between the market price of
the treasury shares at settlement and their acquisition cost.
For shares of UBS Group AG acquired by a direct or indirect
subsidiary, a Reserve for own shares held by subsidiaries is gener-
ally created in UBS Group AG’s equity. However, where UBS AG or
UBS Switzerland AG acquire shares of UBS Group AG and hold
them in their trading portfolios, no Reserve for own shares held
by subsidiaries is created.
➔ Refer to Note 19 for more information
467
Financial statements Note 2 Accounting policies (continued)
Equity participation and other compensation plans
Transfer from UBS AG to UBS Group AG
The transfer of the deferred compensation plans and related
hedging assets in 2014 was conducted on an arm’s length basis,
with a step-up of the plan obligation to fair value. This step-up
resulted in a net liability that was recorded in the standalone
financial statements of UBS AG and transferred to UBS Group AG
(net liability related to deferred compensation plan transfer) in
2014. The fair value of this net liability is taken into account in the
income statement over the average vesting period (for share
awards) or upon exercise / expiry (for option awards) as Other
operating income. Upon exercise of option awards that are set-
tled using conditional capital, the fair value of this net liability is
recorded in the Statutory capital reserve within General reserves.
The difference between the fair value of the hedging assets and
the fair value of the obligations on the plans transferred was com-
pensated for with a loan from UBS AG to UBS Group AG.
Equity participation plans
The grant date fair value of equity-settled share-based compensa-
tion awards granted to employees is generally recognized over
the vesting period of the awards. Awards granted in the form of
UBS Group AG shares and notional shares are settled by delivering
UBS Group AG shares at vesting and are recognized as Compen-
sation-related long-term liabilities if vesting is more than 12
months after the balance sheet date or as Accrued expenses and
deferred income if vesting is within 12 months from the balance
sheet date. The amount recognized is adjusted for forfeiture
assumptions, such that the amount ultimately recognized is based
on the number of awards that meet the related service conditions
at the vesting date. The grant date fair value is based on the UBS
Group AG share price, taking into consideration post-vesting sale
and hedge restrictions, non-vesting conditions and market condi-
tions, where applicable.
Upon settlement of the share awards, any realized gain or loss
is recognized in the income statement as Other operating income
and Other operating expenses, respectively. Realized gains and
losses on share awards represent the difference between the mar-
ket price of the treasury shares at settlement and the grant date
fair value of the share awards.
For certain awards, employees receive beneficial and legal
ownership of the underlying UBS Group AG shares at the grant
date (prepaid awards). Such prepaid awards are recognized as
Prepaid assets if vesting is more than 12 months after the balance
sheet date or as Accrued income and prepaid expenses if vesting
is within 12 months from the balance sheet date.
Shares awarded to employees that are settled using conditional
capital are accounted for as follows at settlement: the amount
paid by the employees for the nominal value of the shares awarded
is recorded in Share capital, while any paid amount exceeding the
nominal value is considered to be share premium and is recorded
in the Statutory capital reserve within General reserves.
Other compensation plans
Deferred compensation plans that are not share-based, including
DCCP awards and awards in the form of AIVs, are accounted for as
cash-settled awards. The present value or fair value of the amount
payable to employees that is settled in cash is recognized as a liability
generally over the vesting period, as Compensation-related long-
term liabilities if vesting is more than 12 months after the balance
sheet date and as Accrued expenses and deferred income if vesting
is within 12 months from the balance sheet date. The liabilities are
remeasured at each balance sheet date at the present value of the
corresponding DCCP award and the fair value of investments in
AIVs, respectively. Gains and losses resulting from remeasurement of
the liabilities are recognized in Other operating income and Other
operating expenses, respectively.
Recharge of compensation expenses
Expenses related to deferred compensation plans are recharged
by UBS Group AG to its subsidiaries employing the personnel.
Upon recharge, UBS Group AG recognizes a receivable from its
subsidiaries corresponding to a liability representing its obligation
toward employees.
Dispensations in the standalone financial statements
As UBS Group AG prepares consolidated financial statements in
accordance with IFRS, UBS Group AG is exempt from various dis-
closures in the standalone financial statements. The dispensations
include the management report and the statement of cash flows,
as well as certain note disclosures.
468
UBS Group AG standalone financial statements Income statement notes
Note 3 Dividend income from the investment in UBS AG
Dividend income received from UBS AG in 2016 consists of CHF
3,434 million related to the financial year ended 31 December
2015, which was approved by the Annual General Meeting of
Shareholders of UBS AG on 4 May 2016, and CHF 2,250 million
related to the financial year ended 31 December 2016, which was
approved by the Annual General Meeting of Shareholders of UBS
AG on 2 March 2017.
Note 4 Other operating income
CHF million
Fair value gains on alternative investment vehicles awards
Gains related to equity-settled awards
Amortization of net liability related to deferred compensation plan transfer
Commission income from guarantees issued
Total other operating income
Note 5 Financial income
CHF million
Treasury share gains
Interest income on long-term receivables from UBS AG
Foreign currency translation gains
Total financial income
Note 6 Personnel expenses
For the year ended
% change from
31.12.16
6
24
2
12
44
31.12.15
13
29
6
1
49
31.12.15
(57)
(18)
(64)
813
(11)
For the year ended
% change from
31.12.16
0
470
4
475
31.12.15
32
253
10
294
31.12.15
(100)
86
(58)
61
Personnel expenses include recharges from UBS AG for person-
nel-related costs for activities performed by UBS AG personnel for
the benefit of UBS Group AG.
UBS Group AG had no employees throughout 2016 and 2015.
All employees of the UBS Group, including the members of the
Group Executive Board (GEB) of UBS Group AG, were employed
by subsidiaries of UBS Group AG. As of 31 December 2016, the
UBS Group employed 59,387 personnel (31 December 2015:
60,099) on a full-time equivalent basis.
Note 7 Other operating expenses
CHF million
Losses related to equity-settled awards
Capital tax
Stamp tax
Other
Total other operating expenses
Note 8 Financial expenses
CHF million
Fair value losses on marketable securities and financial assets
Impairment losses on financial assets
Treasury share losses
Interest expense on interest-bearing liabilities
Brokerage fees paid
Total financial expenses
For the year ended
% change from
31.12.16
3
13
0
18
35
31.12.15
147
13
1
11
171
31.12.15
(98)
(1)
(75)
71
(80)
For the year ended
% change from
31.12.16
3
3
35
469
2
512
31.12.15
12
1
0
255
0
267
31.12.15
(77)
322
84
91
469
Financial statements Balance sheet notes
Note 9 Liquid assets
Liquid assets comprise current accounts held at UBS Switzerland AG.
Note 10 Marketable securities
Marketable securities include investments in AIVs related to compensation awards vesting within 12 months after the balance sheet
date.
Note 11 Other short-term receivables
As of 31 December 2016, other short-term receivables were mainly comprised of a CHF 2,250 million dividend receivable from UBS
AG related to the financial year ended 31 December 2016 and CHF 557 million in receivables from employing entities related to com-
pensation awards. As of 31 December 2015, other short-term receivables were mainly comprised of CHF 632 million in receivables
from employing entities related to compensation awards.
Note 12 Accrued income and prepaid expenses
CHF million
Accrued interest income
Other prepaid expenses
Total accrued income and prepaid expenses
31.12.16
31.12.15
31.12.15
% change from
375
93
469
257
7
264
46
78
470
UBS Group AG standalone financial statements Note 13 Investments in subsidiaries
Unless otherwise stated, the subsidiaries listed in the tables below
have share capital consisting solely of ordinary shares, which are
held by UBS Group AG or UBS AG, respectively. The proportion of
ownership interest held is equal to the voting rights held by UBS
Group AG or UBS AG, respectively. The country where the respec-
tive registered office is located is also the principal place of busi-
ness. UBS AG operates through a global network of branches and
a significant proportion of its business activity is conducted out-
side Switzerland in the UK, US, Asia Pacific and other countries.
UBS Europe SE has branches and offices in a number of EU mem-
ber states, including branches in Germany, Italy, Luxembourg and
Spain.
Subsidiaries of UBS Group AG as of 31 December 2016
Company
UBS AG
UBS Business Solutions AG
UBS Group Funding (Jersey) Ltd.
UBS Group Funding (Switzerland) AG
Registered office
Zurich and Basel, Switzerland
Zurich, Switzerland
St. Helier, Jersey
Zurich, Switzerland
Individually significant subsidiaries of UBS AG as of 31 December 2016
Company
UBS Americas Holding LLC
UBS Asset Management AG
UBS Bank USA
UBS Europe SE
Registered office
Primary business division
Wilmington, Delaware, USA
Corporate Center
Zurich, Switzerland
Asset Management
Salt Lake City, Utah, USA
Wealth Management Americas
Frankfurt, Germany
Wealth Management
UBS Financial Services Inc.
Wilmington, Delaware, USA
Wealth Management Americas
UBS Limited
UBS Securities LLC
UBS Switzerland AG
London, United Kingdom
Wilmington, Delaware, USA
Investment Bank
Investment Bank
Zurich, Switzerland
Personal & Corporate Banking
Share capital in million
Equity interest
accumulated in %
CHF
CHF
CHF
CHF
385.8
1.0
0.0
0.1
100.0
100.0
100.0
100.0
Share capital in million
USD 2,250.01
43.2
CHF
USD
EUR
USD
0.0
176.0
0.0
GBP
226.6
USD 1,283.12
10.0
CHF
Equity interest
accumulated in %
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1 Comprised of common share capital of USD 1,000 and non-voting preferred share capital of USD 2,250,000,000. 2 Comprised of common share capital of USD 100,000 and non-voting preferred share capital of
USD 1,283,000,000.
Individually significant subsidiaries of UBS AG are those entities
that contribute significantly to the Group’s financial position or
results of operations, based on a number of criteria, including the
subsidiaries’ equity and their contribution to the Group’s total
assets and profit or loss before tax, in accordance with Swiss regu-
lations.
During 2016, the majority of the operating subsidiaries of
Asset Management were transferred to UBS Asset Management
AG to create a holding structure spanning the division’s global
activities outside the US. Also in 2016, UBS AG’s direct Wealth
Management subsidiaries UBS (Italia) SpA, UBS (Luxembourg)
S.A. (including its branches in Austria, Denmark and Sweden),
UBS Bank S.A. (Madrid) and UBS Bank (Netherlands) B.V. were
merged into UBS Deutschland AG, which was renamed to UBS
Europe SE and is headquartered in Frankfurt, Germany.
UBS Americas Holding LLC, UBS Asset Management AG, UBS
Europe SE, UBS Limited and UBS Switzerland AG are fully held by
UBS AG. UBS Bank USA, UBS Financial Services Inc. and UBS Secu-
rities LLC are fully held, directly or indirectly, by UBS Americas
Holding LLC.
➔ Refer to Note 28 in the “Consolidated financial statements”
section of this report for more information
Note 14 Financial assets
CHF million
Long-term receivables from UBS AG1
Investments in alternative investment vehicles at fair value related to awards vesting after 12 months
Investments in alternative investment vehicles at cost less impairment
Total financial assets
1 Long-term receivables from UBS AG include the onward lending of the proceeds from the issuances of additional tier 1 perpetual capital notes.
31.12.16
31.12.15
31.12.15
% change from
7,865
291
6
8,162
5,171
294
9
5,475
52
(1)
(33)
49
471
Financial statements Note 15 Accrued expenses and deferred income
CHF million
Short-term portion of net liability related to deferred compensation plan transfer
Short-term portion of compensation liabilities
of which: Deferred Contingent Capital Plan
of which: other deferred compensation plans
Accrued interest expense
Other
Total accrued expenses and deferred income
31.12.16
1
1,048
93
955
374
65
1,487
% change from
31.12.15
31.12.15
2
720
65
655
255
29
1,006
(70)
46
44
46
46
126
48
Note 16 Long-term interest-bearing liabilities
Notes issued, overview by amount, maturity and coupon
31.12.16
in million, except where indicated
Euro-denominated low-trigger loss-absorbing additional tier 1
perpetual capital notes
US dollar-denominated low-trigger loss-absorbing additional tier 1
perpetual capital notes
US dollar-denominated high-trigger loss-absorbing additional tier 1
perpetual capital notes
US dollar-denominated high-trigger loss-absorbing additional tier 1
perpetual capital notes
US dollar-denominated high-trigger loss-absorbing additional tier 1
perpetual capital notes
US dollar-denominated high-trigger loss-absorbing additional tier 1
perpetual capital notes
Total long-term interest-bearing liabilities
Carrying value
in transaction
currency
Carrying value
in CHF
Maturity1
Coupon1
1,000
1,250
1,250
1,575
1,500
1,100
1,071
19.02.22
5.750%
1,272
19.02.25
7.000%
1,272
19.02.20
7.125%
1,603
07.08.25
6.875%
1,527
22.03.21
6.875%
1,120
7,865
10.08.21
7.125%
31.12.15
Carrying value
in transaction
currency
Carrying value
in CHF
988
1,234
1,234
1,555
1,075
1,236
1,236
1,558
5,106
1 The disclosed maturity refers to the optional first call date of the respective issuance and the disclosed coupon refers to the fixed coupon rate from the issue date up to, but excluding, the optional first call date.
Note 17 Compensation-related long-term liabilities
CHF million
Long-term portion of net liability related to deferred compensation plan transfer
Long-term portion of compensation liabilities
of which: Deferred Contingent Capital Plan
of which: other deferred compensation plans
Total compensation-related long-term liabilities
31.12.16
31.12.15
31.12.15
% change from
10
3,469
1,532
1,937
3,479
11
3,107
1,109
1,999
3,119
(11)
12
38
(3)
12
Note 18 Share capital
On 31 December 2016, the issued share capital consisted of 3,850,766,389 (31 December 2015: 3,849,731,535) registered shares at
a par value of CHF 0.10 each.
➔ Refer to the “UBS shares” section of this report for more information on UBS Group AG shares
472
UBS Group AG standalone financial statements Note 19 Treasury shares
Balance as of 31 December 2014
of which: treasury shares held by UBS Group AG
of which: short sales of treasury shares by UBS AG and other subsidiaries
Share-for-share exchange
Acquisitions
Disposals
Delivery of shares to settle equity-settled awards
Balance as of 31 December 2015
of which: treasury shares held by UBS Group AG1
of which: treasury shares held by UBS AG and other subsidiaries
Acquisitions
Disposals
Delivery of shares to settle equity-settled awards
Balance as of 31 December 2016
of which: treasury shares held by UBS Group AG1
of which: treasury shares held by UBS AG and other subsidiaries
1 Treasury shares held by UBS Group AG had a carrying value of CHF 2,271 million as of 31 December 2016 (31 December 2015: CHF 1,724 million).
Number of registered shares
Average price in CHF
87,871,737
90,176,988
(2,305,251)
(100,923)
89,594,586
(27,510,789)
(51,148,336)
98,706,275
98,465,708
240,567
90,448,847
(2,721,710)
(47,991,640)
138,441,772
138,386,307
55,465
16.94
16.95
17.30
19.90
17.57
17.08
17.29
17.51
17.50
19.51
15.49
17.82
16.86
16.41
16.41
16.06
473
Financial statements Additional information
Note 20 Guarantees
As of 31 December 2016, UBS Group AG had issued senior unse-
cured debt through its subsidiary UBS Group Funding (Jersey) Ltd
for a nominal amount equivalent to CHF 17,281 million
(31 December 2015: CHF 5,668 million). This debt contributes to
the total loss-absorbing capacity (TLAC) of the Group. UBS Group
AG issued guarantees to the external investors against any default
in payments of interest and principal by UBS Group Funding
(Jersey) Ltd.
Note 21 Assets pledged to secure own liabilities
As of 31 December 2016, total pledged assets of UBS Group AG
amounted to CHF 4,134 million. These assets consisted of certain
liquid assets, marketable securities and financial assets and were
pledged to UBS AG. As of 31 December 2015, total pledged
assets of UBS Group AG amounted to CHF 41,835 million and
primarily consisted of the investment in UBS AG. The associated
liabilities secured by these pledged assets were CHF 524 million
and CHF 581 million as of 31 December 2016 and 31 December
2015, respectively.
Note 22 Contingent liabilities
UBS Group AG is jointly and severally liable for the combined value added tax (VAT) liability of UBS entities that belong to the VAT group
of UBS in Switzerland.
474
UBS Group AG standalone financial statements Note 23 Significant shareholders
Shareholders registered in the UBS Group AG share register with 3% or more of total share capital
% of share capital
Chase Nominees Ltd., London
GIC Private Limited, Singapore
DTC (Cede & Co.), New York1
Nortrust Nominees Ltd., London
31.12.16
9.43
6.62
3.88
31.12.15
9.14
6.38
6.14
3.60
1 DTC (Cede & Co.), New York, “The Depository Trust Company,” is a US securities clearing organization.
Under the Swiss Federal Act on Financial Market Infrastructures
and Market Conduct in Securities and Derivatives Trading of
19 June 2015 (FMIA), anyone holding shares in a company listed
in Switzerland, or holding derivative rights related to shares of
such a company, must notify the company and the SIX Swiss
Exchange (SIX) if the holding reaches, falls below or exceeds one
of the following thresholds: 3, 5, 10, 15, 20, 25, 331⁄3, 50, or
662⁄3% of voting rights, regardless of whether or not such rights
may be exercised. The detailed disclosure requirements and the
methodology for calculating the thresholds are defined in the
Swiss Financial Market Supervisory Authority Ordinance on Finan-
cial Market Infrastructure (FMIO-FINMA). In particular, the FMIO-
FINMA sets forth that nominee companies that cannot autono-
mously decide how voting rights are exercised are not obligated
to notify the company and SIX if they reach, exceed or fall below
the threshold percentages.
In addition, pursuant to the Swiss Code of Obligations, UBS
must disclose in the Notes to its financial statements the identity
of any shareholder with a holding of more than 5% of the total
share capital of UBS Group AG.
According to disclosure notifications filed with UBS Group AG
and the SIX under the applicable Swiss rules, GIC Private Limited
disclosed on 10 December 2014 a holding of 7.07% of the total
share capital of UBS Group AG. The beneficial owner of this
holding is the Government of Singapore. On 10 December 2014,
Norges Bank, Oslo, the Central Bank of Norway, disclosed a hold-
ing of 3.30%. On 15 January 2015, BlackRock Inc., New York,
disclosed a holding of 4.89%. On 10 February 2016, MFS Invest-
ment Management, Boston, disclosed a holding of 3.05%, and
on 16 November 2016, The Capital Group Companies, Inc., Los
Angeles, disclosed a holding of 3.01%.
In accordance with the FMIA, the aforementioned percentages
were holdings that are not necessarily also registered in the UBS
share register and calculated in relation to the total share capital
of UBS Group AG reflected in the AoA at the time of the respec-
tive disclosure notification. Information on disclosures under the
FMIA is available at www.six-exchange-regulation.com/en/home/
publications/significant-shareholders.html.
According to the share register, the shareholders (acting in their
own name or in their capacity as nominees for other investors or
beneficial owners) listed in the table above were registered in the
UBS share register with 3% or more of the total share capital of UBS
Group AG as of 31 December 2016 or as of 31 December 2015.
Cross-shareholdings
We have no cross-shareholdings in excess of a reciprocal owner-
ship of 5% of capital or voting rights with any other company.
475
Financial statements Note 24 Share and option ownership of the members of the Board of Directors, the Group Executive Board and
other employees
Shares awarded
Awarded to members of the BoD
Awarded to members of the GEB
Awarded to other UBS Group employees
Total
For the year ended 31.12.16
For the year ended 31.12.15
Number of shares
Value of shares
in CHF million
Number of shares
Value of shares
in CHF million
411,962
2,572,329
79,900,730
82,885,021
6
39
1,107
1,152
425,258
2,230,800
64,213,472
66,869,530
7
37
1,042
1,087
➔ Refer to the “Corporate governance, responsibility and compensation” section in this report for more information on the terms and
conditions of the shares and options awarded to the members of the Board of Directors and the Group Executive Board
Number of shares of BoD members1
Name, function
Axel A. Weber, Chairman
Michel Demaré, Vice Chairman
David Sidwell, Senior Independent Director
Reto Francioni, member
Ann F. Godbehere, member
Axel P. Lehmann, former member2
William G. Parrett, member
Isabelle Romy, member
Robert W. Scully, member2
Beatrice Weder di Mauro, member
Dieter Wemmer, member2
Joseph Yam, member
Total
on 31 December
Number of shares held
Voting rights in %
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
635,751
488,889
254,287
215,992
205,540
163,317
51,567
28,787
201,457
169,054
–
252,761
104,385
104,271
91,038
66,490
0
–
99,737
71,261
0
–
109,938
87,354
1,753,700
1,648,176
0.038
0.026
0.015
0.012
0.012
0.009
0.003
0.002
0.012
0.009
–
0.014
0.006
0.006
0.005
0.004
0.000
–
0.006
0.004
0.000
–
0.007
0.005
0.104
0.088
1 Includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2016 and 2015. 2 Dieter Wemmer and Robert W. Scully were newly elected at the
AGM on 10 May 2016 and Axel P. Lehmann stepped down from the BoD as of 31 December 2015 and joined the GEB on 1 January 2016.
476
UBS Group AG standalone financial statements Note 24 Share and option ownership of the members of the Board of Directors, the Group Executive Board and
other employees (continued)
Share and option ownership / entitlements of GEB members1
Name, function
Sergio P. Ermotti, Group Chief Executive Officer
Martin Blessing, President Personal & Corporate Banking and
President UBS Switzerland
Christian Bluhm, Group Chief Risk Officer
Markus U. Diethelm, Group General Counsel
Lukas Gähwiler, former President Personal & Corporate
Banking and President UBS Switzerland
Kirt Gardner, Group Chief Financial Officer
Sabine Keller-Busse, Group Head Human Resources
Ulrich Körner, President Asset Management and President
UBS EMEA
Axel P. Lehmann, Group Chief Operating Officer
Tom Naratil, President Wealth Management Americas and
President UBS Americas
Andrea Orcel, President Investment Bank
Kathryn Shih, President UBS Asia Pacific
Jürg Zeltner, President Wealth Management
Total
on
31 December
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Number of
unvested
shares / at risk2
1,365,537
947,964
Number of
vested shares
Total number
of shares
265,515
155,736
1,631,052
1,103,700
0
–
0
–
538,520
447,694
–
558,657
142,646
–
0
–
0
–
154,820
61,797
–
1,515
38,581
–
0
–
0
–
693,340
509,491
–
560,172
181,227
–
Potentially
conferred
voting
rights in %
0.097
0.059
0.000
0.000
0.041
0.027
0.030
0.011
200,272
120,897
321,169
0.019
–
797,165
642,813
0
–
838,193
598,172
1,203,535
933,686
567,777
–
881,976
683,767
6,535,621
6,747,010
–
95,597
95,597
277,978
–
352,634
310,054
207,114
117,646
0
–
1,075
3,721
1,514,211
1,677,989
–
892,762
738,410
277,978
–
1,190,827
908,226
1,410,649
1,051,332
567,777
–
883,051
687,488
8,049,832
8,424,999
0.053
0.039
0.017
0.071
0.049
0.084
0.056
0.034
0.053
0.037
0.479
0.450
Number of
options3
0
Potentially
conferred
voting
rights in %4
0.000
0
0
–
0
–
0
0
–
0
0
–
0
–
0
0
0
–
412,917
555,115
0
0
143,869
–
64,164
86,279
620,950
1,401,686
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.025
0.030
0.000
0.000
0.009
0.004
0.005
0.037
0.075
1 Includes all vested and unvested shares and options of GEB members, including those held by related parties. 2 Includes shares granted under variable compensation plans with forfeiture provisions. The actual
number of shares vesting in the future will be calculated under the terms of the plans. Refer to the “Our deferred variable compensation plans for 2016” in the “Compensation” section of this report for more information
on the plans. 3 Refer to “Note 27 Equity participation and other compensation plans” in the “Consolidated financial statements” section of this report for more information. 4 No conversion rights outstanding.
Note 25 Related parties
Related parties are defined under the Swiss Code of Obligations
as direct and indirect participants with voting rights of 20% or
more, management bodies (BoD and GEB), external auditors and
direct and indirect investments in subsidiaries. Payables due to
members of the GEB are provided in the table below. Amounts
due from and due to subsidiaries are provided on the face of the
balance sheet.
CHF million
Payables due to the members of the GEB
of which: Deferred Contingent Capital Plan
of which: other deferred compensation plans
31.12.16
31.12.15
31.12.15
% change from
119
51
68
139
53
86
(14)
(4)
(21)
477
Financial statements 478
479
Financial statements 480
Abbreviations frequently used in our financial reports
A
ABS
AGM
AIV
AMA
AT1
B
BCBS
BIS
BoD
C
CC
CCAR
CCF
CCP
CDO
CDR
CDS
CEA
CEO
CET1
CFO
CHF
CLN
CLO
CMBS
CVA
asset-backed security
annual general meeting of
shareholders
alternative investment
vehicle
advanced measurement
approach
additional tier 1
Basel Committee on
Banking Supervision
Bank for International
Settlements
Board of Directors
Corporate Center
Comprehensive Capital
Analysis and Review
credit conversion factor
central counterparty
collateralized debt
obligation
constant default rate
credit default swap
Commodity Exchange Act
Chief Executive Officer
common equity tier 1
Chief Financial Officer
Swiss franc
credit-linked note
collateralized loan
obligation
commercial mortgage-
backed security
credit valuation
adjustment
D
DBO
DCCP
DOJ
DTA
DVA
E
EAD
EC
ECB
EIR
EMEA
EOP
EPS
ETD
ETF
EU
EUR
EURIBOR
F
FCA
FCT
FDIC
FINMA
FMIA
FMIO
FRA
FSA
FSB
FTD
FVA
FX
defined benefit obligation
Deferred Contingent
Capital Plan
Department of Justice
deferred tax asset
debit valuation adjustment
G
GAAP
GBP
GEB
GIIPS
generally accepted
accounting principles
British pound
Group Executive Board
Greece, Italy, Ireland,
Portugal and Spain
Group ALM Group Asset and Liability
Management
H
HQLA
I
IAS
IASB
IFRS
IRB
IRC
ISDA
K
KPI
L
LAC
LAS
LCR
LGD
LIBOR
LRD
LTV
M
MTN
exposure at default
European Commission
European Central Bank
effective interest rate
Europe, Middle East and
Africa
Equity Ownership Plan
earnings per share
exchange-traded derivative
exchange-traded fund
European Union
euro
Euro Interbank Offered Rate
UK Financial Conduct
Authority
foreign currency translation
Federal Deposit Insurance
Corporation
Swiss Financial Market
Supervisory Authority
Swiss Federal Act on
Financial Market Infrastruc-
tures and Market Conduct
in Securities and Derivatives
Trading
FINMA Ordinance on
Financial Market Infrastruc-
ture
forward rate agreement
UK Financial Services
Authority
Financial Stability Board
first to default
funding valuation
adjustment
foreign exchange
high-quality liquid assets
International Accounting
Standards
International Accounting
Standards Board
International Financial
Reporting Standards
internal ratings-based
incremental risk charge
International Swaps and
Derivatives Association
key performance indicator
loss-absorbing capital
liquidity-adjusted stress
liquidity coverage ratio
loss given default
London Interbank
Offered Rate
leverage ratio denominator
loan-to-value
medium-term note
481
Appendix
Abbreviations frequently used in our financial reports (continued)
T
TBTF
TLAC
TRS
U
USD
V
VaR
too big to fail
total loss-absorbing capacity
total return swap
US dollar
value-at-risk
N
NAV
NPA
NRV
NSFR
O
OCI
OTC
P
PRA
PRV
net asset value
non-prosecution agreement
negative replacement value
net stable funding ratio
other comprehensive
income
over-the-counter
UK Prudential Regulation
Authority
positive replacement value
R
RLN
RMBS
RoAE
RoE
RoTE
RV
RWA
S
SE
SEC
SEEOP
SESTA
SESTO
SFT
SNB
SRB
SRM
SVaR
reference-linked note
residential mortgage-
backed security
return on attributed equity
return on equity
return on tangible equity
replacement value
risk-weighted assets
structured entity
US Securities and Exchange
Commission
Senior Executive Equity
Ownership Plan
Swiss Federal Act on Stock
Exchanges and Securities
Trading
FINMA Ordinance on Stock
Exchanges and Securities
Trading
securities financing
transaction
Swiss National Bank
systemically relevant bank
Single Resolution
Mechanism
stressed value-at-risk
482
Information sources
Reporting publications
Other information
Annual publications: Annual Report (SAP-No. 80531): Published
in both English and German, this single-volume report provides a
description of our Group strategy and performance; the strategy
and performance of the business divisions and Corporate Center;
a description of risk, treasury, capital management, corporate gov-
ernance, responsibility and senior management compensation,
including compensation for the Board of Directors and the Group
Executive Board members; and financial information, including the
financial statements. Annual Review (SAP-No. 80530): The book-
let contains key information on our strategy and financials. It is
published in English, German, French and Italian. Compensation
Report (SAP-No. 82307): The report discusses our compensation
framework and provides information on compensation for the
Board of Directors and the Group Executive Board members. It is
published in English and German.
Quarterly publications: Financial report (SAP-No. 80834): The
quarterly financial report provides an update on our strategy and
performance for the respective quarter. It is mainly available in
English.
How to order reports: The annual and quarterly publications are
available in PDF at www.ubs.com/investors in the “UBS Group AG
and UBS AG financial information” section. Printed copies can be
ordered from the same website in the “Investor services” section,
which can be accessed via the link on the left-hand side of the
screen. Alternatively, they can be ordered by quoting the SAP
number and the language preference, where applicable, from
UBS AG, F4UK-AUL, P.O. Box, CH-8098 Zurich, Switzerland.
Website: The “Investor Relations” website at www.ubs.com/
investors provides the following information on UBS: news
releases, financial information, including results-related filings
with the US Securities and Exchange Commission, information
for shareholders, including UBS share price charts as well as data
and dividend information, and for bondholders, the UBS corpo-
rate calendar and presentations by management for investors
and financial analysts. Information on the internet is available in
English, with some information also available in German.
Results presentations: Our quarterly results presentations are
webcast live. A playback of most presentations is downloadable
at www.ubs.com/presentations.
Messaging service / UBS news alert: On the www.ubs.com/
newsalerts website, it is possible to subscribe to news alerts about
UBS via SMS or email. Messages are sent in English, German,
French or Italian, and it is possible to state theme preferences for
the alerts received.
Form 20-F and other submissions to the US Securities and
Exchange Commission: We file periodic reports and submit
other information about UBS to the US Securities and Exchange
Commission (SEC). Principal among these filings is the annual
report on Form 20-F, filed pursuant to the US Securities Exchange
Act of 1934. The filing of Form 20-F is structured as a “wrap-
around” document. Most sections of the filing can be satisfied by
referring to parts of the annual report. However, there is a small
amount of additional information in Form 20-F that is not pre-
sented elsewhere and is particularly targeted at readers in the US.
Readers are encouraged to refer to this additional disclosure. Any
document that we file with the SEC is available to read and copy
on the SEC’s website, www.sec.gov, or at the SEC’s public refer-
ence room at 100 F Street, N.E., Room 1580, Washington, DC,
20549. Please call the SEC on +1800-SEC-0330 for further infor-
mation on the operation of its public reference room. Refer to
www.ubs.com/investors for more information.
483
Appendix
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 de-
scribed, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s expectations.
These factors include, but are not limited to: (i) the degree to which UBS is successful in the ongoing execution of its strategic plans, including its cost reduction
and efficiency initiatives and its ability to manage its levels of risk-weighted assets (RWA) and leverage ratio denominator, liquidity coverage ratio and other finan-
cial resources, and the degree to which UBS is successful in implementing changes to its wealth management businesses to meet changing market, regulatory
and other conditions; (ii) continuing low or negative interest rate environment, developments in the macroeconomic climate and in the markets in which UBS
operates or to which it is exposed, including movements in securities prices or liquidity, credit spreads, and currency exchange rates, and the effects of economic
conditions, market developments, and geopolitical tensions on the financial position or creditworthiness of UBS’s clients and counterparties as well as on client
sentiment and levels of activity; (iii) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings, as well as avail-
ability and cost of funding to meet requirements for debt eligible for total loss-absorbing capacity (TLAC); (iv) changes in or the implementation of financial leg-
islation and regulation in Switzerland, the US, the UK and other financial centers that may impose, or result in, more stringent capital, TLAC, leverage ratio, liquid-
ity and funding requirements, incremental tax requirements, additional levies, limitations on permitted activities, constraints on remuneration, constraints on
transfers of capital and liquidity and sharing of operational costs across the Group or other measures, and the effect these would have on UBS’s business activities;
(v) uncertainty as to when and to what degree the Swiss Financial Market Supervisory Authority (FINMA) will approve, or confirm, limited reductions of gone
concern requirements due to measures to reduce resolvability risk; (vi) the degree to which UBS is successful in implementing further changes to its legal structure
to improve its resolvability and meet related regulatory requirements, including changes in legal structure and reporting required to implement US enhanced
prudential standards, completing the implementation of a service company model, and the potential need to make further changes to the legal structure or book-
ing model of UBS Group in response to legal and regulatory requirements relating to capital requirements, resolvability requirements and proposals in Switzerland
and other jurisdictions for mandatory structural reform of banks or systemically important institutions and the extent to which such changes will have the intended
effects; (vii) the uncertainty arising from the timing and nature of the UK exit from the EU and the potential need to make changes in UBS’s legal structure and
operations as a result of it; (viii) changes in UBS’s competitive position, including whether differences in regulatory capital and other requirements among the
major financial centers will adversely affect UBS’s ability to compete in certain lines of business; (ix) changes in the standards of conduct applicable to our busi-
nesses that may result from new regulation or new enforcement of existing standards, including recently enacted and proposed measures to impose new and
enhanced duties when interacting with customers and in the execution and handling of customer transactions; (x) the liability to which UBS may be exposed, or
possible constraints or sanctions that regulatory authorities might impose on UBS, due to litigation, contractual claims and regulatory investigations, including the
potential for disqualification from certain businesses or loss of licenses or privileges as a result of regulatory or other governmental sanctions, as well as the effect
that litigation, regulatory and similar matters have on the operational risk component of our RWA; (xi) the effects on UBS’s cross-border banking business of tax
or regulatory developments and of possible changes in UBS’s policies and practices relating to this business; (xii) UBS’s ability to retain and attract the employees
necessary to generate revenues and to manage, support and control its businesses, which may be affected by competitive factors including differences in com-
pensation practices; (xiii) changes in accounting or tax standards or policies, and determinations or interpretations affecting the recognition of gain or loss, the
valuation of goodwill, the recognition of deferred tax assets and other matters; (xiv) limitations on the effectiveness of UBS’s internal processes for risk manage-
ment, risk control, measurement and modeling, and of financial models generally; (xv) whether UBS will be successful in keeping pace with competitors in updat-
ing its technology, including by developing digital channels and tools and in our trading businesses; (xvi) the occurrence of operational failures, such as fraud,
misconduct, unauthorized trading, financial crime, cyberattacks, and systems failures; (xvii) restrictions on the ability of UBS Group AG to make payments or
distributions, including due to restrictions on the ability of its subsidiaries to make loans or distributions, directly or indirectly, or, in the case of financial difficulties,
due to the exercise by FINMA or the regulators of UBS’s operations in other countries of their broad statutory powers in relation to protective measures, restructur-
ing and liquidation proceedings; (xviii) the degree to which changes in regulation, capital or legal structure, financial results or other factors, including methodol-
ogy, assumptions and stress scenarios, may affect UBS’s ability to maintain its stated capital return objective; and (xix) the effect that these or other factors or
unanticipated events may have on our reputation and the additional consequences that this may have on our business and performance. The sequence in which
the factors above are presented is not indicative of their likelihood of occurrence or the potential magnitude of their consequences. Our business and financial
performance could be affected by other factors identified in our past and future filings and reports, including those filed with the SEC. More detailed information
about those factors is set forth in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year
ended 31 December 2016. 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.
Rounding | Numbers presented throughout this report may not add up precisely to the totals provided in the tables and text. Percentages, percent changes and
absolute variances are calculated on the basis of rounded figures displayed in the tables and text and may not precisely reflect the percentages, percent changes
and absolute variances that would be calculated on the basis of figures that are not rounded.
Tables | Within tables, blank fields generally indicate that the field is not applicable or not meaningful, or that information is not available as of the relevant date
or for the relevant period. Zero values generally indicate that the respective figure is zero on an actual or rounded basis. Percentage changes are presented as a
mathematical calculation of the change between periods.
484
485
UBS Group AG
P.O. Box
CH-8098 Zurich
www.ubs.com